<SUBMISSION>
<ACCESSION-NUMBER>0000950134-02-004116
<TYPE>10-Q
<PUBLIC-DOCUMENT-COUNT>5
<PERIOD>20020331
<FILING-DATE>20020424
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>ADVANCED NEUROMODULATION SYSTEMS INC
<CIK>0000351721
<ASSIGNED-SIC>3841
<IRS-NUMBER>751646002
<STATE-OF-INCORPORATION>TX
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-Q
<ACT>34
<FILE-NUMBER>000-10521
<FILM-NUMBER>02619946
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>6501 WINDCREST DRIVE SUITE 100
<CITY>PLANO
<STATE>TX
<ZIP>75024
<PHONE>9723098000
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>6501 WINDCREST DRIVE SUITE 100
<CITY>PLANO
<STATE>TX
<ZIP>75024
</MAIL-ADDRESS>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>QUEST MEDICAL INC
<DATE-CHANGED>19920703
</FORMER-COMPANY>
</FILER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>d96263e10-q.txt
<DESCRIPTION>FORM 10-Q FOR QUARTER ENDED MARCH 31, 2002
<TEXT>
<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(MARK ONE)

 X          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---                       SECURITIES EXCHANGE ACT 1934
                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002

            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---                       SECURITIES EXCHANGE ACT 1934
           FOR THE TRANSITION PERIOD FROM              TO
                                          ------------    ------------

                         COMMISSION FILE NUMBER 0-10521

                     ADVANCED NEUROMODULATION SYSTEMS, INC.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

            TEXAS                                       75-1646002
-------------------------------             ------------------------------------
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
Incorporation or Organization)

                    6501 WINDCREST DRIVE, PLANO, TEXAS 75024
               ---------------------------------------------------
               (Address of Principal Executive Offices) (Zip Code)

                                 (972) 309-8000
              ----------------------------------------------------
              (Registrant's Telephone Number, Including Area Code)

Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES  X       NO
    ---         ---

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

                                                NUMBER OF SHARES OUTSTANDING AT
    TITLE OF EACH CLASS                                 APRIL 18, 2002
----------------------------                    --------------------------------
COMMON STOCK, $.05 PAR VALUE                              9,139,015

<PAGE>

             ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS

<Table>
<S>                                                                                                           <C>
PART I.       FINANCIAL INFORMATION                                                                               2

       Item 1.     Financial Statements

                        Condensed Consolidated Balance Sheets (Unaudited)
                            March 31, 2002 and December 31, 2001                                                3-4

                        Condensed Consolidated Statements of Income (Unaudited)
                            For the Three Months Ended March 31, 2002 and 2001                                    5

                        Condensed Consolidated Statements of Cash Flows (Unaudited)
                            For the Three Months Ended March 31, 2002 and 2001                                    6

                        Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
                            For the Year Ended December 31, 2001 and the
                            Three Months Ended March 31, 2002                                                     7

                        Notes to Condensed Consolidated Financial Statements                                   8-13

       Item 2.     Management's Discussion and Analysis of Financial Condition
                     and Results of Operations                                                                14-22

       Item 3.     Quantitative and Qualitative Disclosures About Market Risk                                    22

PART II.      OTHER INFORMATION                                                                                  23

       Item 6.     Exhibits and Reports on Form 8-K                                                              23

SIGNATURES                                                                                                       24
</Table>

                                       1
<PAGE>

                                     PART I

                              FINANCIAL INFORMATION

                                       2
<PAGE>

ITEM 1. FINANCIAL STATEMENTS

             ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                      MARCH 31, 2002 AND DECEMBER 31, 2001

<Table>
<Caption>
                                                                     MARCH 31,      DECEMBER 31,
ASSETS                                                                 2002            2001
                                                                    -----------     ------------

<S>                                                                 <C>             <C>
Current assets:
   Cash and cash equivalents                                        $ 8,394,778     $ 9,785,325
   Marketable securities                                              2,424,348       2,151,722
   Receivables:
     Trade accounts, less allowance for doubtful accounts of
        $113,216 in 2002 and $124,111 in 2001                         7,435,606       6,493,772
     Interest and other                                                 297,763         235,594
                                                                    -----------     -----------
         Total receivables                                            7,733,369       6,729,366
                                                                    -----------     -----------

   Inventories:
     Raw materials                                                    5,044,287       4,685,586
     Work-in-process                                                  2,087,593       1,723,419
     Finished goods                                                   3,322,367       3,339,840
                                                                    -----------     -----------
         Total inventories                                           10,454,247       9,748,845
                                                                    -----------     -----------

   Deferred income taxes                                              1,084,110       1,726,517
   Current income tax receivable                                      1,353,832         678,341
   Prepaid expenses and other current assets                            541,517         685,169
                                                                    -----------     -----------
         Total current assets                                        31,986,201      31,505,285
                                                                    -----------     -----------

Equipment and fixtures:
   Furniture and fixtures                                             3,505,890       3,400,909
   Machinery and equipment                                            8,810,642       8,550,504
   Leasehold improvements                                             1,596,978       1,610,810
                                                                    -----------     -----------
                                                                     13,913,510      13,562,223
   Less accumulated depreciation and amortization                     6,895,709       6,353,920
                                                                    -----------     -----------
         Net property, plant and equipment                            7,017,801       7,208,303
                                                                    -----------     -----------

Goodwill, net of accumulated amortization of $3,404,427 in 2002
    and $3,404,427 in 2001                                            7,407,237       7,407,237
Patents, net of accumulated amortization of $1,141,848 in 2002
    and $1,045,106 in 2001                                            5,299,436       5,368,213
Purchased technology from acquisitions, net of accumulated
    amortization of $1,866,667 in 2002 and $1,800,000 in 2001         2,133,333       2,200,000
Trademarks, net of accumulated amortization of $874,984 in
    2002 and $843,736 in 2001                                         1,630,609       1,656,264
Other assets, net of accumulated amortization of $425,172 in
    2002 and $392,033 in 2001                                           574,388         519,783
                                                                    -----------     -----------
                                                                    $56,049,005     $55,865,085
                                                                    ===========     ===========
</Table>

                                        3
<PAGE>

             ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                      MARCH 31, 2002 AND DECEMBER 31, 2001

<Table>
<Caption>
                                                                     MARCH 31,       DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY                                   2002              2001
                                                                   ------------      ------------

<S>                                                                <C>               <C>
Current liabilities:
   Accounts payable                                                $  1,489,881      $  1,835,037
   Accrued salary and employee benefit costs                          1,195,461         2,112,127
   Accrued tax abatement liability                                      969,204           969,204
   Customer deposits                                                    807,440         1,042,690
   Warranty reserve                                                     316,113           383,477
   Other accrued expenses                                               228,041           204,151
   Current maturities of long-term note payable                          53,560            52,325
                                                                   ------------      ------------
         Total current liabilities                                    5,059,700         6,599,011
                                                                   ------------      ------------

Deferred income taxes                                                 2,283,505         2,316,796
Long-term note payable                                                  123,468           137,397

Commitments and contingencies

Stockholders' equity:
   Common stock of $.05 par value. Authorized 25,000,000
      shares; issued and outstanding: 9,134,979 shares in 2002
      and 9,071,868 in 2001                                             456,749           453,593
   Additional capital                                                39,602,020        38,670,248
   Retained earnings                                                  8,546,266         7,709,290
   Accumulated other comprehensive income (loss), net of tax
      benefit of $11,698 in 2002 and $10,949 in 2001                    (22,703)          (21,250)
                                                                   ------------      ------------
         Total stockholders' equity                                  48,582,332        46,811,881
                                                                   ------------      ------------
                                                                   $ 56,049,005      $ 55,865,085
                                                                   ============      ============
</Table>

See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>

             ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES
            CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
               FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001

<Table>
<Caption>
                                                THREE MONTHS ENDED MARCH 31,
                                               ------------------------------
                                                   2002              2001
                                               ------------      ------------

<S>                                            <C>               <C>
Net revenue                                    $ 11,472,646      $  8,340,810
Cost of revenue                                   4,514,160         3,572,789
                                               ------------      ------------
         Gross profit                             6,958,486         4,768,021
                                               ------------      ------------

Operating expenses:
   Research and development                       1,292,703         1,147,530
   Sales and marketing                            2,895,890         2,056,978
   Amortization of goodwill                              --           139,151
   Amortization of intangibles                      227,796           173,169
   General and administrative                     1,302,872           918,429
                                               ------------      ------------
                                                  5,719,261         4,435,257
                                               ------------      ------------
         Income from operations                   1,239,225           332,764
                                               ------------      ------------

Other income (expenses):
   Acquisition related costs                             --          (483,766)
   Interest expense                                  (4,306)          (10,460)
   Interest and other income                         73,506           148,302
                                               ------------      ------------
                                                     69,200          (345,924)
                                               ------------      ------------
         Income (loss) before income taxes        1,308,425           (13,160)
Income taxes (benefit)                              471,449            (6,899)
                                               ------------      ------------
         Net income (loss)                     $    836,976      $     (6,261)
                                               ============      ============


                                               ============      ============
Basic net income (loss) per share              $        .09      $       (.00)
                                               ============      ============

                                               ============      ============
Diluted net income (loss) per share            $        .08      $       (.00)
                                               ============      ============
</Table>

See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>

             ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
               FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001

<Table>
<Caption>
                                                                          THREE MONTHS ENDED MARCH 31,
                                                                          ----------------------------
                                                                             2002             2001
                                                                          -----------      -----------

<S>                                                                       <C>              <C>
Cash flows from operating activities:
   Net income (loss)                                                      $   836,976      $    (6,261)
   Adjustments to reconcile net income (loss) to net cash provided by
      (used in) operating activities:
        Depreciation and amortization                                         769,585          762,286
        Deferred income taxes                                                 609,863          (33,292)
        Changes in operating assets and liabilities:
           Receivables                                                     (1,004,003)          99,483
           Inventories                                                       (705,402)        (908,046)
           Current income tax receivable                                     (675,491)         359,953
           Prepaid expenses and other assets                                  113,534          817,883
           Customer deposits                                                 (235,250)        (317,563)
           Income taxes payable                                               535,655           82,989
           Accounts payable                                                  (345,156)         597,528
           Accrued expenses                                                  (960,141)        (700,345)
                                                                          -----------      -----------
             Total adjustments                                             (1,896,806)         760,876
                                                                          -----------      -----------
             Net cash provided by (used in) operating activities           (1,059,830)         754,615
                                                                          -----------      -----------

Cash flows from investing activities:
  Proceeds from certificates of deposits with maturities over 90 days              --          385,000
  Purchases of marketable securities                                         (830,964)      (1,032,487)
  Proceeds from sales of marketable securities                                556,136          500,000
  Additions to patents and intangible assets                                  (91,181)        (424,961)
  Additions to equipment and fixtures                                        (351,287)        (778,118)
                                                                          -----------      -----------
             Net cash used in investing activities                           (717,296)      (1,350,566)
                                                                          -----------      -----------

Cash flows from financing activities:
  Payment of long-term obligations                                            (12,694)         (11,613)
  Exercise of stock options                                                   399,273          129,936
                                                                          -----------      -----------
             Net cash provided by financing activities                        386,579          118,323
                                                                          -----------      -----------

Net decrease in cash and cash equivalents                                  (1,390,547)        (477,628)
Net cash used by Hi-tronics in December 2000 (see Note 3)                          --         (672,444)
Cash and cash equivalents at beginning of year                              9,785,325        9,528,721
                                                                          -----------      -----------
Cash and cash equivalents at March 31                                     $ 8,394,778      $ 8,378,649
                                                                          ===========      ===========

Supplemental cash flow information is presented below:
Income taxes paid                                                         $        --      $        --
                                                                          ===========      ===========
Interest paid                                                             $     4,306      $     7,319
                                                                          ===========      ===========

Non-cash activity:
Stock issued for patents and intangible assets                            $        --      $ 2,426,662
                                                                          ===========      ===========
</Table>

See accompanying notes to condensed consolidated financial statements.

                                       6
<PAGE>

             ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES
      CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)

<Table>
<Caption>
                                                                                       Other                            Total
                                Common Stock           Additional      Retained     Comprehensive      Treasury      Stockholders'
                            Shares        Amount        Capital        Earnings     Income (Loss)       Stock           Equity
                           ---------   ------------   ------------   ------------   -------------    ------------    -------------

<S>                        <C>         <C>            <C>            <C>            <C>              <C>             <C>
Balance at
December 31, 2000          8,883,059   $    444,153   $ 34,469,471   $  6,539,223    $    (83,241)   $   (927,793)   $ 40,441,813
   Net income                     --             --             --      1,517,746              --              --       1,517,746
   Net loss of
     Hi-tronics for
     December 2000
     (see Note 1)                 --             --             --       (347,679)             --              --        (347,679)
   Adjustment to
     unrealized
     losses on
     marketable
     securities                   --             --             --             --          61,991              --          61,991
                                                                                                                     ------------
   Comprehensive
     Income                                                                                                             1,232,058
                                                                                                                     ------------
   Compensation
     expense
     resulting from
     changes to
     Hi-tronics stock
     options in
     December 2000                --             --         37,029             --              --              --          37,029
   Issuance of shares
     for stock option
     exercises               188,809          9,440        995,474             --              --              --       1,004,914
   Tax benefit from
     employee stock
     option exercise              --             --      1,669,405             --              --              --       1,669,405
   Issuance of
     119,100 shares
     from treasury
     for acquisition              --             --      1,498,869             --              --         927,793       2,426,662
                           ---------   ------------   ------------   ------------    ------------    ------------    ------------
Balance at
December 31, 2001          9,071,868        453,593     38,670,248      7,709,290         (21,250)             --      46,811,881
   Net income                     --             --             --        836,976              --              --         836,976
   Adjustment to
     unrealized
     losses on
     marketable
     securities                   --             --             --             --          (1,453)             --          (1,453)
                                                                                                                     ------------
   Comprehensive
     Income                                                                                                               835,523
                                                                                                                     ------------
   Issuance of shares
     for stock option
     exercises                63,111          3,156        396,117             --              --              --         399,273
   Tax benefit from
     stock option
     exercises                    --             --        535,655             --              --              --         535,655
                           ---------   ------------   ------------   ------------    ------------    ------------    ------------
Balance at
March 31, 2002             9,134,979   $    456,749   $ 39,602,020   $  8,546,266    $    (22,703)   $         --    $ 48,582,332
                           =========   ============   ============   ============    ============    ============    ============
</Table>

See accompanying notes to condensed consolidated financial statements.

                                       7
<PAGE>

             ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)  BUSINESS/NEW ACCOUNTING STANDARDS

     Advanced Neuromodulation Systems, Inc. (the "Company" or "ANS") designs,
     develops, manufactures and markets implantable neuromodulation devices used
     to manage chronic intractable pain and other disorders of the central
     nervous system. We also provide contract development and custom
     manufacturing for other medical device companies through our Hi-tronics
     Designs, Inc. ("HDI") subsidiary, which we acquired in January 2001. See
     Note 3. ANS neuromodulation revenues are derived primarily from sales
     throughout the United States, Europe and Australia while HDI revenues are
     derived within the United States.

     The research and development, manufacture, sale and distribution of medical
     devices are subject to extensive regulation by various public agencies,
     principally the Food and Drug Administration and corresponding state, local
     and foreign agencies. Product approvals and clearances can be delayed or
     withdrawn for failure to comply with regulatory requirements or the
     occurrence of unforeseen problems following initial marketing.

     In addition, ANS products are purchased primarily by hospitals and other
     users who then bill various third party payers including Medicare,
     Medicaid, private insurance companies and managed care organizations. These
     third party payers reimburse fixed amounts for services based on a specific
     diagnosis. The impact of changes in third party payer reimbursement
     policies and any amendments to existing reimbursement rules and regulations
     that restrict or terminate the eligibility of ANS products could have an
     adverse impact on the Company's financial condition and results of
     operations.

     In June 2001, the Financial Accounting Standards Board issued Statement of
     Financial Accounting Standards No. 141 ("SFAS 141"), "Business
     Combinations" and Statement of Financial Accounting Standards No. 142
     ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141 and SFAS 142
     are effective for fiscal years beginning after December 15, 2001. Under the
     new rules, goodwill and intangible assets deemed to have indefinite lives
     will no longer be amortized but will be subject to annual impairment tests
     in accordance with the statements. Other intangible assets will continue to
     be amortized over their useful lives. The Company adopted SFAS 141 and SFAS
     142 on January 1, 2002 and eliminated amortization of goodwill as of such
     date. Amortization expense for goodwill for the three months ended March
     31, 2001 was $139,151. The pro forma impact on net income (loss) and net
     income (loss) per share for the three months ended March 31, 2001 compared
     to the actual results for the three months ended March 31, 2002 is as
     follows:

<Table>
<Caption>
                                                         THREE MONTHS ENDED
                                                              MARCH 31,
                                                      ------------------------
                                                        2001           2002
                                                      ---------      ---------
                                                     <S>             <C>
     Reported net income (loss)..................     $  (6,261)     $ 836,976
     Goodwill amortization.......................       139,151             --
                                                      ---------      ---------
     Adjusted net income (loss)..................     $ 132,890      $ 836,976
                                                      =========      =========
     Basic net income (loss) per share:
       Reported..................................     $    (.00)     $    0.09
       Goodwill amortization.....................          0.01             --
                                                      ---------      ---------
       Adjusted..................................     $    0.01      $    0.09
                                                      =========      =========
     Diluted net income (loss) per share:
       Reported..................................     $    (.00)     $    0.08
       Goodwill amortization.....................          0.01             --
                                                      ---------      ---------
       Adjusted..................................     $    0.01(A)   $    0.08
                                                      =========      =========
</Table>

<Table>
<S> <C>
----------

(A)  Pro forma diluted shares for the three months ended March 31, 2001 include 894,160 shares
     related to the effect of dilutive stock options.
</Table>

(2)  CONDENSED FINANCIAL STATEMENTS

     The unaudited consolidated financial information contained in this report
     reflects all adjustments (consisting of normal recurring accruals)
     considered necessary, in the opinion of management, for a fair presentation
     of results for the interim periods presented. The preparation of financial
     statements in conformity with generally accepted accounting principles
     requires management to make estimates and assumptions that affect the
     reported amounts of assets and liabilities and disclosure of contingent
     assets and liabilities at the date of the financial statements and the
     reported amounts of revenues and expenses during the reporting period.
     Actual results could differ from these estimates.


