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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    ---------

                                    FORM 10-K

            [X] Annual report pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
                           COMMISSION FILE NO. 0-18602

                                ATS MEDICAL, INC.
             (Exact name of registrant as specified in its charter)

                 MINNESOTA                              41-1595629
      (State or other jurisdiction of      (I.R.S. Employer Identification  No.)
      incorporation or organization)

               3905 ANNAPOLIS LANE
              MINNEAPOLIS, MINNESOTA                      55447
      (Address of principal executive offices)          (Zip Code)

Registrant's telephone number, including area code: (763) 553-7736

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01
par value

      Indicate by check mark 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

                                 Yes [X] No [ ]

      The aggregate market value of voting and non-voting stock held by
non-affiliates of the registrant as of June 30, 2004, was approximately
$115,000,000 (based on the last sale price of such stock as reported by the
NASDAQ National Market).

      The number of shares outstanding of each of the registrant's classes of
common stock as of February 27, 2005, was 30,893,227 shares of $.01 par value
common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Pursuant to General Instruction G, the responses to Items 10, 11, 12, and
14 of Part III of this report are incorporated herein by reference to certain
information contained in the registrant's definitive Proxy Statement for its
2005 Annual Meeting of Shareholders to be held on May 5, 2005.

<PAGE>

                                ATS MEDICAL, INC.
                                 2004 FORM 10-K

                                     PART I

ITEM  1. BUSINESS

OVERVIEW

ATS Medical, Inc. (hereinafter the "Company", "ATS", "we", "us", or "our") is a
Minnesota corporation founded in June, 1987. We develop, manufacture, and market
medical devices. Our primary interest lies with devices used by cardiovascular
surgeons in the cardiac surgery operating theater. Currently we participate in
the mechanical bileaflet portion of the replacement heart valve market and the
market for the surgical treatment of atrial fibrillation. We also engage in a
development project for autotransfusion products.

Our mechanical bileaflet heart valve has a unique open pivot design. Our valve
is used to treat heart valve failure caused by the natural aging process,
rheumatic heart disease, prosthetic valve failure and congenital defects.
Mechanical heart valves have been in use since the early 1960s. The worldwide
market for mechanical heart valves was estimated to exceed $350 million in 2004.

Sulzer Carbomedics ("Carbomedics") developed the basic design from which the ATS
heart valve evolved. Carbomedics is a large and experienced manufacturer of
pyrolytic carbon components used in mechanical heart valves. Carbomedics has
also designed and patented numerous mechanical valves. Carbomedics offered to
license a patented and partially developed valve to us if we would complete the
development of the valve and agree to purchase carbon components from
Carbomedics. In September 1990, we executed a License Agreement, Development
Agreement, Supply Agreement, and Option Agreement with Carbomedics and the
process to complete the valve design and go to market with the valve commenced.
In December 1999, we executed a Technology Agreement with Carbomedics under
which we obtained a license to use Carbomedic's pyrolytic carbon technology. The
Development and Option Agreements are no longer effective, and the License,
Supply and Technology Agreements have been amended many times. Today we hold an
exclusive, royalty-free, worldwide license under the License Agreement to an
open pivot, bileaflet mechanical heart valve design from which the ATS heart
valve has evolved. In addition, under the Technology Agreement we have an
exclusive, worldwide right and license to use Carbomedics' pyrolytic carbon
technology to manufacture components for the ATS heart valve, and a
non-exclusive worldwide right and license to use the technology to produce
pyrolytic carbon components for other devices and manufacturers, including,
after 2008, other heart valve manufacturers. We also have future purchase
obligations under the Supply Agreement discussed in more detail later in this
document.

The ATS Open Pivot(R) Heart Valve ("ATS Open Pivot(R)") is designed to be an
evolutionary improvement upon other available mechanical heart valves by
incorporating a pivot consisting of protruding spheres upon which the leaflets
of the valve pivot to open and close. This unique open pivot has been designed
to eliminate the cavity associated with the pivot of other bileaflet valves and
to improve the ability of the blood to flow through the valve without forming
clots. We began selling the ATS Open Pivot(R) in international markets in 1992.
In October 2000, we received FDA approval to sell the ATS Open Pivot(R) in the
United States.

During 2004, we made our first ventures outside the mechanical heart valve
market by completing two business development agreements. The first, signed in
April, is with ErySave AB, a Swedish research firm, for exclusive worldwide
rights to ErySave's PARSUS filtration technology for cardiac surgery procedures.
We had no revenues in 2004 nor do we expect any for 2005 from this technology.
In November, we completed a global partnership agreement with CryoCath
Technologies, Inc. ("CryoCath") to market CryoCath's surgical cryotherapy
products for the ablation of cardiac arrhythmias. The agreement with CryoCath
will result in revenues for the Company in 2005.

FINANCIAL INFORMATION ABOUT SEGMENTS

Since our inception, we have operated in the single industry segment of
developing, manufacturing, and marketing medical devices.

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SEASONALITY

Our sales and operating results have varied and are expected to continue to vary
significantly from quarter to quarter as a result of seasonal patterns. We
expect that our business will be seasonal, with the third quarter of each year
typically having the lowest sales.

PROSTHETIC HEART VALVE MARKET

There are two types of replacement heart valves: tissue and mechanical. Tissue
valves are made from animal or cadaver tissue or in some cases the patient's own
tissue. Tissue valves do not present the same level of risk of blood clotting
around the valve as mechanical valves. Tissue valves, however, have limited
long-term durability due to calcification and deterioration. If a tissue valve
fails, a new valve must be implanted, requiring another open heart surgery.
Mechanical valves are made from durable materials such as metals and carbon.
In-vitro testing of current pyrolytic carbon mechanical valves has yielded
estimated useful lives in excess of any patient's lifetime. Current mechanical
valves, however, require the use of anti-coagulants to prevent formation of
blood clots; tissue valves generally do not require anti-coagulant treatment.
Tissue valves are generally prescribed for patients who are less able to
tolerate anti-coagulants due to conditions such as gastrointestinal ulcers or
liver dysfunction, elderly patients, and women in their childbearing years.

Heart surgeons choose a particular type of mechanical valve based on a number of
factors. A principal factor in the choice of a valve is the potential for
forming blood clots, or thrombosis, resulting from areas in the valve where the
blood can stagnate. Blood clots can impair the performance of a valve and, if
the clot detaches and moves through the bloodstream (a thromboembolism),
resulting in an arterial blockage or stroke. Another principal factor in the
choice of a mechanical valve is the blood flow efficiency, or hemodynamics, of
the valve. A mechanical valve should allow blood to flow easily through the
valve with minimal pressure required to open the valve and minimal backflow of
blood when the valve closes. The valve also should not exert force on the blood
that could damage the fragile blood cells. Other factors that are important in a
surgeon's choice of a mechanical valve are the ease in implanting and monitoring
the valve's performance, the patient's quality of life and the physician's
familiarity with and confidence in the valve.

In addition to heart surgeons, administrators or business managers at hospitals
and clinics have become increasingly influential in the purchase decision-making
process in recent years. The increasing emphasis on medical cost containment in
most world markets has elevated the decision-making power of the administrator.
The administrator tends to focus on cost-effectiveness and, in some markets,
primarily on the cost of the valve.

We estimate that the total worldwide heart valve market in 2003 was
approximately $840 million or 263,000 procedures. We estimate that the
mechanical valve portion is $351 million or 140,000 procedures. In the United
States, we estimate that the mechanical heart valve market is approximately $120
million or 30,000 procedures.

THE ATS OPEN PIVOT(R) HEART VALVE

Our product is designed to improve upon existing mechanical heart valves by
combining a proprietary open pivot design and other innovative features with the
widely accepted biocompatibility and durability of pyrolytic carbon. The
standard ATS heart valve is available in seven sizes ranging from 19mm to 31mm
in diameter, with sewing cuffs for either aortic valve or mitral valve
replacement. In 1994, we introduced the Advanced Performance series of the ATS
heart valve in international markets. This valve is available in seven sizes
ranging from 16mm to 28mm in diameter. Our 16mm valve is currently the world's
smallest mechanical valve.

The major design features of the ATS Open Pivot(R) Heart Valve are:

      OPEN PIVOT AREAS. The proprietary open pivot areas of the ATS heart valve
      feature spherical protrusions from the orifice that match spherical
      notches in the leaflets. The pivot areas protrude into the orifice and so
      are exposed to the washing action of the blood flowing through the heart
      valve. All other currently marketed bileaflet valves contain pivot
      cavities in the orifice wall into which protrusions from the semi-circular
      leaflets extend to allow the leaflets to open and close. The open pivot
      design also features angled inflow and outflow pivot stops.

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      A THIN BUT DURABLE ORIFICE. The orifice of the ATS heart valve is
      manufactured using a mandrel which is coated with pyrolytic carbon. The
      mandrel is then removed, leaving a solid pyrolytic carbon orifice. Some
      competitive products use an orifice composed of a soft graphite substrate
      coated with pyrolytic carbon. By eliminating the graphite substrate, we
      have made the orifice wall thinner, resulting in a larger average inside
      diameter. The orifice is surrounded by a titanium stiffening ring and is
      rotatable.

      LOW PROFILE DESIGN. The ATS heart valve has a low profile design. The
      profile of a mechanical heart valve refers to the extension of the orifice
      and leaflets above and below the natural tissue anulus, or location of the
      natural heart valve. The inflow side of the orifice of the ATS heart valve
      is flat, unlike the most widely used cavity pivot valve which has upward
      protrusions on the orifice to house the cavity.

      AN ADVANCED SEWING CUFF. The sewing cuff surrounding the orifice of the
      ATS heart valve is made of double velour polyester and includes a surgical
      felt ring for ease of sewing. The Advanced Performance series offers an
      alternative sewing cuff design that allows a valve with a larger inside
      diameter to be used in small anulus situations.

      PYROLYTIC CARBON. Pyrolytic carbon has been used in mechanical heart
      valves for over 25 years. The orifice of our heart valve is fabricated
      entirely from pyrolytic carbon, while the leaflets are fabricated by
      coating pyrolytic carbon on graphite substrates. Pyrolytic carbon used in
      other mechanical valves has been tested to function longer than any
      patient's lifetime. Pyrolytic carbon is believed to be superior to metal
      and plastics in terms of the human body's acceptance of the material, thus
      resulting in lower rates of thrombosis and thromboembolism than with other
      materials. Because of its durability and biocompatibility, pyrolytic
      carbon is used in virtually every mechanical heart valve in the market.

      TWO LEAFLETS. Bileaflet valve designs represent substantially all
      mechanical heart valves being marketed today. The leaflets in the ATS
      heart valve have tungsten impregnated in the substrate to make them
      visible under x-ray.

The ATS Open Pivot(R) Heart Valve is designed to provide the following primary
advances over currently available mechanical heart valves:

      REDUCED RATES OF THROMBOEMBOLIC COMPLICATIONS. The pivot cavities found in
      other bileaflet heart valves are areas of blood flow stagnation and
      possible blood clot formation. By eliminating the cavities in the orifice
      and placing the pivot areas within the normal blood flow, the improved
      washing action in the ATS heart valve is intended to lower the likelihood
      of blood clot formation and the resulting incidence of thromboembolism.
      The open pivot design as well as the angled inflow and outflow pivot stops
      also result in low levels of hemolysis (damage to blood cells), which may
      contribute to a low rate of thromboembolic complications and allow for
      lower levels of anticoagulation related medications.

      IMPROVED PATIENT QUALITY OF LIFE THROUGH LOWER NOISE LEVELS. Patients with
      other implanted mechanical heart valves complain of disturbances resulting
      from the clicking sound created as the valve closes. These disturbances
      range from irritability and insomnia to paranoia and depression. Spouses
      of patients with implanted mechanical valves also report disturbances
      resulting from the noise of the valve. Based on informal surveys and peer
      reviewed publications, we believe that the ATS heart valve is quieter than
      our competitors' valves and below the threshold of hearing of many
      patients. We believe that the reduced noise level of our product further
      improves the quality of life of the patient.

      IMPROVED BLOOD FLOW EFFICIENCIES. We have made the orifice of our product
      durable and thin, resulting in a large inside diameter. The large inside
      diameter of the ATS heart valve is intended to produce lower pressure
      gradients. (The term "gradients" refers to the pressure difference between
      the inflow and outflow side of the valve needed to support the required
      blood flow through the valves.) The ATS heart valve is also designed to
      have low regurgitation (backflow of blood when the valve is closing and
      closed) due to the geometry of its angled inflow and outflow pivot stops
      which minimize the direct leakage paths. These design characteristics are
      intended to result in superior blood flow efficiencies which should reduce
      the workload on the heart.

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      EASE OF IMPLANT. Our product has been designed for ease of use by the
      heart surgeon. The low profile of the ATS heart valve is intended to
      minimize implant complications. Leaflets that extend significantly below
      the natural tissue anulus in the mitral position may obstruct blood
      outflow or interfere with the septum or other parts of the heart.
      Protrusions on the inflow side of the annulus in the aortic position may
      snag sutures used to attach the mechanical valve to the heart. In
      addition, because the orifice can be rotated, the surgeon can optimize
      valve orientation by adjusting the position of the leaflets after the ATS
      heart valve has been sutured in the natural anatomical position in the
      patient's heart. Suturing the ATS heart valve into the heart is made
      easier by reducing the number of layers of polyester material in the
      aortic and mitral cuffs and by adding the surgical felt ring in the sewing
      cuff, thereby easing the passage of the suture needle through the sewing
      cuff. The packaging and accessories of the ATS heart valve also are
      designed to facilitate the implant procedure by including all of the
      required items pre-assembled in a sterilized dual barrier container.

      IMPROVED FOLLOW-UP DIAGNOSTIC CAPABILITY. Our product facilitates the
      follow-up diagnostic process by being more easily visible to x-rays. The
      titanium stiffening ring provides a clear image on x-rays when taken from
      any angle. The leaflets also have a higher density of tungsten impregnated
      in the substrate, making them more visible to x-rays.

ATRIAL FIBRILLATION MARKET

Atrial fibrillation ("AF") is electrical activity in the atria becoming
uncoordinated and chaotic. The atrium begins to quiver in a rapid and chaotic
fashion as a result of the electrical impulses. As a result of the chaotic
quivering, the atrium mechanical activity deteriorates and blood is not fully
expelled from the atrium to the ventricle and begins to pool. The pooled blood
can coagulate and form clots. These clots can move, become lodged in a critical
area, restrict blood flow, and potentially cause a stroke. In addition, if left
untreated, AF can lead to atrial remodeling, contributing to congestive heart
failure.

CRYOTHERAPY TREATMENT

Cryotherapy involves the use of extremely cold temperatures to kill or ablate
specific tissues while leaving underlying connective tissues largely unaffected.
In AF, this enables the surgeon to encircle the pulmonary veins with lines of
scar tissue to block transmission of erratic signals that trigger AF.
Cryotherapy also offers two advantages when compared to the more prevalent
heat-based therapies as freezing preserves tissue integrity and minimizes the
risk of endocardial thrombus associated with heat-based energy sources.

CRYOCATH SURGICAL PRODUCTS

In November, 2004, we announced a global partnership with CryoCath Technologies,
Inc. to market CryoCath's surgical cryotherapy products for the ablation of
atrial arrhythmias. The market is currently estimated to total approximately $60
million within cardiac surgery and growing at over 20%. We have been granted
co-promotion rights in the United States and distribution rights in the rest of
the world. We started marketing and selling this technology in the United States
in the first quarter of 2005. We expect to start marketing and selling this
technology in markets outside of the United States in the second quarter of
2005.

MARKETING, SALES AND DISTRIBUTION

We market in the United States through a sales organization divided into four
regions and 31 sales territories. We focus our sales and marketing efforts on
developing awareness of our products in the approximately 970 U.S. open heart
centers. We currently work with cardiac surgeons in approximately 330 of these
centers.

In one international market, France, we have a direct sales organization. In all
other international markets, we sell through an independent distribution
network. We believe that our distribution partners have provided a rapid and
cost efficient means of increasing market penetration and commercial acceptance
of the ATS heart valve in key international markets. We have been able to
attract experienced mechanical valve sales organizations and people familiar
with local markets and customs to serve as our representatives. Each of our
independent distributors has the exclusive right to sell the ATS heart valve
within a defined territory. These distributors, in some instances, also market
other medical products, although they have agreed not to sell other mechanical
heart valves. Under most of the distributor agreements, we may, at our option,
terminate the agreement upon the departure of certain key

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employees of the distributor, if the Company experiences a change in control, or
if key performance criteria, including sales quotas, are not met. We sell the
ATS heart valve to each distributor F.O.B. Minneapolis, Minnesota. Sales to
international distributors are denominated in U.S. dollars. We have contracts
with independent distributors for countries outside the United States. One
independent distributor, Century Medical Inc., accounted for more than 10% of
our gross sales in 2004. See Note 15 of Notes to Consolidated Financial
Statements in Item 8 of this report for information on our net sales by
geographic region.

Our sales, marketing and customer service personnel provide professional sales,
marketing and promotional support to our independent distributors.

COMPETITION

The prosthetic heart valve market is highly competitive with St. Jude Medical,
Inc. as the mechanical valve market share leader. Other companies that sell
mechanical valves include Medtronic, Inc., Carbomedics, Edwards Lifesciences,
Sorin Biomedica sPa, and Medical Carbon Research, Inc. St. Jude Medical,
Medtronic, Edward Lifesciences, Sorin Biomedica and CryoLife also sell tissue
valves.

We are aware of several companies that are developing new prosthetic heart
valves. Several companies are developing and testing new autologous (created
from the patient's own tissue) valves, potentially more durable tissue valves
and new bileaflet and trileaflet mechanical designs. Advancements also are being
made in surgical procedures such as mitral valve reconstruction, whereby the
natural mitral valve is repaired, delaying the need for a replacement valve.
Other companies are pursuing biocompatible coatings to be applied to mechanical
valves in an effort to reduce the incidence of thromboembolic events and to
treat tissue valves to forestall or eliminate calcific degeneration in these
valves.

