<PAGE>

                                  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, 2003

                           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
incorporation or organization)                             Identification  No.)

          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 stock held by nonaffiliates of the
registrant as of June 30, 2003, was approximately $87,116,511 (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, 2004, was 26,814,089 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
2004 Annual Meeting of Shareholders to be held on May 6, 2004.
<PAGE>
                                ATS MEDICAL, INC.
                                 2003 FORM 10-K

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

ATS Medical, Inc. is a Minnesota corporation founded in June, 1987. We
manufacture and market a mechanical bileaflet heart valve with 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
$400 million in 2002.

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. On September 24, 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.
Various parts of these Agreements have been modified through the years,
especially the Technology and Supply Agreements. 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. In addition, 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, for other heart valve manufacturers. We 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.

FINANCIAL INFORMATION ABOUT SEGMENTS

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

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. Although
our sales over the past six quarters have grown consecutively, we expect that
our business will be seasonal, with the third quarter of each year typically
having the lowest sales and the fourth quarter of each year typically having the
highest 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


                                       2
<PAGE>
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, 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), result
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 heart valve market in the U.S. in 2002 was
approximately $400 million. We estimate that approximately 86,000 heart valve
replacement surgeries were conducted in the United States in 2002.

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.

     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.


                                       3
<PAGE>
     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.

     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.


                                       4
<PAGE>
     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.

MARKETING, SALES AND DISTRIBUTION

We market the ATS valve in the United States through a sales organization
divided into four regions and 28 sales territories. We focus our sales and
marketing efforts on developing awareness of our valve in the approximately 970
U.S. open heart centers. We currently work with cardiac surgeons in
approximately 170 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 employees of the
distributor, if our 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 2003. See Note 11 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, Medical CV 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.


                                       5
<PAGE>
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 product, 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.

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 2004 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.


                                       6
<PAGE>
MANUFACTURING AND SUPPLY

Our products are manufactured in ISO 9001 certified facilities. We have two
facilities in close proximity in 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 Amended 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 Amended 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.

We currently are operating our pyrolytic carbon component facility with limited
production. We are currently operating one manufacturing shift at our valve
assembly facility. 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 activies 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 $1.8 million in 2003,
$2.4 million in 2002, and $3.9 million in 2000.

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 expires 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. 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 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.


                                       7
<PAGE>
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 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.


                                       8
<PAGE>
THIRD PARTY REIMBURSEMENT

In the United States, healthcare providers that purchase medical devices, such
as our product, 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 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 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.


                                       9
<PAGE>
EMPLOYEES

As of January 1, 2004, we employed approximately 87 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
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.

ITEM 2. PROPERTIES

We lease approximately 50,000 square feet of space in two buildings in a suburb
of Minneapolis, Minnesota. The lease covering approximately 27,000 square feet
expires on March 31, 2009 and it is used for administrative, production and
engineering purposes. The lease on the other 23,000 square feet expires July 31,
2008 and is used for carbon manufacturing. We believe that these 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      44   Chief Executive Officer, President and Director
Richard A. Curtis    39   Vice President, Marketing and Business Development
John R. Judd         47   Chief Financial Officer
Marc R. Sportsman    49   Vice President, Sales
</TABLE>

MICHAEL D. DALE has served as our Chief Executive Officer, President and a
Director of the Company since October 2002. From 2000 to 2002, Mr. Dale was
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 Empath Medical, Inc., a medical products company that designs,
develops, manufactures and markets percutaneous delivery solutions.


                                       10
<PAGE>
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 twenty-five years of cardiovascular medical device sales
and sales management experience beginning with Shiley, Inc. and starting in 1986
with St. Jude Medical, Inc. 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.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

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>
Fiscal Year 2002:    High    Low
                    -----   -----
<S>                 <C>     <C>
   First Quarter    $5.50   $1.75
   Second Quarter   $2.06   $0.47
   Third Quarter    $0.64   $0.31
   Fourth Quarter   $0.85   $0.36
</TABLE>

<TABLE>
<CAPTION>
Fiscal Year 2003:    High    Low
                    -----   -----
<S>                 <C>     <C>
   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>

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.