                                       8
<PAGE>
             ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     Certain information and footnote disclosures normally included in financial
     statements prepared in accordance with generally accepted accounting
     principles have been condensed or omitted. These financial statements
     should be read in conjunction with the financial statements and notes
     thereto included in the Company's December 31, 2001 Annual Report on Form
     10-K. The results of operations for the period ended March 31, 2002 are not
     necessarily indicative of operations for the full year.

     The consolidated financial statements include the accounts of Advanced
     Neuromodulation Systems, Inc. and its subsidiaries. All significant
     intercompany balances and transactions have been eliminated in
     consolidation.

(3)  ACQUISITIONS

     On January 2, 2001, the Company acquired the assets of Implantable Devices
     Limited Partnership (IDP) and ESOX Technology Holdings, LLC (ESOX), two
     privately held Minnesota companies, for 119,100 shares of the Company's
     common stock. Based on the closing price of ANS common stock on December
     29, 2000, the value of the stock issued to acquire the assets was $2.43
     million. The assets purchased consisted primarily of intellectual property
     and technology for the fully implantable constant-rate infusion pump that
     ANS has developed. Prior to the acquisition, the Company had licensed
     rights to the technology only for pain and cancer therapy applications.

     Also on January 2, 2001, the Company completed the acquisition of
     Hi-tronics Designs, Inc. (HDI), a privately-held contract developer and
     original equipment manufacturer (O.E.M.) of electro-mechanical devices with
     headquarters in Budd Lake, New Jersey. The Company acquired all of HDI's
     outstanding stock through a merger in exchange for 1,104,725 shares of ANS
     common stock. The transaction was accounted for on a pooling of interests
     basis. HDI developed and manufactured the Company's totally implantable
     pulse generator (IPG) used in the treatment of chronic intractable pain and
     was also the O.E.M. manufacturer of the transmitter used with the Company's
     Renew radio-frequency spinal cord stimulation system.

     Prior to the Company's acquisition of HDI, HDI's fiscal year ended on
     November 30. Beginning in 2001, the fiscal year-ends have been conformed to
     December 31. As a result, the results of operations of HDI for the
     one-month period ending December 31, 2000 have been recorded directly to
     retained earnings in the Consolidated Statement of Stockholders' Equity for
     the period ended December 31, 2001 and are not reflected in the
     Consolidated Statements of Income.

                                       9
<PAGE>
             ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     Summary operating results of HDI for this one-month period ending December
     31, 2000, were as follows:

<Table>
<S>                                                      <C>
             Net revenue                                 $ 119,481
             Loss before income tax benefit              $(591,600)
             Net loss                                    $(347,679)
</Table>

     For the one-month period ended December 31, 2000, cash flows for HDI were
     as follows:

<Table>
<S>                                                      <C>
             Net cash used by operating activities       $(647,210)
             Net cash used by investing activities       $ (14,516)
             Net cash used by financing activities       $ (10,718)
                                                         ---------
                           Net decrease in cash          $(672,444)
                                                         ---------
</Table>

(4)  NOTE PAYABLE

     In connection with the acquisition of HDI (see Note 3), the Company
     assumed responsibility for a note payable with a principal balance of
     $177,028 at March 31, 2002. The note was entered into during March 2000,
     has a five-year term, and bears interest at a fixed rate of 9 percent per
     annum. The monthly installments for principal and interest are $5,623. The
     loan is collateralized by the equipment purchased from the proceeds of the
     note and accounts receivable of HDI. Maturities of the note payable are as
     follows: $39,631 in 2002, $57,304 in 2003, $62,738 in 2004 and $17,355 in
     2005.

(5)  MARKETABLE SECURITIES

     The following is a summary of available-for-sale securities at March 31,
     2002:

<Table>
<Caption>
                                       Gross        Gross
                                     Unrealized   Unrealized   Estimated
                          Cost         Gains        Losses     Fair Value
                        ----------   ----------   ----------   ----------

<S>                     <C>          <C>          <C>          <C>
FNMA and Federal
 Home Loan Bank notes   $  951,451   $       --   $   10,633   $  940,818
 Investment grade
   municipal bonds       1,409,616          177       12,888    1,396,905
 Real estate
   investment trust         97,682           --       11,057       86,625
                        ----------   ----------   ----------   ----------
                        $2,458,749   $      177   $   34,578   $2,424,348
                        ==========   ==========   ==========   ==========
</Table>

     Estimated fair value for the real estate investment trust is determined by
     the closing price as reported on the New York Stock Exchange at each
     financial reporting period. In the case of the investment grade municipal
     bonds and FNMA and Federal Home Loan Bank notes, the brokerage firms
     holding such bonds and notes provide the values at each reporting period by
     utilizing a standard pricing service.

     At March 31, 2002, no individual security represented more than 20 percent
     of the total portfolio or 1 percent of total assets. The Company did not
     have any investments in derivative financial instruments at March 31, 2002.

                                       10
<PAGE>
             ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(6)  COMMITMENTS AND CONTINGENCIES

     The Company entered into a sixty-three month lease agreement on its 40,000
     square feet corporate headquarters and manufacturing facility in Plano,
     Texas during February 1999. The Company relocated its operations to the
     leased facility in May 1999 and the rental period under the lease commenced
     on June 1, 1999. Under the terms of the lease agreement, the Company
     received three months free rent and the monthly rental rate for the
     remaining term of the lease is $48,308. The monthly rental rate includes
     certain operating expenses such as property taxes on the facility,
     insurance, landscape and maintenance and janitorial services. The Company
     also has the first right of refusal to acquire the facility.

     The Company also leases facilities in New Jersey as a result of the January
     2001 acquisition of HDI. One of the facilities, located in Budd Lake, New
     Jersey is 8,800 square feet of office space that is used for
     administration, design engineering, drafting, documentation and regulatory
     affairs. The lease expires on May 31, 2003 and has a monthly rental rate of
     $10,891.The Company also leases 15,000 square feet of space in
     Hackettstown, New Jersey used for the O.E.M. manufacturing operations. The
     Hackettstown lease, which expires on December 31, 2002, has a monthly
     rental rate of $9,636 and is renewable for two additional one-year periods.
     In addition, during January 2001, the Company leased 2,200 square feet of
     additional space in the Hackettstown facility adjacent to the 15,000 square
     feet of manufacturing space until June 30, 2002 at a monthly rental rate of
     $2,269.

     The Company leases transportation equipment under non-cancelable operating
     leases until May 2002 at a monthly rate of $1,472.

     The Company leases office equipment under non-cancelable operating leases
     expiring through 2004. Monthly payments on the office equipment leases are
     $3,600.

     The Company is a party to product liability claims related to ANS
     neurostimulation devices. Product liability insurers have assumed
     responsibility for defending the Company against these claims. While
     historically product liability claims for ANS neurostimulation devices have
     not resulted in significant monetary liability for the Company beyond its
     insurance coverage, there can be no assurances that the Company will not
     incur significant monetary liability to the claimants if such insurance is
     inadequate, and there can be no assurance that the Company's
     neurostimulation business and future ANS product lines will not be
     adversely affected by these product liability claims.

                                       11
<PAGE>
             ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     Except for such product liability the Company is not currently a party to
     any other pending legal proceeding. The Company maintains general liability
     insurance against risks arising out of the normal course of business.

(7)  INCOME TAXES

     The Company recorded income tax expense during the three months ended March
     31, 2002 of $471,449, an overall effective tax rate of 36.0%. This
     effective tax rate is higher than the U.S. statutory rate of 34% for
     corporations due to a provision for state taxes. During the three months
     ended March 31, 2001, the Company recorded a tax benefit of $6,899. The
     effective tax rate in 2001 of 52.4% was higher than the U.S. statutory rate
     of 34% because the Company's 2001 expense for goodwill is not deductible
     for tax purposes, and, when combined with a provision for state taxes,
     results in the higher effective tax rate. In addition, approximately
     $234,000 of the $484,000 of costs incurred in the acquisition of HDI
     recorded in the three month period ended March 31, 2001 are not deductible
     for tax purposes, which also contributed to the higher effective tax rate
     in 2001.

     As of December 31, 2001, the Company had a net operating loss carry forward
     of approximately $1.8 million which expires in years through 2022. As a
     result of the enactment of certain tax law changes during the first
     quarter, the Company will carry back approximately $1.6 million of net
     operating losses resulting in carry forwards which consist primarily of net
     operating losses acquired from HDI. This net operating loss carry forward
     may be subject to Section 382 of the Internal Revenue Code or other
     provisions which may limit the use of the net operating loss carry forward
     in any tax year.

(8)  NET INCOME PER SHARE

     Basic net income per share is computed based only on the weighted average
     number of common shares outstanding during the period. Diluted net income
     per share is computed using the additional dilutive effect, if any, of
     stock options and warrants using the treasury stock method based on the
     average market price of the stock during the period. The following table
     presents the reconciliation of basic and diluted shares:

<Table>
<Caption>
                                                   Three Months Ended March 31,
                                                   ----------------------------
                                                        2002         2001
                                                     ----------   ----------

<S>                                                   <C>         <C>
Weighted-average shares outstanding (basic shares)    9,107,985    8,894,785
Effect of dilutive stock options                      1,184,962           --
                                                     ----------   ----------
       Diluted shares                                10,292,947    8,894,785
                                                     ==========   ==========
</Table>

     For the three months ended March 31, 2002, the incremental shares used for
     dilutive income per share relate to stock options whose exercise price was
     less than the average market price in the underlying quarterly
     computations. For the three months ended March 31, 2002, all stock options
     were included in the computation of diluted income per share since all
     exercise prices were less than the average market price of the common
     shares for that three-month period. For the three months ended March 31,
     2001, no options were included in the computation of diluted income per
     share because the effect would be antidilutive.

                                       12
<PAGE>
             ADVANCED NEUROMODULATION SYSTEMS, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(9)  COMPREHENSIVE INCOME

     Total comprehensive income for 2001 and for the three months ended March
     31, 2002 is reported in the Condensed Consolidated Statements of
     Stockholders' Equity. Comprehensive loss for the three months ended March
     31, 2001 is as follows:

<Table>
<Caption>
                                              Three Months
                                           Ended March 31, 2001
                                           --------------------

<S>                                        <C>
Net loss                                       $  (6,261)
Net loss of Hi-tronics for December
2000 (see Note 3)                               (347,679)
Other comprehensive income                        26,818
                                               ---------
Comprehensive loss                             $(327,122)
                                               =========
</Table>

(10) SEGMENT INFORMATION

     The Company operates in two business segments. The Neuro Products segment
     designs, develops, manufactures and markets implantable medical devices
     that are used to manage chronic intractable pain and other disorders of the
     central nervous system through the delivery of electrical current or drugs
     directly to targeted nerve fibers. The HDI O.E.M. segment provides contract
     development and O.E.M. manufacturing of electro-mechanical devices.

     Segment data for the three months ended March 31, 2002 is as follows:

<Table>
<Caption>
                           Neuro          HDI        Intercompany   Consolidated
                          Products       O.E.M.      Eliminations      Total
                         -----------   -----------   ------------   ------------
<S>                      <C>           <C>           <C>            <C>
 Revenue from external
     customers           $ 8,988,419   $ 2,484,227   $        --    $11,472,646
 Intersegment revenues   $        --   $ 1,135,360   $(1,135,360)   $        --
 Segment income from
     operations          $   757,717   $   481,508   $        --    $ 1,239,225
Segment assets           $52,674,926   $ 6,887,338   $(3,513,259)   $56,049,005
</Table>

     Segment data for the three months ended March 31, 2001 is as follows:

<Table>
<Caption>
                           Neuro          HDI        Intercompany   Consolidated
                          Products       O.E.M.      Eliminations      Total
                         -----------   -----------   ------------   ------------
<S>                      <C>           <C>           <C>            <C>
 Revenue from external
     customers           $ 6,338,303   $ 2,002,507   $        --    $ 8,340,810
 Intersegment revenues   $        --   $   397,992   $  (397,992)   $        --
 Segment income from
     operations          $   204,367   $   128,397   $        --    $   332,764
Segment assets           $48,104,649   $ 6,547,082   $(3,437,637)   $51,214,094
</Table>

                                       13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Consolidated Financial
Statements of the Company and the related Notes.

OVERVIEW

We design, develop, manufacture and market neuromodulation devices for patients
suffering from chronic pain. Neuromodulation devices include implantable
neurostimulation devices, which deliver electric current directly to targeted
nerves, and implantable infusion pumps, which deliver small, precisely
controlled doses of drugs directly to targeted sites within the body. We also
provide contract development and custom manufacturing for other medical device
companies through our Hi-tronics Designs, Inc. subsidiary, which we acquired in
January 2001. See Note 3.

The use of neuromodulation devices is growing rapidly. According to an
independent industry study, the worldwide market for neuromodulation products
was approximately $525 million in 2001, up 21% from the previous year. This
study estimates that the market will grow to approximately $1.1 billion
worldwide by 2005, based solely on currently approved treatment indications in
the U.S. for neuromodulation devices.

Our principal neurostimulation product in 2001 was Renew(R), our latest
generation radio-frequency (RF) spinal cord stimulation device. We have sold
Renew in the U.S. since June 1999 for treatment of chronic pain of the trunk and
limbs.

On November 21, 2001, the U.S. Food and Drug Administration (FDA) approved our
Genesis(TM) totally implantable pulse generator (IPG) spinal cord stimulation
device. We began selling Genesis in Europe in the first quarter of 2001 and in
the U.S. and Australia in January 2002 for the treatment of chronic pain of the
trunk and limbs. Until our launch of the Genesis IPG, only one other company
marketed an approved IPG device in the United States.

In 2000, we completed development of AccuRx, our constant rate implantable drug
pump, in part using proprietary technology we licensed from Implantable Devices
Limited Partnership (IDP). We initiated clinical trials of AccuRx under an
Investigational Device Exemption (IDE) in the first quarter of 2001, and began
selling AccuRx in certain international markets in the second quarter of 2001.
On January 2, 2001, we strengthened our position in the neuromodulation market
by acquiring the assets of IDP and ESOX Technology Holdings, LLC (ESOX) for
119,100 shares of our common valued at approximately $2.43 million. This
acquisition provided us with intellectual property surrounding implantable drug
pump technologies in all applications, including pain and cancer therapy.

Also, on January 2, 2001, we completed the acquisition of Hi-tronics Designs,
Inc. (HDI), a privately-held O.E.M. developer and manufacturer, for
approximately 1.1 million shares of our common stock. We accounted for this
acquisition using the pooling method and, accordingly, the financial information
for all periods prior to the acquisition has been restated. Prior to the

                                       14
<PAGE>

acquisition, HDI developed and manufactured our Genesis IPG, as well as the
transmitter for our Renew system. Acquiring HDI provided us with additional
in-house expertise in the design and manufacture of highly sophisticated
electromechanical devices. Combined with our capabilities in the design and
manufacture of implantable leads, electronic device control and communication
systems and implantable drug pumps, we believe HDI's expertise will allow us to
develop more sophisticated products in less time. Additionally, HDI continues to
provide contract development and manufacturing services to third parties, which
we report as a separate segment for financial reporting purposes (the O.E.M.
segment). In the quarter ended March 31, 2002, our O.E.M. segment provided $2.48
million or 21.7% of our total revenue. We expect our O.E.M. segment revenue to
decrease as a percentage of our total revenue in the future, as we grow revenue
from our proprietary neurostimulation systems and drug pumps and increasingly
utilize HDI's research and development capabilities for internal product
development.

Our current neuromodulation product line includes our Genesis IPG system, Renew
RF system and AccuRx constant rate drug pump. With the launch of Genesis, we now
compete in 100% of the implantable neurostimulation market to treat chronic pain
of the trunk and limbs. Although Renew and Genesis are targeted toward treatment
of different chronic pain conditions, sales growth of Renew has slowed since the
launch of Genesis. Though it is too early to accurately predict future sales
trends, management believes it possible that sales of Renew may plateau or even
decline modestly, at least in the near term.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the U.S. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities and
related disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, management evaluates its estimates
and judgments, including those related to product returns, bad debts,
inventories, intangible assets, warranty obligations and contingencies and
litigation. Management bases its estimates on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

Management believes the following critical accounting policies involve its more
significant judgments and estimates used in preparation of its consolidated
financial statements.