Competition within the prosthetic heart valve market is based on, among other
things, clinical performance record, minimalization of complications, ease of
use for the surgeon, patient comfort and cost effectiveness. We believe that the
most important factors in a heart surgeon's selection of a particular prosthetic
valve are the perceived benefits of the valve and the heart surgeon's confidence
in the valve design. As a result, valves that have developed a favorable
clinical performance record have a significant marketing advantage over new
valves. In addition, negative publicity resulting from isolated incidents can
have a significant negative effect on a valve's overall acceptance. Our success
is dependent upon the surgeon's willingness to use a new prosthetic heart valve
as well as the future clinical performance of the ATS heart valve compared with
the more established competition.

Competition in the medical device industry is intense and is characterized by
extensive research efforts and rapid technological progress. We believe that the
primary competitive factors include quality, technical capability, innovation,
distribution capabilities, and price. Many of our competitors in the heart valve
market have greater resources, more widely accepted products, greater technical
capabilities, and stronger name recognition than we do. Our competitive
capability is affected by our ability to support our products, ensure regulatory
compliance for our products, protect the proprietary technology of our product
and its manufacturing process, effectively market our products, and maintain and
establish distribution relationships. All of these abilities require
continuously attracting and retaining skilled and dedicated employees and
excellent relationships with physicians and suppliers.

We believe that mechanical heart valves are currently being marketed to
hospitals at prices that vary significantly from country to country due to
market conditions, currency valuations, distributor mark-ups and government
regulations. In many markets, government agencies are imposing or proposing
price controls or restrictions on medical products. We work with our independent
distributors to price the ATS heart valve in each market to meet these
limitations. In addition, our primary competitors have the ability, due to their
internal carbon manufacturing facilities and economies of scale, to manufacture
their valves at a lower cost than we can currently manufacture the ATS heart
valve. The market leader has occasionally used price as a method to compete in
several markets.

The surgical ablation of atrial arrhythmias is highly competitive. Other
companies that market products for the treatment of cardiac arrhythmias are
Medtronic, Guidant, and Atricure.

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RELATIONSHIP WITH SULZER CARBOMEDICS

Sulzer Carbomedics ("Carbomedics") developed the basic design from which the ATS
heart valve evolved. Carbomedics is a large and experienced manufacturer of
pyrolytic carbon components used in mechanical heart valves. Carbomedics has
also designed and patented numerous mechanical valves. We have three agreements
with Carbomedics: a license agreement and a long-term carbon supply agreement
entered into in September 1990, and a carbon technology agreement entered into
in December 1999.

Under the terms of the license agreement with Carbomedics, we hold an exclusive,
royalty-free, worldwide license to an open pivot, bileaflet mechanical heart
valve design from which the ATS heart valve has evolved. The license agreement
does not include the right to manufacture the pyrolytic carbon components of the
ATS heart valve, except that if Carbomedics were unable to produce the
components, we would have the right and license to make the components or have
them made for us. There currently is not a third party that can produce the
pyrolytic carbon components for the ATS valve. After making certain design
changes in the valve, we finalized the design of the ATS heart valve and filed
and received our own U.S. patent covering the design of the ATS valve. The
design modifications and the resulting U.S. patent covering the new design are
the exclusive property of ATS.

In connection with the execution of the license agreement, we were also required
to enter into a long-term supply agreement with Carbomedics under which we have
acquired a large inventory of pyrolytic carbon components for the ATS heart
valve. In June 2002, the supply agreement was amended to suspend our purchase
obligations for the remainder of 2002 (with the exception of approximately eight
weeks of work in process) along with 100% of our purchase obligations for 2003,
2004, 2005 and 2006. In January of 2007 the purchase obligations for 2003 will
resume, with the obligations for 2003 through 2006 to follow in each subsequent
year.

In December 1999, we entered into a carbon technology agreement with Carbomedics
under which we obtained an exclusive, worldwide right and license to use
Carbomedics' pyrolytic carbon technology to manufacture components for the ATS
heart valve, and a non-exclusive worldwide right and license to use the
technology to produce pyrolytic carbon components for other devices and
manufacturers, including, after 2008, for other heart valve manufacturers. Under
the agreement Carbomedics also agreed to assist us in designing, building,
equipping, qualifying and commencing operations in a pyrolytic carbon component
production facility in Minneapolis, Minnesota. In return, we agreed to pay
Carbomedics a license fee totaling $41 million. We were also obligated under the
carbon technology agreement to pay all of the costs of establishing the new
carbon production facility, including hourly fees and out-of-pocket expenses of
the Carbomedics employees assigned to assist us in setting up the facility. In
August 2003, we satisfied all of our payment obligations under the carbon
technology agreement.

MANUFACTURING AND SUPPLY

Our products are manufactured in ISO 9001 certified facilities. We have two
facilities in close proximity in Plymouth, a suburb of Minneapolis, Minnesota,
for our manufacturing activities. Our pyrolytic carbon components are
manufactured in one facility and we assemble the ATS heart valve in a controlled
clean room environment in the other facility.

Most of the materials we purchase for our products are supplied by a limited
number of vendors. We currently have high inventory levels of carbon components
purchased under our supply agreement with Carbomedics at costs much higher than
we expect our manufacturing costs to be in the future. We expect our inventory
levels will satisfy our projected requirements for more than one year.

Under our supply agreement with Carbomedics, we have future purchase obligations
for pyrolytic carbon components starting in 2007 and continuing through 2011.

We maintain a comprehensive quality assurance and quality control program, which
includes documentation of all material specifications, operating procedures,
equipment maintenance, and quality control test methods. Our documentation
systems comply with appropriate FDA and ISO 9001 requirements.

During 2004, we developed and implemented a plan to significantly increase
production in our pyrolytic carbon component facility. At the end of 2004, we
consider this ramp-up process to be complete.

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We are currently operating one manufacturing shift at our valve assembly
facility. At our pyrolytic carbon facility, most processes are operating one
manufacturing shift while others operate up to three manufacturing shifts. We
believe that our properties are adequate to serve our business operations for
the foreseeable future.

RESEARCH AND DEVELOPMENT

Our research and development activities include developing new products,
improving our current products, and the clinical and regulatory activities to
support our products. These activities are carried out in our Plymouth
facilities, although we work with physicians, research hospitals, and
universities around the world. None of this work is funded by customers or other
outside institutions. The development process for any new product can range from
several months to several years, primarily depending on the regulatory pathway
required for approval. Research and development expenses totaled $1.0 million in
2004, $1.8 million in 2003, and $2.4 million in 2002.

PATENTS AND PROPRIETARY TECHNOLOGY

Our policy is to protect our proprietary position by obtaining U.S. and foreign
patents to protect technology, inventions and improvements important to the
development of our business. The original patent obtained by Carbomedics under
which our valve was developed expired in 2004. We subsequently made
modifications to the basic design. We were issued a U.S. patent covering our
design improvements to the ATS heart valve in October 1994. This patent expires
in 2011. We also have filed patent applications in Japan, Belgium, France,
Germany, Netherlands, Spain, Switzerland and the United Kingdom relating to the
design improvements. Patents have been granted in all of these countries. We
cannot be certain that any patents will not be challenged or circumvented by
competitors.

We also rely on trade secrets and technical know-how in the manufacture and
marketing of the ATS heart valve. We typically require our employees,
consultants and contractors to execute confidentiality agreements with respect
to our proprietary information.

We claim trademark protection on ATS Medical(TM) and ATS Open Pivot(R).

GOVERNMENT REGULATION

UNITED STATES

Numerous governmental authorities, principally the Food and Drug Administration
(the "FDA") and corresponding state and foreign regulatory agencies, strictly
regulate our products and research and development activities. The Federal Food,
Drug, and Cosmetic Act, or FDA Act, the regulations promulgated under this act,
and other federal and state statutes and regulations, govern, among other
things, the pre-clinical and clinical testing, design, manufacture, safety,
efficacy, labeling, storage, record keeping, advertising and promotion of
medical devices. The FDA classifies our ATS heart valve as a Class III device,
which is subject to the highest level of controls.

Generally, before we can market a new medical device, we must obtain marketing
clearance through a 510(k) premarket notification, approval of a premarket
approval application, or PMA, or approval of product development protocol, or
PDP. A PMA or PDP application must be submitted if a proposed device does not
qualify for a 510(k) premarket clearance procedure. It generally takes several
months from the date of a 510(k) submission to obtain clearance, but it may take
longer, particularly if a clinical trial is required. The PMA and PDP process
can be expensive, uncertain, require detailed and comprehensive data and
generally take significantly longer than the 510(k) process.

If human clinical trials of a device are required, either for a 510(k)
submission or a PMA application, the sponsor of the trial, usually the
manufacturer or the distributor of the device, must file an investigational
device exemption, or an IDE, application prior to commencing human clinical
trials. The IDE application must be supported by data, typically including the
results of animal and/or laboratory testing. If the IDE application is approved
by the FDA and one or more appropriate institutional review boards, or IRBs,
human clinical trials may begin at a specific number of investigational sites
with a specific number of patients, as approved by the FDA. If the device
presents a non-significant risk to the patient, a sponsor may begin the clinical
trial after obtaining approval for the study by the IRBs without separate
approval from the FDA. Submission of an IDE does not give assurance that the FDA
will approve the IDE and, if it is approved, there can be no assurance the FDA
will determine that the data derived from the studies support the safety and
efficacy of the device or warrant the continuation of clinical trials. An IDE
supplement

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must be submitted to and approved by the FDA before a sponsor or investigator
may make a change to the investigational plan that may affect its scientific
soundness, study indication or the rights, safety or welfare of human subjects.

We also are subject to FDA regulations concerning manufacturing processes and
reporting obligations. These regulations require that manufacturing steps be
performed according to FDA standards and in accordance with documentation,
control and testing standards. The FDA monitors compliance with its good
manufacturing practices regulations by conducting periodic inspections. We are
required to provide information to the FDA on adverse incidents as well as
maintain a detailed record keeping system in accordance with FDA guidelines. We
expect that our carbon fabrication processes and new manufacturing facility will
be subject to domestic and international regulatory inspection and review.

The advertising of our product also is subject to both FDA and Federal Trade
Commission regulations. In addition, we will be subject to the "fraud and abuse"
laws and regulations promulgated by the U.S. Department of Health and Human
Services and the U.S. Health Care Finance Administration if we sell the ATS
heart valve to Medicare or Medicaid patients. Under these regulations, it is a
criminal offense (subject to certain exceptions) to knowingly or willfully
offer, pay, solicit, or receive remuneration in order to induce business for
which reimbursement may be provided under a federal health care program.

If the FDA believes we are not in compliance with law, it can institute
proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against us and our officers
and employees. If we fail to comply with these regulatory requirements, our
business, financial condition and results of operations could be harmed. In
addition, regulations regarding the manufacture and sale of our products are
subject to change. We cannot predict the effect, if any, that these changes
might have on our business, financial condition and results of operations.

INTERNATIONAL

In order to market our products in European and other foreign countries, we must
obtain required regulatory approvals and comply with extensive regulations
governing product safety, quality and manufacturing processes. These regulations
vary significantly from country to country and with respect to the nature of the
particular medical device. The time required to obtain these foreign approvals
to market our products may be longer or shorter than that required in the United
States, and requirements for licensing may differ from FDA requirements.

In order to market our products in the member countries of the European Union,
we are required to comply with the medical devices directive and obtain CE mark
certification. The CE mark denotes conformity with European standards for safety
and allows certified devices to be sold in all European Union countries. Under
the medical devices directives, all medical devices including active implants
and in-vitro diagnostic products must qualify for CE marking.

THIRD PARTY REIMBURSEMENT

In the United States, healthcare providers that purchase medical devices,
including our products, generally rely on third-party payors, including
Medicare, Medicaid, private health insurance carriers and managed care
organizations, to reimburse all or part of the cost and fees associated with the
procedures performed using these devices. The commercial success of the ATS
heart valve will depend on the ability of health care providers to obtain
adequate reimbursement from third-party payors for the surgical procedures in
which our products are used. Third-party payors are increasingly challenging the
pricing of medical products and procedures. Even if a procedure is eligible for
reimbursement, the level of reimbursement may not be adequate. In addition,
third-party payors may deny reimbursement if they determine that the device used
in the treatment was not cost-effective or was used for a non-approved
indication.

In international markets, market acceptance of the ATS heart valve depends in
part upon the availability of reimbursement from healthcare payment systems.
Reimbursement and healthcare payment systems in international markets vary
significantly by country. The main types of healthcare payment systems in
international markets are government sponsored healthcare and private insurance.
Countries with governmental sponsored healthcare, such as the United Kingdom,
have a centralized, nationalized healthcare system. New devices are brought into
the system through negotiations between departments at individual hospitals at
the time of budgeting. In many of the countries

                                       9
<PAGE>

where we market, the government sets an upper limit of reimbursement for various
valve types. In most foreign countries, there are also private insurance systems
that may offer payments for alternative devices.

We have pursued reimbursement for our ATS heart valve internationally through
our independent distributors. While the healthcare financing issues in these
countries are substantial, we have been able to sell the ATS heart valve to
private clinics and nationalized hospitals in each of the countries served by
our distributors.

All third-party reimbursement programs, whether government funded or insured
commercially, whether inside the United States or outside, are developing
increasingly sophisticated methods of controlling health care costs through
prospective reimbursement and capitation programs, group purchasing, redesign of
benefits, second opinions required prior to major surgery, careful review of
bills, encouragement of healthier lifestyles and exploration of more
cost-effective methods of delivering health care. These types of programs can
potentially limit the amount which health care providers may be willing to pay
for medical devices.

PRODUCT LIABILITY AND INSURANCE

Cardiovascular device companies are subject to an inherent risk of product
liability and other liability claims in the event that the use of their products
results in personal injury. A mechanical heart valve is a life-sustaining
device, and the failure of any mechanical heart valve usually results in the
death of the patient. We have not received any reports of mechanical failure of
our valves implanted to date. Any product liability claim could subject us to
costly litigation, damages and adverse publicity.

We currently maintain a product liability insurance policy with an annual
coverage limit of $25 million in the aggregate. A $5 million product liability
insurance policy is required by the supply agreement with Carbomedics. We are
financially responsible for any uninsured claims or claims which exceed the
insurance policy limits. Product liability insurance is expensive for mechanical
valves. If insurance becomes completely unavailable, we must either develop a
self-insurance program or sell without insurance, which would require the
consent of Carbomedics. The development of a self-insurance program would
require significant capital.

Carbomedics has made no warranty on our valve components. We have agreed to hold
Carbomedics harmless and indemnify Carbomedics in the event claims are made or
damages are assessed against Carbomedics as a result of our valve.

EMPLOYEES

As of January 1, 2005, we employed approximately 178 full-time and part-time
employees. Our employees are vital to our success. We believe we have been
successful in attracting and retaining qualified personnel. We believe our
employee relations are excellent.

AVAILABLE INFORMATION

Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports filed or furnished
to the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 are available free of charge through our
website (www.atsmedical.com) as soon as reasonably practicable after we
electronically file the material with, or furnish it to, the Securities and
Exchange Commission.

                                       10
<PAGE>

ITEM  2. PROPERTIES

In the United States, we lease approximately 56,000 square feet of space in two
buildings in Plymouth. a suburb of Minneapolis, Minnesota. One lease, covering
approximately 33,000 square feet, expires on March 31, 2009 and is used for
administrative, production and engineering purposes. The lease on the other
23,000 square feet expires July, 2008 and is used for carbon manufacturing.
Outside the United States, we lease four sales and marketing offices in China,
France, Germany, and Sweden. We believe that our facilities are adequate for our
current needs.

ITEM  3. LEGAL PROCEEDINGS

None.

ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers are as follows:

<TABLE>
<CAPTION>
     Name                Age                       Position
     ----                ---                       --------
<S>                      <C>        <C>
Michael D. Dale          45         Chief Executive Officer, President and Director
Richard A. Curtis        40         Vice President, Marketing and Business Development
John R. Judd             48         Chief Financial Officer
Marc R. Sportsman        50         Vice President, Sales
</TABLE>

MICHAEL D. DALE has served as our Chief Executive Officer, President and
Director since October 2002. From 2000 to 2002, Mr. Dale was Vice-President of
Worldwide Sales and Marketing at Endocardial Solutions, Inc., a company that
develops, markets and distributes an advanced cardiac mapping system. Mr. Dale
joined Endocardial Solutions, Inc. in December 1998 as Vice President Worldwide
Sales. From 1996 to 1998, Mr. Dale was Vice President of Global Sales for
Cyberonics, Inc., a medical device company, and additionally was managing
director of Cyberonics Europe S.A. From 1988 to 1996, Mr. Dale served in several
capacities at St. Jude Medical, Inc. most recently as the Business Unit Director
for St. Jude Europe. Mr. Dale is on the Board of Directors of Enpath Medical,
Inc., a medical products company that designs, develops, manufactures and
markets percutaneous delivery solutions.

RICHARD A. CURTIS has served as our Vice President of Marketing and Business
Development since December 2002. Prior to joining the Company, Mr. Curtis was
Vice President of Corporate Development at Cardinal Health, Inc., a provider of
healthcare products and services, from September 2001 to November 2002. From
1999 to 2001, Mr. Curtis was Vice President of Business Development for
Hill-Rom, Inc., a provider of patient care environment and therapy solutions,
and from 1997 to 1999, he was a Director of Corporate Development at Hillenbrand
Industries, a health care and funeral services provider.

JOHN R. JUDD has served as our Chief Financial Officer since October 2003. Prior
to joining the Company, Mr. Judd was Corporate Controller for American Medical
Systems, Inc., a provider of medical devices to urologists and gynecologists,
from 2000 until 2003. From 1981 until 1999, Mr. Judd was at Apogee Enterprises,
Inc., a provider of glass products and services, in various positions within
corporate and divisional finance, operations management, and from 1997 until
1999, Chief Financial Officer of the autoglass division.

MARC R. SPORTSMAN has served as our Vice President of Sales since April 2003.
Mr. Sportsman has over 25 years of cardiovascular medical device sales and sales
management experience, beginning with Shiley, Inc. and then St. Jude Medical,
Inc. from 1986 until 2003. His most recent position before joining ATS Medical
was as Area Vice President of St. Jude Medical, Inc., where he was responsible
for sales of the company's four product groups in an eight state area.

