<PAGE>
                                                                               .
                                                                               .
                                                                               .
                                                                      Exhibit 13



Page 1, Annual Report to Shareholders


                              FINANCIAL HIGHLIGHTS

<Table>
<Caption>
December 31                             2002              2001              2000              1999            1998
--------------------------------   --------------    --------------    --------------    --------------   --------------
<S>                                <C>               <C>               <C>               <C>              <C>
Net Sales                          $   13,301,274    $   15,079,794    $   14,584,568    $   17,461,964   $   17,960,483

Operating income (loss) for
the year                              (17,907,909)       (7,883,634)         (944,775)        1,766,243        1,555,296

Net income (loss) for the
year                                  (18,212,266)       (6,843,566)          504,561         2,637,911        2,838,943

Net income (loss) per
share-diluted                               (0.82)            (0.31)             0.02              0.14             0.16

Total assets                           91,755,698        94,971,232       102,353,776        61,116,685       58,431,376

Long-term debt                          9,080,000                 0                 0                 0                0

Total Shareholders' equity             74,127,210        92,223,249        98,525,105        58,841,598       55,819,575
</Table>





















<PAGE>



MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We manufacture and market a mechanical bileaflet heart valve with a patented
pivot design. Our heart valve is used to treat valvular heart disease caused by
the natural aging process, rheumatic heart disease and congenital defects. We
have received regulatory approvals to market the ATS heart valve in the United
States and most international markets, principally Europe, Japan, China, Canada
and Australia.

We commenced selling the ATS heart valve in international markets in 1992.
Internationally, we sell the valve to independent distributors with assigned
territories (generally a specific country or region) who in turn sell the valve
to hospitals or clinics. Most of our sales to international distributors are
denominated in U.S. dollars so currency risk is borne by the distributor. In
December 2002, we formed ATS Medical France, a foreign subsidiary to sell our
valves directly to hospitals in France. In France, we will consign valves to
hospitals and invoice in euros when the valve is implanted. Sales to our
European distributors represented approximately 46% of our net sales in 2000,
36% in 2001 and 26% in 2002. Sales to our Asian Pacific customers represented
approximately 33% of our net sales in 2000, 34% in 2001 and 42% in 2002.

During 2001, we hired a direct sales force and began selling the ATS heart valve
in the United States. Due to the cost of maintaining a full direct sales force,
we decided in mid-June 2002 to switch to a hybrid sales force in the U.S.
consisting of our top performing direct sales people plus independent
manufacturers representatives. Our U.S. sales as a percentage of our overall
sales was 4% in 2000, 19% in 2001 and 19% in 2002.

In the U.S. market and now in France, we recognize the selling price to the
hospital. In other non-U.S. markets, we recognize the selling price to the
distributor. As U.S. sales increase as a percentage of overall sales, the
overall average selling price may increase, even though the average selling
prices in some non-U.S. markets may be steady or declining. Hospital
administrators continue to apply pressure for lower prices, and the willingness
of competitors to reduce prices will continue to put pressure on revenue growth
and margins.

To date we have purchased all of the pyrolytic carbon components for the ATS
heart valve from Carbomedics, a division of Snia S.p.A. (formerly a division of
Centerpulse (formerly Sulzer Medica)) pursuant to a multi-year supply agreement
entered into in 1990. The cost of the pyrolytic carbon components represents
approximately 80% of the total cost of the ATS heart valve. Under the supply
agreement, the cost of the pyrolytic carbon components has varied according to
annual volume purchases and is adjusted annually by reference to increases in
the U.S. Department of Labor Employment Cost Index.


<PAGE>

In December 1999, we renegotiated the supply agreement with Carbomedics
resulting in significant reductions in our minimum purchase requirements and
unit costs beginning in 2001. In late June 2002, we again amended the supply
agreement such that our purchase obligations for the remainder of 2002 (with the
exception of approximately eight weeks of work in process) would be suspended
along with 100% of our purchase obligations for 2003, 2004, 2005 and 2006. In
January of 2007 the purchase obligations for 2003 would resume, with the
obligations for 2004 through 2006 to follow in each subsequent year. In
addition, a technology transfer fee of $5 million due to Carbomedics at the end
of 2002 will be paid in two equal installments in June and December of 2003.
Furthermore, technology payments due in 2003, 2004, 2005 and 2006 totaling $23
million will begin to be paid based on a percentage of the cost of goods sold
starting in January of 2005 with the first payment in June 2005 and subsequent
payments every six months based on a percent of the cost of goods sold the
previous six months subject to certain cumulative minimum amounts being paid by
the end of 2006, 2007, 2008 and 2009.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States. The preparation of these
financial statements require management to make significant estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. We believe that the following are some of
the more critical judgment areas in the application of our accounting policies
that currently affect our financial condition and results of operations:

Allowance for Doubtful Accounts

Our distribution in international markets through independent distributors
concentrates relatively large amounts of receivables in relatively few customer
accounts. We have successfully done business with most of these distributors for
many years. We record the sale to the distributor at the time the valve is
shipped to the distributor, with the exception of Italy where sales are
recognized on a cash basis. There may be a length of time between when the
distributor receives product from us, puts it on the hospital shelf, bills the
hospital and receives payment for the valve. Most of the time the distributor is
paying us for the valve long before he is paid. Some of the hospitals are
government funded. Payment to the distributor may be delayed due to government
funding issues. Some governments have put restrictions on outgoing payments. We
monitor amounts that are not paid according to term. We attempt to accrue for
potential losses due to non-payment. Financial conditions in international
markets can change very quickly and our allowance for doubtful accounts cannot
anticipate all potential changes.

Impairment of Technology License

At the end of the first quarter of 2002, the Company evaluated the carrying
value of its technology license asset in accordance with the provisions of FASB
Statement 142 (FASB No. 142), Goodwill and Other Intangible Assets, which were
effective for the


<PAGE>


Company as of January 1, 2002. Utilizing a discounted cash flow model, that
analysis indicated the asset's carrying value was recoverable and the Company
recognized no impairment as a result of the adoption of FASB No. 142. In the
second quarter of 2002, the Company experienced decreased sales volumes,
decreased average selling prices and initiated certain restructuring activities
pertaining to its executive team and the manner in which it sells its product in
the United States, changing from a direct sales force to a hybrid sales force of
a few direct salespeople and several independent manufacturers representatives.
In response to these conditions, the Company modified its pricing strategy and
sales volume estimates in conjunction with the reorganization plan implemented
and the increased competitive pressures in the European market. As a result of
these conditions and changes, the Company reviewed its future cash flow analysis
and changed its expectations of the sales volumes estimated and its selling
prices of the heart valve in the cash flow model to evaluate the recoverability
of its technology license. When compared to the revised fair value as calculated
by discounting the new future cash flows projections at June 30, 2002, the
Company determined a non-cash charge representing an impairment of this asset
needed to be recognized in the amount of $8.1 million in the second quarter.
This charge also reflects in part the effect of the amended milestone payments
in the early years of the technology transfer agreement relative to the benefits
of lower cost carbon not being realized until future years after the depletion
of inventories currently on hand.

The assessment of potential impairment requires certain judgments and estimates
by the Company, including the determination of an event indicating impairment;
the future cash flows to be generated by the asset; risks associated with those
cash flows; and the Company's discount rate to be utilized.

Deferred Tax Assets

We have incurred losses in excess of $28.5 million and are eligible for tax
credits of approximately $633,000. The losses are carried forward for U.S. and
state corporate income taxes and can be used to reduce future taxes. At December
31, 2002 we had deferred tax assets totaling $12.5 million. We have taken a
valuation allowance against this asset for its full amount because the
carryforwards have a limited life and other limitations. An alternative
accounting judgment would be to record the entire asset on our balance sheet and
in subsequent periods, if it became apparent that a portion of the asset would
not be realized, write it off against income in that period. In order to utilize
that treatment we would have to decide that it was more likely than not that we
would realize the deferred tax assets and credits.