                                       11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                        --------------------------------------------------
(in thousands, except per share data)     2003       2002       2001       2000      1999
-------------------------------------   --------   --------   --------   -------   -------
<S>                                     <C>        <C>        <C>        <C>       <C>
STATEMENT OF OPERATIONS DATA:
Net sales                                $18,484    $13,301    $15,080   $14,585   $17,462
Cost of sales                             17,632     12,307     10,310     9,559    10,986
                                        --------   --------   --------   -------   -------
Gross profit                                 852        994      4,770     5,026     6,476

Operating expenses:
   Sales and marketing                    10,180      2,425      3,906     1,912     1,307
   Research and development                1,764      3,312      4,904     1,028       841
   General and administrative              4,350      3,114      3,844     3,031     2,562
   Impairment of technology license           --      8,100         --        --        --
   Reorganization expense                     --      1,130         --        --        --
   Distributor termination expenses           --        821         --        --        --
   Gain on extinguishment of debt         (2,575)        --         --        --        --
                                        --------   --------   --------   -------   -------
   Total operating expenses               13,719     18,902     12,654     5,971     4,710
                                        --------   --------   --------   -------   -------
Operating profit (loss)                  (12,867)   (17,908)    (7,884)     (945)    1,766

Interest income (expense)                   (425)      (304)     1,040     1,524       928

                                        --------   --------   --------   -------   -------
Income (loss) before income taxes        (13,292)   (18,212)    (6,844)      579     2,694

Income tax expense                            --         --         --        74        56
                                        --------   --------   --------   -------   -------

Net income (loss)                       ($13,292)  ($18,212)  ($ 6,844)  $   505   $ 2,638
                                        ========   ========   ========   =======   =======

Net income (loss) per share:
   Basic                                  ($0.55)    ($0.82)    ($0.31)  $  0.03   $  0.15
   Diluted                                ($0.55)    ($0.82)    ($0.31)  $  0.02   $  0.14

Weighted average number of shares
   outstanding:
   Basic                                  24,076     22,259     22,159    20,032    17,858
   Diluted                                24,076     22,259     22,159    20,868    18,371
</TABLE>

<TABLE>
<CAPTION>
                                                As of December 31,
                            -----------------------------------------------
(in thousands)                2003      2002      2001      2000      1999
--------------              -------   -------   -------   --------   ------
<S>                         <C>       <C>       <C>       <C>        <C>
BALANCE SHEET DATA:
Cash and cash equivalents   $ 6,472   $ 7,472   $ 5,079   $ 14,804    4,031
Working capital              31,275    21,674    32,466     85,934   52,637
Total assets                 76,134    91,756    94,971    102,354   61,117
Long-term liabilities           307     9,514        --         --       --
Shareholders' equity         72,803    74,127    92,223     98,525   58,842
</TABLE>


                                       12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF OPERATIONS

EXECUTIVE OVERVIEW

We manufacture and market a mechanical bileaflet heart valve with a patented
pivot design. Our heart valve is used to treat valvular heart disease caused by
the natural aging process, rheumatic heart disease and congenital defects.

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. We are drawing down these
paid for inventories and using the cash it generates to fund operations. Our
manufacturing facility for pyrolytic carbon components has been producing
limited quantities. We expect to increase production in this facility sometime
in 2004 but are carefully considering our options as this decision will require
the use of cash as we buy raw materials and hire production workers.

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 level during 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 28% in 2003.

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. Management's
discussion and analysis of financial condition and results of operation is based
upon the consolidated financial statements, which have been prepared in
accordance with accounting principles 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.


                                       13
<PAGE>
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 $0.4 million
and $0.2 million as of December 31, 2003 and 2002, respectively.

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 $0.3 million at December31, 2003 compared to $0.4 million
in 2002. As a percentage of total accounts receivable, the allowance was 5.2% on
December 31, 2003 and 10.6% in 2002. This reduction in allowance is due to the
collection of one account that had been classified as doubtful in previous
accounting periods.

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 $4.4 million, $2.4 million,
and $1.0 million during 2003, 2002, and 2001, 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 raw material inventory
items used in our valve assembly manufacturing process. This allowance totals
$0.2 million at December 31, 2003 and 2002.