                                       11
<PAGE>

                                     PART II

ITEM  5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
         ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

Our common stock is traded on the Nasdaq National Market under the symbol
"ATSI." The following table sets forth, for the periods indicated, the high and
low closing sales prices per share of our common stock as reported on the Nasdaq
National Market. These prices do not include adjustments for retail mark-ups,
mark-downs, or commissions.

<TABLE>
<CAPTION>
                           High       Low
                           -----      -----
<S>                        <C>        <C>
Fiscal Year 2003:
       First Quarter       $1.83      $0.41
       Second Quarter      $3.95      $1.30
       Third Quarter       $4.40      $3.07
       Fourth Quarter      $4.22      $3.50
</TABLE>

<TABLE>
<CAPTION>
                           High       Low
                           -----      -----
<S>                        <C>        <C>
Fiscal Year 2003:
       First Quarter       $6.49      $3.99
       Second Quarter      $5.75      $3.77
       Third Quarter       $3.99      $3.02
       Fourth Quarter      $4.66      $3.38
</TABLE>

HOLDERS

As of March 10, 2005, we had approximately 630 holders of record of our
common stock.

DIVIDENDS

We have never declared or paid cash dividends. We intend to retain all future
earnings for the operation and expansion of our business. We do not anticipate
declaring or paying cash dividends on our common stock in the foreseeable
future.

REPURCHASES OF COMMON STOCK

We did not repurchase any of our securities during the fourth quarter of 2004.

SALES OF UNREGISTERED SECURITIES

We had no sales of unregistered securities during 2004 that have not been
previously disclosed in a Form 8-K or Form 10-Q.

                                       12
<PAGE>

ITEM  6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                 ----------------------------------------------------------
(in thousands, except per share data)               2004        2003         2002        2001        2000
-------------------------------------            ---------   ----------   ---------   ---------   ---------
<S>                                              <C>         <C>          <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Net sales                                         $ 28,015    $  18,484    $ 13,301    $ 15,080   $  14,585
Cost of sales                                       21,227       17,632      12,307      10,310       9,559
                                                 ---------   ----------   ---------   ---------   ---------
Gross profit                                         6,788          852         994       4,770       5,026
Operating expenses:
    Sales and marketing                             16,520       10,180       2,425       3,906       1,912
    Research and development                         1,011        1,764       3,312       4,904       1,028
    General and administrative                       5,954        4,350       3,114       3,844       3,031
    Impairment of technology license                     -            -       8,100           -           -
    Reorganization expense                               -            -       1,130           -           -
    Distributor termination expenses                     -            -         821           -           -
    Gain on extinguishment of debt                       -       (2,575)          -           -           -
                                                 ---------   ----------   ---------   ---------   ---------
    Total operating expenses                        23,485       13,719      18,902      12,654       5,971
                                                 ---------   ----------   ---------   ---------   ---------
Operating loss                                     (16,697)     (12,867)    (17,908)     (7,884)       (945)
Interest income (expense)                               44         (425)       (304)      1,040       1,524
                                                 ---------   ----------   ---------   ---------   ---------
Income (loss) before income taxes                  (16,643)     (13,292)    (18,212)     (6,844)        579
Income tax expense                                       -            -           -           -          74
                                                 ---------   ----------   ---------   ---------   ---------
Net income (loss)                                ($ 16,643)  ($  13,292)  ($ 18,212)   $ (6,844)  $     505
                                                 =========   ==========   =========   =========   =========
Net income (loss) per share:
    Basic                                        ($   0.58)   $   (0.55)  ($   0.82)  ($   0.31)  $    0.03
    Diluted                                      ($  (0.58)   $   (0.55)  ($   0.82)  ($   0.31)  $    0.02

Weighted average number of shares outstanding:
    Basic                                           28,856       24,076      22,259      22,159      20,032
    Diluted                                         28,856       24,076      22,259      22,159      20,868
</TABLE>

<TABLE>
<CAPTION>
                                                                     As of December 31,
                                                 ----------------------------------------------------------
(in thousands)                                      2004        2003         2002        2001        2000
-----------------------------                    ---------   ----------   ---------   ---------   ---------
<S>                                              <C>         <C>          <C>         <C>         <C>
BALANCE SHEET DATA:
Cash and cash equivalents                        $   8,302    $   6,472   $   7,472   $   5,079   $  14,804
Working capital                                     41,459       31,275      21,674      32,466      85,934
Total assets                                        79,051       76,134      91,756      94,971     102,354

Long-term liabilities, excluding current
maturities                                           1,826          307       9,514           -           -
Shareholders' equity                                69,441       72,803      74,127      92,223      98,525
</TABLE>

                                       13
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

EXECUTIVE OVERVIEW

We develop, manufacture, and market medical devices. Our primary interest lies
with devices used by cardiovascular surgeons in the cardiac surgery operating
theater. Currently, we participate in the mechanical bileaflet portion of the
replacement heart valve market and in the market for the surgical treatment of
atrial fibrillation. We also are engaged in a development project for
autotransfusion products.

Sulzer Carbomedics ("Carbomedics") developed the basic design from which the ATS
heart valve evolved. Carbomedics is a large and experienced manufacturer of
pyrolytic carbon components used in mechanical heart valves. Carbomedics has
also designed and patented numerous mechanical valves. Carbomedics offered to
license a patented and partially developed valve to us if we would complete the
development of the valve and agree to purchase carbon components from
Carbomedics. We hold an exclusive, royalty-free, worldwide license to an open
pivot, bileaflet mechanical heart valve design owned by Carbomedics from which
the ATS heart valve has evolved. In addition, we have an exclusive, worldwide
right and license to use Carbomedics' pyrolytic carbon technology to manufacture
components for the ATS heart valve.

We commenced selling the ATS heart valve in international markets in 1992. In
October 2000, we received FDA approval to sell the ATS Open Pivot(R) MHV and
commenced sales and marketing of our valve in the United States. The original
sales forecasts as well as the pricing models that were used when the original
Supply Agreement was signed with Carbomedics proved to be too optimistic.
Accordingly, to keep the Supply Agreement active and the license to sell the
valve exclusive, we purchased quantities of inventory far in excess of demand.

From 1990 through 2002, we paid Carbomedics approximately $125 million for the
development of our valve, the technology to manufacture our pyrolytic carbon
components, and for pyrolytic valve components manufactured by Carbomedics. On
December 31, 2002, we had remaining payments due under the Technology Agreement
that totaled $28 million. This led us in 2003 to negotiate an accelerated but
reduced payment for all outstanding debts to Carbomedics related to the
Technology Agreement. In August 2003 we paid $12 million to satisfy all future
obligations under this agreement.

With inventory purchases exceeding sales through the years, we have built
inventory levels that today provide a source of cash. In 2004 we drew down these
paid-for inventories and used the cash it generated to fund operations. During
2004, we developed and implemented a plan to ramp-up our manufacturing facility
for pyrolytic carbon. By the end of 2004, this process was complete.

In June 2002, we reorganized the company, laying off more than half of the work
force including all executive management. With the hiring of a new president
late in 2002, we have started the process of rebuilding our sales and marketing
teams, especially in the United States. This rebuilding is the most significant
factor in our expense levels during 2004 and 2003. Because sales prices in the
United States exceed selling prices elsewhere, we feel that our future success
will depend on achieving increased market share in the U.S. Our U.S. sales as a
percentage of our overall sales have grown from 4% in 2000 to 33% in 2004.

During 2004, we made our first ventures outside the mechanical heart valve
market by completing two business development agreements. The first, signed in
April, is with ErySave AB, a Swedish research firm, for exclusive worldwide
rights to ErySave's PARSUS filtration technology for cardiac surgery procedures.
We had no revenues in 2004 nor do we expect any for 2005 from this technology.
In November, we completed a global partnership agreement with CryoCath
Technologies, Inc. to market CryoCath's surgical cryotherapy products for the
ablation of cardiac arrhythmias. The agreement with CryoCath will result in
revenues for our company in 2005.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. This discussion and
analysis of our financial condition and results of operations is based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles

                                       14
<PAGE>

generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect (1) the
reported amounts of assets, liabilities, revenues, and expenses and (2) the
related disclosure of contingent liabilities. At each balance sheet date, we
evaluate our estimates, including but not limited to, those related to accounts
receivable, inventories, long-lived assets, and income taxes. The critical
accounting policies that are most important in fully understanding and
evaluating the financial condition and results of operations are discussed
below.

REVENUE RECOGNITION POLICY. A significant portion of our revenue in the United
States, Canada, and France is generated from consigned inventory maintained at
hospitals or with field representatives. In these situations, revenue is
recognized at the time that the product has been implanted or used. In all other
instances, revenue is recognized at the time product is shipped. Certain
independent distributors in select international markets receive rebates against
invoiced sales amounts. In these situations, we accrue for these rebates at the
time of the original sale. The total of these accrued rebates was $0.5 million
as of December 31, 2004 and 2003.

ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain an allowance for doubtful accounts
that is calculated using subjective judgments and estimates to establish this
valuation account. 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 monitor amounts that are not paid according to
terms. 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. Our allowance for
doubtful accounts was $0.4 million at December 31, 2004 compared to $0.3 million
at December 31, 2003. As a percentage of total accounts receivable, the
allowance was 4.7% on December 31, 2004 and 5.2% on December 31, 2003. This
increase in allowance is due to the aging deterioration of several international
accounts.

INVENTORY VALUATION. Inventories are recorded at the lower of manufacturing cost
or net realizable value. We have historically had manufacturing costs exceeding
net realizable values in certain international markets requiring us to
write-down certain inventories to expected selling prices due to high purchase
prices of pyrolytic valve components under our supply agreement with
Carbomedics. This lower of cost or market adjustment is charged to cost of sales
and is calculated by estimating future selling volume and prices by market and
comparing this to actual inventory levels, both finished goods and work in
process. An adjustment is made in those cases where our manufacturing costs are
or will be greater than our eventual selling price. If our estimates of future
selling prices or volumes prove incorrect, future adjustments to inventory
carrying values would be necessary and could have a material impact on
operations. Lower of cost or market adjustments were $0.8 million, $4.4 million,
and $2.4 million during 2004, 2003, and 2002, respectively. We believe that
future manufacturing costs will be lower as we manufacture our own pyrolytic
carbon components. This should decrease the risk of these adjustments as current
inventories are depleted.

We maintain an obsolescence allowance against certain finished goods inventories
to cover resterilization charges for expired items. This allowance totals $0.2
million at December 31, 2004 and 2003.

A portion of inventories on hand at December 31, 2004 and 2003 are not likely to
be sold in the following twelve months periods and therefore are not classified
as a current asset. The estimate of inventories necessary to support current
sales includes our projections not only of sales but inventories for new
consignment accounts and contingencies. Accordingly, these amounts are
classified as a current asset.

LONG TERM ASSETS--TECHNOLOGY LICENSE. We assess the carrying value of our
technology license from Carbomedics annually in accordance with the provisions
of FAS Statement 142 (FAS No. 142), Goodwill and Other Intangible Assets. The
assessment of potential impairment requires certain judgments and estimates,
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 discount rate to be utilized. As of December 31, 2004, we believe that the
carrying value of our technology license is recoverable and no impairment charge
is currently necessary.

DEFERRED TAX ASSETS. We have incurred tax losses of approximately $62 million.
The losses are carried forward for U.S. and state corporate income taxes and can
be used to reduce future taxes. At December 31, 2004 we had deferred tax assets
totaling $23.2 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

                                       15
<PAGE>

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.

RESULTS OF OPERATIONS

The following table provides the dollar and percentage change in our Statements
of Operations for 2004 compared to 2003 and 2003 compared to 2002.

<TABLE>
<CAPTION>
                                                           Increase                                       Increase
(in thousands)                       2004         2003     (Decrease)    %          2003       2002      (Decrease)     %
--------------                     ---------    --------   ---------   ------    ---------   ---------   ----------   ------
<S>                               <C>           <C>        <C>         <C>      <C>         <C>          <C>          <C>
Net sales                          $  28,015    $ 18,484   $   9,531     51.6%   $  18,484    $ 13,301   $    5,183     39.0%
Cost of sales                         21,227      17,632       3,595     20.4%      17,632      12,307        5,325     43.3%
                                  ----------    --------   ---------   ------   ----------   ---------   ----------   ------
Gross profit                           6,788         852       5,936    696.7%         852         994         (142)   -14.3%

Operating expenses:
     Sales and marketing              16,520      10,180       6,340     62.3%      10,180       3,312        6,868    207.4%
     Research and development          1,011       1,764        (753)   -42.7%       1,764       2,425         (661)   -27.3%
     General and administrative        5,954       4,350       1,604     36.9%       4,350       3,114        1,236     39.7%
     Impairment of technology
       license                             -           -           -        -            -       8,100       (8,100)   100.0%

     Reorganization expense                -           -           -        -            -       1,130       (1,130)   100.0%
     Distributor termination
       expenses                            -           -           -        -            -         821         (821)   100.0%
     Gain on extinguishment of
       debt                                -      (2,575)      2,575        -       (2,575)          -       (2,575)     0.0%
                                  ----------    --------   ---------   ------   ----------   ---------   ----------   ------
     Total operating expenses         23,485      13,719       9,766     71.2%      13,719      18,902       (5,183)   -27.4%
                                  ----------    --------   ---------   ------   ----------   ---------   ----------   ------

Operating loss                       (16,697)    (12,867)     (3,830)   -29.8%     (12,867)    (17,908)       5,041     28.1%

Interest income (expense)                 54        (425)        479   -112.7%        (425)       (304)        (121)    39.8%
                                  ----------    --------   ---------   ------   ----------   ---------   ----------   ------
Net loss                          ($  16,643)  ($ 13,292) ($   3,351)   -25.2%  ($  13,292)  ($ 18,212)  $    4,920     27.0%
                                  ==========    ========   =========   ======   ==========   =========   ==========   ======
</TABLE>

The following table presents the statement of operations as a percentage of
sales for 2004, 2003, and 2002.

<TABLE>
<CAPTION>
                                      2004       2003       2002
                                   ---------  ---------   --------
<S>                                <C>        <C>         <C>
Net sales                            100.0%     100.0%     100.0%
Cost of sales                         75.8%      95.4%      92.5%
                                      ----      -----      -----
Gross profit                          24.2%       4.6%       7.5%
Operating expenses:
     Sales and marketing              59.0%      55.1%      24.9%
     Research and development          3.6%       9.5%      18.2%
     General and administrative       21.3%      23.5%      23.4%
     Impairment of technology
      license                          0.0%       0.0%      60.9%
     Reorganization expense            0.0%       0.0%       8.5%
     Distributor termination
      expenses                         0.0%       0.0%       6.2%
     Gain on extinguishment of
      debt                             0.0%     -13.9%       0.0%
                                      ----      -----      -----
     Total operating expenses         83.8%      74.2%     142.1%
                                      ----      -----      -----

Operating loss                       -59.6%     -69.6%    -134.6%

Interest income (expense)              0.2%      -2.3%      -2.3%

                                     -----      -----     ------
Net loss                             -59.4%     -71.9%    -136.9%
                                     =====      =====     ======
</TABLE>

                                       16
<PAGE>

NET SALES.  The following tables compare net sales during 2004, 2003, and 2002.

<TABLE>
<CAPTION>
(in thousands)      2004         2003       Increase        %          2003         2002       Increase       %
--------------   ----------   ----------   ----------   ---------   ----------   ----------   ----------   -------
<S>              <C>          <C>          <C>          <C>         <C>          <C>          <C>          <C>
United States    $    9,330   $    5,141   $    4,189      81.5%    $    5,141   $    2,535   $    2,606    102.8%

Outside United

States               18,685       13,343        5,342      40.0%        13,343       10,766        2,577     23.9%
                 ----------   ----------   ----------   -------     ----------   ----------   ----------     ----

Total            $   28,015   $   18,484   $    9,531      51.6%    $   18,484   $   13,301   $    5,183     39.0%
                 ==========   ==========   ==========   =======     ==========   ==========   ==========     ====
</TABLE>

<TABLE>
<CAPTION>
                            2004 Change in               2003 Change in
                    -----------------------------   -----------------------
                    Average                         Average
                     Sales      Unit                 Sales    Unit
                     Price     Sales      Total      Price    Sales   Total
                    -------   -------   ---------   -------   -----   -----
<S>                 <C>       <C>       <C>         <C>       <C>     <C>
United States         2.0%      77.9%     81.5%        5.9%    91.4%  102.8%

Outside United

States               -4.0%      45.9%     40.0%      -15.6%    46.8%   23.9%

                     ----       ----      ----       -----     ----    ----
Total                -3.2%      56.5%     51.6%       -7.9%    50.9%   39.0%
                     ====       ====      ====       =====     ====    ====
</TABLE>

<TABLE>
<CAPTION>
                        2004      2003     2002
                       -------   ------   ------
<S>                    <C>       <C>      <C>
Share of total sales:

United States           33.3%     27.8%    19.1%

Outside United
  States                66.7%     72.2%    80.9%
                       -----     -----    -----

Total                  100.0%    100.0%   100.0%
                       =====     =====    =====
</TABLE>

In June 2002, the majority of our U.S. sales persons were terminated. Starting
in the fourth quarter of 2002 and through 2004, we have been building a new
sales organization in the U.S. which has grown to four area directors managing
31 sales territories. Our representation within these territories consists of
both direct sales representatives and independent agents. This new sales
organization and overall greater sales efforts contributed to our increase in
sales in 2003 and 2004 and to our sales within the U.S. accounting for a larger
percentage of overall sales.

During 2003 and 2004, we aggressively entered several international markets that
represented opportunities for greater sales unit growth but at prices lower than
our other markets. Prices in some of these territories are lower than our
current manufacturing costs. We feel this strategy is reasonable because it
allows us to increase our market share while reducing our high priced but
paid-for inventories. Once we have exhausted our high priced components, we
expect to have lower manufacturing costs per valve which will allow us to
realize gross profit in these international markets.