Revenue Recognition

Revenue from the sale of our neuromodulation products and custom manufactured
O.E.M. products is recognized when the goods are shipped to our customers. We
record, as a reduction in revenue, a provision for estimated sales returns and
allowances on these product

                                       15
<PAGE>

sales in the same period as the related revenue is recorded. These estimates are
based on historical sales returns, analysis of credit memo data and other known
factors. If the historical data we use to calculate these estimates does not
properly reflect future returns, revenue could be overstated.

We also design and develop products under fixed price development agreements
with third parties. Each development agreement reflects the terms and conditions
of the project, including project objectives, product specifications,
responsibilities for tasks, licenses and fields of use of intellectual
properties, manufacturing rights and compensation, among other terms and
conditions. A typical development project will take one to two years to complete
and is undertaken in accordance with the FDA's Quality System Regulations, which
address design controls and methods, facilities and quality assurance controls
used in manufacturing medical devices, and similar international standards. We
recognize revenue and profit under the development agreements using the
percentage-of-completion method, which relies on estimates of total expected
revenue and costs. We follow this method since reasonably dependable estimates
of revenue and costs applicable to various stages of a development agreement can
be made. If we do not accurately estimate the resources required or the scope of
work to be performed under a development agreement, then future profit margins
and results of operations may be negatively impacted.

In certain cases, we will undertake a development project on a cost plus basis.
In these cases, we invoice the customer for actual time and material expended on
the project at predetermined hourly billing rates and mark ups.

Bad Debt

We are required to estimate the collectibility of our trade receivables. A
considerable amount of judgment is required in assessing the ultimate
realization of the receivables including the current credit-worthiness of each
customer. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances or write-offs may be required.

Inventory

Our reserve for excess and obsolete inventory is based upon forecasted demand
for our products. If the demand for our products is less favorable than those
projected by management, additional inventory write-downs or write-offs may be
required.

Intangible Assets

Goodwill associated with the excess purchase price over the fair value of assets
acquired was amortized using the straight-line method through December 31, 2001
over the estimated life of 20 years.

On January 1, 2002, we adopted Statement of Financial Accounting Standards No.
141, "Business Combinations" and Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets". Under the new accounting rules,
goodwill and intangible assets deemed to have indefinite lives are no longer
amortized but will be subject to annual impairment tests in accordance with the
statements. We determined that our

                                       16
<PAGE>

goodwill at December 31, 2001 was unimpaired and eliminated amortization of the
goodwill effective January 1, 2002. Prior to adoption of these statements, our
amortization expense for goodwill was $139,151 per quarter, or $556,604 on an
annual basis.

Other identifiable intangible assets, such as patents, purchased technology,
trademarks and covenants not to compete, are currently amortized on the
straight-line method over their estimated useful lives.

In assessing the recoverability of our intangible assets, we must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the respective assets. If these estimates or their related
assumptions change in the future, we may be required to record impairment
charges for these assets not previously recorded.

Warranty Obligations

Our products are generally covered by a one-year warranty. We accrue a warranty
reserve for estimated costs to provide warranty services. Our estimate of costs
to service our warranty obligations is based on historical experience and
expectation of future conditions. To the extent we experience increased warranty
claim activity or increased costs associated with servicing those claims, our
warranty accrual will increase resulting in decreased gross profit.

Contingencies

We are subject to proceedings, lawsuits and other claims related to our products
and business. We are required to assess the likelihood of any adverse judgments
or outcomes to these matters, as well as potential ranges of probable losses. A
determination of the amount of reserves required, if any, for these
contingencies is made after careful analysis of each individual issue. The
required reserves may change in the future due to new developments in each
matter or changes in approach, such as a change in settlement strategy, in
dealing with these matters.

Currently, product liability claims are the only litigation to which we are a
party. While historically our product liability claims have not resulted in
significant monetary liability beyond our insurance coverage, an adverse
judgment beyond our insurance coverage could have a material adverse impact on
our results of operations and financial condition.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2002 and 2001

We reported net income of $837,000, or $.08 per diluted share, for the three
months ended March 31, 2002, compared to a net loss of $6,300 or $.00 per
diluted share in the same 2001 period. Results for the first quarter of 2002
reflect the U.S. launch of our Genesis IPG system. The net loss during the 2001
period included $484,000 of expense for costs associated with our acquisition of
HDI in January 2001. These costs were expensed instead of capitalized because
the acquisition is accounted for under the pooling of interests method.
Excluding such acquisition related costs, on a pro forma basis, net income was
$269,000, or $.03 per diluted share, for the three-month period ended March 31,
2001.

                                       17
<PAGE>

Net revenue increased 37.5% to $11.47 million for the three months ended March
31, 2002, compared to $8.34 million in the comparable 2001 period. Net revenue
of our neuromodulation products increased 41.8% to $9.00 million in 2002 from
$6.34 million in 2001 due to the U.S. launch of our Genesis IPG system. Net
revenue from our O.E.M. business increased 24.1% to $2.48 million in 2002 from
$2.00 million in 2001 due to higher volume of O.E.M. product sales and contract
engineering fees.

Gross profit increased to $6.96 million during the three months ended March 31,
2002 from $4.77 million in 2001, principally due to the increase in net revenue
discussed above. Additionally, gross profit margins increased to 60.7% in 2002,
compared to 57.2% in 2001, due to higher sales of our neuromodulation products,
which contribute higher margins than O.E.M. product sales, and operational
efficiencies from higher manufacturing volumes.

Total operating expenses increased to $5.72 million for the three months ended
March 31, 2002 from $4.44 million in the same period during 2001. However, as a
percentage of net revenue, these expenses decreased to 49.9% in 2002 from 53.2%
in 2001 due to elimination of goodwill amortization and leveraging of research
and development expense.

Research and development expense increased to $1.29 million, or 11.3% of net
revenue, during the three months ended March 31, 2002, from $1.15 million, or
13.8% of net revenue, during the same period in 2001. This increase in the
absolute dollar amount in 2002 compared to 2001 was the result of higher salary
and benefit expense from staffing additions, annual salary increases, and higher
test material expense. Our development efforts continue to be focused on
next-generation IPG stimulation systems, next-generation RF stimulation systems,
an IPG stimulation systems for deep brain stimulation to address essential
tremor and Parkinson's Disease, next generation drug pumps, and clinical trials
of our AccuRx.

Sales and marketing expense, as a percentage of net revenue, increased to 25.2%
during the three months ended March 31, 2002 from 24.7% in the same 2001 period,
and the absolute dollar amount increased to $2.90 million in 2002 from $2.06
million during 2001. This increase in the absolute dollar amount during 2002
compared to 2001 was principally attributable to higher salary and benefit
expense from staffing additions in direct sales, reimbursement and sales support
positions, annual salary increases, higher commission expense from increased
product sales, and higher sample and promotional expense in support of the
Genesis IPG launch.

General and administrative expense, as a percentage of net revenue, increased to
11.4% during the three months ended March 31, 2002 from 11.0% in the same 2001
period, and the absolute dollar amount increased to $1.30 million in 2002 from
$918,000 during 2001. This increase in the absolute dollar amount of $384,000
during 2002 compared to 2001 was principally attributable to higher salary
expense from staffing additions, annual salary increases, higher employee
benefit costs and increased legal costs.

No amortization expense of goodwill was recorded during the three months ended
March 31, 2002 due to the adoption of Statement of Financial Accounting
Standards No. 141 and Statement of Financial Accounting Standards No. 142 on
January 1, 2002. For the three months ended March 31, 2001, we recorded $139,000
of amortization expense for goodwill.

                                       18
<PAGE>

Amortization of other intangibles increased to $228,000 during the three months
ended March 31, 2002 from $173,000 in the same period in 2001, due to additional
patent amortization.

Other income increased to $69,000 during the three months ended March 31, 2002
from an expense of $346,000 during the three months ended March 31, 2001
primarily as a result of the $484,000 of expense associated with the acquisition
of HDI.

Income tax expense increased to $471,000 during the three months ended March 31,
2002 from a tax benefit of $6,900 for the same period in 2001. The 2001 period
reflects a loss before income taxes of $13,000 due to the costs associated with
the acquisition of HDI recorded in the first quarter of 2001.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2002 our working capital increased to $26.93 million from $24.91
million at December 31, 2001. The ratio of current assets to current liabilities
was 6.32:1 at March 31, 2002, compared to 4.77:1 at December 31, 2001. Cash,
cash equivalents and marketable securities totaled $10.82 million at March 31,
2002 compared to $11.94 million at December 31, 2001.

We increased our investment in inventories to $10.45 million at March 31, 2002,
from $9.75 million at December 31, 2001. This increase from year-end 2001 was
primarily additional inventory to support our market launch of the Genesis IPG
including consignment inventory for additional sales agents to whom we provide
approximately $30,000 in consignment inventory each.

We spent $351,000 during the three months ended March 31, 2002 for capital
expenditures for additional equipment and fixtures. These expenditures consisted
primarily of additional tooling, molds and test equipment for new parts and
products we developed, and furniture and data processing equipment for new
personnel we have hired. We expect capital expenditures for the remainder of
fiscal 2002 to approximate $2.1 million.

We received $399,000 of cash during the three months ended March 31, 2002 from
the exercise of 63,111 stock options.

We believe our current cash, cash equivalents, marketable securities and cash
generated from operations will be sufficient to fund our current operating needs
and capital expenditures for the foreseeable future. We currently have no credit
facilities in place. If we decide to acquire complementary businesses, product
lines or technologies, or enter into joint ventures or strategic alliances that
require substantial capital, we intend to finance those activities by the most
attractive alternative available, which could include bank borrowings, or the
issuance of debt or equity securities.

On April 24, 2002, we filed a registration statement with the Securities and
Exchange Commission to register for issuance and sale by us through underwriters
of up to 2,875,000 shares of common stock, which includes 375,000 shares subject
to an over-allotment option granted to the underwriters. This registration
statement has not yet become effective. The securities may not be sold, nor may
offers to buy be accepted, prior to the time the

                                       19
<PAGE>

registration statement becomes effective. We plan to use the net proceeds from
this offering, if and when completed, to expand our worldwide sales and
marketing resources, to fund development of new technologies, products and
applications for existing products, to pursue regulatory approvals, and to
invest in product lines, businesses, companies, services or technologies that
complement our current business through mergers, acquisitions, joint ventures
or otherwise, as well as for working capital and other general purposes.

CASH FLOWS

Net cash used by operations was $1.06 million for the three months ended March
31, 2002, while operating activities provided cash of $755,000 during the same
period in 2001. Although we reported net earnings of $837,000 during the 2002
period compared to a net loss of $6,300 in the 2001 period, we used cash in our
operating activities during 2002 primarily for increases in accounts receivable
and inventories of $1.0 million and $705,000, respectively, and for reducing our
current liabilities by nearly $1.54 million.

Net cash used in investing activities was $717,000 for the three months ended
March 31, 2002, as compared to $1.35 million for the same period in 2001, a
decrease of $633,000. This decrease in the use of cash in investing activities
during the 2002 period compared to 2001 was the result of a $761,000 reduction
in additions to patents and intangible assets and capital expenditures for
equipment and fixtures.

Net cash provided by financing activities was $387,000 for the three months
ended March 31, 2002, as compared to $118,000 for the same period in 2001.
During the first quarter of 2002, we used $13,000 to reduce certain debt
obligations, while we received $399,000 from the exercise of stock options.
During the first quarter of 2001, we used $12,000 to reduce our obligations
under certain debt agreements, while we received $130,000 from the exercise of
stock options.

CURRENCY FLUCTUATIONS

Substantially all of our international sales are denominated in U.S. dollars.
Fluctuations in currency exchange rates in other countries could reduce the
demand for our products by increasing the price of our products in the currency
of the countries in which the products are sold, although we do not believe
currency fluctuations have had a material effect on the Company's results of
operations to date.

                                       20
<PAGE>

OUTLOOK AND UNCERTAINTIES

The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: The matters discussed in this Quarterly Report on
Form 10-Q contain statements that constitute forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
The words "expect", "estimate", "anticipate", "predict", "believe", "plan",
"will", "should", "intend", "potential", "new market", "potential market
applications" and similar expressions and variations thereof are intended to
identify forward-looking statements. Such statements appear in a number of
places in this Quarterly Report on Form 10-Q and include statements regarding
our intent, belief or current expectations with respect to, among other things:
(i) trends affecting our financial condition or results of operations; (ii) our
financing plans; and (iii) our business growth strategies. We caution our
readers that any forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual results may differ
materially from those projected in the forward-looking statements as a result of
various factors. These risks and uncertainties include the following:

o    failure of our Genesis IPG to gain market acceptance would adversely affect
     our revenue growth and profitability

o    because our main competitor has significantly greater resources than we do
     and new competitors may enter the neuromodulation market, it may be
     difficult for us to compete in this market

o    if pain management specialists do not recommend and endorse our products,
     our sales could be negatively impacted and we may be unable to increase our
     revenues and profitability

o    the launch of Genesis and other market factors could impede growth in or
     reduce sales of Renew, which would adversely affect our revenues and
     profitability

o    if patients choose less invasive or less expensive alternatives to our
     products, our sales could be negatively impacted

o    any adverse changes in coverage or reimbursement amounts by Medicare and
     Medicaid, private insurance companies and managed care organizations, or
     workers' compensation programs could limit our ability to market and sell
     our products

o    if we fail to protect our intellectual property rights, our competitors may
     take advantage of our ideas and compete directly against us

o    other parties may sue us for infringing their intellectual property rights

o    failure to obtain necessary government approvals for new products or for
     new applications for existing products would mean we could not sell those
     new products, or sell our existing products for those new applications

o    modification of any marketed device could require a new 510(k) clearance or
     PMA or require us to cease marketing or recall the modified device until we
     obtain this clearance or approval

o    we will be unable to sell our products if we fail to comply with
     manufacturing regulations

o    our products are subject to product recalls even after receiving FDA
     clearance or approval, which would negatively affect our financial
     performance and could harm our reputation

o    we are subject to potential product liability claims and we may not have
     the insurance or other resources to cover the cost of any successful claim

                                       21
<PAGE>

o    we are subject to substantial government regulation and our failure to
     comply with all applicable government regulations could subject us to
     numerous penalties, any of which could adversely affect our business

o    our reliance on single suppliers for critical components used in our main
     products could adversely affect our ability to deliver products on time

o    two distributors currently account for a significant percentage of our
     revenue from our neuromodulation products segment, and several of our
     competitors currently account for a significant percentage of our revenue
     from our O.E.M. segment

o    we are dependent upon the success of neuromodulation technology; our
     inability to continue to develop innovative neuromodulation products, or
     the failure of the neuromodulation market to develop as we anticipate,
     would adversely affect our business

o    our success will depend on our ability to attract and retain key personnel
     and scientific staff

o    if we choose to acquire complementary business, products or technologies
     instead of developing them ourselves, we may be unable to complete these
     acquisitions or to successfully integrate an acquired business, product or
     technology in a cost-effective and non-disruptive manner

o    we are subject to additional risks associated with international operations

o    our operations are conducted at three locations, and a disaster at any of
     these facilities could result in a prolonged interruption of our business

o    general economic risks

o    other risks detailed from time to time in our SEC public filings

Consequently, if our assumptions prove to be incorrect or such risks or
uncertainties materialize, anticipated results could differ materially from
those forecasted in forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For the period ended March 31, 2002, the Company did not experience material
changes in market risk exposures that affect the quantitative and qualitative
disclosures presented in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.

                                       22
<PAGE>

                                     PART II

                                OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibit 3.1- Articles of Incorporation, as amended and restated (1)

          Exhibit 3.2- ByLaws (1)

          Exhibit 4.1- Rights Agreement dated as of August 30, 1996, between
          Quest Medical, Inc. and KeyCorp Shareholder Services, Inc. as Rights
          Agent (2)

          Exhibit 4.2- Amendment to Rights Agreement dated as of January 25,
          2002, between Advanced Neuromodulation Systems, Inc and Computershare
          Investor Services LLC (formerly KeyCorp Shareholder Services, Inc.)
          (3)

          Exhibit 10.16- Employment Agreement dated as of April 1, 2002, between
          Christopher G. Chavez and Advanced Neuromodulation Systems, Inc.(4)

          Exhibit 10.17- Employment Agreement dated as of April 1, 2002, between
          Kenneth G. Hawari and Advanced Neuromodulation Systems, Inc.(4)

          Exhibit 10.18- Special Termination Agreement dated as of April 1,
          2002, between Christopher G. Chavez and Advanced Neuromodulation
          Systems, Inc.(4)

          Exhibit 10.19- Special Termination Agreement dated as of April 1,
          2002, between Kenneth G. Hawari and Advanced Neuromodulation Systems,
          Inc.(4)

     (b)  The Company filed a report on Form 8-K on January 30, 2002, to report
          certain amendments adopted by the Board of Directors on January 25,
          2002 to the existing Rights Agreement between the Registrant and
          Computershare Investor Services LLC dated as of August 30, 1996.