A portion of inventories on hand at December 31, 2003 and 2002 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 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, 2003, 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 $42 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, 2003 we had deferred tax
assets totaling $17.3 million. We have taken a valuation allowance against this
asset for its full amount because the carryforwards have a limited life and
other limitations. An alternative accounting judgment would be to record the
entire asset on our balance sheet and in subsequent periods, if it became
apparent that a portion of the asset would not be realized, write it off against
income in that period. In order to utilize that treatment we would have to
decide that it was more likely than not that we would realize the deferred tax
assets and credits.


                                       14
<PAGE>
RESULTS OF OPERATIONS

The following table provides the dollar and percentage change in our Statements
of Operations for 2003 compared to 2002 and 2002 compared to 2001.

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                               ------------------------------------------------------------------------------------

                                                      Increase                                   Increase
(in thousands)                   2003       2002     (Decrease)      %       2002       2001    (Decrease)      %
--------------                 --------   --------   ----------   ------   --------   -------   ----------   ------
<S>                            <C>        <C>        <C>          <C>      <C>        <C>       <C>          <C>
Net sales                      $ 18,484   $ 13,301    $ 5,183       39.0%  $ 13,301   $15,080    ($ 1,779)    -11.8%

Cost of sales                    17,632     12,307      5,325       43.3%    12,307    10,310       1,997      19.4%
                               --------   --------    -------     ------   --------   -------   ----------   ------
Gross profit                        852        994       (142)     -14.3%       994     4,770      (3,776)    -79.2%

Operating expenses:
   Sales and marketing           10,180      3,312      6,868      207.4%     3,312     4,904      (1,592)    -32.5%
   Research and
   development                    1,764      2,425       (661)     -27.3%     2,425     3,906      (1,481)    -37.9%
   General and
   administrative                 4,350      3,114      1,236       39.7%     3,114     3,844        (730)    -19.0%
   Impairment of
      technology
      license                        --      8,100     (8,100)    -100.0%     8,100        --       8,100        --
   Reorganization expense            --      1,130     (1,130)    -100.0%     1,130        --       1,130        --
   Distributor termination
      expenses                       --        821       (821)    -100.0%       821        --         821        --
   Gain on extinguishment of
      debt                       (2,575)        --     (2,575)      --           --        --          --        --
                               --------   --------    -------     ------   --------   -------   ----------   ------
   Total operating
      expenses                   13,719     18,902     (5,183)     -27.4%    18,902    12,654        6,248     49.4%
                               --------   --------    -------     ------   --------   -------   ----------   ------

Operating loss                  (12,867)   (17,908)     5,041       28.1%   (17,908)   (7,884)    (10,024)   -127.1%
Interest income (expense)          (425)      (304)      (121)      39.8%      (304)    1,040      (1,344)   -129.2%
                               --------   --------    -------     ------   --------   -------   ----------   ------
Net loss                       ($13,292)  ($18,212)   $ 4,920       27.0%  ($18,212)  ($6,844)   ($11,368)   -166.1%
                               ========   ========    =======     ======   ========   =======   ==========   ======
</TABLE>

The following table presents the statement of operations as a percentage of
sales for 2003, 2002, and 2001.

<TABLE>
<CAPTION>
                                Year Ended December 31,
                                -----------------------
                                 2003     2002     2001
                                 -----   ------   -----
<S>                              <C>     <C>      <C>
Net sales                        100.0%   100.0%  100.0%
Cost of sales                     95.4%    92.5%   68.4%
                                 -----   ------   -----
Gross profit                       4.6%     7.5%   31.6%
Operating expenses:
   Sales and marketing            55.1%    24.9%   32.5%
   Research and development        9.5%    18.2%   25.9%
   General and administrative     23.5%    23.4%   25.5%
   Impairment of technology
      license                      0.0%    60.9%    0.0%
   Reorganization expense          0.0%     8.5%    0.0%
   Distributor termination
      expenses                     0.0%     6.2%    0.0%
   Gain on extinguishment of
      debt                       -13.9%     0.0%    0.0%
                                 -----   ------   -----
   Total operating expenses       74.2%   142.1%   83.9%
                                 -----   ------   -----
Operating loss                   -69.6%  -134.6%  -52.3%

Interest income (expense)         -2.3%    -2.3%    6.9%
                                 -----   ------   -----
Net loss                         -71.9%  -136.9%  -45.4%
                                 =====   ======   =====
</TABLE>


                                       15
<PAGE>
NET SALES.  The following tables compare net sales during 2003, 2002, and 2001.