Inventories

We have purchased heart valve components for the past nine years from
Carbomedics under a supply agreement negotiated in 1990, that was amended in
December 1999 and again amended in June 2002. These purchases were in excess of
our sales and for the most part tied to minimums in the contract. Until we
received approval from the U.S. FDA to sell the valve in the United States, it
was impossible to estimate how much inventory would be needed to meet the
demands of this significant market. We have


<PAGE>

estimated that a portion of inventories on hand at December 31, 2001 and
December 31, 2002 were not likely to be sold in the following twelve months
periods and therefore should not be classified as a current asset. The estimate
of inventories necessary to support current sales includes management
projections not only of sales but inventories for new consignment accounts and
contingencies.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED TO 2001

Net sales for the year ended December 31, 2002 decreased 12% to $13,301,274
compared to $15,079,794 for the year ended December 31, 2001. The decrease in
sales revenues was primarily attributable to Europe where Italy remains on
distributor accounting and France did not place orders during the majority of
2002. Unit sales for the year ended December 31, 2002 decreased 1% compared to
unit sales for the year ended December 31, 2001. The average selling prices in
2002 decreased 12% compared to 2001. The decreases in average selling price was
primarily attributable to lower prices in Europe due to competitive pricing.
Revenue in the United States decreased 5% for the year ended December 31, 2002
compared to the year ended December 31, 2001, primarily because we were in the
midst of reorganizing our sales representation during the second half of 2002.

During 2001, we hired a direct sales force and began selling the ATS heart valve
in the United States. In mid-June 2002, we took certain cost savings measures
including a reduction in our work force, which included the majority of our
direct sales people. Independent manufacturers representatives were recruited to
take the place of the former direct territories affected by the reduction in
force. We will continue our efforts to organize our sales distribution in the
U.S. We expect to have all managers in place by the end of first quarter 2003,
with the remainder of the sales positions filled in the second quarter 2003.
Valves are consigned to hospitals desiring to use the ATS valve and a sale is
recorded once the valve is implanted. The "sales cycle" for new accounts can
take from one to three months. We feel that we have a superior product, however,
our competitors have larger sales staffs and greater financial resources so they
are currently able to reach more potential customers. The rate at which we will
open new accounts and realize new implants with our hybrid sales force is
difficult to forecast from quarter to quarter.

Cost of goods sold totaled $12,306,736 and $10,309,814 for 2002 and 2001,
respectively, or 93% of sales in 2002 and 68% for 2001. In both years, we wrote
down a portion of inventory to allow us to maintain some market share in
countries where the realizable valve price is lower than our cost. This charge
to the cost of goods sold was $2,400,000 in 2002 and $1,000,000 in 2001. The
average cost per valve remained constant in 2002 compared to 2001.

Gross profit totaled $994,538 or 7% of sales for the year ended December 31,
2002 versus $4,769,980 or 32% of sales, for the year ended December 31, 2001.
The write


<PAGE>


down of inventory discussed above and the decrease in average selling prices
were the principle factors for this decrease.

Research, development and engineering expenses totaled $2,425,374 for the year
ended December 31, 2002 versus $3,905,556 for the year ended December 31, 2001,
a decrease of 38%. Total expenses related to our own carbon manufacturing
facility were approximately 74% and 78% of research and development for 2002 and
2001, respectively. Our focus during 2001 and the first quarter of 2002 was
making qualification and verification coating runs, training ATS personnel on
the new carbon manufacturing equipment installed during the period, and
documenting procedures. This culminated with the submissions at the end of the
first quarter 2002 to the TUV, who we use as a notified body for our European
approval, and to the U.S. Food and Drug Administration. On May 29, 2002, we
received notification from the FDA of full approval of our carbon manufacturing
plant. As our existing inventories are depleted over the next few years,
components from this facility are expected to allow for significant reduction in
the cost of our components utilized in our valve.

Sales and marketing expenses decreased for the year ended December 31, 2002 to
$3,312,157 compared to $4,904,205 for the year ended December 31, 2001. The
decrease in expenses is due to the restructuring that took place in June 2002.
Since the restructuring, we are utilizing a hybrid sales force consisting of
direct sales people and independent manufacturers representatives. We expect our
sales and marketing expenses to increase in future quarters as we complete our
new sales organization.

General and administrative expenses totaled $3,113,551 for the year ended
December 31, 2002, a 19% decrease from the $3,843,853 reported for the year
ended December 31, 2001. The decrease is due to fewer personnel in the general
and administrative departments as a result of certain reorganization initiatives
during the second half of the year in 2002 compared to 2001.

We took an impairment charge on our technology license in the quarter ended June
30, 2002 in the amount of $8,100,000. During that quarter, we reached three
additional milestones in conjunction with our technology license agreement with
Carbomedics, which resulted in an additional $13.6 million of long-term
obligations to be recognized on our balance sheet. At the end of our first
quarter of 2002, we evaluated the carrying value of our technology license asset
in accordance with the provisions of FASB Statement 142 (FASB No. 142), Goodwill
and Other Intangible Assets, which were effective for the Company as of January
1, 2002. Utilizing a discounted cash flow model, that analysis indicated the
asset's carrying value was recoverable and we recognized no impairment as a
result of the adoption of FASB NO. 142. In the second quarter of 2002, we
experienced decreased sales volumes, decreased average selling prices and
initiated certain restructuring activities pertaining to our executive team and
the manner in which we sell our products from a direct sales force to a hybrid
sales force of a few direct salespeople and several independent manufacturers
representatives. In response to these conditions, we modified our pricing
strategy and sales volume estimates in conjunction with the reorganization plan
implemented and the increased competitive pressures in the European market. As a
result of these conditions and changes, we reviewed our future


<PAGE>


cash flow analysis and changed our expectations of the sales volume estimates
and selling prices of the heart valve in the cash flow model to evaluate the
recoverability of our technology license. When compared to the revised fair
value as calculated by discounting the changed future cash flows at June 30,
2002, we determined a non-cash charge representing an impairment of this asset
needed to be recognized in the amount of $8.1 million in the second quarter.
This charge also reflects in part the effect of the amended milestone payments
in the early years of the technology transfer agreement relative to the benefits
of lower cost carbon not being realized until future years after the depletion
of inventories currently on hand.

Our total reorganization expense for the year ended December 31, 2002 totaled
$1,129,867. In 2002, the Board of Directors decided to implement cost
containment measures and to seek a new management team to lead the business. As
part of these cost reduction measures, approximately one half of the workforce,
including all of the executive officers of the Company were released from
employment. . As of December 31, 2002, we had 46 employees compared to 89
employees at December 31, 2001. Included in this total is approximately $235,000
accrued in December 2002 of additional reorganization expense related to
releasing our former CEO from employment. The reorganization expenses consist of
approximately $985,367 of severance pay and benefits, and $144,500 of rent that
was expensed for the vacated portion of the Company's leased facility. Of the
total reorganization expenses approximately $493,000 has not been paid as of
December 31, 2002.

During the fourth quarter 2002, we terminated our relationship with our
distributor covering France and Belgium because of violations of several
conditions of the distributor agreement. The distributor has the right to return
its inventory of valves to the Company as a result of the early termination
clause within the distributor agreement. We accrued an estimated termination
charge of $821,498, representing the margin on the valves that are expected to
be returned and the estimated costs related to restocking such inventory for
resale.

For the year ended December 31, 2002, we recognized interest expense of
approximately $480,000 on the long-term debt. This interest results from the
amortization of the $2.4 million discount amount on the non-interest bearing
debt owed to Carbomedics for milestones achieved to date on the technology
transfer agreement.