COST OF GOODS SOLD. We have made write-downs to our inventories the past three
years due to future selling prices being lower than manufacturing costs in
select international markets. Following is a summary of our cost of goods sold
divided between sales of products and lower of cost or market adjustments.

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                           ----------------------------------
(in thousands)                               2004         2003         2002
---------------------------------------    --------     --------     --------
<S>                                        <C>          <C>          <C>
Cost of goods sold, as reported            $ 21,227     $ 17,632     $ 12,307
Adjustments to cost of goods sold:
     Cost of goods sold related to a
     lower of cost or market adjustment        (819)      (4,400)      (2,400)
                                           --------     --------     --------
Adjusted cost of goods sold                $ 20,408     $ 13,232     $  9,907
                                           ========     ========     ========
Adjusted cost of goods sold as a
     percentage of net sales                   72.8%        71.6%        74.5%

</TABLE>

                                       17
<PAGE>

Our costs of goods sold as a percentage of net sales has varied due to changes
in average selling price. Our gross margin is anticipated to improve as sales
within the Unites States increase as a percentage of total sales and as we start
selling valves that have been entirely manufactured in our facilities. Our
inventories of high priced carbon components currently exceed our expected sales
during 2005.

The ATS valve is made of materials that do not deteriorate. Other than the need
to resterilize the valves periodically, there is no risk of perishability.
Pyrolytic carbon, which is the substrate used in manufacturing our valves, has
been the only material used to manufacture mechanical heart valves for humans
for many years and remains the most advanced raw material for our products. The
other sources of prosthetic heart valves for humans are cadaver and porcine
tissues. For our heart valves, however, obsolescence issues are remote due to
certain advantages offered by mechanical heart valves, including superior
durability. Similarly, we believe that, given the lead time that would be
required, there is no material risk that there would be the introduction and FDA
approval of another substrate that would replace pyrolytic carbon prior to the
end of the period over which we expect to sell our inventory of valves.

SALES AND MARKETING. Cost increases in 2004 over 2003 and 2003 over 2002 were
for the development of our worldwide marketing organization and the substantial
increase in sales personnel, mostly in the U.S. In June 2002, the majority of
our U.S. sales persons were terminated, resulting in a substantial decrease in
expenses during 2002. Starting in late 2002, we began building a worldwide
marketing department that now consists of 12 employees. In 2003, we set up
direct operations in France rather than going to market through an independent
distributor. In early 2004, we set up infrastructure to support sales in China.
We have steadily grown to more than 30 sales territories in the U.S.

RESEARCH AND DEVELOPMENT. Research and development expenses include the costs to
develop and improve current and future products, the costs for regulatory and
clinical activities for these products, and prior to 2004, the costs to set up
and maintain our carbon components manufacturing facility while it was in a
pre-production mode.

The following table compares the different components of research and
development costs for 2004, 2003, and 2002.

<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                              -------------------------
(in thousands)                                 2004      2003    2002
---------------------------------------       ------    ------   ------
<S>                                           <C>       <C>      <C>
Costs related to manufacturing facility       $    -    $1,209   $1,795
All other R&D costs                            1,011       555      630
                                              ------    ------   ------

Total                                         $1,011    $1,764   $2,425
                                              ======    ======   ======
</TABLE>

On May 29, 2002, we received notification from the FDA of full approval of our
carbon manufacturing facility. The decrease in research and development expenses
during 2003 is attributable to the costs of setting up and qualifying our
manufacturing facility to receive this approval during the first half of 2002.
During 2004, we developed and implemented a plan to ramp-up our pyrolytic carbon
facility. Accordingly, these costs are now part of our inventories and will be
expensed through cost of sales as products are sold.

GENERAL AND ADMINISTRATIVE. During 2004, we experienced costs increases of
approximately $0.2 million for salaries and benefits of our employees, $0.3
million for corporate insurances, $0.3 million for bad debt expense, and $0.6
million for outside consultants and additional audit expenses to document and
test internal controls in support of Sarbanes-Oxley. During 2003, we incurred
legal, accounting, and other professional services substantially for legal
support, recruitment, and hiring of our executive team that totaled $0.8
million. In addition, management bonus accruals increased by $0.6 million for
management's attainment of increased financial performance.

IMPAIRMENT CHARGE. During the first quarter of 2002, we evaluated the carrying
value of our technology license asset in accordance with the provisions of
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets. While this evaluation indicated that the asset's carrying
value was recoverable, changes in sales volumes and selling prices during the
second quarter of 2002 necessitated a revaluation of the recoverability of that
asset. As a result of this updated cash flow analysis, we recorded an $8.1
million non-cash charge during the second quarter of 2002. We believe our
current carrying value of the technology license from Carbomedics is recoverable
and no further impairment charges have been taken.

                                       18
<PAGE>

DISTRIBUTOR TERMINATION EXPENSES. During the fourth quarter of 2002, we
terminated our relationship with our distributor who covered France and Belgium
because of violations of several conditions of the distributor agreement. The
distributor had the right to return its inventory of valves to us under the
early termination clause within the distributor agreement. We accrued an
estimated termination charge of $0.8 million, representing the margin on the
valves that were expected to be returned and the estimated cost related to
restocking such inventory for resale. The entire charge was paid for in 2003.

REORGANIZATION EXPENSE. In June 2002, the Board of Directors decided to
significantly decrease our workforce. As part of these cost reduction measures,
one half of the workforce, including the executive officers of the Company, were
released from employment. A charge of $1.1 million was recorded as
reorganization expense at that time.

GAIN ON EXTINGUISHMENT OF DEBT. On July 21, 2003, we entered into an agreement
and on August 21, 2003, we paid Centerpulse USA Holdings Co. ("Centerpulse") $12
million in exchange for cancellation of all of our payment obligations under our
carbon technology agreement and after which we would own a fully paid exclusive
license to use the carbon technology to produce components for our valve. Prior
to this agreement, we were obligated to pay Centerpulse an aggregate of $28
million under the technology agreement over a period of approximately four
years. These payments were accrued as milestones were met. Of the total $28
million, there were two uncompleted milestones totaling $12 million that were
not accrued. Since the amount accrued exceeded the amount we paid, we realized a
non-cash gain on the extinguishment of debt in the amount of $2.6 million on
this transaction.

NET INTEREST INCOME (EXPENSE). In 2004, interest expense was primarily
attributable to our new credit facility and the amortization of the costs to set
up this facility. During 2003 and 2002, interest expense was primarily
attributable to the imputed interest on our long-term debt previously owed to
Centerpulse. Interest income is primarily attributable to the investment of our
cash balances.

INCOME TAXES. We have accumulated approximately $62 million of net operating
loss ("NOL") carryforwards for U.S. tax purposes. We believe that our ability to
fully utilize the existing NOL 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 conducted a formal study of whether a change in control of
ATS has occurred in the past that impairs our NOL carryforwards because we are
unable to utilize such NOL carryforwards until we achieve profitability and
because this study would be very expensive to complete. When we attain
profitability, we will conduct a formal study of any restrictions on our
carryforwards. We have not recorded any net assets related to our NOL
carryforwards and other deferred items as we currently cannot determine that it
is reasonably likely that this asset will be realized and we, therefore, have
provided a valuation allowance for the entire asset.

NET LOSS. Our increase in net loss in 2004 compared to 2003 and the decrease in
net loss in 2003 compared to 2002 resulted from changes in sales offset by
changes in operating costs, all of which are described above.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents, and short-term investments totaled $16.0 million and
$8.5 million at December 31, 2004 and December 31, 2003, respectively.

OPERATING ACTIVITIES. During 2004, we received cash payments from customers of
$25.1 million and made cash payments to employees and customers of $31.1
million. During 2003, we received cash payments from customers of $17.1 million
and made payments to employees and suppliers of $17.2 million. Our operating
losses during 2004 and 2003 of $16.7 million and $12.9 million, respectively,
were substantially funded through the depletion of inventories. During 2004 and
2003, we incurred significant expenses commercializing the ATS heart valve in
the United States. As we build sales in future periods and our cost of
inventories decrease, our operating losses will decrease and we will move
steadily towards a cash flow breakeven on sales and eventually to profitability.
We believe our current cash balances are adequate to fund our operating
activities during 2005.

INVESTING AND FINANCING ACTIVITIES. We historically have funded our operations
through equity investments. During 2004 and 2003, we raised $13.2 million and
$11.6 million through equity offerings and the issuance of stock through the
exercise of stock options. In 2004, we signed a credit agreement and received
advances on notes payable of $2.5 million. During 2003, we paid $12.0 million of
debt related to our Technology Agreement with Carbomedics. We have no future
payment obligations under the Technology Agreement. We purchased property and
equipment of

                                       19
<PAGE>

$2.9 million and $0.7 million during 2004 and 2003, respectively. During 2005,
our spending on property and equipment will decrease as a substantial portion of
our 2004 purchases supported our pyrolytic carbon facility during production
ramp-up.

CASH MANAGEMENT

During 2005 and into 2006, we will deplete our high priced but paid-for
inventories of pyrolytic carbon components. We have started increasing
production of these components in our own factory. This will require the use of
cash as we purchase raw materials and incur employee costs and overhead to
manufacture the inventory. We estimate that operating costs will remain high in
comparison to sales during 2005 and will require the use of cash to fund
operations. We will draw down cash balances to build inventories and fund
operations during 2005.

On April 26, 2004, we signed an exclusive development and licensing agreement
with ErySave AB and made an initial milestone payment of approximately $0.2
million. Future payments under this agreement, based upon the attainment of
developmental milestones, could total an additional $1.1 million. These payments
are expected to occur during 2005 and 2006.

On November 9, 2004, we signed a global partnership agreement with
Canadian-based CryoCath Technologies, Inc. to market CryoCath's surgical
cryotherapy products for the ablation of cardiac arrhythmias. For certain
customers to which we will market, we have agreed to make a payment to CryoCath
representing a portion of the prior year's sales to these customers and future
payments of a certain percentage of the sales occurring over the following
three-year period. These payments are refundable to us upon cancellation of the
agreements. We expect that these payments will commence during the first quarter
of 2005.

Based upon the current forecast of sales and operating expenses, we anticipate
having cash to fund our operations through 2005. However, as identified under
the heading of "Cautionary Statements" 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.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any "off-balance sheet arrangements" (as such term is defined in
Item 303 of Regulation S-K) that are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources.

CONTRACTUAL OBLIGATIONS

The following table sets forth our future payment obligations.

<TABLE>
<CAPTION>
                                       Payments Due By Period
                       ------------------------------------------------------
                                    Less      One to     Four to   More than
                                    than      Three       Five        Five
(thousands)             Total     One year    Years       Years      Years
-----------            --------   --------   --------   --------   ----------
<S>                    <C>        <C>        <C>        <C>        <C>
Notes payable          $  2,786        974      1,812          -          -
Operating leases          2,313        540      1,507        266          -
Purchase obligations     21,750          -     10,000     10,000      1,750
                       --------   --------   --------   --------   --------

Total                  $ 26,849   $  1,514   $ 13,319   $ 10,266   $  1,750
                       ========   ========   ========   ========   ========
</TABLE>

                                       20
<PAGE>

CAUTIONARY STATEMENTS

This document contains forward-looking statements within the meaning of federal
securities laws that may include statements regarding intent, belief or current
expectations of our Company and our management. The Private Securities
Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking
statements to encourage companies to provide prospective information without
fear of litigation 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
projected in the statement. We desire to take advantage of these "safe harbor"
provisions. Accordingly, we hereby identify the following important factors
which could cause our actual results to differ materially from any such results
which may be projected, forecast, estimated or budgeted by us in forward-looking
statements made by us from time to time in reports, proxy statements,
registration statements and other written communications, or in oral
forward-looking statements made from time to time by the Company's officers and
agents. We do not intend to update any of these forward-looking statements after
the date of this Form 10-K to conform them to actual results.

IF OUR HEART VALVE DOES NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE IN THE UNITED
STATES, OUR OPERATING RESULTS WILL BE HARMED AND WE MAY NOT ACHIEVE
PROFITABILITY.

      Our success will depend, in large part, on the medical community's
acceptance of the ATS heart valve in the United Sates, which is the largest
revenue market in the world for heart valves. The U.S. medical community's
acceptance of the ATS heart valve will depend upon our ability to demonstrate
the safety and efficacy, advantages, long-term clinical performance and
cost-effectiveness of the ATS heart valve as compared to other prosthetic heart
valves. We cannot predict whether the U.S. medical community will accept the ATS
heart valve or, if accepted, the extent of its use. Negative publicity resulting
from isolated incidents involving the ATS heart valve or other prosthetic heart
valves could have a significant adverse effect on the overall acceptance of our
heart valve. If we encounter difficulties developing a market for the ATS heart
valve in the United States, we may not be able to increase our revenue enough to
achieve profitability and our business and results of operations will be
seriously harmed.

WE CURRENTLY RELY ON THE ATS HEART VALVE AS OUR PRIMARY SOURCE OF REVENUE. IF WE
ARE NOT SUCCESSFUL IN SELLING THIS PRODUCT, OUR OPERATING RESULTS WILL BE
HARMED.

      We have developed only one product, which is currently being sold
primarily outside the United States. Even if we were to develop additional
products, regulatory approval would likely be required to sell them. Clinical
testing and the approval process itself are very expensive and can take many
years. Therefore, we do not expect to be in a position to sell additional
products in the foreseeable future. Adverse rulings by regulatory authorities,
product liability lawsuits, the failure to achieve widespread U.S. market
acceptance, the loss of market acceptance outside of the United States, or other
adverse publicity may significantly and adversely affect our sales of the ATS
heart valve, and, as a result, would adversely affect our business, financial
condition and results of operations.

IN 2002, WE BEGAN USING A COMBINATION OF DIRECT SALES PERSONS AND INDEPENDENT
MANUFACTURING REPRESENTATIVES TO SELL OUR VALVES IN THE UNITED STATES. IF OUR
NEW U.S. SALES STRATEGY IS NOT SUCCESSFUL, WE WILL NOT BE ABLE TO CONTINUE OUR
OPERATIONS AS PLANNED.

      Our sales approach for the sale of the ATS valve in the United States
consists primarily of direct salespersons with a few independent manufacturer's
representatives. We will need to continue to expend significant funds and
management resources to develop and maintain this hybrid sales force. We believe
there is significant competition for sales personnel and independent
manufacturing representatives with the advanced sales skills and technical
knowledge we need. If we are unable to recruit, retain and motivate qualified
personnel and representatives, U.S. sales of the ATS valve could be adversely
affected. The loss of key salespersons or independent manufacturer's
representatives could have a material adverse effect on our sales or potential
sales to current customers and prospects serviced by such salespersons or
representatives. Further, we cannot assure the successful expansion of our
network of independent manufacturer's representatives on terms acceptable to
ATS, if at all, or the successful marketing of our products by our hybrid sales
force. To the extent we rely on sales through independent manufacturer's
representatives, any revenues we receive will depend primarily on the efforts of
these parties. We do not control the amount and timing of marketing resources
that these third parties devote to our product. If our U.S.

                                       21
<PAGE>

sales strategy is not successful, we may be forced to change our U.S. sales
strategy again. Any such change could disrupt sales in the United States.
Further, any change in our U.S. sales strategy could be expensive and would
likely have a material adverse impact on our results of operations.

WE CURRENTLY DEPEND ON THE MARKETING AND SALES EFFORTS OF INTERNATIONAL
INDEPENDENT DISTRIBUTORS, AND OUR SALES HAVE BEEN CONCENTRATED IN THREE
COUNTRIES.

      The ATS heart valve is sold internationally through independent
distributors. The loss of an international distributor could seriously harm our
business and results of operations if a new distributor could not be found on a
timely basis in the relevant geographic market. We do not control the amount and
timing of marketing resources that these third parties devote to our product.
Furthermore, to the extent we rely on sales through independent distributors,
any revenues we receive will depend primarily on the efforts of these parties.

WE ARE DEPENDENT UPON SALES OUTSIDE THE UNITED STATES, WHICH ARE SUBJECT TO A
NUMBER OF RISKS INCLUDING A DROP IN SALES DUE TO CURRENCY FLUCTUATIONS.

      For 2004, 67% of our net sales were derived from international operations.
We expect that international sales will account for a substantial majority of
our revenue until the ATS heart valve receives wider market acceptance from U.S.
customers. Accordingly, any material decrease in foreign sales may materially
and adversely affect our results of operations.

      We sell in U.S. dollars to most of our customers abroad. An increase in
the value of the U.S. dollar in relation to other currencies can and has
adversely affected our sales outside of the United States. In prior years, the
decrease in sales was due primarily to the change in the value of the U.S.
dollar against the Euro, as well as competitor price pressure. Our dependence on
sales outside of the United States will continue to expose us to U.S. dollar
currency fluctuations for the foreseeable future.

      Our future results of operations could also be harmed by risks inherent in
doing business in international markets, including:

      -     unforeseen changes in regulatory requirements and government health
            programs;

      -     weaker intellectual property rights protection in some countries;

      -     new export license requirements, changes in tariffs or trade
            restrictions;

      -     political and economic instability in our target markets; and

      -     greater difficulty in collecting payments from product sales.

      Slow payment of receivables by our international distributors, or the
occurrence of any of the other factors listed above, could harm our ability to
successfully commercialize our product internationally and could harm our
business.

WE HAVE A HISTORY OF NET LOSSES. IF WE DO NOT HAVE NET INCOME IN THE FUTURE, WE
MAY BE UNABLE TO CONTINUE OUR OPERATIONS.

      We are not currently profitable and have a very limited history of
profitability. As of December 31, 2004, we had an accumulated deficit of $67.5
million. We expect to incur significant expenses over the next several years as
we continue to devote substantial resources to the commercialization of the ATS
heart valve in the United States. We will not generate net income unless we are
able to significantly increase revenue from U.S. sales. If we continue to
sustain losses, we may not be able to continue our business as planned.

THE MARKET FOR PROSTHETIC HEART VALVES IS HIGHLY COMPETITIVE, AND A NUMBER OF
OUR COMPETITORS ARE LARGER AND HAVE MORE FINANCIAL RESOURCES. IF WE DO NOT
COMPETE EFFECTIVELY, OUR BUSINESS WILL BE HARMED.