----------

(1)  Filed as an Exhibit to the report of the Company on Form 10-K for the year
     ended December 31, 2000, and incorporated herein by reference.

(2)  Filed as an Exhibit to the report of the Company on Form 8-K dated
     September 3, 1996, and incorporated herein by reference.

(3)  Filed as an Exhibit to the report of the Company on Form 8-K dated January
     30, 2002, and incorporated herein by reference.

(4)  Filed herewith.

                                       23
<PAGE>

                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                       ADVANCED NEUROMODULATION SYSTEMS, INC.

Date: April 24, 2002                   By: /s/ F. Robert Merrill III
                                           -------------------------------------
                                           F. Robert Merrill III
                                           Executive Vice President, Finance
                                           Chief Financial Officer and Treasurer

                                       24
<PAGE>

                                  EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NUMBER            DESCRIPTION
-------           -----------

<S>               <C>
 3.1              Articles of Incorporation, as amended and restated (1)

 3.2              ByLaws (1)

 4.1              Rights Agreement dated as of August 30, 1996, between Quest
                  Medical, Inc. and KeyCorp Shareholder Services, Inc. as Rights
                  Agent (2)

 4.2              Amendment to Rights Agreement dated as of January 25, 2002
                  between Advanced Neuromodulation Systems, Inc and
                  Computershare Investor Services LLC (formerly KeyCorp
                  Shareholder Services, Inc.) (3)

 10.16            Employment Agreement dated as of April 1, 2002, between
                  Christopher G. Chavez and Advanced Neuromodulation Systems,
                  Inc.(4)

 10.17            Employment Agreement dated as of April 1, 2002, between
                  Kenneth G. Hawari and Advanced Neuromodulation Systems,
                  Inc.(4)

 10.18            Special Termination Agreement dated as of April 1, 2002,
                  between Christopher G. Chavez and Advanced Neuromodulation
                  Systems, Inc.(4)

 10.19            Special Termination Agreement dated as of April 1, 2002,
                  between Kenneth G. Hawari and Advanced Neuromodulation
                  Systems, Inc.(4)
</Table>

----------

(1)  Filed as an Exhibit to the report of the Company on Form 10-K for the year
     ended December 31, 2000, and incorporated herein by reference.

(2)  Filed as an Exhibit to the report of the Company on Form 8-K dated
     September 3, 1996, and incorporated herein by reference.

(3)  Filed as an Exhibit to the report of the Company on Form 8-K dated January
     30, 2002, and incorporated herein by reference.

(4)  Filed herewith.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.16
<SEQUENCE>3
<FILENAME>d96263ex10-16.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT - CHRISTOPHER CHAVEZ
<TEXT>
<PAGE>
                                                                   EXHIBIT 10.16

                              EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered to be
effective as of April 1, 2002, by and between Advanced Neuromodulation Systems,
Inc. (the "Company" or "ANS") and Christopher G. Chavez ("Employee").

                                    RECITALS

     The Company has special expertise in its business that has enabled it to
provide unique career opportunities for its employees.

     The Company's growth depends, to a significant degree, on its possession of
more and better information than that available to its competitors concerning a
number of matters, including but not limited to, research, systems, development,
marketing, management and other information not generally known to others in the
Company's industry. To obtain such information and use it successfully, the
Company has made significant investments in research, business development,
customer satisfaction methods and techniques, business process improvements and
other developments in marketing methods and providing services to its customers.
This unique and special expertise in pooling this information has enabled the
Company to conduct its business successfully and thus provide potential
employment opportunities for its employees.

     The parties acknowledge that Employee has his own valuable knowledge and
training in certain of the areas in which the Company conducts its business but
that his knowledge will be enhanced by this employment.

     Employee recognizes that unless the Company imparts to him its special
expertise, he would be less effective and of less benefit to the Company.
Employee further acknowledges that without the additional knowledge to be
imparted to him by the Company, he will be less valuable than would otherwise be
the case in its business.

     Employee understands and acknowledges that a covenant not to compete and a
restriction on disclosure of confidential information is essential to the
continued growth and stability of the Company's business and to the continuing
viability of its business in the event the Employee's employment is terminated
as expressly permitted under the terms and limitations of this Agreement.

     The Employee desires employment as an employee of the Company under the
terms and conditions of this Agreement and further desires to be given access to
the Company's proprietary information.

     The Company desires to employ Employee under the terms and conditions of
this Agreement.

     NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the parties agree as follows:

     1. Employment. Subject to the terms and conditions set forth in this
Agreement, the Company employs Employee, and Employee hereby accepts such
employment by the Company.

<PAGE>

     2. Duties of Employee.

        (a) Employee shall serve in the capacities of Chief Executive Officer
and President of ANS, and shall be subject to supervision by the Board of
Directors of ANS. In such capacities, Employee shall have all necessary powers
to discharge his responsibilities. Employee shall have all powers granted by the
Bylaws of the Company to the President, and Employee shall report to the Board
of Directors of the Company. For so long as Employee serves in the foregoing
capacities, the Company shall nominate and support the election of Employee as a
member of the Board of Directors.

        (b) During the term of this Agreement, and thereafter so long as
Employee is employed by the Company, Employee shall devote his full business
time and effort to the performance of his duties and responsibilities as an
officer of the Company. Notwithstanding the foregoing, Employee may spend
reasonable amounts of time on personal civic and charitable activities that do
not interfere with the performance of his duties and responsibilities to the
Company. In addition, Employee may, subject to prior approval by the Board of
Directors of the Company, spend reasonable amounts of time serving on boards of
directors for other companies, provided that such service does not, in the sound
discretion of the Board of Directors of the Company, constitute or create a
conflict of interest.

        (c) Employee shall observe and comply with the written rules and
regulations of the Company respecting its business and shall carry out and
perform the directives and policies of the Company as they may from time to time
be stated to Employee in writing by the Chairman of the Board of Directors.

        (d) Employee shall maintain accurate business records as may from time
to time be required by the Company. Such records may be examined by the Company,
at all reasonable times after written request is delivered to Employee. Any such
document shall be delivered to the Company promptly upon request.

        (e) Employee agrees not to solicit or receive any income or other
compensation from any third party in connection with his employment with the
Company. Employee agrees, upon written request by the Company, to render an
accounting of all transactions relating to his business endeavors during the
term of this employment hereunder.

     3. Term. The term of this Agreement (the "Term") shall commence effective
as of April 1, 2002 (the "Effective Date") and continue until the third
anniversary of the Effective Date, unless Employee's employment is earlier
terminated in accordance with Section 10 of this Agreement; provided, however,
that, on the third and subsequent anniversary dates of this Agreement or any
extension, this Agreement will automatically be extended for an additional year
unless, not later than 90 calendar days prior to such anniversary date, the
Company shall have given written notice to the Employee that it does not wish to
extend the Term. Upon expiration of the term of this Agreement, Employee shall
remain an "at will" employee of the Company but shall still be subject to and
bound by the terms of this Agreement.

     4. Salary. Commencing on the Effective Date, the Company will pay Employee
a minimum base annual salary during the term of this Agreement for his services
as an officer of $253,500, which shall be payable in accordance with the
Company's standard payroll practice, but

<PAGE>

not less than monthly. Such base salary will not include any benefits made
available to Employee or any contributions or payments made on his behalf
pursuant to any employee benefit plan or program of the Company, including any
health, disability or life insurance plan or program, 401-K plan, cash bonus
plan, stock incentive plan, retirement plan or similar plan or program of any
nature. The Company shall review Employee's salary on an annual basis, and shall
increase the annual salary of Employee from time to time as may be warranted in
accordance with the Company's compensation policies.

     5. Bonus Compensation. The Company shall pay Employee an annual cash bonus
in accordance with Company policy established by the Board from time to time, as
described in Exhibit "A" to this Agreement.

     6. Stock Options: The Company will grant Employee non-transferable stock
options to purchase shares of the Company Common Stock in number and on such
terms and conditions as the Company's Compensation Committee determines.

     7. Executive Allowances and other Fringe Benefits: The Company will provide
Employee an annual executive allowance to cover the cost of Employee's personal
tax planning and country club dues.

     8. Other Employee Benefits. During the term of this Agreement, the Company
will provide Employee with all benefits made available from time to time by the
Company to its executive officers and /or other employees, such benefits to be
in accordance with the Company's policies, except that if Employee's employment
with the Company is terminated, Employee's cash severance payments shall be in
accordance with Section 10 of this Agreement, in lieu of cash severance payments
provided by the policies of the Company. Specifically, Employee's benefits shall
include participation in medical, dental and vision plans or programs (providing
coverage for Employee's immediate family); disability insurance; 401-K plan;
life insurance payable to Employee's designated beneficiary; executive car
allowance; and paid vacation (up to four weeks). In the event that Employee's
employment with the Company is terminated, the Company agrees to pay in full all
premiums associated with Employee's election to continue health benefits
provided hereunder for a period of two years following the date of termination.

     9. Reimbursement of Expenses. The Company shall reimburse Employee for all
expenses actually and reasonably incurred by him in the business interests of
the Company. Such reimbursement shall be made to Employee upon appropriate
documentation of such expenditures in accordance with the Company's written
policies.

     10. Early Termination. It is the desire and expectation of each party that
the employer-employee relationship shall continue for the full term specified
herein and be a pleasant and rewarding experience for the parties hereto. The
Company shall, however, be entitled to terminate Employee's employment at any
time before or after the Effective Date with or without Cause (as defined in
this Section 10). Termination shall require approval by majority vote of the
board of directors of the Company.

         If Employee's employment is terminated without Cause (as defined in
this Section 10), the Company shall pay Employee severance compensation pursuant
to the following formulas:

         (a) In the event of a termination without Cause during the term of this
Agreement, Employee shall receive a lump sum amount equal to 200% of the sum of
(A) the

<PAGE>

highest annual salary of Employee in effect at any time during the Term or the
salary of Employee in effect immediately prior to the termination without Cause,
whichever is the larger amount, plus (B) the amount of the bonus or incentive
compensation targeted for payment to the Employee for the fiscal year during
which the termination without Cause occurs.

         (b) In the event of a termination without Cause at any time during the
term of this Agreement, Employee shall also receive a job search lump sum
payment of $25,000.

         (c) However, if the termination without Cause is the result of a
"Change in Control" as that term is defined in the Special Termination Agreement
between the Company and the Employee dated as of April 1, 2002, then Employee
will not be entitled to any payments under the preceding subparagraphs (a) and
(b), and the Company's severance compensation obligations to Employee shall be
governed by the terms of that Special Termination Agreement.

         If Employee dies, is unable to perform his duties and responsibilities
as a result of disability that continues for 90 consecutive days or more
("Disability"), voluntarily resigns from the Company, or is terminated for
"Cause," the Company shall pay Employee (or his estate, executor or legal
representative, as appropriate) any salary and bonus that has accrued to the
date employment ceases, and the Company's obligations to pay additional salary
or cash compensation or benefits shall terminate as of such date.

         "Cause," for the purpose of this Agreement, shall mean the occurrence
of any of the following events:

         (a) Performance by Employee of illegal or fraudulent acts, criminal
conduct or willful misconduct relating to the activities of the Company;

         (b) A conviction of or nolo contendere plea by Employee for any
criminal acts involving moral turpitude having or reasonably likely to have a
material adverse effect upon the Company, including, without limitation, upon
its profitability, reputation or goodwill;

         (c) Willful or grossly negligent failure by Employee to perform his
duties in a manner consistent with the Company's best interests;

         (d) Willful refusal by Employee to carry out reasonable written
instructions of the Company's Board of Directors not inconsistent with the
provisions of this Agreement;

         (e) Violation by Employee of any of Employee's covenants and agreements
contained in Sections 11, 12 or 13 of this Agreement; or

         (f) Any other material breach of Employee's obligations hereunder,
which he fails to cure within thirty days after receiving written notice
thereof.

     11. Non-Competition Agreement.

         (a) Employee understands and the Company promises that during the
course of his employment by the Company, Employee will have access to and the
benefit of the information referred to in the Recitals above, specifically Trade
Secrets and Confidential Information, and will represent the Company and develop
contacts and relationships with other persons and entities,

<PAGE>

including but not limited to customers, potential customers and other employees
of such entities. To protect the Company's interest in preserving its Trade
Secrets, Confidential and other protected information and in the Business Good
Will generated by new contacts and relationships, and as a direct inducement and
consideration for the Company's promises to provide new Trade Secrets, new
Confidential Information and new contacts, the Employee agrees and covenants to
the duties and obligations created by this covenant not to compete.

         (b) The Employee agrees that all duties assumed by this covenant not to
compete include any actions taken by the Employee directly or indirectly, either
as an individual or as an employee, partner, officer, director, shareholder,
advisor, or consultant or in any other capacity whatsoever, of any person (other
than ownership of less than 1% of the issued and outstanding voting securities
of a publicly held corporation).

         (c) Employee covenants he:

             (1) will not recruit, hire, assist others in recruiting or hiring,
discuss employment with, or refer to others for employment any person who is, or
within the 12 month period immediately preceding the date of any such activity
was, an employee of either Company or any of its Affiliates;

             (2) Employee agrees that during the term of his employment with the
Company and for a period of two years thereafter, without regard to the party
terminating such employment or the reason for termination, if any, Employee will
not, without prior written approval by the Board of Directors for the Company,
in the United States or in any foreign country in which either Company is then
marketing its products or services, directly or indirectly engage in or own or
control an interest in (except as to those investments held at the effective
date of this agreement or as a passive investor in publicly held Company, i.e.,
Employee and Employee's relatives do not own of record, or beneficially, an
aggregate of more than one percent of any class of outstanding securities) or
act as an officer, director, or employee of, or consultant or adviser to, any
firm, corporation, institution or entity, directly or indirectly in competition
with or engaged in a business substantially similar to that of Employer,
including the research, development, manufacture, sale or marketing of products,
devices, instruments, methods or techniques (or any related services or
activities) similar to any products, devices, instruments, methods or techniques
which either Company is engaged in the research of, development of, manufacture,
selling, or marketing, or has under consideration to do the same (whether or not
such products, devices, instruments, methods or techniques or the technology
related thereto were obtained from Employee), during the term of the Employee's
employment. This provision 11(c)(2) is not intended to, and shall not be
construed in such a manner as to, prevent Employee from securing gainful
employment within the health care industry except with those entities whose
products, devices, instruments, methods or techniques (or any related services
or activities) substantially compete with those of the Company.

         (d) It is understood and agreed that the scope of the foregoing
covenant is reasonable as to time, scope and geography and is necessary to
protect the legitimate business interests of the Company, in the Confidential
Information and Trade Secrets the Company have promised to share with Employee.
It is further agreed that such covenant will be regarded as divisible and will
be operative as to time, area and persons to the extent that it may be so
operative, and if any part of such covenant is declared invalid, unenforceable,
or void as to time, area or persons, the validity and enforceability of the
remainder will not be affected.

<PAGE>

         (e) If Employee violates the restrictive covenants of this Section 11
and the Company brings legal action for injunctive or other relief, neither
Company shall be deprived of the benefit of the full period of the restrictive
covenant, as a result of the time involved in obtaining the relief. Accordingly,
to the extent allowed by law, the Employee agrees that the restricted period
following the term of employment shall have a duration of one year, and the
regularly scheduled expiration date of such covenant shall be extended by the
same amount of time that Employee is determined to have violated such covenant.

     12. Confidentiality. Employee acknowledges that he has learned and will
learn Confidential Information (as defined herein) relating to the business
conducted and to be conducted by the Company. The Company promises to provide
all needed Confidential Information to the Employee. Employee agrees that he
will not during the term of employment with the Company or at any time after the
termination of such employment, without regard to the party terminating such
employment, except in the normal and proper course of his duties hereunder,
disclose or use or authorize any third party to disclose or use any such
Confidential Information, without prior written approval of the Company. As used
in this Section 12, "Confidential Information" shall mean information disclosed
to or known to Employee as a direct or indirect consequence of or through his
employment with the Company, about the Company's business, methods, business
plans Company, operations, products, processes, and services, including, but not
limited to, information relating to research, development, inventions,
recommendations, programs, systems, and systems analyses, flow charts, finances,
and financial statements, marketing plans, Company and strategies,
merchandising, pricing strategies, merchandise sources, client sources, system
designs, procedure manuals, automated data programs, financing methods,
financial projections, terms and conditions of arrangements of any business,
computer software, terms and conditions of business arrangements with customers
or suppliers, reports, personnel procedures, supply and services resources,
names and addresses of clients, the Company's contacts, names of professional
advisors, and all other information pertaining to customers and suppliers,
including, but not limited to assets, business interests, personal data and all
other information pertaining to the Company, clients or suppliers whatsoever,
including all accompanying documentation therefor. All information disclosed to
Employee, or to which Employee has access during the period of his employment,
for which there is any reasonable basis to be believed is, or which appears to
be treated by the Company as Confidential Information, shall be presumed to be
Confidential Information hereunder. Confidential Information shall not, however,
include information that (i) is publicly known or becomes publicly known through
no fault of Employee, or (ii) is generally or readily obtainable by the public,
or (iii) constitutes general skills, knowledge and experience acquired by
Employee before and/or during his employment with the Company.