Interest income totaled $175,684 for the year ended December 31, 2002 compared
to $1,040,068 for the year ended December 31, 2001. The decreases in interest
income for the year ended December 31, 2002 were the result of lower average
investable cash balances and lower interest rates.

ATS recorded a net loss of $18,212,266 or ($0.82) per share for the year ended
December 31, 2002 compared to a net loss of $6,843,566 or ($0.31) per share for
the year ended December 31, 2001. The decreases in gross margin and interest
income, coupled with the impairment charge, reorganization expenses and
distributor termination charge, were the reasons for the increased loss. We are
improving our representation in the United States


<PAGE>



and making some changes in our international representation to increase sales
and to return to profitability in future years.

ATS has accumulated approximately $28.5 million of net operating loss (NOL)
carryforwards for U.S. tax purposes. ATS believes that its ability to fully
utilize the existing net operating loss carryforwards could be restricted on a
portion of the NOL for changes in control that may have occurred or may occur in
the future. We have not accrued any tax benefits for such tax loss benefit.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO 2000

Net sales for the year ended December 31, 2001 increased 3% to $15,079,794
compared to $14,584,568 for the year ended December 31, 2000. Unit sales
decreased 5% in 2001 compared to 2000. We experienced a decline in sales in
Europe where the euro continued to struggle in exchange value with the U.S.
dollar, and competitors continued to lower prices. Our net sales in Europe
declined 19% for the year ended December 31, 2001 compared to 2000 and our
European unit sales declined by 17% in 2001 compared to 2000. Despite lowering
our prices in Europe an average of 6%, European sales declined due to the impact
of the weak euro and competitive price-cutting. We received FDA approval to sell
our heart valve in the United States in the fourth quarter of 2000. U.S. sales
were 19% of total sales for the year ended December 31, 2001 and 4% for the year
ended December 31, 2000.

During the first full year of selling the valve in the United States we have
encountered significant competition. Some of our competitors are much larger and
are able to spend more money promoting their products. Some competitors have
lower costs and can use lower prices to retain customers. Some customers are
slow or reluctant to change from a valve they have been implanting for many
years. We will continue to promote our valve on the basis of its documented
excellent clinical performance.

Cost of sales totaled $10,309,814 and $9,558,464 for 2001 and 2000,
respectively, or 68% of sales for 2001 and 66% for 2000. The average cost per
valve remained constant in 2001 compared to 2000. In the third quarter of 2001
we wrote down a portion of inventory to allow us to maintain some market share
in less developed countries where we had been selling and where the realizable
price is lower than our cost. The amount of this write down was approximately
$1,000,000.

Gross profit totaled $4,769,980 or 32% of sales for the year ended December 31,
2001 versus $5,026,104 or 34% of sales, for the year ended December 31, 2000.
The increase in average selling price from the introduction of the valve in the
United States was offset by a decrease in the average selling prices in
international markets and the write down of inventory discussed above, which
resulted in a decrease in gross profit.

Research, development and engineering expenses totaled $3,905,556 for the year
ended December 31, 2001 versus $1,911,815 for the year ended December 31, 2000.
The increase in research, development and engineering expenses in 2001 resulted
from operational qualification and validation of the carbon production equipment
and making


<PAGE>


pilot coating runs. We increased our research and development personnel to 20
employees at December 31, 2001 compared to 8 employees at December 31, 2000.
Approximately 18% and 4% of our research and development expenses for 2001 and
2000, respectively, were for Carbomedics consulting services related to setting
up the carbon facility.

With the hiring of a direct sales force in the United States, we began
displaying selling expense as a separate line of operating expense in the
statement of operations in 2001. For the year ended December 31, 2001 we spent
$4,904,205 on sales and marketing compared to $1,028,333 for the year ended
December 31, 2000. From November 2000 to May 2001 we hired four regional
managers and 20 direct salespeople in the United States. During 2001 we also
hired a director of marketing.

General and administrative expenses totaled $3,843,853 for the year ended
December 31, 2001, an increase from the $3,030,731 general and administrative
expenses recorded for the year ended December 31, 2000. We incurred one-time
charges and severance expense associated with the resignation of our CEO and
workforce reductions in September and November 2001. We wrote off certain
uncollectable accounts totaling $222,570 in 2001 as compared to none in 2000. In
addition, we accrued $197,700 in 2001 and $220,000 in 2000 to increase our
allowance for doubtful accounts, which is included in general and administrative
expense in the statement of operations. There were no management bonuses accrued
in 2001. We had 89 employees at December 31, 2001 compared to 104 employees at
December 31, 2000.

We reported a loss from operations for the year ended December 31, 2001 of
$7,883,634. The increases in selling expense associated with the direct sales
force, research spending associated with starting our carbon facility, the
inventory charge taken for lower of cost or market issues and the one-time
charge associated with workforce reductions were the primary causes for the
increase in the operating loss. We incurred a loss from operations for the year
ended December 31, 2000 of $944,775 due to the decline in gross profit and the
increases in research and development expense and selling, general and
administrative spending.

Interest income totaled $1,040,068 for the year ended December 31, 2001 compared
to $1,523,793 for the year ended December 31, 2000. The decrease in interest
income in 2001 was primarily due to lower average cash balances as we invested
in carbon manufacturing and direct U.S. distribution. Interest rates have
declined several times in the past 18 months and coupled with continued use of
our cash, we expect to earn less than 50% of the interest earned in 2001 in
2002.

We realized a net loss of $6,843,566 or $0.31 per share for the year ended
December 31, 2001. Net income totaled $504,561 or $0.02 per share for the year
ended December 31, 2000. The increased research and development spending
associated with our carbon project and the hiring of the direct sales force in
the United States caused expenses to exceed gross profit resulting in a loss for
2001.



<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments decreased by $2,803,152 from
$12,777,040 at December 31, 2001 to $9,973,888 at December 31, 2002. Inventory
purchases and operating losses including the reorganization expenses were
primarily responsible for the cash used during fiscal 2002. With the reductions
in personnel and spending enacted by ATS in the second quarter 2002, we were
cash flow positive by approximately $1,521,000 for the second half of 2002. We
do not expect to be cash flow positive for the majority of 2003, due primarily
to the technology fee payments of $2,500,000 due in both June and December 2003.

Accounts receivable decreased from $4,082,992 at December 31, 2001 to $3,557,055
at December 31, 2002. The majority of the receivable balances are amounts owing
from our international customers, where payments terms are 60 days or longer.

Current liabilities increased $5,800,505 from $2,747,983 at December 31, 2001 to
$8,548,488 at December 31, 2002. The majority of the increase is the $5 million
short-term note on the technology transfer payment where $2.5 million is due in
both June and December 2003. Accrued reorganization charges totaling $492,572
consist of severance payments that will be paid out over the year in 2003.
Accrued distributor liabilities totaling $1,597,323 at December 31, 2002 and
$298,382 for December 31, 2001, consist of accrued distributor rebates plus the
amount we expect to owe our terminated French distributor for returned valves
and associated expenses.

Accounts payable decreased $835,645 from $1,345,780 at December 31, 2001 to
$510,135 at December 31, 2002. The decrease in account payable is due to the
amended supply agreement where we suspended component purchases from Carbomedics
from July 2002 until January 2007. ATS had contracted to purchase $8.4 million
of components during 2002 in accordance with the terms of its supply agreement
with Carbomedics. On June 27, 2002 this agreement was amended to suspend carbon
component purchases until January 2007, except for the current work in process
that we received in the third quarter 2002. This suspension of component
purchases reduced cash expenditures for the Company by approximately $3 million
dollars in 2002. For the years 2003 to 2006, the total deferred expenditures
will be approximately $18 million.