      The market for prosthetic heart valves is highly competitive. We expect
that competition will intensify as additional companies enter the market or
modify their existing products to compete directly with us. Our primary
competitor, St. Jude Medical, Inc., currently controls approximately 50% of the
worldwide mechanical heart valve

                                       22
<PAGE>

market. Many of our competitors have long-standing FDA approval for their valves
and extensive clinical data demonstrating the performance of their valves. In
addition, they have greater financial, manufacturing, marketing and research and
development capabilities than we have. For example, many of our competitors have
the ability, due to their internal carbon manufacturing facilities and economies
of scale, to manufacture their heart valves at a lower cost than we can
manufacture our ATS heart valve. Our primary competitor has recently used price
as a method to compete in several international markets. If heart valve prices
decline significantly we might not be able to compete successfully, which would
harm our results of operations.

OUR FUTURE RESULTS WILL BE HARMED IF THE USE OF MECHANICAL HEART VALVES
DECLINES.

      Our business could suffer if the use of mechanical heart valves declines.
Historically, mechanical heart valves have accounted for over two-thirds of all
heart valve replacements. Recently, there has been an increase in the use of
tissue valves. We estimate that mechanical heart valves are currently being used
in 40% to 65% of all heart valve replacements, depending on the geographic
market, down from 65 to 75% about ten years ago. We believe the tissue
manufacturers' claims of improvements in tissue valve longevity and an increase
in the average age of valve patients have contributed to the recent increase in
the use of tissue valves.

NEW PRODUCTS OR TECHNOLOGIES DEVELOPED BY OTHERS COULD RENDER OUR PRODUCT
OBSOLETE.

      The medical device industry is characterized by significant technological
advances. Several companies are developing new prosthetic heart valves based on
new or potentially improved technologies. Significant advances are also being
made in surgical procedures, which may delay the need for replacement heart
valves. A new product or technology may emerge that renders the ATS heart valve
noncompetitive or obsolete. This could materially harm our results of operations
or force us to cease doing business altogether.

WE MAINTAIN A LARGE VOLUME OF INVENTORY, WHICH EXCEEDS THE CURRENT DEMAND FOR
THE ATS HEART VALVE. IF SALES OF OUR PRODUCT DO NOT INCREASE, THE VALUE OF OUR
INVENTORY COULD DECREASE SUBSTANTIALLY.

      We purchased pyrolytic carbon components under a long-term supply
agreement with Carbomedics through June 2002, and we are required to resume
purchases of such components in 2007. To date, our purchases of pyrolytic carbon
components have exceeded our sales of the ATS heart valves. We currently have in
inventory enough pyrolytic carbon components to satisfy our projected
requirements through 2005. If we are unable to achieve widespread acceptance for
the ATS heart valve or if competitive pressures result in price reductions, the
value of the excess inventory would likely decrease, which could seriously harm
our results of operations and financial condition. Because the pyrolytic carbon
components are made to meet the unique specifications of the ATS heart valve,
our inventory may have little, if any, value in the open market.

WE LICENSE PATENTED TECHNOLOGY AND OTHER PROPRIETARY RIGHTS FROM CARBOMEDICS. IF
THESE AGREEMENTS ARE BREACHED OR TERMINATED, OUR RIGHT TO MANUFACTURE THE ATS
HEART VALVE COULD BE TERMINATED.

      Under our carbon technology agreement with Carbomedics, we have obtained a
license to use Carbomedics' pyrolytic carbon technology to manufacture
components for the ATS heart valve. If this agreement is breached or terminated,
we would be unable to manufacture our own product. If our inventory is exhausted
and we do not have any other sources of carbon components, we would be forced to
cease doing business.

A DELAY OR INTERRUPTION IN THE SUPPLY OF PYROLYTIC CARBON COMPONENTS COULD DELAY
PRODUCT DELIVERY OR FORCE US TO CEASE OPERATIONS.

      We cannot be certain that, after our current inventory is exhausted,
sufficient quantities of pyrolytic carbon components will be available to
assemble the ATS heart valve. Other than our carbon facility, the only other
FDA-approved alternate supplier of our pyrolytic carbon components is
Carbomedics. Although we have a supply agreement with Carbomedics under which it
agrees to supply us with a minimum annual number of pyrolytic carbon components
during 2007 through 2011, the amounts available under this agreement are not
expected to be sufficient to supply all of our needs for components in those
years. If our inventory is exhausted and we are unable to manufacture carbon
components or obtain them from other sources, we could be forced to reduce or
cease operations.

                                       23
<PAGE>

BECAUSE WE LACK MANUFACTURING EXPERIENCE, WE MAY NOT REALIZE EXPECTED SAVINGS
FROM MANUFACTURING OUR OWN PRODUCT. IN ADDITION, WE COULD EXPERIENCE PRODUCTION
DELAYS AND SIGNIFICANT ADDITIONAL COSTS.

      Under our agreement with Carbomedics, we have been granted an exclusive
worldwide license to manufacture pyrolytic carbon components for the ATS heart
valve. We cannot be certain that our strategy to establish internal
manufacturing capabilities will result in a cost-effective means for
manufacturing the ATS heart valve. We have limited experience in manufacturing
pyrolytic carbon. Although we have an FDA-approved carbon manufacturing
facility, we have only just started increasing production to higher levels. In
the future as we continue to increase production at the plant, we may encounter
difficulties in maintaining and expanding our manufacturing operations,
including problems involving:

      -     production yields;

      -     quality control;

      -     per unit manufacturing costs;

      -     shortages of qualified personnel; and

      -     compliance with FDA and international regulations and requirements
            regarding good manufacturing practices.

      Difficulties encountered by us in establishing or maintaining a
commercial-scale manufacturing facility may limit our ability to manufacture our
heart valve and therefore could seriously harm our business and results of
operations.

OUR BUSINESS COULD BE SERIOUSLY HARMED IF THIRD-PARTY PAYORS DO NOT REIMBURSE
THE COSTS FOR OUR HEART VALVE.

      Our ability to successfully commercialize the ATS heart valve depends on
the extent to which reimbursement for the cost of our product and the related
surgical procedure is available from third-party payors, such as governmental
programs, private insurance plans and managed care organizations. Third-party
payors are increasingly challenging the pricing of medical products and
procedures that they consider not to be cost-effective or are used for a
non-approved indication. The failure by physicians, hospitals and other users of
our products to obtain sufficient reimbursement from third-party payors would
seriously harm our business and results of operations.

      In recent years, there have been numerous proposals to change the health
care system in the United States. Some of these proposals have included measures
that would limit or eliminate payment for medical procedures or treatments. In
addition, government and private third-party payors are increasingly attempting
to contain health care costs by limiting both the coverage and the level of
reimbursement. In international markets, reimbursement and health care payment
systems vary significantly by country. In addition, we have encountered price
resistance from government-administered health programs. Significant changes in
the health care system in the United States or elsewhere, including changes
resulting from adverse trends in third-party reimbursement programs, could have
a material adverse effect on our business and results of operations.

WE MAY FACE PRODUCT LIABILITY CLAIMS, WHICH COULD RESULT IN LOSSES IN EXCESS OF
OUR INSURANCE COVERAGE AND WHICH COULD NEGATIVELY AFFECT OUR ABILITY TO ATTRACT
AND RETAIN CUSTOMERS.

      The manufacture and sale of mechanical heart valves entails significant
risk of product liability claims and product recalls. A mechanical heart valve
is a life-sustaining device and the failure of any mechanical heart valve
usually results in the patient's death or need for reoperation. A product
liability claim or product recall, regardless of the ultimate outcome, could
require us to spend significant time and money in litigation or to pay
significant damages and could seriously harm our business. We currently maintain
product liability insurance coverage in an aggregate amount of $25 million.
However, we cannot be assured that our current insurance coverage is adequate to
cover the costs of any product liability claims made against us. Product
liability insurance is expensive and does not cover the costs of a product
recall. In the future, product liability insurance may not be available at
satisfactory rates or in adequate amounts. A product liability claim or product
recall could also materially and adversely affect our ability to attract and
retain customers.

                                       24
<PAGE>

OUR BUSINESS WOULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS.

      Our success depends in part on our ability to maintain and enforce our
patents and other proprietary rights. We rely on a combination of patents, trade
secrets, know-how and confidentiality agreements to protect the proprietary
aspects of our technology. These measures afford only limited protection, and
competitors may gain access to our intellectual property and proprietary
information. The patent positions of medical device companies are generally
uncertain and involve complex legal and technical issues. Litigation may be
necessary to enforce our intellectual property rights, to protect our trade
secrets and to determine the validity and scope of our proprietary rights. Any
litigation could be costly and divert our attention from the growth of the
business. We cannot be assured that you that our patents and other proprietary
rights will not be successfully challenged, or that others will not
independently develop substantially equivalent information and technology or
otherwise gain access to our proprietary technology.

WE MAY BE SUED BY THIRD PARTIES WHICH CLAIM THAT OUR PRODUCT INFRINGES ON THEIR
INTELLECTUAL PROPERTY RIGHTS. ANY SUCH SUITS COULD RESULT IN SIGNIFICANT
LITIGATION OR LICENSING EXPENSES OR WE MIGHT BE PREVENTED FROM SELLING OUR
PRODUCT.

      We may be exposed to future litigation by third parties based on
intellectual property infringement claims. Any claims or litigation against us,
regardless of the merits, could result in substantial costs and could harm our
business. In addition, intellectual property litigation or claims could force us
to:

      -     cease manufacturing and selling our product, which would seriously
            harm us;

      -     obtain a license from the holder of the infringed intellectual
            property right, which license may not be available on reasonable
            terms, if at all; or

      -     redesign our product, which could be costly and time-consuming.

WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION, WHICH IS COSTLY, TIME
CONSUMING AND CAN SUBJECT US TO UNANTICIPATED DELAYS.

      The ATS heart valve and our manufacturing activities are subject to
extensive regulation by a number of governmental agencies, including the FDA and
comparable international agencies. We are required to:

      -     maintain the approval of the FDA and international regulatory
            agencies to continue selling the ATS heart valve;

      -     obtain the approval of international regulatory agencies in
            countries where the ATS heart valve is not yet marketed;

      -     satisfy content requirements for all of our labeling, sales and
            promotional materials;

      -     comply with manufacturing and reporting requirements; and

      -     undergo rigorous inspections by these agencies.

      Compliance with the regulations of these agencies may delay or prevent us
from introducing any new or improved products. Violations of regulatory
requirements may result in fines, marketing restrictions, product recall,
withdrawal of approvals and civil and criminal penalties.

THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE, WHICH MAY RESULT IN LOSSES TO
INVESTORS.

      Historically, the market price of our common stock has fluctuated over a
wide range and it is likely that the price of our common stock will fluctuate in
the future. The market price of our common stock could be impacted by the
following:

      -     the success of our management in operating ATS effectively;

      -     the failure of the ATS valve to gain market acceptance in the United
            States;

      -     announcements of technical innovations or new products by our
            competitors;

                                       25
<PAGE>

      -     the status of component supply arrangements;

      -     changes in reimbursement policies;

      -     government regulation;

      -     developments in patent or other proprietary rights;

      -     public concern as to the safety and efficacy of products developed
            by us or others; and

      -     general market conditions.

      In addition, due to one or more of the foregoing factors, in future years,
our results of operations may fall below the expectations of securities analysts
and investors. In that event, the market price of our common stock could be
materially and adversely affected. Finally, in recent years the stock market has
experienced extreme price and volume fluctuations. This volatility has had a
significant effect on the market prices of securities issued by many companies
for reasons unrelated to their operating performance. These broad market
fluctuations may materially adversely affect our stock price, regardless of our
operating results.

OUR CHARTER DOCUMENTS AND MINNESOTA LAW MAY DISCOURAGE AND COULD DELAY OR
PREVENT A TAKEOVER OF OUR COMPANY.

      Provisions of our articles of incorporation, bylaws and Minnesota law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our shareholders. These provisions include the following:

      -     No cumulative voting by shareholders for directors;

      -     The ability of our board to set the size of the board of directors,
            to create new directorships and to fill vacancies;

      -     The ability of our board, without shareholder approval, to issue
            preferred stock, which may have rights and preferences that are
            superior to our common stock;

      -     The ability of our board to amend the bylaws; and

      -     Restrictions under Minnesota law on mergers or other business
            combinations between us and any holder of 10% or more of our
            outstanding common stock.

                                       26
<PAGE>

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES 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, and both government and non-government debt
securities. The average duration of all 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, Canada, and France, we sell our products directly to
hospitals. In other international markets, 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.

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 are in Euros,
so we are subject to profitability risk arising from exchange rate movements. We
have not used foreign exchange contract 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.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements and the report of our independent
registered public accounting firm are included in this Annual Report on Form
10-K beginning on page F-1. The index to this report and the financial
statements is included in Item 15 below.

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE

None.

ITEM 9A.    CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including
our Chief Executive Officer and our Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that, except for the material
weakness in our internal control over financial reporting discussed below, our
disclosure controls and procedures were effective as of the end of the period
covered by this report in timely alerting them to the material information
relating to us required to be included in our periodic SEC filings.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as that term is defined in Rule 13a-15 under
the Exchange Act. Under the supervision and with the participation of
management, including our Chief Executive Officer and our Chief Financial
Officer, we are in the process of conducting an evaluation of our internal
control over financial reporting based on the framework in the "Internal Control
- Integrated Framework" issued by the Committee of Sponsoring Organizations of
the Treadway

                                       27
<PAGE>

Commission. We have not yet completed this evaluation and so have not included
in this Annual Report on Form 10-K our "Management's Annual Report on Internal
Control Over Financial Reporting" required by Item 308(a) of Regulation S-K (the
"Management's Report") or the related "Attestation Report of our Independent
Registered Public Accounting Firm" required by Item 308(b) of Regulation S-K
(the "Attestation Report"). Securities Exchange Act Release No. 34-50754, which
was issued on November 30, 2004, provides that, subject to certain conditions,
issuers may defer filing of these reports this year for up to 45 days after the
due date of the related Annual Report on Form 10-K. In accordance with the terms
of this Release, we have not included the Management's Report or the Attestation
Report in our Annual Report on Form 10-K. We expect to file an amendment to our
Annual Report on Form 10-K no later than April 29, 2005 which will include both
of these reports and the related officer certifications, auditor consent and
revised disclosure under Item 9A of our Annual Report on Form 10-K.

In connection with the pending evaluation, we have identified a material
weakness in our internal control over financial reporting relating to our
inventory cycle counting methods. We have relied on a cycle counting procedure
to substantiate inventory quantities in lieu of taking physical inventories.
During our evaluation of internal controls over our cycle counting procedures,
we determined that our processes were neither sufficient nor documented
adequately to rely upon. We therefore conducted a physical inventory after year
end which confirmed the accuracy of our inventory as recorded in our financial
statements for the year ended December 31, 2004. No adjustment was recorded. The
material weakness in our inventory cycle counting methods is in the process of
being remediated.

As a result of the material weakness, we will not be able to conclude in our
Management's Report that our internal control over financial reporting was
effective as of the end of the period covered by our Annual Report on Form 10-K.
We are not currently aware of any material weaknesses in our internal control
over financial reporting other than the weakness described above.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the most recent fiscal quarter, there has been no change in our internal
controls over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

ITEM 9B.     OTHER INFORMATION

None

                                       28
<PAGE>

                                    PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

See Part I of this Report for certain information regarding the Company's
executive officers. Pursuant to General Instruction G(3), reference is made to
information contained under the headings "Proposal 1 Election of Directors",
"Report of the Audit Committee of the Board of Directors", "Committees of the
Board of Directors and Attendance", "Shareholder Communications with the Board
of Directors", "Nominations", "Code of Conduct", and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive proxy statement for
its 2004 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission on or before May 2, 2005, which information is incorporated
herein.

ITEM 11.     EXECUTIVE COMPENSATION

Pursuant to General Instruction G(3), reference is made to information contained
under the headings "Executive Compensation" and "Compensation of Directors" in
the Company's definitive proxy statement for its 2005 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before May 2, 2005, which information is incorporated herein, excluding the
"Report of the Compensation Committee Concerning Executive Compensation."

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
             RELATED STOCKHOLDER MATTERS

Pursuant to General Instruction G(3), reference is made to information contained
under the headings "Security Ownership of Certain Beneficial Owners and
Management" and "Equity Compensation Plans" in the Company's definitive proxy
statement for its 2005 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission on or before May 2, 2005, which information
is incorporated herein.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES

Reference is made to information contained under the heading "Independent
Registered Public Accounting Firm Fees" in the Company's definitive proxy
statement for its 2005 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission on or before May 2, 2005, which information
is incorporated herein.

                                       29
<PAGE>

                                    PART IV

ITEM 15.          EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

FINANCIAL STATEMENTS

Our Consolidated Financial Statements and the Independent Auditor's Report
Thereon are included herein (page numbers refer to pages in this Annual Report
on Form 10-K):

<TABLE>
<S>                                                                                  <C>
Report of Independent Registered Public Accounting Firm                              Page F-1

Consolidated Balance Sheets as of December 31, 2004 and 2003                         Page F-2

Consolidated Statements of Operations for the years ended December 31, 2004,
2003, and 2002                                                                       Page F-3

Consolidated Statement of Changes in Shareholders' Equity for the years
ended December 31, 2004, 2003, and 2002                                              Page F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2004,
2003, and 2002                                                                       Page F-5

Notes to Consolidated Financial Statements for the years ended December 31,          Page F-6 through
2004, 2003, and 2002                                                                 F-16
</TABLE>

                                       30
<PAGE>

FINANCIAL STATEMENT SCHEDULES

                                ATS MEDICAL, INC.
          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                 (in thousands)
<TABLE>
<CAPTION>
                                                            ADDITIONS -
                                                            -----------
                                                                         CHARGED TO
                                           BALANCE AT     CHARGED TO       OTHER                                 BALANCE AT
                                           BEGINNING      COSTS AND      ACCOUNTS-      DEDUCTIONS                 END OF
              DESCRIPTION                  OF PERIOD       EXPENSES       DESCRIBE       DESCRIBE                  PERIOD
---------------------------------------   ------------   ------------   ------------   ------------             ------------
                COLUMN A                    COLUMN B                COLUMN C            COLUMN D                  COLUMN E
-----------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>            <C>            <C>                      <C>
VALUATION ACCOUNTS:

     Year Ended December 31, 2004
     Deducted from asset accounts
        Allowance for doubtful accounts   $        270   $        150   $          0   ($        32) (1)        $        388
        Allowance for obsolete
        inventories                       $        200   $          0   $          0    $         0             $        200
     Year ended December 31, 2003
        Allowance for doubtful accounts   $        420   $          0   $          0   ($       150) (2)        $        270
        Allowance for obsolete
        inventories                       $        200   $          0   $          0    $         0             $        200
     Year ended December 31, 2002
        Allowance for doubtful accounts   $        400   $         20   $          0    $         0             $        420
        Allowance for obsolete
        inventories                       $        200   $          0   $          0    $         0             $        200
</TABLE>

(1)   Uncollectible accounts written off, net of recoveries.