     Employee agrees that all documents of any nature pertaining to activities
of the Company or its Affiliates, or that include any Confidential Information,
in his possession now or at any time during the term of his employment,
including without limitation, memoranda, notebooks, notes, data sheets, records
and computer programs, are and shall be the property of such entity and that all
copies thereof shall be surrendered to the appropriate entity upon termination
of his employment.

     13. Inventions; Developments. Employee agrees to notify the Company of any
discovery, invention, innovation, or improvement which is related to the
Business or to the business of any customer or supplier (collectively called
"Developments") conceived or developed by Employee during the term of the
Employee's employment. Developments shall include, without limitation,
developments in computer software, logical systems, algorithms, and any or all
other intellectual properties related to the Business. All Developments,
including but not limited to all written documents pertaining thereto, shall be
the exclusive property of the Company or the

<PAGE>

Company, as the case may be, and shall be considered Confidential Information
subject to the terms of this Agreement. Employee agrees that when appropriate,
and upon written request of the Company or the Company, the Employee will
acknowledge that Developments are "works for hire" and will file for patents or
copyrights with regard to any or all Developments and will sign documentation
necessary to evidence ownership of Developments in the Company.

     14. Exit Interview. To insure a clear understanding of this Agreement,
including but not limited to the protection of the Company's business interests,
Employee agrees, at no additional expense to the Company, to engage in an exit
interview with the Company prior to Employee's departure from the Company at a
time and place designated by the Company. In the event that the exit interview
takes place in a location outside of the Dallas/Fort Worth metropolitan area,
the Company agrees to reimburse Employee for reasonable expenses associated with
his travel to and from said exit interview.

     15. Right of Setoff. the Company shall be entitled, at its option and not
in lieu of any other remedies to which they may be entitled, to set off any
amounts due Employee or any Affiliate of Employee against any amount due and
payable by Employee or any Affiliate of Employee to the Company ("Set-Offs")
pursuant to this Agreement or otherwise, provided that the Set-Offs are set
forth in detail in writing with supporting evidence to substantiate each
Set-Off.

     16. Notice Provision. Any notice, demand or request required or permitted
to be given or made under this Agreement shall be in writing and shall be deemed
given or made when delivered in person, when sent by United States registered or
certified mail, or postage prepaid, or when telecopied to a party at its address
or telecopy number specified below:

         If to the Company:

         Advanced Neuromodulation Systems, Inc.
         6501 Windcrest Drive, Suite 100
         Plano, Texas 75024
         Telecopy number: (972) 309-8150

         If to Employee:

         Christopher G. Chavez
         2900 Cedar Ridge Dr.
         McKinney, Texas 75070

     The parties to this Agreement may change its addresses for notice in the
manner provided above.

     17. Headings Non-binding. All section titles and captions in this Agreement
are for convenience only, shall not be deemed part of this Agreement, and in no
way shall define, limit, extend or describe the scope or intent of any
provisions hereof.

     18. Words to have Contextual Meaning. Whenever the context may require, any
pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa. Additionally, the words "and" and "or"
shall be given its contextual meaning and not be interpreted blindly as being
solely conjunctive or disjunctive, as the case may be.

<PAGE>

     19. Execution of Agreement. The parties shall execute all documents,
provide all information and take or refrain from taking all actions as may be
reasonably necessary or appropriate to achieve the purposes of this Agreement.

     20. Partial Assignment Clause. This Agreement shall be binding upon and
inure to the benefit of the parties hereto, its representatives and permitted
successors and assigns. Employee's duties hereunder are personal services and
are not assignable. Except for the provisions of Sections 11, 12 and 13 of this
Agreement, which are intended to benefit the Company and the Company's
Affiliates as third party beneficiaries, or as otherwise expressly provided in
this Agreement, nothing in this Agreement, express or implied, is intended to
confer upon any person other than the parties to this Agreement, its respective
representatives and permitted successors and assigns, any rights, remedies or
obligations under or by reason of this Agreement.

     21. Limitation of Benefits Clause. None of the provisions of this Agreement
shall be for the benefit of or enforceable by any creditors of the parties,
except as otherwise expressly provided herein.

     22. Non-waiver Provision. No failure by any party to insist upon the strict
performance of any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof shall
constitute waiver of any such breach or any other covenant, duty, agreement or
condition.

     23. Multiple Originals. This Agreement may be executed in counterparts, all
of which together shall constitute one agreement binding on all the parties
hereto, notwithstanding that all such parties are not signatories to the
original or the same counterpart.

     24. CHOICE OF LAWS. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES
OF CONFLICTS OF LAW.

     25. Subject Claims; Initiation of Binding Arbitration. The matters, claims,
rights, and obligations subject to these arbitration provisions include all
rights, claims and obligations arising out of or relating to this Agreement or
to the employee's employment and/or its termination, including, without
limitation, any and all claims, rights or causes of action which may ever arise
or be asserted under any federal, state, local or foreign statutory, regulatory
or common law, and including, without limitation, claims of discrimination,
wrongful discharge or termination, breach of contract, tort (such as intentional
infliction of emotional distress, libel, slander, wrongful invasion of privacy
or personal injury), workers compensation or unemployment compensation. All of
the foregoing types of matters, claims, rights and obligations subject to these
arbitration provisions are herein called "Subject Claims". In the event of a
dispute relating to any Subject Claim, then, upon notice by any party to the
other parties (an "Arbitration Notice") and to American Arbitration Association
("AAA"), Dallas, the controversy or dispute shall be submitted to a sole
arbitrator who is independent and impartial, for binding arbitration in Dallas,
Texas, in accordance with AAA's National Rules for the Resolution of Employment
Disputes (the "Rules") as modified or supplemented hereby. The parties agree
that they will faithfully observe this agreement and the Rules and that they
will abide by and perform any award rendered by the arbitrator. The arbitration
shall be governed by the Federal Arbitration Act, 9 U.S.C. Section 116 (or by
the same principles enunciated by

<PAGE>

such Act in the event it may not be technically applicable). The award or
judgment of the arbitrator shall be final and binding on all parties and
judgment upon the award or judgment of the arbitrator may be entered and
enforced by any court having jurisdiction. If any party becomes the subject of a
bankruptcy, receivership or other similar proceeding under the laws of the
United States of America, any state or commonwealth or any other nation or
political subdivision thereof, then, to the extent permitted or not prohibited
by applicable law, any factual or substantive legal issues arising in or during
the pendency of any such proceeding shall be subject to all of the foregoing
mandatory mediation and arbitration provisions and shall be resolved in
accordance therewith. The agreements contained herein have been given for
valuable consideration, are coupled with an interest and are not intended to be
executory contracts. The fees and expenses of the arbitrator will be shared
equitably (as determined by the arbitrator) by all parties engaged in the
dispute or controversy.

     Selection of Arbitrator. Promptly after the Arbitration Notice is given,
AAA will select five possible arbitrators, to whom AAA will give the identities
of the parties and the general nature of the controversy. If any of those
arbitrators disqualifies himself or declines to serve, AAA shall continue to
designate potential arbitrators until the parties have five to select from.
After the panel of five potential arbitrators has been completed, a two-page
summary of the background of each of the potential arbitrators will be given to
each of the parties, and the parties will have a period of 10 days after
receiving the summaries in which to attempt to agree upon the arbitrator to
conduct the arbitration. If the parties are unable to agree upon an arbitrator,
then one of the parties shall notify AAA and the other party, and AAA will
notify each party that it has five days from the AAA notice to strike two names
from the list and advise AAA of the two names stricken. After expiration of the
strike period, if all but one candidate has been stricken, the remaining one
will be the arbitrator, but, if two or more have not been stricken, AAA shall
select the arbitrator from one of those not stricken. The decision of AAA with
respect to the selection of the arbitrator will be final and binding in such
case.

     No Litigation; Damages Limitation. Unless and only to the extent mandatory
arbitration is validly prohibited or limited by applicable statute or
regulation, no litigation or other proceeding may ever be instituted at any time
in any court or before any administrative agency or body for the purpose of
adjudicating, interpreting or enforcing any of the rights, duties, liabilities
or obligations of the parties hereto or any rights, duties, liabilities or
obligations relating to any Subject Claim, whether or not covered by the express
terms of this Agreement, or for the purpose of adjudicating a breach or
determination of the validity of this Agreement, or for the purpose of appealing
any decision of an arbitrator, except a proceeding instituted (i) for the
purpose of having the award or judgment of an arbitrator entered and enforced or
(ii) to seek an injunction or restraining order (but not damages in connection
therewith) in circumstances where such relief is available. Unless and only to
the extent a limitation of damages is validly prohibited or limited by
applicable statute or regulation, no punitive, exemplary or consequential
damages may ever be awarded by the arbitrator or anyone else, and each of the
parties hereby waives any and all rights to make, claim or recover any such
damages.

     Arbitration Hearing. Within 20 days after the selection of the arbitrator,
the parties and its counsel will appear before the arbitrator at a place and
time designated by the arbitrator for the purpose of each party making a one
hour or less presentation and summary of the case. Thereafter, the arbitrator
will set dates and times for additional hearings in accordance with the Rules
until the proceeding is concluded. The desire and goal of the parties is, and
the arbitrator will be advised that his goal should be, to conduct and conclude
the arbitration

<PAGE>

proceeding as expeditiously as possible. If any party or his counsel fails to
appear at any hearing, the arbitrator shall be entitled to reach a decision
based on the evidence that has been presented to him by the parties who did
appear.

     26. Severability and Reformation. If any provision of this Agreement is
declared or found to be illegal, unenforceable, or void, in whole or in part,
then the parties shall be relieved of all obligations arising under such
provision, but only to the extent that it is illegal, unenforceable or void, it
being the intent and agreement of the parties that this Agreement shall be
deemed amended by modifying such provision to the extent necessary to make it
legal and enforceable while preserving its intent or, if that is not possible,
by substituting therefor another provision that is legal and enforceable and
achieves the same objectives.

     27. Written Amendments Provision. No supplement, modification or amendment
of this agreement or waiver of any provision of this Agreement shall be binding
unless executed in writing by all parties to this Agreement. No waiver of any of
the provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provision of this Agreement (regardless of whether similar), nor shall
any such waiver constitute a continuing wavier unless otherwise expressly
provided.

     28. Actions to Enforce Non-Compete, Confidentiality or Inventions. Employee
acknowledges and agrees that the Company and the Company would be irreparably
harmed by any violation of Employee's obligations under Sections 11, 12 and 13
hereof and that, in addition to all other rights or remedies available at law or
in equity, the Company and the Company will be entitled to injunctive and other
equitable relief to prevent or enjoin any such violation. Additionally, both
parties agree that irrespective of its agreement to arbitrate, either party may
seek to have its rights under Sections 11, 12 or 13 of this agreement enforced
by legal or equitable action in a Court of Competent jurisdiction. The
provisions of Sections 11, 12 and 13 hereof will survive any termination of this
Agreement, in accordance with its terms.

     29. Written Consent for Assignment. No party may assign this Agreement or
any rights or benefits thereunder without the written consent of the other
parties to this Agreement.

     30. Choice of Forum. Any action initiated pursuant to paragraph 28 must
proceed in a Texas District Court in Collin County, Texas. If such an action
cannot proceed in District Court due to jurisdictional limitations, then it
shall proceed in any State or County court of competent jurisdiction in Collin
County, Texas.

<PAGE>

     EXECUTED as of the date first above written.

                                       ADVANCED NEUROMODULATION SYSTEMS, INC.

                                       By: /s/ Hugh M. Morrison
                                           ----------------------------------
                                           Hugh M. Morrison
                                           Chairman of the Board

                                       /s/ Christopher G. Chavez
                                       --------------------------------------
                                       Christopher G. Chavez

<PAGE>

                                    EXHIBIT A

Annual Bonus

In addition to the base salary described in Section 4 of this Agreement,
Employee shall be eligible for an annual performance-based cash bonus.
Employee's standard bonus percentage would be 60% of his annual base salary, to
be earned by meeting certain objectives to be determined by mutual agreement of
Employee and the Board of Directors, such that Employee will receive the full
60% bonus amount if all such objectives are fully met. In the event that the
Company's performance or Employee's performance exceeds the objectives
established by Employee and the Board of Directors, Employee shall be eligible
for a bonus in an amount larger than the standard bonus percentage stated above.
In the event that Employee's performance falls short of the objectives
established by Employee and the Board of Directors, Employee may receive less
than the full bonus percentage.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.17
<SEQUENCE>4
<FILENAME>d96263ex10-17.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT - KENNETH G. HAWARI
<TEXT>
<PAGE>
                                                                   EXHIBIT 10.17

                              EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered to be
effective as of April 1, 2002, by and between Advanced Neuromodulation Systems,
Inc. (the "Company" or "ANS") and Kenneth G. Hawari ("Employee").

                                    RECITALS

     The Company has special expertise in its business that has enabled it to
provide unique career opportunities for its employees.

     The Company's growth depends, to a significant degree, on its possession of
more and better information than that available to its competitors concerning a
number of matters, including but not limited to, research, systems, development,
marketing, management and other information not generally known to others in the
Company's industry. To obtain such information and use it successfully, the
Company has made significant investments in research, business development,
customer satisfaction methods and techniques, business process improvements and
other developments in marketing methods and providing services to its customers.
This unique and special expertise in pooling this information has enabled the
Company to conduct its business successfully and thus provide potential
employment opportunities for its employees.

     The parties acknowledge that Employee has his own valuable knowledge and
training in certain of the areas in which the Company conducts its business but
that his knowledge will be enhanced by this employment.

     Employee recognizes that unless the Company imparts to him its special
expertise, he would be less effective and of less benefit to the Company.
Employee further acknowledges that without the additional knowledge to be
imparted to him by the Company, he will be less valuable than would otherwise be
the case in its business.

     Employee understands and acknowledges that a covenant not to compete and a
restriction on disclosure of confidential information is essential to the
continued growth and stability of the Company's business and to the continuing
viability of its business in the event the Employee's employment is terminated
as expressly permitted under the terms and limitations of this Agreement.

     The Employee desires employment as an employee of the Company under the
terms and conditions of this Agreement and further desires to be given access to
the Company's proprietary information.

     The Company desires to employ Employee under the terms and conditions of
this Agreement.

     NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the parties agree as follows:

     1. Employment. Subject to the terms and conditions set forth in this
Agreement, the Company employs Employee, and Employee hereby accepts such
employment by the Company.

<PAGE>

     2. Duties of Employee.

        (a) Employee shall serve in the capacities of General Counsel and
Executive Vice President - Corporate Development of ANS, and shall be subject to
supervision by the Chief Executive Officer of ANS. In such capacities, Employee
shall have all necessary powers to discharge his responsibilities, including
general supervision of the legal affairs of the Company and active participation
in its corporate development activities. Employee shall have all powers granted
by the Bylaws of the Company to a Vice President, and Employee shall report to
the Chief Executive Officer of the Company.

        (b) During the term of this Agreement, and thereafter so long as
Employee is employed by the Company, Employee shall devote his full business
time and effort to the performance of his duties and responsibilities as an
officer of the Company. Notwithstanding the foregoing, Employee may spend
reasonable amounts of time on personal civic and charitable activities that do
not interfere with the performance of his duties and responsibilities to the
Company. In addition, Employee may, subject to prior approval by the Board of
Directors of the Company, spend reasonable amounts of time serving on boards of
directors for other companies, provided that such service does not, in the sound
discretion of the Board of Directors of the Company, constitute or create a
conflict of interest.

        (c) Employee shall observe and comply with the written rules and
regulations of the Company respecting its business and shall carry out and
perform the directives and policies of the Company as they may from time to time
be stated to Employee in writing by the Chief Executive Officer or the Chairman
of the Board of Directors.

        (d) Employee shall maintain accurate business records as may from time
to time be required by the Company. Such records may be examined by the Company,
at all reasonable times after written request is delivered to Employee. Any such
document shall be delivered to the Company promptly upon request.

        (e) Employee agrees not to solicit or receive any income or other
compensation from any third party in connection with his employment with the
Company. Employee agrees, upon written request by the Company, to render an
accounting of all transactions relating to his business endeavors during the
term of this employment hereunder.

     3. Term. The term of this Agreement (the "Term") shall commence effective
as of April 1, 2002 (the "Effective Date") and continue until the third
anniversary of the Effective Date, unless Employee's employment is earlier
terminated in accordance with Section 10 of this Agreement; provided, however,
that, on the third and subsequent anniversary dates of this Agreement or any
extension, this Agreement will automatically be extended for an additional year
unless, not later than 90 calendar days prior to such anniversary date, the
Company shall have given written notice to the Employee that it does not wish to
extend the Term. Upon expiration of the term of this Agreement, Employee shall
remain an "at will" employee of the Company but shall still be subject to and
bound by the terms of this Agreement.