Under the carbon agreement entered into in December 1999, ATS agreed to pay
Carbomedics a license fee of $41 million in annual installments ending in
December 2006. In addition to granting ATS an exclusive worldwide right and
license to use its carbon coating technology to manufacture pyrolytic carbon
components for the ATS valve under this agreement, Carbomedics agreed to assist
ATS in designing, building and commencing operations in its own pyrolytic carbon
production facility in Minneapolis, Minnesota. In May 2002, the Company received
notice of approval of its carbon plant from the U.S. Food and Drug
Administration. At the end of June 2002, ATS and Carbomedics agreed to delay the
timing of the technology fee payments due under the carbon agreement. The $5
million payment that was due in December 2002 will now be paid in two equal
installments in June and December of 2003. An aggregate of $23 million of
technology transfer fees will be due in subsequent years under the carbon


<PAGE>


agreement, and will be paid in semi-annual installments beginning in June 2005
in amounts equal to a percentage of the cost of goods sold in the previous six
months, subject to certain cumulative minimum amounts being paid by the end of
2006, 2007, 2008 and 2009. These adjustments to the timing of payments due under
our supply and carbon agreements with Carbomedics deferred cash expenditures of
approximately $8 million dollars in 2002.

We have two operating leases for our facilities with minimum lease commitments
of $417,413 in 2003 and $111,567 in 2004 through 2008. One of our leases expires
on December 31, 2003 and we are currently evaluating our property needs.

Based upon the current forecast of sales and our reduced operating expenses,
along with the adjustments to the timing of our payments to Carbomedics, we
anticipate having cash to fund our operations through 2005. However, as
identified under the heading of "Cautionary Statements Pursuant to the Private
Litigation and Securities Reform Act of 1995" below, any adverse change that
affects our revenue, access to the capital markets or future demand for our
products will affect our long term viability. Maintaining adequate levels of
working capital depends in part upon the success of our products in the
marketplace, the relative profitability of those products and our ability to
control operating and capital expenses. Funding of our operations in future
periods may require additional investments in ATS in the form of equity or debt.
There can be no assurance that we will achieve desired levels of sales or
profitability, or that future capital infusions will be available.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates may
cause the fair market value of the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate later
rises, the fair value of the principal amount of our investment will probably
decline. To minimize this risk our portfolio of cash equivalents and short-term
investments may be invested in a variety of securities, including commercial
paper, money market funds, government and non-government debt securities. The
average duration of all of our investments has generally been less than one
year. Due to the short-term nature of these investments, we believe we have no
material exposure to interest rate risk arising from our investments.

In the United States and France, we sell our products directly to hospitals.
Revenue is recognized upon shipment of products to customers. In international
markets outside of France, we sell our products to independent distributors who,
in turn, sell to medical hospitals. Loss, termination or ineffectiveness of
distributors to effectively promote our product would have a material adverse
effect on our financial condition and results of operations.


<PAGE>


Transactions with U.S. and non-U.S. customers and distributors, other than in
France, are entered into in U.S. dollars, precluding the need for foreign
currency hedges on such sales. Sales through our French subsidiary, which was
established in 2002 to replace a distributor, will be in euros, so we will be
subject to profitability risk arising from exchange rate movements. We have not
used foreign exchange contracts or similar devices to reduce this risk. We will
evaluate the need to use foreign exchange contracts or similar devices, if sales
in France increase substantially.

CAUTIONARY STATEMENTS PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995

The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their business, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. ATS desires to take
advantage of the safe harbor provisions with respect to any forward-looking
statements it may make in this filing, other filings with the Securities and
Exchange Commission and any public oral statements or written releases. The
words or phrases "will likely," "is expected," "will continue," "is
anticipated," "estimate," "projected," "forecast," or similar expressions are
intended to identify forward-looking statements within the meaning of the Act.
Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. ATS cautions readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made.

In accordance with the Act, the Company identifies the following important
general factors which, if altered from the current status, could cause the
Company's actual results to differ from those described in any forward-looking
statements: the continued acceptance of the Company's mechanical heart valve in
international markets, the rate of increase of acceptance of the Company's valve
in the United States, the continued listing of our stock on The Nasdaq Stock
Market, our ability to successfully implement our sales strategy in the United
States, the continued clinical performance of the Company's mechanical heart
valve, the actions of the Company's competitors including pricing changes and
new product introductions, the continued performance of the Company's
independent distributors in selling the valve, the actions of the Company's
supplier of pyrolytic carbon components for the valve and difficulties we may
encounter in operating our own pyrolytic carbon manufacturing capability as well
as the matters discussed on our "Cautionary Statements" filed as Exhibit 99.1 to
our form 10-K for the year ended December 31, 2002. This list is not exhaustive
and the Company may supplement this list in any future filing or in connection
with the making of any specific forward-looking statement.







<PAGE>


COMMON STOCK INFORMATION

The Company's common stock (the "Common Stock") is traded on the Nasdaq National
Market under the symbol "ATSI." The following table sets forth the high and low
sale prices since January 1, 2001. Prices represent transactions between dealers
and do not reflect retail markups, markdowns, or commissions.

<Table>
<Caption>
   2002            High           Low           2001            High          Low
------------   ------------   ------------   ------------   ------------   ------------
<S>            <C>            <C>            <C>            <C>            <C>
First Qtr      $       5.50   $       1.75      First Qtr   $      13.63   $       7.00
Second Qtr             2.06           0.47     Second Qtr          13.01           7.00
Third Qtr              0.64           0.31      Third Qtr          11.48           3.25
Fourth Qtr             0.85           0.36     Fourth Qtr           5.78           2.98
</Table>


As of December 31, 2002 there were 446 record holders of the Common Stock. The
Company has not paid cash dividends and has no present intentions of paying cash
dividends on its Common Stock.

MARKET MAKERS

During 2002, the following securities firms were the most significant market
makers of the Company's common stock:


   Knight Securities L.P.
   Piper Jaffray Companies Inc.
   Pacific Growth Equities, LLC
   Cincinnati Stock Exchange
   Schwab Capital Markets
   A.G. Edwards & Sons, Inc.
   Dougherty & Company LLC














<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
ATS Medical, Inc.

We have audited the accompanying consolidated statements of financial position
of ATS Medical, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ATS Medical, Inc.
and subsidiaries at December 31, 2002 and 2001, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States.

                                                     /s/ Ernst & Young LLP

Minneapolis, Minnesota
January 31, 2003















<PAGE>




                                ATS Medical, Inc.

                  Consolidated Statements of Financial Position

<Table>
<Caption>
                                                                             DECEMBER 31
                                                                        2002             2001
                                                                   --------------    --------------
<S>                                                                <C>               <C>
ASSETS
Current assets:
   Cash and cash equivalents                                       $    7,472,219    $    5,078,750
   Short-term investments                                               2,501,669         7,698,290
                                                                   --------------    --------------
                                                                        9,973,888        12,777,040
   Accounts receivable, less allowance of $420,000 in 2002 and
     $400,000 in 2001                                                   3,557,055         4,082,992
   Inventories                                                         15,876,324        17,348,901
   Prepaid expenses                                                       382,107           570,716
                                                                   --------------    --------------
Total current assets                                                   29,789,374        34,779,649

Leasehold improvements, furniture, and equipment, net                   6,025,962         6,753,483

Inventories                                                            37,000,000        40,000,000

Technology license                                                     18,500,000        13,000,000

Other assets                                                              440,362           438,100
                                                                   --------------    --------------
Total assets                                                       $   91,755,698    $   94,971,232
                                                                   ==============    ==============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                $      510,135    $    1,345,780
   Due to related party                                                   192,904           192,904
   Accrued reorganization charges                                         492,572                --
   Accrued payroll and expenses                                           321,521           476,884
   Accrued distributor liabilities                                      1,597,323           298,382
   Notes payable                                                        5,000,000                --
                                                                   --------------    --------------
Total current liabilities                                               8,114,455         2,313,950

Due to related party                                                      434,033           434,033
Long-term debt                                                          9,080,000                --

Shareholders' equity:
   Common Stock, $.01 par value:
     Authorized shares - 40,000,000
     Issued and outstanding shares - 22,305,920 in 2002 and
       22,203,940 in 2001                                                 223,059           222,039
   Additional paid-in capital                                         111,473,528       111,354,615
   Accumulated deficit                                                (37,565,671)      (19,353,405)
   Accumulated other comprehensive loss                                    (3,706)               --
                                                                   --------------    --------------
Total shareholders' equity                                             74,127,210        92,223,249
                                                                   --------------    --------------
Total liabilities and shareholders' equity                         $   91,755,698    $   94,971,232
                                                                   ==============    ==============
</Table>

See accompanying notes.