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                        -------------------------------------------------------------------------------
                                             Increase                                 Increase
(in thousands)            2003      2002    (Decrease)     %       2002      2001    (Decrease)     %
--------------          -------   -------   ----------   -----   -------   -------   ----------   -----
<S>                     <C>       <C>       <C>          <C>     <C>       <C>       <C>          <C>
United States           $ 5,141   $ 2,535     $2,606     102.8%  $ 2,535   $ 2,613       ($78)     -3.0%

Outside United States    13,343    10,766      2,577      23.9%   10,766    12,467     (1,701)    -13.6%
                        -------   -------     ------     -----   -------   -------    -------     -----
Total                   $18,484   $13,301     $5,183      39.0%  $13,301   $15,080    ($1,779)    -11.8%
                        =======   =======     ======     =====   =======   =======    =======     =====
</TABLE>

<TABLE>
<CAPTION>
                               2003 Change in            2002 Change in
                         -----------------------   -----------------------
                         Average                   Average
                          Sales     Unit            Sales    Unit
                          Price    Sales   Total    Price    Sales   Total
                         -------   -----   -----   -------   -----   -----
<S>                      <C>       <C>     <C>     <C>       <C>     <C>
United States               5.9%   91.4%   102.8%    -2.0%   -1.0%    -3.0%

Outside United States     -15.6%   46.8%    23.9%   -12.8%   -1.0%   -13.6%
                         ------    ----    -----    -----    ----    -----
Total                      -7.9%   50.9%    39.0%   -10.9%   -1.0%   -11.8%
                         ======    ====    =====    =====    ====    =====
</TABLE>

<TABLE>
<CAPTION>
                        Year Ended December 31,
                        -----------------------
                          2003    2002    2001
                         -----   -----   -----
<S>                      <C>     <C>     <C>
Share of total sales:

United States             27.8%   19.1%   17.3%

Outside United States     72.2%   80.9%   82.7%
                         -----   -----   -----
Total                    100.0%  100.0%  100.0%
                         =====   =====   =====
</TABLE>

In June 2002, the majority of our U.S. sales persons were terminated. In the
fourth quarter of 2002, we hired a new CEO and began building our "new sales
organization" in the U.S. consisting of four area directors managing 28 sales
territories. Our representation within these territories now 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
as compared to 2002 and to our sales within the U.S. accounting for a larger
percentage of overall sales.

During 2003 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 if
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)                                  2003      2002     2001
--------------                                -------   -------   -------
<S>                                           <C>       <C>       <C>
Cost of goods sold, as reported               $17,632   $12,307   $10,310
Less: Cost of good sold related to a lower
   of cost or market adjustment                 4,400     2,400     1,000
                                              -------   -------   -------
Cost of goods sold related to product sales   $13,232   $ 9,907   $ 9,310
                                              =======   =======   =======
Cost of good sold related to product sales
   as a percentage of net sales                  71.6%     74.5%     61.7%
</TABLE>


                                       16
<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 2004.

The ATS valve is made of materials that do not deteriorate. Other than the need
to resterilize them 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,
however, obsolescence issue because of this are remote because of 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 2003 over 2002 were for the building of
our "new sales and marketing organizations". In June 2002, the majority of our
U.S. sales persons were terminated resulting in a substantial decrease in
expenses during 2002 compared to 2001. In the fourth quarter of 2002, we hired a
new CEO and thereafter began the process of hiring and training the new
employees in the new sales and marketing organizations. We have substantially
completed the hiring and training of our new sales and marketing organizations.

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 the costs to set up and maintain our
carbon components manufacturing facility while it is in pre-production mode. The
operational qualification and validation of the carbon production equipment and
making pilot coating runs have been charged to research and development costs.

The following table compares the different components of research and
development costs for 2003, 2002, and 2001.

<TABLE>
<CAPTION>
                                  Year Ended December 31,
                                 ------------------------
(in thousands)                    2003     2002     2001
--------------                   ------   ------   ------
<S>                              <C>      <C>      <C>
Costs related to manufacturing
   facility                      $1,209   $1,795   $3,052

All other R&D costs                 555      630      854
                                 ------   ------   ------

Total                            $1,764   $2,425   $3,906
                                 ======   ======   ======
</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.
We expect to increase production capacity of our carbon components during 2004.
Accordingly, the costs of this facility that are now classified as research and
development costs will be included as costs of goods sold after the date on
which we commence increased production of these carbon components.