     4. Salary. Commencing on the Effective Date, the Company will pay Employee
a minimum base annual salary during the term of this Agreement for his services
as an officer of $200,000.00, which shall be payable in accordance with the
Company's standard payroll practice, but not less than monthly. Such base salary
will not include any benefits made available to

<PAGE>

Employee or any contributions or payments made on his behalf pursuant to any
employee benefit plan or program of the Company, including any health,
disability or life insurance plan or program, 401-K plan, cash bonus plan, stock
incentive plan, retirement plan or similar plan or program of any nature. The
Company shall review Employee's salary on an annual basis, and shall increase
the annual salary of Employee from time to time as may be warranted in
accordance with the Company's compensation policies.

     5. Bonus Compensation. The Company shall pay Employee an annual cash bonus
in accordance with Company policy established by the Board from time to time, as
described in Exhibit "A" to this Agreement.

     6. Stock Options: The Company will grant Employee non-transferable stock
options to purchase shares of the Company Common Stock in number and on such
terms and conditions as the Company's Compensation Committee determines.

     7. Executive Allowances and other Fringe Benefits: Employee will be
entitled to an $800 per month car allowance. In addition, the Company will
provide Employee a separate annual executive allowance of $6,000 to cover the
cost of Employee's personal tax planning and country club dues.

     8. Other Employee Benefits. During the term of this Agreement, the Company
will provide Employee with all benefits made available from time to time by the
Company to its executive officers and /or other employees, such benefits to be
in accordance with the Company's policies, except that if Employee's employment
with the Company is terminated, Employee's cash severance payments shall be in
accordance with Section 10 of this Agreement, in lieu of cash severance payments
provided by the policies of the Company. Specifically, Employee's benefits shall
include participation in medical, dental and vision plans or programs (providing
coverage for Employee's immediate family); disability insurance; 401-K plan;
life insurance payable to Employee's designated beneficiary; executive car
allowance; and paid vacation (up to four weeks). In the event that Employee's
employment with the Company is terminated, the Company agrees to pay in full all
premiums associated with Employee's election to continue health benefits
provided hereunder for a period of two years following the date of termination.

     9. Reimbursement of Expenses. The Company shall reimburse Employee for all
expenses actually and reasonably incurred by him in the business interests of
the Company. Such reimbursement shall be made to Employee upon appropriate
documentation of such expenditures in accordance with the Company's written
policies.

     10. Early Termination. It is the desire and expectation of each party that
the employer-employee relationship shall continue for the full term specified
herein and be a pleasant and rewarding experience for the parties hereto. The
Company shall, however, be entitled to terminate Employee's employment at any
time before or after the Effective Date with or without Cause (as defined in
this Section 10). Termination shall require approval by majority vote of the
board of directors of the Company.

         If Employee's employment is terminated without Cause (as defined in
this Section 10), the Company shall pay Employee severance compensation pursuant
to the following formulas:

         (a) In the event of a termination without Cause occurring prior to the
first anniversary of this Agreement, Employee shall receive a lump sum amount
equal to 299% of the

<PAGE>

sum of (A) the highest annual salary of Employee in effect at any time during
the Term or the salary of Employee in effect immediately prior to the
termination without Cause, whichever is the larger amount, plus (B) the amount
of the bonus or incentive compensation targeted for payment to the Employee for
the fiscal year during which the termination without Cause occurs.

         (b) In the event of a termination without Cause occurring at any time
after the first anniversary of this Agreement, Employee will receive 200% of the
sum of the amounts referred to in Section 10(a)(A) and (B).

         (c) In the event of a termination without Cause at any time during the
term of this Agreement, Employee shall also receive a job search lump sum
payment of $25,000.

         (d) However, if the termination without Cause is the result of a
"Change in Control" as that term is defined in the Special Termination Agreement
between the Company and the Employee dated as of April 1, 2002, then Employee
will not be entitled to any payments under the preceding sub-paragraphs (a) (b)
and/or (c), and the Company's severance compensation obligations to Employee
shall be governed by the terms of that Special Termination Agreement.

         If Employee dies, is unable to perform his duties and responsibilities
as a result of disability that continues for 90 consecutive days or more
("Disability"), voluntarily resigns from the Company, or is terminated for
"Cause," the Company shall pay Employee (or his estate, executor or legal
representative, as appropriate) any salary and bonus that has accrued to the
date employment ceases, and the Company's obligations to pay additional salary
or cash compensation or benefits shall terminate as of such date.

         "Cause," for the purpose of this Agreement, shall mean the occurrence
of any of the following events:

         (a) Performance by Employee of illegal or fraudulent acts, criminal
conduct or willful misconduct relating to the activities of the Company;

         (b) A conviction of or nolo contendere plea by Employee for any
criminal acts involving moral turpitude having or reasonably likely to have a
material adverse effect upon the Company, including, without limitation, upon
its profitability, reputation or goodwill;

         (c) Willful or grossly negligent failure by Employee to perform his
duties in a manner consistent with the Company's best interests;

         (d) Willful refusal by Employee to carry out reasonable written
instructions of the Chief Executive Officer or the Company's Board of Directors
not inconsistent with the provisions of this Agreement;

         (e) Violation by Employee of any of Employee's covenants and agreements
contained in Sections 11, 12 or 13 of this Agreement; or

         (f) Any other material breach of Employee's obligations hereunder,
which he fails to cure within thirty days after receiving written notice
thereof.

<PAGE>

     11. Non-Competition Agreement.

         (a) Employee understands and the Company promises that during the
course of his employment by the Company, Employee will have access to and the
benefit of the information referred to in the Recitals above, specifically Trade
Secrets and Confidential Information, and will represent the Company and develop
contacts and relationships with other persons and entities, including but not
limited to customers, potential customers and other employees of such entities.
To protect the Company's interest in preserving its Trade Secrets, Confidential
and other protected information and in the Business Good Will generated by new
contacts and relationships, and as a direct inducement and consideration for the
Company's promises to provide new Trade Secrets, new Confidential Information
and new contacts, the Employee agrees and covenants to the duties and
obligations created by this covenant not to compete.

         (b) The Employee agrees that all duties assumed by this covenant not to
compete include any actions taken by the Employee directly or indirectly, either
as an individual or as an employee, partner, officer, director, shareholder,
advisor, or consultant or in any other capacity whatsoever, of any person (other
than ownership of less than 1% of the issued and outstanding voting securities
of a publicly held corporation).

         (c) Employee covenants he:

             (1) will not recruit, hire, assist others in recruiting or hiring,
discuss employment with, or refer to others for employment any person who is, or
within the 12 month period immediately preceding the date of any such activity
was, an employee of either Company or any of its Affiliates;

             (2) Employee agrees that during the term of his employment with the
Company and for a period of two years thereafter, without regard to the party
terminating such employment or the reason for termination, if any, Employee will
not, without prior written approval by the Board of Directors for the Company,
in the United States or in any foreign country in which either Company is then
marketing its products or services, directly or indirectly engage in or own or
control an interest in (except as to those investments held at the effective
date of this agreement or as a passive investor in publicly held Company, i.e.,
Employee and Employee's relatives do not own of record, or beneficially, an
aggregate of more than one percent of any class of outstanding securities) or
act as an officer, director, or employee of, or consultant or adviser to, any
firm, corporation, institution or entity, directly or indirectly in competition
with or engaged in a business substantially similar to that of Employer,
including the research, development, manufacture, sale or marketing of products,
devices, instruments, methods or techniques (or any related services or
activities) similar to any products, devices, instruments, methods or techniques
which either Company is engaged in the research of, development of, manufacture,
selling, or marketing, or has under consideration to do the same (whether or not
such products, devices, instruments, methods or techniques or the technology
related thereto were obtained from Employee), during the term of the Employee's
employment. This provision 11(c)(2) is not intended to, and shall not be
construed in such a manner as to, prevent Employee from securing gainful
employment within the health care industry except with those entities whose
products, devices, instruments, methods or techniques (or any related services
or activities) substantially compete with those of the Company.

         (d) It is understood and agreed that the scope of the foregoing
covenant is reasonable as to time, scope and geography and is necessary to
protect the legitimate business

<PAGE>

interests of the Company, in the Confidential Information and Trade Secrets the
Company have promised to share with Employee. It is further agreed that such
covenant will be regarded as divisible and will be operative as to time, area
and persons to the extent that it may be so operative, and if any part of such
covenant is declared invalid, unenforceable, or void as to time, area or
persons, the validity and enforceability of the remainder will not be affected.

         (e) If Employee violates the restrictive covenants of this Section 11
and the Company brings legal action for injunctive or other relief, neither
Company shall be deprived of the benefit of the full period of the restrictive
covenant, as a result of the time involved in obtaining the relief. Accordingly,
to the extent allowed by law, the Employee agrees that the restricted period
following the term of employment shall have a duration of one year, and the
regularly scheduled expiration date of such covenant shall be extended by the
same amount of time that Employee is determined to have violated such covenant.

     12. Confidentiality. Employee acknowledges that he has learned and will
learn Confidential Information (as defined herein) relating to the business
conducted and to be conducted by the Company. The Company promises to provide
all needed Confidential Information to the Employee. Employee agrees that he
will not during the term of employment with the Company or at any time after the
termination of such employment, without regard to the party terminating such
employment, except in the normal and proper course of his duties hereunder,
disclose or use or authorize any third party to disclose or use any such
Confidential Information, without prior written approval of the Company. As used
in this Section 12, "Confidential Information" shall mean information disclosed
to or known to Employee as a direct or indirect consequence of or through his
employment with the Company, about the Company's business, methods, business
plans Company, operations, products, processes, and services, including, but not
limited to, information relating to research, development, inventions,
recommendations, programs, systems, and systems analyses, flow charts, finances,
and financial statements, marketing plans, Company and strategies,
merchandising, pricing strategies, merchandise sources, client sources, system
designs, procedure manuals, automated data programs, financing methods,
financial projections, terms and conditions of arrangements of any business,
computer software, terms and conditions of business arrangements with customers
or suppliers, reports, personnel procedures, supply and services resources,
names and addresses of clients, the Company's contacts, names of professional
advisors, and all other information pertaining to customers and suppliers,
including, but not limited to assets, business interests, personal data and all
other information pertaining to the Company, clients or suppliers whatsoever,
including all accompanying documentation therefor. All information disclosed to
Employee, or to which Employee has access during the period of his employment,
for which there is any reasonable basis to be believed is, or which appears to
be treated by the Company as Confidential Information, shall be presumed to be
Confidential Information hereunder. Confidential Information shall not, however,
include information that (i) is publicly known or becomes publicly known through
no fault of Employee, or (ii) is generally or readily obtainable by the public,
or (iii) constitutes general skills, knowledge and experience acquired by
Employee before and/or during his employment with the Company.

     Employee agrees that all documents of any nature pertaining to activities
of the Company or its Affiliates, or that include any Confidential Information,
in his possession now or at any time during the term of his employment,
including without limitation, memoranda, notebooks, notes, data sheets, records
and computer programs, are and shall be the property of such entity and that all
copies thereof shall be surrendered to the appropriate entity upon termination
of his employment.

<PAGE>

     13. Inventions; Developments. Employee agrees to notify the Company of any
discovery, invention, innovation, or improvement which is related to the
Business or to the business of any customer or supplier (collectively called
"Developments") conceived or developed by Employee during the term of the
Employee's employment. Developments shall include, without limitation,
developments in computer software, logical systems, algorithms, and any or all
other intellectual properties related to the Business. All Developments,
including but not limited to all written documents pertaining thereto, shall be
the exclusive property of the Company or the Company, as the case may be, and
shall be considered Confidential Information subject to the terms of this
Agreement. Employee agrees that when appropriate, and upon written request of
the Company or the Company, the Employee will acknowledge that Developments are
"works for hire" and will file for patents or copyrights with regard to any or
all Developments and will sign documentation necessary to evidence ownership of
Developments in the Company.

     14. Exit Interview. To insure a clear understanding of this Agreement,
including but not limited to the protection of the Company's business interests,
Employee agrees, at no additional expense to the Company, to engage in an exit
interview with the Company prior to Employee's departure from the Company at a
time and place designated by the Company. In the event that the exit interview
takes place in a location outside of the Dallas/Fort Worth metropolitan area,
the Company agrees to reimburse Employee for reasonable expenses associated with
his travel to and from said exit interview.

     15. Right of Setoff. the Company shall be entitled, at its option and not
in lieu of any other remedies to which they may be entitled, to set off any
amounts due Employee or any Affiliate of Employee against any amount due and
payable by Employee or any Affiliate of Employee to the Company ("Set-Offs")
pursuant to this Agreement or otherwise, provided that the Set-Offs are set
forth in detail in writing with supporting evidence to substantiate each
Set-Off.

     16. Notice Provision. Any notice, demand or request required or permitted
to be given or made under this Agreement shall be in writing and shall be deemed
given or made when delivered in person, when sent by United States registered or
certified mail, or postage prepaid, or when telecopied to a party at its address
or telecopy number specified below:

         If to the Company:

         Advanced Neuromodulation Systems, Inc.
         6501 Windcrest Drive, Suite 100
         Plano, Texas 75024
         Telecopy number: (972) 309-8150

         If to Employee:

         Kenneth G. Hawari
         3605 Edgestone
         Plano, Texas 75093
         Telecopy number: 972-378-0661

     The parties to this Agreement may change its addresses for notice in the
manner provided above.

<PAGE>

     17. Headings Non-binding. All section titles and captions in this Agreement
are for convenience only, shall not be deemed part of this Agreement, and in no
way shall define, limit, extend or describe the scope or intent of any
provisions hereof.

     18. Words to have Contextual Meaning. Whenever the context may require, any
pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa. Additionally, the words "and" and "or"
shall be given its contextual meaning and not be interpreted blindly as being
solely conjunctive or disjunctive, as the case may be.

     19. Execution of Agreement. The parties shall execute all documents,
provide all information and take or refrain from taking all actions as may be
reasonably necessary or appropriate to achieve the purposes of this Agreement.

     20. Partial Assignment Clause. This Agreement shall be binding upon and
inure to the benefit of the parties hereto, its representatives and permitted
successors and assigns. Employee's duties hereunder are personal services and
are not assignable. Except for the provisions of Sections 11, 12 and 13 of this
Agreement, which are intended to benefit the Company and the Company's
Affiliates as third party beneficiaries, or as otherwise expressly provided in
this Agreement, nothing in this Agreement, express or implied, is intended to
confer upon any person other than the parties to this Agreement, its respective
representatives and permitted successors and assigns, any rights, remedies or
obligations under or by reason of this Agreement.

     21. Limitation of Benefits Clause. None of the provisions of this Agreement
shall be for the benefit of or enforceable by any creditors of the parties,
except as otherwise expressly provided herein.

     22. Non-waiver Provision. No failure by any party to insist upon the strict
performance of any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof shall
constitute waiver of any such breach or any other covenant, duty, agreement or
condition.

     23. Multiple Originals. This Agreement may be executed in counterparts, all
of which together shall constitute one agreement binding on all the parties
hereto, notwithstanding that all such parties are not signatories to the
original or the same counterpart.

     24. CHOICE OF LAWS. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES
OF CONFLICTS OF LAW.

     25. Subject Claims; Initiation of Binding Arbitration. The matters, claims,
rights, and obligations subject to these arbitration provisions include all
rights, claims and obligations arising out of or relating to this Agreement or
to the employee's employment and/or its termination, including, without
limitation, any and all claims, rights or causes of action which may ever arise
or be asserted under any federal, state, local or foreign statutory, regulatory
or common law, and including, without limitation, claims of discrimination,
wrongful discharge or termination, breach of contract, tort (such as intentional
infliction of emotional distress, libel, slander, wrongful invasion of privacy
or personal injury), workers compensation or unemployment compensation. All of
the foregoing types of matters, claims, rights and

<PAGE>

obligations subject to these arbitration provisions are herein called "Subject
Claims". In the event of a dispute relating to any Subject Claim, then, upon
notice by any party to the other parties (an "Arbitration Notice") and to
American Arbitration Association ("AAA"), Dallas, the controversy or dispute
shall be submitted to a sole arbitrator who is independent and impartial, for
binding arbitration in Dallas, Texas, in accordance with AAA's National Rules
for the Resolution of Employment Disputes (the "Rules") as modified or
supplemented hereby. The parties agree that they will faithfully observe this
agreement and the Rules and that they will abide by and perform any award
rendered by the arbitrator. The arbitration shall be governed by the Federal
Arbitration Act, 9 U.S.C. Section 116 (or by the same principles enunciated by
such Act in the event it may not be technically applicable). The award or
judgment of the arbitrator shall be final and binding on all parties and
judgment upon the award or judgment of the arbitrator may be entered and
enforced by any court having jurisdiction. If any party becomes the subject of a
bankruptcy, receivership or other similar proceeding under the laws of the
United States of America, any state or commonwealth or any other nation or
political subdivision thereof, then, to the extent permitted or not prohibited
by applicable law, any factual or substantive legal issues arising in or during
the pendency of any such proceeding shall be subject to all of the foregoing
mandatory mediation and arbitration provisions and shall be resolved in
accordance therewith. The agreements contained herein have been given for
valuable consideration, are coupled with an interest and are not intended to be
executory contracts. The fees and expenses of the arbitrator will be shared
equitably (as determined by the arbitrator) by all parties engaged in the
dispute or controversy.