<PAGE>




                                ATS Medical, Inc.

                      Consolidated Statements of Operations

<Table>
<Caption>
                                                                   YEAR ENDED DECEMBER 31
                                                          2002              2001              2000
                                                     --------------    --------------    --------------
<S>                                                  <C>               <C>               <C>
Net sales                                            $   13,301,274    $   15,079,794    $   14,584,568
Cost of goods sold                                       12,306,736        10,309,814         9,558,464
                                                     --------------    --------------    --------------
Gross profit                                                994,538         4,769,980         5,026,104

Expenses:
   Research, development, and engineering                 2,425,374         3,905,556         1,911,815
   Sales and marketing                                    3,312,157         4,904,205         1,028,333
   General and administrative                             3,113,551         3,843,853         3,030,731
   Impairment of technology license                       8,100,000                --                --
   Reorganization expenses                                1,129,867                --                --
   Distributor termination expenses                         821,498                --                --
                                                     --------------    --------------    --------------
Total expenses                                           18,902,447        12,653,614         5,990,879
                                                     --------------    --------------    --------------
Operating loss                                          (17,907,909)       (7,883,634)         (944,775)

Interest (expense) income                                  (304,357)        1,040,068         1,523,793
                                                     --------------    --------------    --------------

(Loss) income before income taxes                       (18,212,266)       (6,843,566)          579,018
   Income tax expense                                            --                --            74,457
                                                     --------------    --------------    --------------
Net (loss) income                                    $  (18,212,266)   $   (6,843,566)   $      504,561
                                                     ==============    ==============    ==============

Net (loss) income per share:
   Basic                                             $         (.82)   $         (.31)   $          .03
   Diluted                                           $         (.82)   $         (.31)   $          .02

Weighted average number of shares outstanding:
   Basic                                                 22,258,806        22,158,513        20,031,611
   Diluted                                               22,258,806        22,158,513        20,868,188
</Table>

See accompanying notes.



<PAGE>





                                ATS Medical, Inc.

            Consolidated Statement of Changes in Shareholders' Equity

<Table>
<Caption>

                                                                                      ACCUMULATED
                                                COMMON STOCK            ADDITIONAL       OTHER
                                         ----------------------------     PAID-IN     COMPREHENSIVE    ACCUMULATED
                                            SHARES          AMOUNT        CAPITAL      INCOME (LOSS)     DEFICIT          TOTAL
                                         ------------    ------------   ------------  -------------    ------------    ------------
<S>                                      <C>             <C>            <C>           <C>              <C>             <C>
Balance at December 31, 1999               17,909,010    $    179,090   $ 71,633,414   $     43,494    $(13,014,400)   $ 58,841,598
Common Stock issued under the
   Employee Stock
   Purchase Plan                               13,318             133        118,379             --              --         118,512
Stock options exercised                       347,900           3,479      1,351,024             --              --       1,354,503
Sale of Common Stock                        3,827,273          38,273     37,711,152             --              --      37,749,425

Change in foreign currency translation             --              --             --        (43,494)             --         (43,494)
Net income for the year                            --              --             --             --         504,561         504,561
                                                                                                                       ------------
Comprehensive income                                                                                                        461,067
                                         ------------    ------------   ------------  -------------    ------------    ------------
Balance at December 31, 2000               22,097,501         220,975    110,813,969             --     (12,509,839)     98,525,105
Common Stock issued under the
 Employee Stock Purchase Plan                  39,885             399        210,663             --              --         211,062

Stock options exercised                        66,554             665        329,983             --              --         330,648
Net loss and comprehensive loss
 for the year                                      --              --             --             --      (6,843,566)     (6,843,566)
                                         ------------    ------------   ------------  -------------    ------------    ------------
Balance at December 31, 2001               22,203,940         222,039    111,354,615             --     (19,353,405)     92,223,249
Common Stock issued under the
   Employee Stock Purchase Plan               101,980           1,020        118,913             --              --         119,933
Change in foreign currency translation             --              --             --         (3,706)             --          (3,706)
Net loss for the year                              --              --             --             --     (18,212,266)    (18,212,266)
                                                                                                                       ------------
Comprehensive loss                                                                                                      (18,215,972)
                                         ------------    ------------   ------------  -------------    ------------    ------------
Balance at December 31, 2002               22,305,920    $    223,059   $111,473,528   $     (3,706)   $(37,565,671)   $ 74,127,210
                                         ------------    ------------   ------------  -------------    ------------    ------------
</Table>

See accompanying notes.



<PAGE>




                                ATS Medical, Inc.

                      Consolidated Statements of Cash Flows

<Table>
<Caption>
                                                                           YEAR ENDED DECEMBER 31
                                                                  2002               2001              2000
                                                             --------------    --------------    --------------
<S>                                                          <C>               <C>               <C>
OPERATING ACTIVITIES
Net (loss) income                                            $  (18,212,266)   $   (6,843,566)   $      504,561
Adjustments to reconcile net (loss) income to net cash
   used in operating activities:
     Depreciation                                                   713,447           687,654           272,885
     Loss on disposal of equipment                                   34,998            13,820             5,387
     Imputed interest on long-term debt                             480,000                --                --
     Impairment of technology license                             8,100,000                --                --
     Changes in operating assets and liabilities:
       Accounts receivable                                          525,937         2,498,323          (421,691)
       Prepaid expenses                                             188,609            44,964          (187,846)
       Other assets                                                  (2,262)          (14,238)          (20,670)
       Inventories                                                4,472,577        (5,860,773)      (12,853,539)
       Accounts payable and accrued expenses                        800,505        (1,080,688)        1,553,584
                                                             --------------    --------------    --------------
Net cash used in operating activities                            (2,898,455)      (10,554,504)      (11,147,329)

INVESTING ACTIVITIES
Purchases of short-term investments                              (5,663,312)      (19,289,620)      (24,908,245)
Maturities of short-term investments                             10,859,933        27,864,600        14,294,337
Payments for technology license                                          --        (5,000,000)       (3,000,000)
Purchases of leasehold improvements, furniture, and
   equipment                                                       (185,713)       (3,287,631)       (3,644,155)
Proceeds on disposal of equipment                                   164,789                --                --
                                                             --------------    --------------    --------------
Net cash provided by (used in) investing activities               5,175,697           287,349       (17,258,063)

FINANCING ACTIVITIES
Net proceeds from issuance of Common Stock                          119,933           541,710        39,222,440
                                                             --------------    --------------    --------------
Net cash provided by financing activities                           119,933           541,710        39,222,440

Effect of exchange rate changes                                      (3,706)               --           (43,494)
                                                             --------------    --------------    --------------
Increase (decrease) in cash and cash equivalents                  2,393,469        (9,725,445)       10,773,554
Cash and cash equivalents at beginning of year                    5,078,750        14,804,195         4,030,641
                                                             --------------    --------------    --------------
Cash and cash equivalents at end of year                     $    7,472,219    $    5,078,750    $   14,804,195
                                                             --------------    --------------    --------------
</Table>

See accompanying notes.