(2)   Changes in estimate recovered through a reduction in expenses.

All other schedules have been omitted because of absence of conditions under
which they are required or because the required information is included in the
financial statements or notes thereto.

EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                                   DESCRIPTION
<S>               <C>
3.1               Restated Articles of Incorporation, as amended to date (Incorporated by reference to
                  Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31,
                  1993 (the "1993 Form 10-K")).

3.2               Bylaws of the Company, as amended to date (Incorporated by reference to Exhibit 3.2 to the
                  Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form
                  10-K")).

4.1               Specimen certificate for shares of Common Stock of the Company (Incorporated by reference
                  to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended December 31,
                  1997 (the "1997 Form 10-K")).

10.1**            1987 Stock Option and Stock Award Plan, as restated and amended to date (Incorporated by
                  reference to  Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
                  ended June 30, 1997).

10.2**            ATS Medical Inc. 2000 Stock Incentive Plan (Incorporated by reference to the appendix to
                  the Company's Definitive Proxy Statement filed on March 28, 2003).


10.3**            Agreement between the Company and Manuel A. Villafana dated September 11, 2001
                  (Incorporated by reference to Exhibit 10.3 to the Company's Form 10-K for the year ended
                  December 31, 2001 (the "2001 Form 10-K")).
</TABLE>

                                       31
<PAGE>

<TABLE>
<S>               <C>
10.4              Lease Agreement between the Company and Crow Plymouth Land Limited Partnership dated
                  December 22, 1987 (Incorporated by reference to Exhibit 10(d) to the Company's Registration
                  Statement on Form S-18, File No. 33-34785-C (the "Form S-18")).

10.5              Amendment No. 1 to Lease Agreement between the Company and Crow Plymouth Land Limited
                  Partnership, dated January 5, 1989 (Incorporated by reference
                  to Exhibit 10(e) to the Form S-18).

10.6              Amendment No. 2 to Lease Agreement between the Company and Crow Plymouth Land Limited
                  Partnership, dated January 1989 (Incorporated by reference to
                  Exhibit 10(f) to the Form S-18).

10.7              Amendment No. 3 to Lease Agreement between the Company and Crow Plymouth Land Limited
                  Partnership, dated June 14, 1989 (Incorporated by reference to
                  Exhibit 10(g) to the Form S-18).

10.8              Amendment No. 4 to Lease Agreement between the Company and Plymouth Business Center Limited
                  Partnership, dated February 10, 1992 (Incorporated by reference to Exhibit 10.8 to the 1996
                  Form 10-K).

10.9*             O.E.M. Supply Contract dated September 24, 1990, with CarboMedics, Inc. (confidential
                  treatment granted) (Incorporated by reference to Exhibit 10.10 to the 1996 Form 10-K).

10.10*            License Agreement dated September 24, 1990, with CarboMedics, Inc. (confidential treatment
                  granted) (Incorporated by reference to Exhibit 10.11 to the 1996 Form 10-K).

10.11**           Employment Agreement between the Company and Michael D. Dale dated September 18, 2002
                  (Incorporated by reference to Exhibit 10.12 to the Company's Form 10-K for the year ended
                  2002 (the "2002 Form 10-K")).

10.12             Helix BioCore, Inc. Self-Insurance Trust Agreement dated February 28, 1991 (Incorporated by
                  reference to Exhibit 10.13 to the 1996 Form 10-K).

10.13*            Amendment 1 to License Agreement dated December 16, 1993, with CarboMedics, Inc.
                  (confidential treatment granted) (Incorporated by reference to Exhibit 10.17 to the 1993
                  Form 10-K).

10.14*            Amendment 4 to O.E.M. Supply Contract dated December 16, 1993, with CarboMedics, Inc.
                  (confidential treatment granted) (Incorporated by reference to Exhibit 10.18 to the 1993
                  Form 10-K).

10.15*            Amendment 5 to O.E.M. Supply Contract dated September 1, 1994, with CarboMedics, Inc.
                  (confidential treatment granted) (Incorporated by reference to Exhibit 10.19 to the 1994
                  Form 10-K).

10.16             Letter Agreement between the Company and Sulzer Carbomedics, Inc., dated June 27, 2002
                  (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
                  June 20, 2002).

10.17             Line of Credit dated August 11, 1994, between the Company and First Bank National
                  Association (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the
                  quarter ended September 30, 1994).

10.18             Form of International Distributor Agreement (Incorporated by reference to Exhibit 10.22 to
                  the 1994 Form 10-K).

10.19**           Form of Agreement between ATS Medical, Inc. and each officer dated June 30, 1995,
                  concerning severance benefits upon a change in control (Incorporated by reference to
                  Exhibit 10.23 to the
</TABLE>

                                       32
<PAGE>

<TABLE>
<S>               <C>
                  Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995
                  Form 10-K")).

10.20**           ATS Medical, Inc. Change in Control Severance Pay Plan  (Incorporated by reference to
                  Exhibit 10.24 to the 1995 Form 10-K).

10.21             Amendment No. 5 to Lease Agreement between the Company and St. Paul Properties, Inc., dated
                  May 30, 1996 (Incorporated by reference to Exhibit 10.22 to the 1996 Form 10-K).

10.22**           Letter Agreement dated November 1, 2002, extending the agreement dated September 11, 2001
                  between the Company and Manuel A. Villafana (Incorporated by reference to Exhibit 10.23 to
                  the 2002 Form 10-K).

10.23             Amendment No. 6 to Lease Agreement between the Company and St. Paul Properties, Inc., dated
                  November 25, 1997 (Incorporated by reference to Exhibit 10.23 to the 1997 Form 10-K).

10.24             1998 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 4 to the Company's
                  Registration Statement on Form S-8, File No. 333-57527).

10.25**           1998 Management Incentive Compensation Plan (Incorporated by reference to Exhibit 10.25 to
                  the 1998 Form 10-K).

10.26*            Carbon Agreement by and between Sulzer Carbomedics, Inc. and ATS Medical, Inc., dated
                  December 29, 1999 (confidential treatment granted) (Incorporated by reference to Exhibit
                  99.1 to the Current Report on Form 8-K filed on January 13, 2000 (the "January 2000 Form
                  8-K").

10.27*            Amendment 7 to OEM Supply Contract by and between Sulzer Carbomedics, Inc. and ATS Medical,
                  Inc., dated December 29, 1999 (confidential treatment granted) (Incorporated by reference
                  to Exhibit 99.2 to the January 2000 Form 8-K).

10.28*            Amendment 2 to License Agreement by and between Sulzer Carbomedics, Inc. and ATS Medical,
                  Inc., dated December 29, 1999 (confidential treatment granted) (Incorporated by reference
                  to Exhibit 99.3 to the January 2000 Form 8-K).

10.29             Amendment No. 7 to Lease Agreement between the Company and St. Paul Properties, Inc., dated
                  May 18, 2000 (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the
                  quarter ended  June 30, 2000).

10.30             Lease Agreement between the Company and St. Paul Properties, Inc., dated April 29, 2000
                  (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
                  June 30, 2000).

10.31             Amendment No. 8 to Lease Agreement between the Company and St. Paul Properties, Inc., dated
                  December 14, 2000 (Incorporated by reference to Exhibit 10.32 to the Company's Annual
                  Report on Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K")).

10.32*            Amendment 8 to OEM Supply Contract by and between Sulzer Carbomedics, Inc. and ATS Medical,
                  Inc., dated November 3, 2000 (confidential treatment granted) (Incorporated by reference to
                  Exhibit 10.33 to the 2000 Form 10-K).

10.33             Form of U.S. Distribution Agreement (incorporated by reference to Exhibit 10.34 to the 2002
                  Form 10-K).

10.34             Amendment No. 9 to Lease Agreement between the Company and St. Paul Properties, Inc., dated
                  September 8, 2003 (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for
                  the quarter ended September 30, 2003).
</TABLE>

                                       33
<PAGE>

<TABLE>
<S>               <C>
10.35             Form of Employee Stock Option Agreement under the company's 2000 Stock Incentive Plan
                  (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report of Form 10-Q
                  for the quarter ended September 30, 2004).

10.36             Form of Non-Qualified Stock Option Agreement under the Company's 2000 Stock Incentive Plan
                  (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
                  for the quarter ended September 30, 2004).

10.37             Form of Non-Plan Non-Qualified Stock Option Agreement (Incorporated by reference to Exhibit
                  10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
                  2004).

10.38*            Development and License Agreement dated as of April 26, 2004 between the Company and
                  ErySave AB (Incorporated by reference to Exhibit 10.1 to the company's Quarterly Report on
                  Form 10-Q for the quarter ended June 30, 2004).

10.39             Credit Agreement between Silicon Valley Bank and the Company, dated July 28, 2004
                  (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
                  for the quarter ended September 30, 2004).

10.40             Amendment No. 10 to Lease Agreement between the Company and St. Paul Properties, Inc. dated
                  as of October 1, 2004.

10.41*            Agent Agreement dated November 9, 2004 between the Company and CryoCath Technologies, Inc.

10.42*            Distribution Agreement dated November 9, 2004 between the Company and CryoCath
                  Technologies, Inc.

10.43             Letter Agreement between the Company and Centerpulse USA Holding Co. dated July 9, 2003
                  (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on September 26,
                  2003).

10.44**           2004 Management Incentive Compensation Plan (Incorporated by reference to Exhibit 10.36
                  to the Company's Form 10-K for the year ended December 31, 2003).

21                List of Subsidiaries (Incorporated by reference to Exhibit 21 to the Company's Form 10-K
                  for the year ended 2002).

23                Consent of Ernst & Young LLP.

31.1              Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
                  the Securities Exchange Act, as amended.

31.2              Certification of Chief financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
                  the Securities Exchange Act, as amended.

32.1              Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2              Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</TABLE>

* Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of these exhibits have been deleted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.

** Represents a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 15 of Form 10-K.

                                       34
<PAGE>

                                   SIGNATURES

            Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

Dated:  March 14, 2005                      ATS MEDICAL, INC.

                                            By  /s/ Michael D. Dale
                                                ------------------------
                                            Michael D. Dale
                                            Chief Executive Officer

            Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 11, 2005.

SIGNATURE                                   TITLE

                                    Chief Executive Officer,
                                    President and Chairman of the
/s/ Michael D. Dale                 Board (principal executive
------------------------------      officer)
Michael D. Dale

                                    Chief Financial Officer
                                    (principal financial and
/s/ John R. Judd                    accounting officer)
------------------------------
John R. Judd

/s/ David L. Boehnen                Director
------------------------------
David L. Boehnen

/s/ John D. Buck                    Director
------------------------------
John D. Buck

/s/ Eric W. Sivertson               Director
------------------------------
Eric W. Sivertson

/s/ Robert E. Munzenrider           Director
------------------------------
Robert E. Munzenrider

                                       35
<PAGE>

                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                                    DESCRIPTION
<S>               <C>
3.1               Restated Articles of Incorporation, as amended to date (Incorporated by reference to
                  Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31,
                  1993 (the "1993 Form 10-K")).

3.2               Bylaws of the Company, as amended to date (Incorporated by reference to Exhibit 3.2 to the
                  Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form
                  10-K")).

4.1               Specimen certificate for shares of Common Stock of the Company (Incorporated by reference
                  to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended December 31,
                  1997 (the "1997 Form 10-K")).

10.1**            1987 Stock Option and Stock Award Plan, as restated and amended to date (Incorporated by
                  reference to  Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
                  ended June 30, 1997).

10.2**            ATS Medical Inc. 2000 Stock Incentive Plan (Incorporated by reference to the appendix to
                  the Company's Definitive Proxy Statement filed on March 28, 2003).

10.3**            Agreement between the Company and Manuel A. Villafana dated September 11, 2001 (Incorporated
                  by reference to Exhibit 10.3 to the Company's Form 10-K for the year ended December 31, 2001
                  (the "2001 Form 10-K")).

10.4              Lease Agreement between the Company and Crow Plymouth Land Limited Partnership dated
                  December 22, 1987 (Incorporated by reference to Exhibit 10(d) to the Company's Registration
                  Statement on Form S-18, File No. 33-34785-C (the "Form S-18")).

10.5              Amendment No. 1 to Lease Agreement between the Company and Crow Plymouth Land Limited
                  Partnership, dated January 5, 1989 (Incorporated by reference to Exhibit 10(e) to the Form
                  S-18).

10.6              Amendment No. 2 to Lease Agreement between the Company and Crow Plymouth Land Limited
                  Partnership, dated January 1989 (Incorporated by reference to Exhibit 10(f) to the Form
                  S-18).

10.7              Amendment No. 3 to Lease Agreement between the Company and Crow Plymouth Land Limited
                  Partnership, dated June 14, 1989 (Incorporated by reference to Exhibit 10(g) to the Form
                  S-18).

10.8              Amendment No. 4 to Lease Agreement between the Company and Plymouth Business Center Limited
                  Partnership, dated February 10, 1992 (Incorporated by reference to Exhibit 10.8 to the 1996
                  Form 10-K).

10.9*             O.E.M. Supply Contract dated September 24, 1990, with CarboMedics, Inc. (confidential
                  treatment granted) (Incorporated by reference to Exhibit 10.10 to the 1996 Form 10-K).

10.10*            License Agreement dated September 24, 1990, with CarboMedics, Inc. (confidential treatment
                  granted) (Incorporated by reference to Exhibit 10.11 to the 1996 Form 10-K).

10.11**           Employment Agreement between the Company and Michael D. Dale dated September 18, 2002
                  (Incorporated by reference to Exhibit 10.12 to the Company's Form 10-K for the year ended
                  2002 (the "2002 Form 10-K")).

10.12             Helix BioCore, Inc. Self-Insurance Trust Agreement dated February 28, 1991 (Incorporated by
                  reference to Exhibit 10.13 to the 1996 Form 10-K).
</TABLE>

                                       36
<PAGE>

<TABLE>
<S>               <C>
10.13*            Amendment 1 to License Agreement dated December 16, 1993, with CarboMedics, Inc.
                  (confidential treatment granted) (Incorporated by reference to Exhibit 10.17 to the 1993
                  Form 10-K).

10.14*            Amendment 4 to O.E.M. Supply Contract dated December 16, 1993, with CarboMedics, Inc.
                  (confidential treatment granted) (Incorporated by reference to Exhibit 10.18 to the 1993
                  Form 10-K).

10.15*            Amendment 5 to O.E.M. Supply Contract dated September 1, 1994, with CarboMedics, Inc.
                  (confidential treatment granted) (Incorporated by reference to Exhibit 10.19 to the 1994
                  Form 10-K).

10.16             Letter Agreement between the Company and Sulzer Carbomedics, Inc., dated June 27, 2002
                  (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
                  June 20, 2002).

10.17             Line of Credit dated August 11, 1994, between the Company and First Bank National
                  Association (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the
                  quarter ended September 30, 1994).

10.18             Form of International Distributor Agreement (Incorporated by reference to Exhibit 10.22 to
                  the 1994 Form 10-K).

10.19**           Form of Agreement between ATS Medical, Inc. and each officer dated June 30, 1995,
                  concerning severance benefits upon a change in control (Incorporated by reference to
                  Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31,
                  1995 (the "1995 Form 10-K")).

10.20**           ATS Medical, Inc. Change in Control Severance Pay Plan  (Incorporated by reference to
                  Exhibit 10.24 to the 1995 Form 10-K).

10.21             Amendment No. 5 to Lease Agreement between the Company and St. Paul Properties, Inc., dated
                  May 30, 1996 (Incorporated by reference to Exhibit 10.22 to the 1996 Form 10-K).

10.22**           Letter Agreement dated November 1, 2002, extending the agreement dated September 11, 2001
                  between the Company and Manuel A. Villafana (Incorporated by reference to Exhibit 10.23 to
                  the 2002 Form 10-K).

10.23             Amendment No. 6 to Lease Agreement between the Company and St. Paul Properties, Inc., dated
                  November 25, 1997 (Incorporated by reference to Exhibit 10.23 to the 1997 Form 10-K).

10.24             1998 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 4 to the Company's
                  Registration Statement on Form S-8, File No. 333-57527).

10.25**           1998 Management Incentive Compensation Plan (Incorporated by reference to Exhibit 10.25 to
                  the 1998 Form 10-K).

10.26*            Carbon Agreement by and between Sulzer Carbomedics, Inc. and ATS Medical, Inc., dated
                  December 29, 1999 (confidential treatment granted) (Incorporated by reference to Exhibit
                  99.1 to the Current Report on Form 8-K filed on January 13, 2000 (the "January 2000 Form
                  8-K").

10.27*            Amendment 7 to OEM Supply Contract by and between Sulzer Carbomedics, Inc. and ATS Medical,
                  Inc., dated December 29, 1999 (confidential treatment granted) (Incorporated by reference
                  to Exhibit 99.2 to the January 2000 Form 8-K).
</TABLE>

                                       37
<PAGE>

<TABLE>
<S>               <C>
10.28*            Amendment 2 to License Agreement by and between Sulzer Carbomedics, Inc. and ATS Medical,
                  Inc., dated December 29, 1999 (confidential treatment granted) (Incorporated by reference
                  to Exhibit 99.3 to the January 2000 Form 8-K).