     Selection of Arbitrator. Promptly after the Arbitration Notice is given,
AAA will select five possible arbitrators, to whom AAA will give the identities
of the parties and the general nature of the controversy. If any of those
arbitrators disqualifies himself or declines to serve, AAA shall continue to
designate potential arbitrators until the parties have five to select from.
After the panel of five potential arbitrators has been completed, a two-page
summary of the background of each of the potential arbitrators will be given to
each of the parties, and the parties will have a period of 10 days after
receiving the summaries in which to attempt to agree upon the arbitrator to
conduct the arbitration. If the parties are unable to agree upon an arbitrator,
then one of the parties shall notify AAA and the other party, and AAA will
notify each party that it has five days from the AAA notice to strike two names
from the list and advise AAA of the two names stricken. After expiration of the
strike period, if all but one candidate has been stricken, the remaining one
will be the arbitrator, but, if two or more have not been stricken, AAA shall
select the arbitrator from one of those not stricken. The decision of AAA with
respect to the selection of the arbitrator will be final and binding in such
case.

     No Litigation; Damages Limitation. Unless and only to the extent mandatory
arbitration is validly prohibited or limited by applicable statute or
regulation, no litigation or other proceeding may ever be instituted at any time
in any court or before any administrative agency or body for the purpose of
adjudicating, interpreting or enforcing any of the rights, duties, liabilities
or obligations of the parties hereto or any rights, duties, liabilities or
obligations relating to any Subject Claim, whether or not covered by the express
terms of this Agreement, or for the purpose of adjudicating a breach or
determination of the validity of this Agreement, or for the purpose of appealing
any decision of an arbitrator, except a proceeding instituted (i) for the
purpose of having the award or judgment of an arbitrator entered and enforced or
(ii) to seek an injunction or restraining order (but not damages in connection
therewith) in circumstances where such relief is available. Unless and only to
the extent a limitation of damages is validly prohibited or limited by
applicable statute or regulation, no punitive, exemplary or consequential
damages may ever be awarded by the arbitrator or anyone else,

<PAGE>

and each of the parties hereby waives any and all rights to make, claim or
recover any such damages.

     Arbitration Hearing. Within 20 days after the selection of the arbitrator,
the parties and its counsel will appear before the arbitrator at a place and
time designated by the arbitrator for the purpose of each party making a one
hour or less presentation and summary of the case. Thereafter, the arbitrator
will set dates and times for additional hearings in accordance with the Rules
until the proceeding is concluded. The desire and goal of the parties is, and
the arbitrator will be advised that his goal should be, to conduct and conclude
the arbitration proceeding as expeditiously as possible. If any party or his
counsel fails to appear at any hearing, the arbitrator shall be entitled to
reach a decision based on the evidence that has been presented to him by the
parties who did appear.

     26. Severability and Reformation. If any provision of this Agreement is
declared or found to be illegal, unenforceable, or void, in whole or in part,
then the parties shall be relieved of all obligations arising under such
provision, but only to the extent that it is illegal, unenforceable or void, it
being the intent and agreement of the parties that this Agreement shall be
deemed amended by modifying such provision to the extent necessary to make it
legal and enforceable while preserving its intent or, if that is not possible,
by substituting therefor another provision that is legal and enforceable and
achieves the same objectives.

     27. Written Amendments Provision. No supplement, modification or amendment
of this agreement or waiver of any provision of this Agreement shall be binding
unless executed in writing by all parties to this Agreement. No waiver of any of
the provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provision of this Agreement (regardless of whether similar), nor shall
any such waiver constitute a continuing wavier unless otherwise expressly
provided.

     28. Actions to Enforce Non-Compete, Confidentiality or Inventions. Employee
acknowledges and agrees that the Company and the Company would be irreparably
harmed by any violation of Employee's obligations under Sections 11, 12 and 13
hereof and that, in addition to all other rights or remedies available at law or
in equity, the Company and the Company will be entitled to injunctive and other
equitable relief to prevent or enjoin any such violation. Additionally, both
parties agree that irrespective of its agreement to arbitrate, either party may
seek to have its rights under Sections 11, 12 or 13 of this agreement enforced
by legal or equitable action in a Court of Competent jurisdiction. The
provisions of Sections 11, 12 and 13 hereof will survive any termination of this
Agreement, in accordance with its terms.

     29. Written Consent for Assignment. No party may assign this Agreement or
any rights or benefits thereunder without the written consent of the other
parties to this Agreement.

     30. Choice of Forum. Any action initiated pursuant to paragraph 28 must
proceed in a Texas District Court in Collin County, Texas. If such an action
cannot proceed in District Court due to jurisdictional limitations, then it
shall proceed in any State or County court of competent jurisdiction in Collin
County, Texas.

<PAGE>

     EXECUTED as of the date first above written.

                                       ADVANCED NEUROMODULATION SYSTEMS, INC.

                                       By: /s/ Christopher Chavez
                                           ----------------------------------
                                           Christopher Chavez
                                           Chief Executive Officer

                                       /s/ Kenneth G. Hawari
                                       --------------------------------------
                                       Kenneth G. Hawari

<PAGE>

                                    EXHIBIT A

Annual Bonus

In addition to the base salary described in Section 4 of this Agreement,
Employee shall be eligible for an annual performance-based cash bonus.
Employee's standard bonus percentage is 50% of his annual base salary, to be
earned by satisfactorily performing his duties. Employee will receive the full
50% bonus amount if his duties are performed satisfactorily. In the event that
Employee's performance exceeds this standard, Employee may be considered for a
bonus in an amount larger than the standard bonus percentage stated above. In
the event that Employee's performance falls short of this standard, Employee may
receive less than the full bonus percentage.

In addition, to the extent that other executive vice presidents and vice
presidents of the Company earn bonuses under the Company's Bonus Plan for Vice
Presidents for 1) net revenues exceeding 100% of plan, and/or 2) earnings from
operations exceeding 100% of plan, Employee will earn a commensurate bonus. For
calendar year 2002, reference is made to the Advanced Neuromodulation Systems
2002 Bonus Plan - Corporate Vice Presidents.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.18
<SEQUENCE>5
<FILENAME>d96263ex10-18.txt
<DESCRIPTION>SPECIAL TERMINATION AGREEMENT - CHRISTOPHER CHAVEZ
<TEXT>
<PAGE>
                                                                   EXHIBIT 10.18

                          SPECIAL TERMINATION AGREEMENT

     THIS SPECIAL TERMINATION AGREEMENT ("Agreement") is made and entered into
to be effective as of April 1, 2002, by and between Advanced Neuromodulation
Systems, Inc., a Texas corporation (the "Company"), and Christopher G. Chavez
(the "Executive") (together, referred to as the "parties").

     The Executive is currently serving as the Company's President and Chief
Executive Officer.

     The Executive possesses an intimate knowledge of the business and affairs
of the Company, its policies, methods, personnel and plans for the future and
has acquired contacts of considerable value to the Company.

     The Board of Directors of the Company (the "Board") recognizes that the
Executive's contribution to the growth and success of the Company has been
substantial and wishes to offer an inducement to the Executive to remain in the
employ of the Company.

     NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, the parties agree as
follows:

     1. Term. The term of this Agreement shall continue until the earlier of (i)
the expiration of the third anniversary of this Agreement, (ii) the Executive's
death, or (iii) the Executive's earlier voluntary retirement; provided, however,
that, on each anniversary date of this Agreement or any extension, this
Agreement, the Term and the periods referenced in Section 3 shall automatically
be extended for an additional year unless, not later than 90 calendar days prior
to such anniversary date, the Company shall have given written notice to the
Executive that it does not wish to have the term extended.

     2. Definitions.

     (a) Acquiring Person: An "Acquiring Person" shall mean any person (as
defined in Section 2(d)(iv) of this Agreement) that, together with all
Affiliates and Associates of such person, is or becomes the beneficial owner of
50% or more of the outstanding Common Stock. The term "Acquiring Person" shall
not include the Company, any subsidiary of the Company, any employee benefit
plan of the Company or any subsidiary of the Company, or any person holding
Common Stock for or pursuant to the terms of any such plan. For the purposes of
this Agreement, a person who becomes an Acquiring Person by acquiring beneficial
ownership of 50% or more of the Common Stock at any time after the date of this
Agreement shall continue to be an Acquiring Person whether or not such person
continues to be the beneficial owner of 50% or more of the outstanding Common
Stock.

     (b) Affiliate and Associate. "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") in effect on the date of this Agreement.

<PAGE>

     (c) Change in Control. A "Change in Control" of the Company shall have
occurred if at any time during the term of this Agreement any of the following
events shall occur:

(i) any consolidation, merger or other reorganization of the Company in which
the Company is merged, consolidated or reorganized into or with another
corporation or other legal person or pursuant to which shares of the Company's
stock are converted into cash, securities or other property, other than a merger
of the Company in which the holders of the Company's common stock immediately
prior to the merger own more than 50% of the common stock of the surviving
corporation or its ultimate parent immediately after the merger;

(ii) any sale, lease, exchange or other transfer (or in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company and as a result of such transaction the holders of the Company's common
stock immediately prior thereto own less than 50% of the common stock of such
transferee or its ultimate parent immediately after such transaction;

(iii) any liquidation or dissolution of the Company or any approval by the
stockholders of the Company of any plan or proposal for the liquidation or
dissolution of the Company;

(iv) any person (including any "person" as such term is used in Section 13(d)(3)
or Section 14(d)(2) of the Exchange Act), has become an Acquiring Person;

(v) if at any time, the Continuing Directors then serving on the Board cease for
any reason to constitute at least a majority thereof;

(vi) any occurrence that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A or any successor rule or regulation
promulgated under the Exchange Act; or

(vii) such other events that cause a change in control of the Company;

          provided, however, that a Change in Control of the Company shall not
          be deemed to have occurred as the result of any transaction having one
          or more of the foregoing effects if such transaction is proposed by,
          and includes a significant equity participation (i.e., an aggregate of
          at least 50% of the then outstanding common equity securities of the
          Company immediately after such transaction which are entitled to vote
          to elect any class of Directors) of, the Executive officers of the
          Company as constituted immediately prior to the occurrence of such
          transaction or any Company employee stock ownership plan or pension
          plan.

     (d) Code. The "Code" shall mean the Internal Revenue Code of 1986, as
amended.

     (e) Continuing Director. A "Continuing Director" shall mean a Director of
the Company who (i) is not an Acquiring Person, an Affiliate or Associate, a
representative of an Acquiring Person or nominated for election by an Acquiring
Person, and (ii) was either a member of the Board of Directors of the Company on
the date of this Agreement or subsequently became a Director of the Company and
whose initial election or initial nomination for election by the Company's
stockholders was approved by at least two-thirds of the Continuing Directors
then on the Board of Directors of the Company.

<PAGE>

     (f) Severance Compensation. The "Severance Compensation" shall be a lump
sum amount equal to 299% of the sum of (A) the highest annual salary of the
Executive in effect at any time during the Term of this Agreement, or the salary
of the Executive in effect immediately prior to the Change in Control, whichever
is the larger amount, plus (B) the amount of the bonus or incentive compensation
targeted for payment to the Executive for the fiscal year during which the
Change in Control occurs.

     (g) Termination Date. The "Termination Date" shall be the date upon which
the Change in Control occurs.

3.   Rights of Executive Upon Change in Control.

     (a) Subject to paragraph 5 below, the Company shall pay the Severance
Compensation to the Executive within ten days following the Termination Date in
lieu of compensation to the Executive for periods subsequent to the Termination
Date, but without affecting the other rights of the Executive at law or in
equity. In addition, the Company shall pay the Executive a job search lump sum
payment of $25,000 within ten days following the Termination Date.

     (b) If the amounts due to the Executive in connection with a Change in
Control under this Agreement (considering amounts due under other agreements,
plans or arrangements) would result in an "excess parachute payment" within the
meaning of Section 280G of the Code, then the Company shall pay to Executive an
additional amount of cash (a "Gross-Up Payment") equal to the amount necessary
to cause the amount of the aggregate after-tax compensation and benefits
received by the Executive here-under (after payment of the excise tax under
Section 4999 of the Code with respect to any excess parachute payment, and any
state and federal income and employment taxes with respect to the Gross-Up
Payment) to equal the aggregate after-tax compensation and benefits the
Executive would have received if Sections 280G and 4999 of the Code had not been
enacted. A nationally recognized public accounting firm selected by the Company
shall initially determine, at the Company's expense, whether an "excess
parachute payment" will be made to Executive, and if so, the amount of the
Gross-Up Payment. In the event of a subsequent claim by the Internal Revenue
Service that, if successful, would result in Executive's liability for an excise
tax under Section 4999 of the Code in excess of the amount covered by any
previous Gross-Up Payment, the Executive shall promptly notify the Company in
writing of such claim. If the Company elects to contest such claim, it shall so
notify the Executive and shall bear and pay directly or indirectly all costs and
expenses of contesting the claim (including additional interest and penalties
incurred in connection with such action), and shall indemnify and hold Executive
harmless, on an after-tax basis, for any excise, income, or employment tax,
including interest and penalties with respect thereto, imposed as a result of
the Company's payment of costs of the contest. Executive shall cooperate fully
with the Company in the defense of any such IRS claim. If, as a result of the
Company's action with respect to a claim, Executive receives a refund of any
amount paid by the Company with respect to such claim, Executive shall promptly
pay such refund to the Company. In the event the IRS claim is finally determined
to result in the imposition of additional excise tax under Section 280G of the
Code on Executive, the Company shall make an additional Gross-Up Payment with
respect to any such additional excise tax.

<PAGE>

     (c) The payment of Severance Compensation by the Company to the Executive
shall not affect any other rights and benefits of the Executive provided by the
Company, whether currently or in the future, prior to the Termination Date,
which rights shall be governed by the terms thereof. The Company shall provide
to the Executive through his Termination Date group insurance benefits,
retirement benefits, and other benefits substantially similar to those which the
Executive was receiving or entitled to receive immediately prior to the Change
of Control Date, subject to any changes required to comply with changes in the
law, and subject to changes in carriers in the ordinary course of business.

     (d) The Company shall have no right of set-off or counterclaim in respect
of any claim, debt or obligation against any payment or benefit to or for the
benefit of the Executive provided for in this Agreement.

     (e) Without limiting the rights of the Executive at law or in equity, if
the Company fails to make any payment required to be made hereunder on a timely
basis, the Company shall pay interest on the amount thereof on demand at an
annualized rate of interest equal to 120% of the then applicable Federal short
term rate determined under Section 1274(d) of the Code, compounded semi-annually
(but in no event shall such interest exceed the highest lawful rate).

     4. No Mitigation Required. In the event that the Company is required to pay
the Severance Compensation under this Agreement, the Executive shall not be
obligated to mitigate his damages nor the amount of any payment provided for in
this Agreement by seeking other employment or otherwise, and the acceptance of
employment elsewhere after termination shall in no way reduce the amount of
Severance Compensation payable hereunder.

     5. Release. In consideration for the protection and benefits provided for
under this Agreement, at the Company's request, Employee hereby agrees to
execute a release of all claims against the Company or any of its affiliates,
directors, officers, employees, agents and benefit plans, in form and substance
satisfactory to the Company. Payment of the benefits under Section 3(a) is
expressly conditioned on Employee's execution of such release if the Company so
requests.

     6. Successors: Binding Agreement.

     (a) The Company will require any successor and any corporation or other
legal person (including any "person" as defined in Section 2(d)(iv) of this
Agreement) which is in control of such successor (as "control" is defined in
Regulation 230.405 or any successor rule or regulation promulgated under the
Securities Act of 1933, as amended) to all or substantially all of the business
and/or assets of the Company (by purchase, merger, consolidation or otherwise),
by agreement in form and substance satisfactory to the Executive, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession shall

<PAGE>

be a material breach of this Agreement by the Company. Notwithstanding the
foregoing, any such assumption shall not, in any way, affect or limit the
liability of the Company under the terms of this Agreement or release the
Company from any obligation hereunder. As used in this Agreement, "Company"
shall mean the Company and any successor to its business and/or all or part of
its assets, which executes and delivers the agreement provided for in this
Section 6 or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law.

     (b) This Agreement and all rights of the Executive here under shall inure
to the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.

     7. Notice. The Company shall give written notice to Executive within thirty
days after any Change in Control. Failure to give such notice shall constitute a
material breach of this Agreement. For purposes of this Agreement, notices and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or received after being
mailed by United States registered mail, return receipt requested, postage
prepaid, addressed as follows:

     If to the Executive: Christopher G. Chavez
                          2900 Cedar Ridge Dr.
                          McKinney, Texas 75070

     If to the Company:   Advanced Neuromodulation Systems, Inc.
                          6501 Windcrest Drive, Suite 100
                          Plano, Texas 75024

or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of chance of address shall be
effective only upon receipt.

     8. Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the Executive and the Company. No waiver by either party of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, unless specifically
referred to herein with respect to the subject matter of this Agreement have
been made be either party which are not set forth expressly in this agreement.
THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT
SHALL BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAW.

     9. Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.

<PAGE>

     10. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.