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2002

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS ACTIVITY

ATS Medical, Inc. (the Company) manufactures and sells a bileaflet mechanical
heart valve. The Company received U.S. Food and Drug Administration approval to
market the valve in the United States in October 2000, and the Company is now
permitted to sell valves throughout the world.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
both of its wholly owned subsidiaries, ATS Medical Sales, Inc. and ATS Medical
France SARL, after elimination of intercompany accounts and transactions.

CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Cash equivalents
are carried at cost which approximates market value.

SHORT-TERM INVESTMENTS

Short-term investments are comprised of debt securities and are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a component of
comprehensive income (loss) in shareholders' equity. Realized gains and losses
and declines in value judged to be other than temporary on available-for-sale
securities are included in other income.

INVENTORIES

Inventories are carried at the lower of cost (first-in, first-out basis) or
market. The majority of the inventories consist of purchased components. The
Company has recorded a valuation reserve against inventories of $200,000 as of
December 31, 2002 and 2001. The Company has written down a portion of its
inventories to provide for the lower of cost or market value expected in less
developed countries. The write-down was $2.4 million and $1.0 million in 2002
and 2001, respectively.

At December 31, 2002 and 2001, the Company's inventory is in excess of its
current requirements based on the recent level of sales. Management believes
that excess quantities will be utilized over several years now that the U.S.
Food and Drug Administration has approved its valve for sale in the United
States. As such, the Company has classified $37,000,000 and $40,000,000 of
inventories as noncurrent assets at December 31, 2002 and 2001, respectively.

OTHER ASSETS

Prior to obtaining directors' and officers' liability insurance, the Company had
placed monies into a self-insurance trust to provide coverage for potential
issues. At December 31, 2002 and 2001, the deposits within the trust amounted to
$440,362 and $438,100, respectively.







<PAGE>


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LEASEHOLD IMPROVEMENTS, FURNITURE, AND EQUIPMENT

Leasehold improvements, furniture, and equipment are stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:

<Table>
<Caption>
<S>                                                           <C>
   Furniture and fixtures                                     7 years
   Equipment                                                  5 to 7 years
   Computers                                                  2 years
</Table>

Leasehold improvements are amortized over the related lease term or estimated
useful life, whichever is shorter.

TECHNOLOGY LICENSE

The Company has a commitment to purchase an exclusive, worldwide right and
license to use Sulzer Carbomedics, Inc. (Carbomedics) pyrolytic carbon
technology (see Note 9 - Commitments). As specific milestones are met that
obligate the Company to make payments under the commitment, the payment amount
will be capitalized as part of the technology license. The technology license
will be tested annually for impairment in accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to undiscounted future net cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.

REVENUE RECOGNITION

The Company recognizes revenue at the time of shipment and invoicing of the
product for all sales to distributors, except for sales to its Italian
distributor. Sales to the Italian distributor are recognized on a cash basis.
Valves are also consigned to hospitals and the revenue recognized once the valve
is implanted.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.

INCOME TAXES

Income taxes are accounted for under the liability method. Deferred income taxes
are provided for temporary differences between financial reporting and tax bases
of assets and liabilities.

STOCK-BASED COMPENSATION

The Company has a stock-based employee compensation plan, which is described
more fully in Note 6. This plan is accounted for under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Under APB
No. 25, when the exercise price of stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized,
and reflected in the net (loss) income.


<PAGE>



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The following table illustrates the effect on net income (loss) and net income
(loss) per share if we had applied the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation:

<Table>
<Caption>
                                                                    YEAR ENDED DECEMBER 31
                                                            2002              2001             2000
                                                       --------------    --------------    --------------
<S>                                                    <C>               <C>               <C>
   Net (loss) income as reported                       $  (18,212,266)   $   (6,843,566)   $      504,561
   Deduct total stock-based employee compensation
     expense determined under fair value-based
     method for all awards                                 (1,148,842)       (1,909,380)       (2,482,337)
                                                       --------------    --------------    --------------
   Pro forma net loss                                  $  (19,361,108)   $   (8,752,946)   $   (1,977,776)
                                                       ==============    ==============    ==============

   Net (loss) income per share:
     Basic - as reported                               $         (.82)   $         (.31)   $          .03
     Basic - pro forma                                 $         (.87)   $         (.39)   $         (.10)

     Diluted - as reported                             $         (.82)   $         (.31)   $          .02
     Diluted - pro forma                               $         (.87)   $         (.39)   $         (.10)
</Table>

Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS No. 123. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 2002, 2001, and 2000: risk-free interest rate of 3.65%, 5.18%,
and 5.53%, respectively; dividend yield of 0%; volatility factor of the expected
market price of the Company's Common Stock of .95, .77, and .67; and a weighted
average expected life of the option of seven years.

The pro forma effect on net (loss) income is not representative of the pro forma
effect on net income in future years.

NET INCOME PER SHARE

Basic earnings per share is computed by dividing net income by the weighted
average shares outstanding and excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share gives effect to
all dilutive potential common shares outstanding during the year.

RECLASSIFICATIONS

Certain prior year balances were classified to conform with the current year
presentation.

2. SHORT-TERM INVESTMENTS

As of December 31, 2002 and 2001, the cost of short-term investments held by the
Company, which have maturity dates of one year or less, approximated their fair
market value of $2,501,669 and $7,698,290, respectively. As a result, no
unrealized gains or losses were recognized at December 31, 2002 and 2001.









<PAGE>


3. LEASEHOLD IMPROVEMENTS, FURNITURE, AND EQUIPMENT, NET

Leasehold improvements, furniture, and equipment consists of the following:

<Table>
<Caption>
                                                DECEMBER 31
                                           2002             2001
                                       -------------   -------------
<S>                                    <C>             <C>
   Furniture and fixtures              $     361,260   $     356,155
   Equipment                               2,339,730       2,287,512
   Leasehold improvements                  3,227,132       3,227,787
   Construction in progress                3,309,255       3,428,121
                                       -------------   -------------
                                           9,237,377       9,299,575
   Less accumulated depreciation           3,211,415       2,546,092
                                       -------------   -------------
                                       $   6,025,962   $   6,753,483
                                       =============   =============
</Table>

4. IMPAIRMENT OF TECHNOLOGY LICENSE

At the end of the first quarter of 2002, the Company evaluated the carrying
value of its technology license asset in accordance with the provisions of FASB
No. 142, which were effective for the Company as of January 1, 2002. Utilizing a
discounted cash flow model, that analysis indicated the asset's carrying value
was recoverable and the Company recognized no impairment as a result of the
adoption of FASB No. 142. In the second quarter of 2002, the Company experienced
decreased sales volumes, decreased average selling prices and initiated certain
restructuring activities pertaining to its executive team and the manner in
which it sells its product from a direct sales force to a hybrid sales force of
a few direct salespeople and several independent manufacturers representatives.
In response to these conditions, the Company modified its pricing strategy and
sales volume estimates in conjunction with the reorganization plan implemented
and the increased competitive pressures in the European market. As a result of
these conditions and changes, the Company reviewed its future cash flow analysis
and changed its expectations of the sales volumes estimates and its selling
prices of the heart valve in the cash flow model to evaluate the recoverability
of its technology license. When compared to the revised fair value as calculated
by discounting the changed future cash flows at June 30, 2002, the Company
determined a non-cash charge representing an impairment of this asset needed to
be recognized in the amount of $8.1 million in the second quarter. This charge
also reflects in part the effect of the amended milestone payments in the early
years of the technology transfer agreement relative to the benefits of lower
cost carbon not being realized until future years after the depletion of
inventories currently on hand.