10.29             Amendment No. 7 to Lease Agreement between the Company and St. Paul Properties, Inc., dated
                  May 18, 2000 (Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the
                  quarter ended  June 30, 2000).

10.30             Lease Agreement between the Company and St. Paul Properties, Inc., dated April 29, 2000
                  (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
                  June 30, 2000).

10.31             Amendment No. 8 to Lease Agreement between the Company and St. Paul Properties, Inc., dated
                  December 14, 2000 (Incorporated by reference to Exhibit 10.32 to the Company's Annual
                  Report on Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K")).

10.32*            Amendment 8 to OEM Supply Contract by and between Sulzer Carbomedics, Inc. and ATS Medical,
                  Inc., dated November 3, 2000 (confidential treatment granted) (Incorporated by reference to
                  Exhibit 10.33 to the 2000 Form 10-K).

10.33             Form of U.S. Distribution Agreement (incorporated by reference to Exhibit 10.34 to the 2002
                  Form 10-K).

10.34             Amendment No. 9 to Lease Agreement between the Company and St. Paul Properties, Inc., dated
                  September 8, 2003 (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for
                  the quarter ended September 30, 2003).

10.35             Form of Employee Stock Option Agreement under the company's 2000 Stock Incentive Plan
                  (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report of Form 10-Q
                  for the quarter ended September 30, 2004).

10.36             Form of Non-Qualified Stock Option Agreement under the Company's 2000 Stock Incentive Plan
                  (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
                  for the quarter ended September 30, 2004).

10.37             Form of Non-Plan Non-Qualified Stock Option Agreement (Incorporated by reference to Exhibit
                  10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
                  2004).

10.38*            Development and License Agreement dated as of April 26, 2004 between the Company and
                  ErySave AB (Incorporated by reference to Exhibit 10.1 to the company's Quarterly Report on
                  Form 10-Q for the quarter ended June 30, 2004).

10.39             Credit Agreement between Silicon Valley Bank and the Company, dated July 28, 2004
                  (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
                  for the quarter ended September 30, 2004).

10.40             Amendment No. 10 to Lease Agreement between the Company and St. Paul Properties, Inc. dated
                  as of October 1, 2004.

10.41*            Agent Agreement dated November 9, 2004 between the Company and CryoCath Technologies, Inc.

10.42*            Distribution Agreement dated November 9, 2004 between the Company and CryoCath
                  Technologies, Inc.
</TABLE>

                                       38
<PAGE>

<TABLE>
<S>               <C>
10.43             Letter Agreement between the company and Centerpulse USA Holding co. dated July 9, 2003
                  (Incorporated by reference to Exhibit 10.1 to the company's Form 8-K filed on September 26,
                  2003).

10.44**           2004 Management Incentive Compensation Plan (Incorporated by reference to Exhibit 10.36
                  to the Company's Form 10-K for the year ended December 31, 2003).

21                List of Subsidiaries (incorporated by reference to Exhibit 21 to the Company's Form 10-K
                  for the year ended 2002).

23                Consent of Ernst & Young LLP.

31.1              Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
                  the Securities Exchange Act, as amended.

31.2              Certification of Chief financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
                  the Securities Exchange Act, as amended.

32.1              Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2              Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</TABLE>

* Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of these exhibits have been deleted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.

** Represents a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 15 of Form 10-K.

                                       39
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
ATS Medical, Inc.

We have audited the accompanying consolidated balance sheets of ATS Medical,
Inc. as of December 31, 2004 and 2003, 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, 2004. Our audits also included the
financial statement schedule presented at Item 15. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free from 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.
at December 31, 2004 and 2003, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

                                                        /s/Ernst & Young LLP

Minneapolis, Minnesota
February 14, 2005

                                      F-1
<PAGE>

                                ATS Medical, Inc.

                           Consolidated Balance Sheets
                        (In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                                                        DECEMBER 31
                                                                    2004               2003
                                                                  --------           --------
<S>                                                               <C>                <C>
ASSETS
Current assets:
   Cash and cash equivalents                                      $  8,302           $  6,472
   Short-term investments                                            7,692              2,003
                                                                  --------           --------
                                                                    15,994              8,475
   Accounts receivable, less allowance of $388 in 2004
     and $270 in 2003                                                7,893              4,939
   Inventories, net                                                 24,303             20,377
   Prepaid expenses                                                  1,053                508
                                                                  --------           --------
Total current assets                                                49,243             34,299

Leasehold improvements, furniture, and equipment, net                7,650              5,895

Inventories                                                          3,000             17,000

Intangible assets                                                   18,720             18,500

Other assets                                                           438                440
                                                                  --------           --------
Total assets                                                      $ 79,051           $ 76,134
                                                                  ========           ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                               $  4,049           $    989
   Due to related party                                                217                217
   Accrued reorganization charges                                        -                  9
   Accrued compensation                                              1,797              1,156
   Accrued distributor liabilities                                     527                475
   Other accrued liabilities                                           430                178
   Current maturities of note payable                                  764                  -
                                                                  --------           --------
Total current liabilities                                            7,784              3,024

Due to related party                                                    90                307
Note payable                                                         1,736                  -

Shareholders' equity:
   Common Stock, $0.01 par value:
     Authorized shares - 40,000,000
     Issued and outstanding shares - 30,889,637 in 2004 and
       26,778,557 in 2003                                              309                268
   Additional paid-in capital                                      136,562            123,412
   Accumulated deficit                                             (67,501)           (50,858)
   Accumulated other comprehensive income                               95                 51
   Deferred compensation                                               (24)               (70)
                                                                  --------           --------
Total shareholders' equity                                          69,441             72,803
                                                                  --------           --------
Total liabilities and shareholders' equity                        $ 79,051           $ 76,134
                                                                  ========           ========
</TABLE>

See accompanying notes.

                                      F-2

<PAGE>

                                ATS Medical, Inc.

                      Consolidated Statements of Operations
                    (In Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31
                                                          2004               2003              2002
                                                        --------           --------          --------
<S>                                                     <C>                <C>               <C>
Net sales                                               $ 28,015           $ 18,484          $ 13,301
Cost of goods sold                                        21,227             17,632            12,307
                                                        --------           --------          --------
Gross profit                                               6,788                852               994

Operating expenses:
   Sales and marketing                                    16,520             10,180             3,312
   Research and development                                1,011              1,764             2,425
   General and administrative                              5,954              4,350             3,114
   Impairment of technology license                            -                  -             8,100
   Reorganization expenses                                     -                  -             1,130
   Gain on extinguishment of debt                              -             (2,575)                -
   Distributor termination expenses                            -                  -               821
                                                        --------           --------          --------
Total operating expenses                                  23,485             13,719            18,902
                                                        --------           --------          --------
Operating loss                                           (16,697)           (12,867)          (17,908)

Interest income                                              156                 81               176
Interest expense                                            (102)              (506)             (480)
                                                        --------           --------          --------
Net loss                                                $(16,643)          $(13,292)         $(18,212)
                                                        ========           ========          ========

Net loss per share:
   Basic and diluted                                    $  (0.58)          $  (0.55)         $  (0.82)

Weighted average number of shares outstanding:
   Basic and diluted                                      28,856             24,076            22,259
</TABLE>

See accompanying notes.

                                      F-3

<PAGE>

                                ATS Medical, Inc.

            Consolidated Statement of Changes in Shareholders' Equity
                                 (In Thousands)

<TABLE>
<CAPTION>

                                                                    ACCUMULATED
                                   COMMON STOCK        ADDITIONAL      OTHER
                                ------------------       PAID-IN   COMPREHENSIVE     DEFERRED     ACCUMULATED
                                SHARES      AMOUNT       CAPITAL   INCOME (LOSS)   COMPENSATION     DEFICIT        TOTAL
                                ------      ------     ----------  --------------  ------------   -----------    --------
<S>                             <C>         <C>        <C>         <C>             <C>            <C>            <C>
Balance at December 31, 2001    22,204      $  222     $  111,355       $  -          $    -       $ (19,354)    $ 92,223
Common Stock issued under
   the Employee Stock
   Purchase Plan                   102           1            119          -               -               -          120
Change in foreign currency
   translation                       -           -              -         (4)              -               -           (4)
Net loss for the year                -           -              -          -               -         (18,212)     (18,212)
                                                                                                                 --------
Comprehensive loss                                                                                                (18,216)
                                ------      ------     ----------       ----          ------       ---------     --------
Balance at December 31, 2002    22,306         223        111,474         (4)              -         (37,566)      74,127
Common Stock issued under
   the Employee Stock
   Purchase Plan                    37           1             55                          -                           56
Stock options exercised             36           -            111          -               -               -          111
Common stock issued in
   private placement,
   net of offering costs         4,400          44         11,381          -               -               -       11,425
Stock option issued for
   services                          -           -            218          -               -               -          218
Deferred compensation                                                                                      -
   related to stock options          -           -            173          -            (173)                           -
Amortization of deferred                                                                                   -
   compensation                      -           -              -          -             103                          103
Change in foreign currency
   translation                       -           -              -         55               -               -           55
Net loss for the year                -           -              -          -               -         (13,292)     (13,292)
                                                                                                                 --------
Comprehensive loss                                                                                                (13,237)
                                ------      ------     ----------       ----          ------       ---------     --------
Balance at December 31, 2003    26,779         268        123,412         51             (70)        (50,858)      72,803
Common Stock issued under
   the Employee Stock
   Purchase Plan                    90           1            297          -               -               -          298
Stock options exercised            334           3            458          -               -               -          461
Common stock issued in
   private placement, net
   of offering costs             3,687          37         12,381          -               -               -       12,418
Deferred compensation
   related to stock options          -           -             14          -             (14)              -            -
Amortization of deferred
   compensation                      -           -              -          -              60               -           60
Change in foreign currency
   translation                       -           -              -         44               -               -           44
Net loss for the year                -           -              -          -               -         (16,643)     (16,643)
                                                                                                                 --------
Comprehensive loss                                                                                                (16,658)
                                ------      ------     ----------       ----          ------       ---------     --------
Balance at December 31, 2004    30,890      $  309     $  136,562       $ 95          $  (24)      $ (67,501)    $ 69,441
                                ======      ======     ==========       ====          ======       =========     ========
</TABLE>

See accompanying notes.

                                      F-4

<PAGE>

                                ATS Medical, Inc.

                      Consolidated Statements of Cash Flows
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31
                                                                   2004               2003              2002
                                                                 --------           --------          --------
<S>                                                              <C>                <C>               <C>
OPERATING ACTIVITIES
Net loss                                                         $(16,643)          $(13,292)         $(18,212)
Adjustments to reconcile net loss to net
   cash used in operating activities:
     Depreciation                                                   1,088                792               713
     Loss on disposal of equipment                                     17                  4                35
     Non-cash interest expense                                         12                320               480
     Compensation expense related to stock options                     60                321                 -
     Impairment of technology license                                   -                  -             8,100
     Gain on extinguishment of debt                                     -             (2,575)                -
     Lower of cost or market adjustment                               819              4,400             2,200
     Changes in operating assets and liabilities:
       Accounts receivable                                         (2,954)            (1,382)              526
       Inventories                                                  9,255             11,099             2,273
       Accounts payable and accrued expenses                        3,779                (42)              800
       Other                                                         (543)              (125)              186
                                                                 --------           --------          --------
Net cash used in operating activities                              (5,110)              (480)           (2,899)

INVESTING ACTIVITIES
Purchases of short-term investments                                (8,688)            (5,231)           (5,663)
Maturities of short-term investments                                2,999              5,729            10,860
Payments for technology license                                         -            (12,000)                -
Payments for other intangibles                                       (232)                 -                 -
Purchases of leasehold improvements, furniture, and
   equipment                                                       (2,860)              (665)             (186)
Proceeds on disposal of equipment                                       -                  -               165
                                                                 --------           --------          --------
Net cash provided by (used in) investing activities                (8,781)           (12,167)            5,176

FINANCING ACTIVITIES
Advances on note payable                                            2,500                  -                 -
Net proceeds from issuance of common stock                         13,177             11,592               120
                                                                 --------           --------          --------
Net cash provided by financing activities                          15,677             11,592               120

Effect of exchange rate changes                                        44                 55                (4)
                                                                 --------           --------          --------
(Decrease) increase in cash and cash equivalents                    1,830             (1,000)            2,393
Cash and cash equivalents at beginning of year                      6,472              7,472             5,079
                                                                 --------           --------          --------
Cash and cash equivalents at end of year                         $  8,302           $  6,472          $  7,472
                                                                 ========           ========          ========
</TABLE>

See accompanying notes.

                                      F-5

<PAGE>

                                ATS Medical, Inc.

                   Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS ACTIVITY

ATS Medical, Inc. (the Company) develops, manufactures, and markets medical
devices. The Company's interest lies with devices used by cardiovascular
surgeons in the cardiac surgery operating theater. Currently, the Company
participates in the mechanical bileaflet portion of the replacement heart valve
market and the market for the surgical treatment of atrial fibrillation.

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 cost which
approximates fair value.

ACCOUNTS RECEIVABLE

Credit is extended based on evaluation of a customer's financial condition and,
generally, collateral is not required. Accounts receivable are due within 30-180
days and are stated at amounts due from customers net of an allowance for
doubtful accounts. Accounts receivable outstanding longer than the contractual
payment terms are considered past due. The Company determines its allowance by
considering a number of factors, including the length of time trade accounts
receivable are past due, the Company's previous loss history, the customer's
current ability to pay its obligation to the Company, and the condition of the
general economy and the industry as a whole. The Company writes off accounts
receivable when they become uncollectible, and payments subsequently received on
such receivables are credited to the allowance for doubtful accounts.

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 $0.2 million as
of December 31, 2004 and 2003. The Company has written down a portion of its
inventories to provide for the lower of cost or market value expected to be
realized on its sales in less developed countries. The write-down was $0.8 in
2004, $4.4 million in 2003, and $2.4 million in 2002. These write-downs were
included in cost of goods sold in the statement of operations.

                                      F-6

<PAGE>

                                ATS Medical, Inc.

                   Notes to Consolidated Financial Statements

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                           2004             2003
                         --------         --------
<S>                      <C>              <C>
Raw materials            $  7,780         $ 12,033
Work-in-process             7,258            9,615
Finished goods             12,465           15,929
Obsolescence reserve         (200)            (200)
                         --------         --------
                         $ 27,303         $ 37,377
                         ========         ========
</TABLE>

At December 31, 2004 and 2003, the Company's inventory is in excess of its
current requirements based on the historical and anticipated level of sales.
Management believes that excess quantities will be utilized over several years.
The Company has classified $3.0 million and $17.0 million of inventories as
non-current assets at December 31, 2004 and 2003, 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, 2004 and 2003, the deposits within the trust amounted to
$0.4 million.

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>
<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 exclusive, worldwide right and license to use Sulzer
Carbomedics, Inc. (Carbomedics) pyrolytic carbon technology (see Note 4). The
technology license is included in intangible assets and is tested annually for
impairment in accordance with Statement of Financial Accounting Standard 142
(SFAS 142) "Goodwill and Other Intangible Assets".

INDEFINITE-LIVED INTANGIBLE ASSETS

Indefinite-lived intangible assets are carried at cost. Statement of Financial
Accounting Standard 142 (SFAS 142) "Goodwill and Other Intangible Assets"
prohibits the amortization of intangible assets with indefinite useful lives.
SFAS 142 requires that these assets be reviewed for impairment at least
annually. Management reviews indefinite-lived intangible assets for impairment
annually as of the last day of the second quarter, or more frequently if a
change in circumstances or occurrence of events suggests the remaining value may
not be recoverable. The test for impairment requires management to make
estimates about fair-value which are based either on the expected undiscounted
future cash flows or on other measures of value such as the market
capitalization of the Company. If the carrying amount of the assets is greater
than the measures of fair value, impairment is considered to have occurred and a
write-down of the asset is recorded. Management completed the annual impairment
tests in the second quarter of 2004 and determined that its single
indefinite-lived asset, the technology license, was not impaired.

                                      F-7

<PAGE>

                                ATS Medical, Inc.

                   Notes to Consolidated Financial Statements

REVENUE RECOGNITION

A significant portion of the Company's revenue in the United States, Canada, and
France is generated from consigned inventory maintained at hospitals or with
field representatives. In these situations, revenue is recognized at the time
that the product has been implanted or used. In all other instances, revenue is
recognized at the time product is shipped. Certain independent distributors in
select international markets receive rebates against invoiced sales amounts. In
these situations, the Company accrues for these rebates at the time of the
original sale. These rebates are treated as a reduction of revenue.

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.

ADVERTISING AND PROMOTIONAL COSTS

Advertising and promotional costs are charged to operations in the year
incurred. Advertising and promotional costs charged to operations during 2004,
2003, and 2002 were $0.1 million each year.

FOREIGN CURRENCY TRANSLATION

The financial statements for operations outside the United States are maintained
in their local currency. All assets and liabilities of the Company's
international subsidiary are translated to United States dollars at year-end
exchange rates, while elements of the statement of operations are translated at
average exchange rates in effect during the year. Translation adjustments
arising from the use of differing exchange rates are included in accumulated
other comprehensive income (loss) in shareholders' equity. Gains and losses on
foreign currency transactions were not significant during 2004, 2003, or 2002.

INCOME TAXES

The Company accounts for income taxes under Statement of Financial Accounting
Standards 109 (SFAS 109) "Accounting for Income Taxes". Deferred taxes are
provided on an asset and liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carry forwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
amounts of assets and liabilities recorded for income tax and financial
reporting purposes. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.

WARRANTIES

The Company adopted Financial Accounting Standards Board Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Indebtedness to Others (FIN 45), during the first quarter of 2003. FIN
45 requires disclosures concerning the Company's obligations under certain
guarantees.

The Company has indemnified the supplier of its valve components against claims
made or damages assessed as the result of the supplier's manufacture of the
valve components. The Company has determined that given its history of no
reports of product failures or liability claims, the likelihood of claims and
subsequent payments is remote, and accordingly, no liabilities in conjunction
with this indemnification have been accrued.