GENERAL AND ADMINISTRATIVE. During 2003, we incurred legal, accounting, and
other professional services substantially for legal support, recruitment, and
the hiring of our new 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.

The decrease in expenses during 2002 compared to 2001 is due to fewer personnel
as a result of certain reorganization initiatives during the second half of
2002.

IMPAIRMENT CHARGE. During the first quarter of 2002, we evaluated the carrying
value of its technology license asset of $13 million 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


                                       17
<PAGE>
charge during the second quarter of 2002. We believe our current carrying value
of the technology license is recoverable and no further impairment charges have
been taken.

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 as a result of
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). Our interest expense was primarily attributable
to imputed interest on our long-term debt previously owed to Centerpulse. Our
interest income is primarily attributable to the investment of our cash
balances.

INCOME TAXES. We have accumulated approximately $42 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 decrease in net loss in 2003 compared to 2002 and the increase in
net loss in 2002 compared to 2001 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 $8.5 million and
$10.0 million on December 31, 2003 and December 31, 2002, respectively.

OPERATING ACTIVITIES. During 2003 we received cash payments from customers of
$17.1 million. We made cash payments to employees and suppliers of $17.2
million. Our operating loss during 2003 of $12.9 million was substantially
funded through the depletion of inventories. During 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 2004.


                                       18
<PAGE>
INVESTING AND FINANCING ACTIVITIES. We historically have funded our operations
through equity investments. During 2003, we raised $11.6 million through an
equity offering and the issuance of stock through the exercise of stock options.
During 2003, we paid $12.0 million of debt related to our Carbon Technology
Agreement. We have no future payment obligations under this Agreement. During
2003 we purchased property and equipment totaling $0.7 million. Our current
level of property and equipment is adequate to support operations in 2004 and
purchases of equipment will approximate 2003 spending in 2004.

CASH MANAGEMENT

During 2004 and into 2005, we expect to increase production of pyrolytic carbon
components in our own factory. This will require the use of cash as we purchase
raw materials and hire employees to make the inventory. Current inventory levels
are adequate into 2005. We estimate that operating costs will remain high in
comparison to sales during 2004 and 2005 and will require the use of cash to
fund operations. We will draw down cash balances to build inventories and fund
operations during 2004 and 2005.

Based upon the current forecast of sales and operating expenses, we anticipate
having cash to fund our operations through 2004. 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>
Operating leases       $ 2,294     $429     $1,293   $   531    $    41
Purchase obligations   $23,500       --      3,500    10,000     10,000
                       -------     ----     ------   -------    -------
Total                  $25,794     $429     $4,793   $10,531    $10,041
                       =======     ====     ======   =======    =======
</TABLE>

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


                                       19
<PAGE>
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 SOLE 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. 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


                                       20
<PAGE>
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.

As December 31, 2003, 72% of our net sales are 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.

In 2001, we experienced a slow collection of receivables from our Italian
distributor. As a result, we ceased recognizing sales to this distributor upon
shipment, and instead recognize sales to this distributor only upon receipt of
payment. Slow payment of receivables by other 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, 2003, we had an accumulated deficit of $50.9
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.

WE CHANGED MANAGEMENT IN LATE 2002. OUR FAILURE TO RETAIN THE CURRENT MANAGEMENT
OR OUR MANAGEMENT'S FAILURE TO IMPROVE SALES AND ACHIEVE PROFITABILITY COULD
ADVERSELY IMPACT OUR RESULTS OF OPERATIONS.

In October 2002 we hired a new President and Chief Executive Officer. Since
then, we have hired the rest of our current executive team. Most of the members
of our executive team have extensive experience in sales and marketing medical
device products. There is substantial competition for executives with this kind
of experience. Therefore, we cannot assure you that we will be able to retain
our management team. Replacing our management team could substantially disrupt
our prospects, business and operations. Further, the failure of the current
management team to substantially increase sales and return the company to
profitability could negatively affect our continued ability to sell products to
existing customers.

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.