5. EMPLOYEE STOCK PURCHASE PLAN

In May 1998, the Company implemented the 1998 ATS Medical, Inc. 423 Employee
Stock Purchase Plan. Under the terms of the plan, employees are eligible to
purchase Common Stock of the Company on a quarterly basis. Employees can
purchase Common Stock at 85% of the lesser of the market price of the Common
Stock on the first day of the quarter or the last day of the quarter. During
2002, 2001 and 2000, shares of Common Stock totaling 101,980, 39,885 and 13,318
were purchased under the plan at prices ranging from $0.46 to $2.21, $3.24 to
$10.84 and $7.65 to $11.48 per share, respectively.

6. COMMON STOCK AND STOCK OPTIONS

In March 2000, the Company sold, in a private transaction, 1,100,000 shares of
its Common Stock at a price of $9.00 per share. In July 2000, in another private
equity sale, the Company sold 2,727,273 shares of its Common Stock at a price of
$11.00 per share. Net proceeds from these two offerings totaled $37,749,425.

The Company has a Stock Option Plan and a Stock Award Plan (the Plans) under
which options to purchase Common Stock of the Company may be awarded to
employees and nonemployees of the Company. The options may be granted under the
Plans as incentive stock options (ISO) or as nonqualified stock options
(non-ISO).



<PAGE>


6. COMMON STOCK AND STOCK OPTIONS (CONTINUED)

The following table summarizes the options to purchase shares of the Company's
Common Stock under the Plans:

<Table>
<Caption>
                                                               STOCK OPTIONS
                                                               OUTSTANDING UNDER
                                             SHARES            THE PLANS                              WEIGHTED AVERAGE
                                             RESERVED          -----------------------------------    EXERCISE PRICE
                                             FOR GRANT         ISO                  NON-ISO           PER SHARE
                                             --------------    -----------------    --------------    ----------------

<S>                                          <C>               <C>                  <C>               <C>
   Balance at December 31, 1999                     566,679           791,132           604,954       $      5.90
     Increase in shares reserved for              1,000,000                --                --                --
       grant
     Options granted                               (886,000)          411,853           474,147              9.99
     Options exercised                                   --          (168,650)         (179,250)             3.89
     Options canceled                                17,875           (17,875)               --              7.06
     Options expired                                 (1,054)               --                --                --
                                             --------------    --------------       -----------
   Balance at December 31, 2000                     697,500         1,016,460           899,851              8.15
     Options granted                               (496,857)          322,415           174,442              8.42
     Options exercised                                   --           (40,115)           (1,439)             5.78
     Options canceled                                85,399          (108,874)          (25,325)             9.54
     ISO shares made non-qualified
       in 2001                                           --           (81,050)           81,050                --
                                             --------------    --------------       -----------
   Balance at December 31, 2001                     286,042         1,108,836         1,128,579              8.17
     Options granted                               (595,000)          195,000           400,000              0.44
     Options canceled                               328,221          (545,709)         (430,912)             8.30
                                             --------------    --------------       -----------
   Balance at December 31, 2002                      19,263           758,127         1,097,667              5.62
                                             ==============    ==============       ===========
</Table>


<Table>
<Caption>
                                    OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                         ------------------------------------------   ---------------------------
                                        WEIGHTED
                                        AVERAGE        WEIGHTED                      WEIGHTED
                                        REMAINING      AVERAGE                       AVERAGE
RANGE OF                 NUMBER         CONTRACTUAL    EXERCISE       NUMBER         EXERCISE
EXERCISE PRICES          OUTSTANDING    LIFE           PRICE          EXERCISABLE    PRICE
--------------------     ------------   ------------   ------------   ------------   ------------
<S>                      <C>            <C>            <C>            <C>            <C>
 $  0.35  -  $  0.52        810,000     9.81 years     $     0.44             --     $     --
    2.37  -     8.50        802,044     5.62 years           6.76        546,895         6.21
    9.00  -    16.19        468,750     6.96 years          10.16        310,250        10.07
                         ----------                                   ----------
    0.35  -    16.19      2,080,794     7.55 years           5.07        857,145         7.61
                         ==========                                   ==========
</Table>



<PAGE>

6. COMMON STOCK AND STOCK OPTIONS (CONTINUED)

The weighted average fair value of options granted during the years ended
December 31, 2002, 2001, and 2000 was $0.37, $6.15, and $6.94, respectively.

In 2001, non-Plan options to purchase 25,000 shares, exercisable at $3.63 per
share, were exercised.

At December 31, 2002, 2001, and 2000, Plan and non-Plan options for 857,145,
1,216,082, and 1,002,011 shares of Common Stock, respectively, were exercisable
at a weighted average price of $7.61, $7.49, and $7.04 per share, respectively.
Options can be exercised by tendering shares previously acquired.

In December 2002, the Company granted 225,000 non-Plan options exercisable at an
average exercise price of $0.52. These options vest ratably over three or four
year periods. Of the total non-Plan options granted, 50,000 options were granted
to a outside consultant, for which the Company will recognize compensation
expense over the three-year vesting period.

The Company has 1,850,057 shares of Common Stock reserved for issuance.

7. LEASES

The Company has operating leases for its facilities in Plymouth, Minnesota.
These leases expire at various dates through July 31, 2008. Future minimum lease
payments under these agreements are as follows:

<Table>
<S>                                 <C>
2003                                $  417,413
2004                                   111,567
2005                                   111,567
2006                                   115,877
2007                                   121,912
2008                                    71,115
                                    ----------
                                       949,451
Less sublease rental income             60,439
                                    ----------
                                    $  889,012
                                    ==========
</Table>

The rent expense was $410,487, $395,425, and $254,523 for 2002, 2001, and 2000,
respectively.



<PAGE>


8. INCOME TAXES

At December 31, 2002, the Company had net operating loss carryforwards of
approximately $28.5 million and credits for increasing research and development
costs of approximately $633,000, which are available to offset future taxable
income or reduce taxes payable through 2020. These carryforwards and credits
will begin expiring in 2007 and 2003, respectively. The Company paid income
taxes of $74,457 in 2000.

Included as part of the Company's net operating loss carryforwards are
approximately $2.2 million in tax deductions that resulted from the exercise of
stock options. When these loss carryforwards are realized, the corresponding
change in valuation allowance will be recorded as additional paid-in capital.

Components of deferred tax assets and liabilities are as follows:

<Table>
<Caption>
                                                                     DECEMBER 31
                                                                2002              2001
                                                           --------------    --------------
<S>                                                        <C>               <C>
   Deferred tax assets (liabilities):
     Net operating loss carryforwards                      $   10,661,000    $    7,614,000
     Research and development credits                             633,000           616,000
     AMT credit                                                        --           150,000
     Inventory reserves                                         1,158,000           118,000
     Depreciation                                                 302,000           224,000
     Technology license amortization                           (1,016,000)         (518,000)
     Compensation reserves                                        277,000           302,000
     Other                                                        470,000           144,000
                                                           --------------    --------------
   Net deferred tax assets before valuation allowance          12,485,000         8,650,000
   Less valuation allowance                                   (12,485,000)       (8,650,000)
                                                           --------------    --------------
   Net deferred tax assets                                 $           --    $           --
                                                           ==============    ==============
</Table>

The Company's ability to utilize its net operating loss carryforwards to offset
future taxable income is subject to certain limitations under Section 382 of the
Internal Revenue Code due to changes in the equity ownership of the Company.