                                      F-8
<PAGE>

                                ATS Medical, Inc.

                   Notes to Consolidated Financial Statements

STOCK-BASED COMPENSATION

The Company has a stock-based employee compensation plan, which is described
more fully in Note 10. 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.

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

<TABLE>
<CAPTION>
                                                          2004             2003              2002
                                                       --------          --------         --------
<S>                                                    <C>               <C>              <C>
Net loss as reported                                   $(16,643)         $(13,292)        $(18,212)
Deduct total stock-based employee compensation
  expense determined under fair value-based
  method for all awards                                  (2,350)           (1,357)          (1,149)
                                                       --------          --------         --------
Pro forma net loss                                     $(18,993)         $(14,649)        $(19,361)
                                                       ========          ========         ========

Net loss per share:
  Basic and diluted - as reported                      $  (0.58)         $  (0.55)        $  (0.82)
  Basic and diluted - pro forma                        $  (0.66)         $  (0.61)        $  (0.87)
</TABLE>

Pro forma information regarding net loss and net loss 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:

<TABLE>
<CAPTION>
Assumptions used:                2004        2003        2002
----------------------------    -------     -------     -------
<S>                             <C>         <C>         <C>
Volatility                       0.89        0.93        0.95
Risk-free interest rate           4.0%        3.7%        3.7%
Expected life                   7 YEARS     8 years     9 years
Dividend yield                      0%          0%          0%
</TABLE>

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

NET LOSS PER SHARE

Basic net loss per share is computed by dividing net loss by the weighted
average shares outstanding and excludes any dilutive effects of options,
warrants, and convertible securities. For all periods presented, diluted net
loss per share is equal to basic net loss per share because the effect of
including potential common shares for stock options outstanding would have been
anti-dilutive. Had net income been achieved, approximately 1,838,460 of common
stock equivalents would have been included in the computation of diluted net
income per share for the year ended December 31, 2004.

                                      F-9

<PAGE>

                                ATS Medical, Inc.

                   Notes to Consolidated Financial Statements

2. SHORT-TERM INVESTMENTS

As of December 31, 2004 and 2003, the cost of short-term investments held by the
Company of $7.7 million and $2.0 million, respectively, which have maturity
dates of one year or less, approximated their fair value and consist of the
following ( in thousands):

<TABLE>
<CAPTION>
                                  2004             2003
                                -------          -------
<S>                             <C>              <C>
Commercial Paper                $ 3,065          $ 2,003
U.S. Agency                       3,566                -
Corporate Bonds                   1,061                -
                                -------          -------
                                $ 7,692          $ 2,003
                                =======          =======
</TABLE>

3. LEASEHOLD IMPROVEMENTS, FURNITURE, AND EQUIPMENT, NET

Leasehold improvements, furniture, and equipment consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                     2004              2003
                                    -------          -------
<S>                                 <C>              <C>
Furniture and fixtures              $   577          $   372
Equipment                             6,601            2,918
Leasehold improvements                3,294            3,227
Construction in progress              2,080            3,309
                                     12,552            9,826
Less accumulated depreciation         4,902            3,931
                                    -------          -------
                                    $ 7,650          $ 5,895
                                    =======          =======
</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 SFAS
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 SFAS 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 volume 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 noncash
charge representing an impairment of this asset needed to be recognized in the
amount of $8.1 million in the second quarter of 2002. 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 at the time of the analysis. There was no additional impairment to the
technology license during 2004 and 2003.

                                      F-10

<PAGE>

                                ATS Medical, Inc.

                   Notes to Consolidated Financial Statements

5. PRIVATE PLACEMENT

In August 2003, the Company completed a private placement of common stock
selling 4.4 million shares at $2.80 a share for gross proceeds of $12.3 million.
The proceeds received were used to pay Centerpulse in conjunction with the
agreement reached in July 2003 for the remaining obligations in conjunction with
the technology license purchase (see Note 8).

In June 2004, the Company completed a private placement of common stock selling
3.7 million shares at $3.55 a share for gross proceeds of $13.1 million. The
proceeds were used for general working capital purposes.

6. ACQUISITION OF LICENSING AGREEMENT

On April 26, 2004, the Company signed an exclusive development and licensing
agreement with ErySave AB and made an initial milestone payment of approximately
$0.2 million. The agreement grants the Company worldwide rights for ErySave's
filtration technology for cardiac surgery procedures. Payments under the
agreement, based upon the achievement of certain development milestones, could
total approximately $1.3 million.

On November 9, 2004, the Company signed an exclusive agency agreement and a
distribution agreement with CryoCath Technologies, Inc. The agreement grants the
Company co-promotion rights in the United States as well as exclusive
distribution rights in the rest of the world including Europe and Asia for
CryoCath's cryotherapy products for the ablation of cardiac arrhythmias.

7. LONG-TERM DEBT

On July 28, 2004, the Company entered into an agreement with Silicon Valley Bank
to establish a secured revolving credit facility for $8.5 million. Under terms
of the agreement, the Company received a $2.5 million three-year term loan as
well as a two-year $6.0 million line of credit. Borrowings available under the
line of credit are based on certain receivable and inventory balances. At
December 31, 2004, the Company is eligible to borrow $4.1 million on the line of
credit. The term loan carries an interest rate of prime plus 1.0% with a minimum
of 5.25%. At December 31, 2004, the actual rate was 6.75%. The line of credit
carries an interest rate of prime plus 1.5% with a minimum rate of 5.75%. The
credit facility contains two financial covenants, a leverage ratio and a
required minimum tangible net worth.

As of December 31, 2004, the Company had drawn all $2.5 million of the
three-year term loan. The term loan carries 36 equal installment payments
beginning January 30, 2005. The future maturities of the long-term debt are $0.8
million in 2005, 2006, and 2007. The Company has not drawn any advances and
accordingly has no outstanding balances on the line of credit at December 31,
2004.

8. EXTINGUISHMENT OF DEBT

In July 2003, the Company entered into an agreement with Centerpulse USA
Holdings, Co. (Centerpulse) under which the Company would pay Centerpulse $12
million in exchange for cancellation of all of the Company's payment obligations
under its carbon technology agreement with Carbomedics Inc. and provide for
Company ownership of the technology license. Prior to this agreement, the
Company was obligated to pay Centerpulse an aggregate of approximately $28
million under the technology agreement over a period of approximately four
years. The obligations per the agreement were accrued as specific criteria were
met. Of the total $28 million, there were two uncompleted milestones totaling
$12 million not accrued at the time of the July 2003 agreement. As the $12
million payment made under the agreement was exceeded by the Company's accrued
liability by approximately $2.6 million, the Company recognized a gain in the
quarter ended September 30, 2003.

                                      F-11
<PAGE>

                                ATS Medical, Inc.

                   Notes to Consolidated Financial Statements

9. 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.

<TABLE>
<CAPTION>
FISCAL YEAR                    NUMBER OF SHARES                  PRICE RANGE
-----------                    ----------------                ----------------
<S>                            <C>                             <C>
   2004                             90,203                     $ 2.93 - $  4.34
   2003                             36,762                     $ 0.41 - $  2.72
   2002                            101,980                     $ 0.46 - $  2.21
</TABLE>

10. COMMON STOCK AND STOCK OPTIONS

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 non-employees of the Company. The options may be granted under the
Plans as incentive stock options (ISO) or as non-qualified stock options
(non-ISO).

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

<TABLE>
<CAPTION>
                                                 STOCK OPTIONS OUTSTANDING                  WEIGHTED
                                      SHARES          UNDER THE PLANS                        AVERAGE
                                     RESERVED    -------------------------     NON-PLAN   EXERCISE PRICE
                                     FOR GRANT     ISO            NON-ISO      OPTIONS     PER SHARE
                                     ---------   ---------       ---------    ---------   --------------
<S>                                  <C>         <C>             <C>          <C>         <C>
Balance at December 31, 2001           286,042   1,108,836       1,128,579            -       8.17
  Options granted                     (595,000)    195,000         300,000      325,000       0.45
  Options canceled                     328,221    (545,709)       (430,912)           -       8.30
                                     ---------   ---------       ---------    ---------       ----
Balance at December 31, 2002            19,263     758,127         997,667      325,000       5.07
  Increase in shares reserved for
    grant                            1,000,000           -               -            -          -
    Options granted                   (848,448)    828,448          20,000    2,500,000       2.49
  Options exercised                          -      (5,875)        (30,000)           -       3.11
  Options canceled                     369,059    (285,404)        (99,167)    (100,000)      5.34
                                     ---------   ---------       ---------    ---------       ----
Balance at December 31, 2003           539,874   1,295,296         888,500    2,725,000       3.32
  Options granted                      (75,000)     25,000          50,000      916,000       4.30
  Options exercised                          -     (45,750)       (120,000)    (167,944)      1.38
  Options canceled                     159,751     (34,596)       (358,000)    (487,500)      5.43
                                     ---------   ---------       ---------    ---------       ----
Balance at December 31, 2004           624,625   1,239,950         460,500    2,985,556       3.27
                                     =========   =========       =========    =========
</TABLE>

                                      F-12

<PAGE>

                               ATS Medical, Inc.

                   Notes to Consolidated Financial Statements

<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           821,291      7.89 years      $   0.44           290,125          $ 0.45
  0.79 -    2.51         1,099,565      8.28 years      $   1.77           219,565          $ 1.82
  2.70 -    3.60           841,700      9.11 years      $   3.38           116,700          $ 3.22
  3.64 -    3.80           822,000      8.88 years      $   3.75           235,509          $ 3.74
  3.99 -    8.19           842,450      7.25 years      $   5.45           277,394          $ 6.47
  8.25 -   12.44           259,000      5.07 years      $   9.95           259,000          $ 9.55
----------------         ---------      ----------      --------         ---------          ------
$ 0.35 - $ 12.44         4,686,006      8.10 years      $   3.27         1,398,293          $ 4.33
                         =========                                       =========
</TABLE>

The weighted average fair value of options granted during the years ended
December 31, 2004, 2003, and 2002, was $3.32, $2.05, and $0.37, respectively.

At December 31, 2004, 2003, and 2002, Plan and non-Plan options for 1,398,293,
1,045,851, and 857,145 shares of Common Stock, respectively, were exercisable at
a weighted average price of $4.33, $6.35, and $7.61 per share, respectively.
Options can be exercised by tendering shares previously acquired.

In 2002, 325,000 non-Plan options were granted at an average exercise price of
$0.47. These options vest ratably over three or four year periods. Of the total
non-Plan options granted, 50,000 options were granted to a non-employee in
December 2002, the non-Plan options granted to non-employees, vest over three
years to coincide with the period of service. As such, these options are
revalued at each reporting date using an accelerated expense attribution method
and expensed over the vesting periods. In 2003, 2,500,000 non-Plan options were
granted at an average exercise price of $2.32. These options vest ratably over
two or four year periods. Of the total non-Plan options granted, 120,000 options
were granted to non-employees for prior services rendered.

During 2004, the costs recognized by the Company for deferred compensation and
expense related to these non-Plan options were not significant. During 2003, the
Company recognized $0.2 million of deferred compensation and $0.1 million of
expenses related to these non-Plan, non-employee options.

The Company has 2,325,075 shares of Common Stock reserved for issuance under the
Plans.

11. LEASES

The Company has operating leases for its facilities in Plymouth, Minnesota as
well as France and China. These leases expire at various dates through November
2011. Future minimum lease payments under these agreements are as follows (in
thousands):

<TABLE>
<S>                                <C>
Year ending December 31:
2005                               $    540
2006                                    514
2007                                    522
2008                                    471
2009                                    160
2010 and thereafter                     106
                                   --------
                                   $  2,313
                                   ========
</TABLE>

The rent expense was $0.4 million, $0.3 million, and $0.4 million for 2004, 2003
and 2002, respectively.

                                      F-13

<PAGE>

                               ATS Medical, Inc.

                   Notes to Consolidated Financial Statements

12. INCOME TAXES

At December 31, 2004, the Company had net operating loss carryforwards of
approximately $62 million and credits for increasing research and development
costs of approximately $0.4 million, which are available to offset future
taxable income or reduce taxes payable through 2024. These loss carryforwards
will begin expiring in 2006. The credits continue to expire in 2005 through
2018.

Included as part of the Company's net operating loss carryforwards are
approximately $2.7 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 (in thousands):

<TABLE>
<CAPTION>
                                                              DECEMBER 31
                                                          2004              2003
                                                        --------         --------
<S>                                                     <C>              <C>
Deferred tax assets (liabilities):
  Net operating loss carryforwards                      $ 23,085         $ 15,482
  Research and development credits                           416              647
  Inventory reserves                                       1,062            1,962
  Depreciation                                               701              490
  Technology license amortization                         (2,624)          (1,672)
  Compensation reserves                                      179               90
  Other                                                      313              319
                                                        --------         --------
Net deferred tax assets before valuation allowance        23,132           17,318
Less valuation allowance                                 (23,132)         (17,318)
                                                        --------         --------
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.

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

<TABLE>
<CAPTION>
                                                2004            2003         2002
                                               -----           -----         -----
<S>                                            <C>             <C>           <C>
Tax at statutory rate                          (34.0)%         (34.0)%       (34.0)%
State income taxes                              (4.0)           (4.0)         (4.0)
Impact of changes in valuation allowance        38.0            38.0          38.0
                                               -----           -----         -----
                                                   - %             - %           - %
                                               =====           =====         =====
</TABLE>

13. COMMITMENTS

In June 2002, the Company amended the supply and technology transfer agreements
with Carbomedics. The amendment to the supply agreement suspended component set
purchases until January 2007. This postpones component purchases totaling
approximately $21.5 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.

14. 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

                                      F-14

<PAGE>

                               ATS Medical, Inc.

                   Notes to Consolidated Financial Statements

contribution. The Company recognized expense for contributions to the plan of
$0.1 million in 2004, 2003, and 2002.

15. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

Since its inception, the Company has operated in the single industry segment
developing, manufacturing, and marketing medical devices. 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>
                   2004             2003              2002
                   ----             ----              ----
<S>                <C>              <C>               <C>
North America        33%              28%               19%
Asia Pacific         33               32                42
Europe               28               29                26
Other Markets         6               11                13
</TABLE>

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

<TABLE>
<CAPTION>
                2004             2003              2002
                ----             ----              ----
<S>             <C>              <C>               <C>
Customer A      16.3%            21.4%             31.3%
Customer B        --               --              12.0
</TABLE>

The Company had balances owing by two customers, which represented 24%, 11%, and
34% of its outstanding accounts receivable balances, respectively, at December
31, 2004, 2003, and 2002.

16. ACCRUED DISTRIBUTOR LIABILITIES

The Company recognized $0.8 million of expense in the year ended December 31,
2002 related to the termination of its France and Belgium distributor. The
Company bought back inventory from this distributor, in accordance with the
termination terms as provided for in the distributor agreements. The Company
paid approximately $1.1 million for all costs associated with this termination
in fiscal 2003. The charge represents the margin on valves that were returned to
the Company and the costs associated with restocking such inventories for
resale.

17. 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 recorded an expense of $1.1 million
in conjunction with the reorganization in fiscal 2002, and made payments of $0.6
million in 2002 and $0.4 million in 2003. The reorganization expenses consist of
approximately $1.0 million of severance pay and benefits, and $0.1 million of
rent that was expensed for the vacated portion of the Company's leased facility.
As of December 31, 2004 all reorganization expenses have been paid.

18. RELATED-PARTY TRANSACTION

For the years ended December 31, 2004, 2003, and 2002, the Company had a
consulting agreement with a former director of the Company as of 2004, which
provided for future annual compensation. The agreement provides for compensation
through fiscal 2006. An expense has been recognized as a result of this
agreement in the amount of $0.1 million and $0.2 million during 2003 and 2002.
An expense for a portion

                                      F-15

<PAGE>

                               ATS Medical, Inc.

                   Notes to Consolidated Financial Statements

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 agreement.

19. QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly data for 2004 and 2003 was as follows (in thousands, except loss per
share):

<TABLE>
<CAPTION>
                                                                      QUARTER
                                                 FIRST         SECOND          THIRD         FOURTH
                                                --------      -------         -------        -------
<S>                                             <C>           <C>             <C>            <C>
YEAR ENDED DECEMBER 31, 2004
Net sales                                       $  6,694      $ 7,548         $ 6,547        $ 7,226
Gross profit                                       1,927        2,120           1,369          1,371
Net loss                                          (3,305)      (3,368)         (4,526)        (5,444)

Net basic and diluted loss per share            $  (0.12)     $ (0.12)        $ (0.15)       $ (0.18)

YEAR ENDED DECEMBER 31, 2003
Net sales                                       $  3,965      $ 4,246         $ 4,639        $ 5,634
Gross profit                                       1,217          998           1,384         (2,747)
Net loss                                          (1,539)      (3,103)           (307)        (8,343)

Net basic and diluted loss                      $  (0.07)     $ (0.14)        $ (0.01)       $ (0.31)
</TABLE>

The Company recorded lower of cost or market value adjustments against
inventories of $0.8 million and $4.4 million in the fourth quarter of 2004 and
2003. In the third quarter of 2003, the Company recognized a $2.6 million gain
on the extinguishment of debt.

20. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (Revised 2004), Share-Based Payment, which is a revision
of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement
123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the
approach in Statement 123(R) is similar to the approach described in Statement
123. However, Statement 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative.

Statement 123(R) must be adopted no later than July 1, 2005. Early adoption will
be permitted in periods in which financial statements have not yet been issued.
Management expects to adopt Statement 123(R) on July 1, 2005. Management is
evaluating which methodology to use in adopting Statement 123(R) and has not
determined what effect it will have on its financial statements.

In December, 2004, the Financial Accounting Standards Board issued FASB
Statement No. 151, Inventory Costs. Statement 151 requires abnormal amounts of
inventory costs related to idle facility, freight handling, and wasted material
expenses to be recognized as current period charges. Additionally, SFAS 151
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
standard is effective for fiscal years beginning after June 15, 2005. The
Company believes the adoption of SFAS 151 will not have a material impact on its
consolidated financial results.

                                      F-16