     11. Employment Rights. Nothing implied in this Agreement shall create any
right or duty on the part of the Company or the Executive to have the Executive
remain in the employment of the Company prior to any Change in Control.
Notwithstanding any other provision hereof to the contrary and subject to the
terms of the Employment Agreement between the Company and the Executive dated as
of April 1, 2002, the Executive may, at any time during the Term of this
Agreement, upon the giving of 30 days prior written notice, terminate his
employment hereunder. If this Agreement or the employment of the Executive is
terminated under circumstances in which the Executive is not entitled to any
Severance Compensation, the Executive shall have no further obligation or
liability to the Company hereunder or otherwise with respect to his prior or any
future employment by the Company.

     12. Withholding of Taxes. The Company may withhold from any amounts payable
under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or government regulation or ruling; provided,
however, that no withholding pursuant to Section 4999 of the Code shall be made
unless, in the opinion of tax counsel selected by the Company's independent
accountants and acceptable to the Executive, such withholding relates to
payments which result in the imposition of an excise tax pursuant to Section
4999 of the Code.

     13. Legal Fees and Expenses. It is the intent of the Company that the
Executive not be required to incur the expenses associated with the enforcement
of his rights under this Agreement by litigation or other legal action because
the cost and expense thereof would substantially detract from the benefits
intended to be extended to the Executive in this Agreement. Accordingly, if it
should appear to the Executive that the Company has failed to comply with any of
its obligations under the Agreement or in the event that the Company or any
other person takes any action to declare the Agreement void or unenforceable, or
institutes any litigation designed to deny, or to recover from, the Executive
the benefits intended to be provided to the Executive hereunder, the Company
irrevocably authorizes the Executive from time to time to retain counsel of his
choice, at the expense of the Company as hereafter provided, to represent the
Executive in connection with the initiation or defense of any litigation or
other legal action, whether by or against the Company or any director, officer,
stockholder or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior attorney-client relationship between the
Company and such counsel, the Company irrevocably consents to the Executive
entering into an attorney-client relationship with such counsel, and in that
connection the Company and the Executive agree that a confidential relationship
shall exist between the Executive and such counsel. The Company shall pay and be
solely responsible for any and all reasonable attorneys' and related fees and
expenses incurred by the Executive as a result of the Company's failure to
perform this Agreement or any provision thereof or as a result of the Company or
any person contesting the validity or enforceability of this Agreement or any
provision thereof, up to $100,000 in the aggregate.

<PAGE>

     14. Rights and Remedies Cumulative. No right or remedy conferred upon or
reserved to the Executive is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy under this Agreement, or otherwise, shall not
prevent the concurrent assertion or employment of any other appropriate right or
remedy.

     IN WITNESS WHEREOF, the parties have executed this Agreement effective on
the date and year first above written.

                                       ADVANCED NEUROMODULATION SYSTEMS, INC.:

                                       By:  /s/ F. Robert Merrill
                                            ----------------------------------
                                            F. Robert Merrill
                                       Its: Executive Vice President and Chief
                                            Financial Officer

                                       EXECUTIVE:

                                       By: /s/ Christopher G. Chavez
                                           -----------------------------------
                                           Christopher G. Chavez

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.19
<SEQUENCE>6
<FILENAME>d96263ex10-19.txt
<DESCRIPTION>SPECIAL TERMINATION AGREEMENT - KENNETH G. HAWARI
<TEXT>
<PAGE>
                                                                   EXHIBIT 10.19

                          SPECIAL TERMINATION AGREEMENT

     THIS SPECIAL TERMINATION AGREEMENT ("Agreement") is made and entered into
to be effective as of April 1, 2002, by and between Advanced Neuromodulation
Systems, Inc., a Texas corporation (the "Company"), and Kenneth G. Hawari (the
"Executive") (together, referred to as the "parties").

     The Executive is currently serving as the Company's General Counsel and
Executive Vice President - Corporate Development.

     The Executive possesses an intimate knowledge of the business and affairs
of the Company, its policies, methods, personnel and plans for the future and
has acquired contacts of considerable value to the Company.

     The Board of Directors of the Company (the "Board") recognizes that the
Executive's contribution to the growth and success of the Company has been
substantial and wishes to offer an inducement to the Executive to remain in the
employ of the Company.

     NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, the parties agree as
follows:

     1. Term. The term of this Agreement shall continue until the earlier of (i)
the expiration of the third anniversary of this Agreement, (ii) the Executive's
death, or (iii) the Executive's earlier voluntary retirement; provided, however,
that, on each anniversary date of this Agreement or any extension, this
Agreement, the Term and the periods referenced in Section 3 shall automatically
be extended for an additional year unless, not later than 90 calendar days prior
to such anniversary date, the Company shall have given written notice to the
Executive that it does not wish to have the term extended.

     2. Definitions.

     (a) Acquiring Person: An "Acquiring Person" shall mean any person (as
defined in Section 2(d)(iv) of this Agreement) that, together with all
Affiliates and Associates of such person, is or becomes the beneficial owner of
50% or more of the outstanding Common Stock. The term "Acquiring Person" shall
not include the Company, any subsidiary of the Company, any employee benefit
plan of the Company or any subsidiary of the Company, or any person holding
Common Stock for or pursuant to the terms of any such plan. For the purposes of
this Agreement, a person who becomes an Acquiring Person by acquiring beneficial
ownership of 50% or more of the Common Stock at any time after the date of this
Agreement shall continue to be an Acquiring Person whether or not such person
continues to be the beneficial owner of 50% or more of the outstanding Common
Stock.

     (b) Affiliate and Associate. "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") in effect on the date of this Agreement.

<PAGE>

     (c) Change in Control. A "Change in Control" of the Company shall have
occurred if at any time during the term of this Agreement any of the following
events shall occur:

(i) any consolidation, merger or other reorganization of the Company in which
the Company is merged, consolidated or reorganized into or with another
corporation or other legal person or pursuant to which shares of the Company's
stock are converted into cash, securities or other property, other than a merger
of the Company in which the holders of the Company's common stock immediately
prior to the merger own more than 50% of the common stock of the surviving
corporation or its ultimate parent immediately after the merger;

(ii) any sale, lease, exchange or other transfer (or in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company and as a result of such transaction the holders of the Company's common
stock immediately prior thereto own less than 50% of the common stock of such
transferee or its ultimate parent immediately after such transaction;

(iii) any liquidation or dissolution of the Company or any approval by the
stockholders of the Company of any plan or proposal for the liquidation or
dissolution of the Company;

(iv) any person (including any "person" as such term is used in Section 13(d)(3)
or Section 14(d)(2) of the Exchange Act), has become an Acquiring Person;

(v) if at any time, the Continuing Directors then serving on the Board cease for
any reason to constitute at least a majority thereof;

(vi) any occurrence that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A or any successor rule or regulation
promulgated under the Exchange Act; or

(vii) such other events that cause a change in control of the Company;

          provided, however, that a Change in Control of the Company shall not
          be deemed to have occurred as the result of any transaction having one
          or more of the foregoing effects if such transaction is proposed by,
          and includes a significant equity participation (i.e., an aggregate of
          at least 50% of the then outstanding common equity securities of the
          Company immediately after such transaction which are entitled to vote
          to elect any class of Directors) of, the Executive officers of the
          Company as constituted immediately prior to the occurrence of such
          transaction or any Company employee stock ownership plan or pension
          plan.

     (d) Code. The "Code" shall mean the Internal Revenue Code of 1986, as
amended.

     (e) Continuing Director. A "Continuing Director" shall mean a Director of
the Company who (i) is not an Acquiring Person, an Affiliate or Associate, a
representative of an Acquiring Person or nominated for election by an Acquiring
Person, and (ii) was either a member of the Board of Directors of the Company on
the date of this Agreement or subsequently became a Director of the Company and
whose initial election or initial nomination for election by the Company's
stockholders was approved by at least two-thirds of the Continuing Directors
then on the Board of Directors of the Company.

<PAGE>

     (f) Severance Compensation. The "Severance Compensation" shall be a lump
sum amount equal to 299% of the sum of (A) the highest annual salary of the
Executive in effect at any time during the Term of this Agreement, or the salary
of the Executive in effect immediately prior to the Change in Control, whichever
is the larger amount, plus (B) the amount of the bonus or incentive compensation
targeted for payment to the Executive for the fiscal year during which the
Change in Control occurs.

     (g) Termination Date. The "Termination Date" shall be the date upon which
the Change in Control occurs.

3.   Rights of Executive Upon Change in Control.

     (a) Subject to paragraph 5 below, the Company shall pay the Severance
Compensation to the Executive within ten days following the Termination Date in
lieu of compensation to the Executive for periods subsequent to the Termination
Date, but without affecting the other rights of the Executive at law or in
equity. In addition, the Company shall pay the Executive a job search lump sum
payment of $25,000 within ten days following the Termination Date.

     (c) If the amounts due to the Executive in connection with a Change in
Control under this Agreement (considering amounts due under other agreements,
plans or arrangements) would result in an "excess parachute payment" within the
meaning of Section 280G of the Code, then the Company shall pay to Executive an
additional amount of cash (a "Gross-Up Payment") equal to the amount necessary
to cause the amount of the aggregate after-tax compensation and benefits
received by the Executive here-under (after payment of the excise tax under
Section 4999 of the Code with respect to any excess parachute payment, and any
state and federal income and employment taxes with respect to the Gross-Up
Payment) to equal the aggregate after-tax compensation and benefits the
Executive would have received if Sections 280G and 4999 of the Code had not been
enacted. A nationally recognized public accounting firm selected by the Company
shall initially determine, at the Company's expense, whether an "excess
parachute payment" will be made to Executive, and if so, the amount of the
Gross-Up Payment. In the event of a subsequent claim by the Internal Revenue
Service that, if successful, would result in Executive's liability for an excise
tax under Section 4999 of the Code in excess of the amount covered by any
previous Gross-Up Payment, the Executive shall promptly notify the Company in
writing of such claim. If the Company elects to contest such claim, it shall so
notify the Executive and shall bear and pay directly or indirectly all costs and
expenses of contesting the claim (including additional interest and penalties
incurred in connection with such action), and shall indemnify and hold Executive
harmless, on an after-tax basis, for any excise, income, or employment tax,
including interest and penalties with respect thereto, imposed as a result of
the Company's payment of costs of the contest. Executive shall cooperate fully
with the Company in the defense of any such IRS claim. If, as a result of the
Company's action with respect to a claim, Executive receives a refund of any
amount paid by the Company with respect to such claim, Executive shall promptly
pay such refund to the Company. In the event the IRS claim is finally determined
to result in the imposition of additional excise tax under Section 280G of the
Code on Executive, the Company shall make an additional Gross-Up Payment with
respect to any such additional excise tax.

<PAGE>

     (c) The payment of Severance Compensation by the Company to the Executive
shall not affect any other rights and benefits of the Executive provided by the
Company, whether currently or in the future, prior to the Termination Date,
which rights shall be governed by the terms thereof. The Company shall provide
to the Executive through his Termination Date group insurance benefits,
retirement benefits, and other benefits substantially similar to those which the
Executive was receiving or entitled to receive immediately prior to the Change
of Control Date, subject to any changes required to comply with changes in the
law, and subject to changes in carriers in the ordinary course of business.

     (d) The Company shall have no right of set-off or counterclaim in respect
of any claim, debt or obligation against any payment or benefit to or for the
benefit of the Executive provided for in this Agreement.

     (e) Without limiting the rights of the Executive at law or in equity, if
the Company fails to make any payment required to be made hereunder on a timely
basis, the Company shall pay interest on the amount thereof on demand at an
annualized rate of interest equal to 120% of the then applicable Federal short
term rate determined under Section 1274(d) of the Code, compounded semi-annually
(but in no event shall such interest exceed the highest lawful rate).

     4. No Mitigation Required. In the event that the Company is required to pay
the Severance Compensation under this Agreement, the Executive shall not be
obligated to mitigate his damages nor the amount of any payment provided for in
this Agreement by seeking other employment or otherwise, and the acceptance of
employment elsewhere after termination shall in no way reduce the amount of
Severance Compensation payable hereunder.

     5. Release. In consideration for the protection and benefits provided for
under this Agreement, at the Company's request, Employee hereby agrees to
execute a release of all claims against the Company or any of its affiliates,
directors, officers, employees, agents and benefit plans, in form and substance
satisfactory to the Company. Payment of the benefits under Section 3(a) is
expressly conditioned on Employee's execution of such release if the Company so
requests.

     6. Successors: Binding Agreement.

     (a) The Company will require any successor and any corporation or other
legal person (including any "person" as defined in Section 2(d)(iv) of this
Agreement) which is in control of such successor (as "control" is defined in
Regulation 230.405 or any successor rule or regulation promulgated under the
Securities Act of 1933, as amended) to all or substantially all of the business
and/or assets of the Company (by purchase, merger, consolidation or otherwise),
by agreement in form and substance satisfactory to the Executive, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession shall be a material breach of this
Agreement by the Company. Notwithstanding the foregoing, any

<PAGE>

such assumption shall not, in any way, affect or limit the liability of the
Company under the terms of this Agreement or release the Company from any
obligation hereunder. As used in this Agreement, "Company" shall mean the
Company and any successor to its business and/or all or part of its assets,
which executes and delivers the agreement provided for in this Section 6 or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.

     (b) This Agreement and all rights of the Executive here under shall inure
to the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees.

     7. Notice. The Company shall give written notice to Executive within thirty
days after any Change in Control. Failure to give such notice shall constitute a
material breach of this Agreement. For purposes of this Agreement, notices and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or received after being
mailed by United States registered mail, return receipt requested, postage
prepaid, addressed as follows:

     If to the Executive: Kenneth G. Hawari
                          3605 Edgestone Drive
                          Plano, Texas 75093

     If to the Company:   Advanced Neuromodulation Systems, Inc.
                          6501 Windcrest Drive, Suite 100
                          Plano, Texas 75024

or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of chance of address shall be
effective only upon receipt.

     8. Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the Executive and the Company. No waiver by either party of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, unless specifically
referred to herein with respect to the subject matter of this Agreement have
been made be either party which are not set forth expressly in this agreement.
THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT
SHALL BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAW.

     9. Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.

<PAGE>

     10. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.

     11. Employment Rights. Nothing implied in this Agreement shall create any
right or duty on the part of the Company or the Executive to have the Executive
remain in the employment of the Company prior to any Change in Control.
Notwithstanding any other provision hereof to the contrary and subject to the
terms of the Employment Agreement between the Company and the Executive dated
April 1, 2002, the Executive may, at any time during the Term of this Agreement,
upon the giving of 30 days prior written notice, terminate his employment
hereunder. If this Agreement or the employment of the Executive is terminated
under circumstances in which the Executive is not entitled to any Severance
Compensation, the Executive shall have no further obligation or liability to the
Company hereunder or otherwise with respect to his prior or any future
employment by the Company.

     12. Withholding of Taxes. The Company may withhold from any amounts payable
under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or government regulation or ruling; provided,
however, that no withholding pursuant to Section 4999 of the Code shall be made
unless, in the opinion of tax counsel selected by the Company's independent
accountants and acceptable to the Executive, such withholding relates to
payments which result in the imposition of an excise tax pursuant to Section
4999 of the Code.

     13. Legal Fees and Expenses. It is the intent of the Company that the
Executive not be required to incur the expenses associated with the enforcement
of his rights under this Agreement by litigation or other legal action because
the cost and expense thereof would substantially detract from the benefits
intended to be extended to the Executive in this Agreement. Accordingly, if it
should appear to the Executive that the Company has failed to comply with any of
its obligations under the Agreement or in the event that the Company or any
other person takes any action to declare the Agreement void or unenforceable, or
institutes any litigation designed to deny, or to recover from, the Executive
the benefits intended to be provided to the Executive hereunder, the Company
irrevocably authorizes the Executive from time to time to retain counsel of his
choice, at the expense of the Company as hereafter provided, to represent the
Executive in connection with the initiation or defense of any litigation or
other legal action, whether by or against the Company or any director, officer,
stockholder or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior attorney-client relationship between the
Company and such counsel, the Company irrevocably consents to the Executive
entering into an attorney-client relationship with such counsel, and in that
connection the Company and the Executive agree that a confidential relationship
shall exist between the Executive and such counsel. The Company shall pay and be
solely responsible for any and all reasonable attorneys' and related fees and
expenses incurred by the Executive as a result of the Company's failure to
perform this Agreement or any provision thereof or as a result of the Company or
any person contesting the validity or enforceability of this Agreement or any
provision thereof, up to $100,000 in the aggregate.

<PAGE>

     14. Rights and Remedies Cumulative. No right or remedy conferred upon or
reserved to the Executive is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy under this Agreement, or otherwise, shall not
prevent the concurrent assertion or employment of any other appropriate right or
remedy.

<PAGE>

     IN WITNESS WHEREOF, the parties have executed this Agreement effective on
the date and year first above written.

                                       ADVANCED NEUROMODULATION SYSTEMS, INC.:

                                       By:  /s/ F. Robert Merrill
                                            ----------------------------------
                                            F. Robert Merrill
                                       Its: Executive Vice President and Chief
                                            Financial Officer

                                       EXECUTIVE:

                                       By: /s/ Kenneth G. Hawari
                                           -----------------------------------
                                           Kenneth G.Hawari

</TEXT>
</DOCUMENT>
</SUBMISSION>