Income tax expense consists of the following:

<Table>
<Caption>
                                                   2002       2001       2000
                                                 --------   --------   --------
<S>                                              <C>        <C>        <C>
   Current:
     Federal                                     $     --   $     --   $ 64,000
     State                                             --         --     10,457
                                                 --------   --------   --------
                                                 $     --   $     --   $ 74,457
                                                 ========   ========   ========
</Table>

Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:

<Table>
<Caption>
                                                                               2002         2001         2000
                                                                             --------     --------     --------
<S>                                                                          <C>          <C>          <C>
   Tax at statutory rate                                                         34.0%        34.0%        34.0%
   State income taxes                                                             4.0          4.0          6.0
   Impact of net operating loss carryforwards                                   (38.0)       (38.0)       (27.1)
                                                                             --------     --------     --------
                                                                                   --%          --%        12.9%
                                                                             ========     ========     ========
</Table>


<PAGE>



9. COMMITMENTS

In 1990, the Company entered into various agreements with Carbomedics giving the
Company the exclusive worldwide license to sell a bileaflet mechanical heart
valve under patents held by Carbomedics. As part of the agreements, the Company
entered into a 15-year supply contract that was amended several times.

In December 1999, the Company and Carbomedics entered into an agreement, which
entitles the Company to an exclusive, worldwide right and license to use
Carbomedics' pyrolytic carbon technology to manufacture components for the
Company's mechanical heart value. This agreement further provides that
Carbomedics will assist the Company in various aspects to enable the Company's
completion of a manufacturing facility in Minneapolis, Minnesota to produce its
own pyrolytic carbon components. The purchase price for the technology license
totals $41 million payable in eight installments contingent upon the attainment
of specified milestones. As of December 31, 2002, $13 million has been paid.

In June 2002, the Company amended the supply and technology transfer agreements
it has with Carbomedics. The amendment to the supply agreement suspends
component set purchases until January 2007. This postpones component purchases
totaling approximately $18 million for the years ended December 31, 2003 to
2006. In January of 2007, the purchase obligations for 2003 would resume, with
the obligations for 2004 through 2006 to follow in each subsequent year. In
addition, the technology transfer fee of $5,000,000 that was due at the end of
2002 will be paid in two equal installments in June and December of 2003. The
Company will pay interest at the rate of 7% on the installments now payable in
2003 from the original due date until the payment date.

Furthermore, the technology payments due in 2003, 2004, 2005 and 2006 totaling
$23 million begin to be paid based on a percentage of cost of goods sold
starting in January of 2005 with the first payment in June 2005 and subsequent
payments every six months based on a percent of costs of goods sold during the
previous six months. The Company has recorded a $2.4 million discount on the
non-interest bearing debt owed to Carbomedics for milestones achieved to date.
The discount is to be amortized as interest expense over the estimated term of
the debt. As part of this agreement, the Company has provided Carbomedics a
security interest in its inventories covering all of its material obligations
under its agreements with Carbomedics.

Payments to Carbomedics were $6,052,901, $14,049,719, and $17,927,911 in 2002,
2001, and 2000, respectively. The amounts payable to Carbomedics, net of
discount, were $14,080,000 and $870,847 at December 31, 2002 and 2001,
respectively.

10. BENEFIT PLAN

The Company has a defined contribution salary deferral plan covering
substantially all employees under Section 401(k) of the Internal Revenue Code.
The plan allows eligible employees to contribute up to 12% of their annual
compensation, with the Company contributing an amount equal to 25% of each
employee's contribution. The Company recognized expense for contributions to the
plan of $61,397, $76,167, and $59,623 during 2002, 2001, and 2000, respectively.



<PAGE>


11. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

The Company operates in one segment, the sale of a bileaflet mechanical heart
valve. As a result, the information disclosed herein materially represents all
of the financial information related to the Company's principal operating
segment. The Company derived the following percentages of its net sales from the
following geographic regions:

<Table>
<Caption>
                                                 2002    2001    2000
                                                 ----    ----    ----
<S>                                              <C>     <C>     <C>
   Europe                                          26%     36%     46%
   Asia Pacific                                    42      34      34
   North America                                   19      19       4
   Emerging Markets                                13      11      16
</Table>

Shown below are the percentage of sales of specific customers which exceeded 10%
for the years shown:

<Table>
<Caption>
                                                    2002      2001      2000
                                                   ------    ------    ------
<S>                                                <C>       <C>       <C>
   Customer A                                        31.3%     23.6%     19.2%
   Customer B                                          --      10.3      12.9
   Customer C                                          --        --      11.9
</Table>

The Company had balances owing by three customers, which represented 44% and 45%
of its outstanding accounts receivable balances, respectively, at December 31,
2002 and 2001.

12. NET (LOSS) INCOME PER SHARE - WEIGHTED AVERAGE SHARE CALCULATION

The following table sets forth the reconciliation of the denominator for the
calculation of basic and diluted net (loss) income per share:

<Table>
<Caption>
                                                                 2002           2001          2000
                                                             ------------   ------------   ------------
<S>                                                          <C>            <C>            <C>
   Denominator for basic net (loss) income per
     share - weighted average shares                           22,258,806     22,158,513     20,031,611
   Effect of dilutive securities:
     Stock options                                                     --             --        836,577
                                                             ------------   ------------   ------------
   Denominator for diluted net (loss) income per share
     - adjusted weighted average shares
                                                               22,258,806     22,158,513     20,868,188
                                                             ============   ============   ============
</Table>





<PAGE>

13. QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly data for 2002 and 2001 was as follows:

<Table>
<Caption>
                                   QUARTER
                                   FIRST             SECOND            THIRD             FOURTH
                                   --------------    --------------    --------------    --------------
<S>                                <C>               <C>               <C>               <C>
YEAR ENDED DECEMBER 31, 2002
Net sales                          $    3,902,263    $    2,475,241    $    3,184,351    $    3,739,419
Gross profit                            1,211,352           151,230         1,004,931        (1,372,975)
Net loss                               (1,483,371)      (11,367,713)         (589,206)       (4,771,976)

Earnings per share:
  Basic                            $         (.07)   $         (.51)   $         (.03)   $         (.21)
  Diluted                          $         (.07)   $         (.51)   $         (.03)   $         (.21)

YEAR ENDED DECEMBER 31, 2001
Net sales                          $    4,253,573    $    4,415,222    $    3,744,095    $    2,666,904
Gross profit                            1,645,413         1,543,034           491,124         1,090,409
Net loss                                 (575,317)       (1,347,763)       (2,374,310)       (2,546,176)

Earnings per share:
  Basic                            $         (.03)   $         (.06)   $         (.11)   $         (.11)
  Diluted                          $         (.03)   $         (.06)   $         (.11)   $         (.11)
</Table>

14. ACCRUED DISTRIBUTOR LIABILITIES

The Company has recognized $821,498 of expense in the year ended December 31,
2002,related to the termination of their French and Belgium distributor. The
Company will be buying back inventory from this distributor, in accordance with
the terms of the distributor agreements. The Company will pay approximately $1.1
million for all costs associated with this termination in fiscal 2003. The
charge represents the margin on valves that are expected to be returned to the
Company and the estimated costs associated with restocking such inventories for
resale.

15. REORGANIZATION EXPENSES

In June 2002, the Board of Directors decided to implement new cost containment
measures and to seek a new management team to lead the business. As part of
these cost reduction measures, approximately one half of the workforce,
including all of the executive officers of the Company, have been released from
employment. The Company had 46 employees at December 31, 2002 compared to 89
employees at December 31, 2001. The Company has recorded $1,129,867 in
reorganization expenses. The reorganization expenses consist of approximately
$985,367 of severance pay and benefits, and $144,500 of rent that was expensed
for the vacated portion of the Company's leased facility. Of the total
reorganization expenses, $492,572 has not been paid as of December 31, 2002.

16. RELATED-PARTY TRANSACTION

For the years ended December 31, 2002 and 2001, the Company had consulting
agreements with a director of the Company, which provided for an annual
compensation in each of the three following years. The 2001 agreement was
extended one additional year in fiscal 2002. An expense has been recognized as a
result of these agreements in the amount of $192,904 and $626,937 for the years
ended December 31, 2002 and 2001, respectively. An expense for a portion of the
compensation was recognized at the time the agreement was signed, as the Company
has deferred only the fair value of expected services to be received under the
agreements.