                                       21
<PAGE>
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 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, Inc. (formerly Sulzer Carbomedics, Inc.) 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 2004. 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 in 2007 through
2011, the amounts available under this agreement are not expected to be
sufficient to


                                       22
<PAGE>
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.

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, it is currently operating at the minimal level necessary to maintain
the plant and our technical expertise in producing carbon components. In the
future when we 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 are not cost-effective or are used for a
non-approved indication. The failure by physicians, hospitals and other users of
our product 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 entail 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
assure you 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.


                                       23
<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 assure 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.

The minimum bid price of our common stock was below $1.00 per share during a
ten-month period beginning in 2002 and ending in March 2003. As a result, our
common stock lost its eligibility to be traded on The Nasdaq National Market and
instead was traded on The Nasdaq SmallCap Market until July 2003, when our
common stock was relisted on The Nasdaq National Market after again meeting that
market's eligibility criteria. If the minimum bid price of our stock again falls
below $1.00 for an extended period of time, we may be forced to relist our stock
on The Nasdaq SmallCap Market. If our common stock fails to meet the eligibility
criteria for continued listing on either The Nasdaq National Market or The
Nasdaq SmallCap Market, the price of our stock would, in all likelihood,
decline, and our investors would find it more difficult to dispose of or to
obtain accurate quotations as to the market value of our common stock.


                                       24
<PAGE>
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;

     -    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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of our investments 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.


                                       25
<PAGE>
Transactions with U.S. and non-U.S. customers and distributors, other than in
France, are entered into in U.S. dollars, precluding the need for foreign
currency hedges on such sales. Sales through our French subsidiary, which was
established in 2002 to replace a distributor, 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 auditors
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 (a) (1)
below.

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

None.

ITEM 9a. CONTROLS AND PROCEDURES

(a) 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(f) under the Exchange Act). Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective in timely alerting them to the
material information relating to us required to be included in our periodic SEC
filings.

(b) Changes in Internal Control

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.


                                       26
<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 "Election of Directors" 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 April 30, 2004, 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 2004 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before April 30, 2004, 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 SHAREHOLDER MATTERS

Pursuant to General Instruction G(3), reference is made to information contained
under the headings "Security Ownership of Certain Beneficial Owners and
Management", "Equity Compensation Plan Information" and "Election of Directors"
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 April 30, 2004, which information is incorporated herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this Item appears under the heading "Audit Fees" of the
Proxy Statement and is incorporated herein by reference.


                                       27
<PAGE>
                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A) 1. 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):

Report of Independent Auditors                             Page F-1

Consolidated Statements of Financial Position as of
   December 31, 2003 and 2002                              Page F-2

Consolidated Statements of Operations for the years
   end December 31, 2003, 2002, and 2001                   Page F-3

Consolidated Statement of Shareholder's Equity for the
   years ended December 31, 2003, 2002, and 2001           Page F-4

Consolidated Statements of Cash Flows for the years
   ended  December 31, 2003, 2002, and 2001                Page F-5

Notes to Consolidated Financial Statements for the
   years ended December 31, 2003, 2002, and 2001           Page F-6 through F-15


                                       28
<PAGE>
(A) 2. 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, 2003
   Deducted from asset accounts
      Allowance for doubtful accounts      $420         $  0          $0        ($150)(1)      $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
   Year ended December 31, 2001
      Allowance for doubtful accounts      $425         $198                     $223 (2)      $400
      Allowance for obsolete
      inventories                          $200         $  0          $0         $  0          $200
</TABLE>

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

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

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.

(A)  3. LISTING OF 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 Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
          September 30, 2000).
</TABLE>


                                       29
<PAGE>
<TABLE>
<S>       <C>
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).

10.10*    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).

10.11*    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).

10.12**   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")).

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

10.14*    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).

10.15*    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).

10.16*    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).

10.17     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).

10.18     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).

10.19     Form of International Distributor Agreement (Incorporated by reference
          to Exhibit 10.22 to the 1994 Form 10-K).
</TABLE>


                                       30
<PAGE>
<TABLE>
<S>       <C>
10.20**   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")).

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

10.22     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).

10.23**   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).

10.24     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).

10.25     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).

10.26**   1998 Management Incentive Compensation Plan (Incorporated by reference
          to Exhibit 10.25 to the 1998 Form 10-K).

10.27*    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").

10.28*    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).

10.29*    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).

10.30     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).

10.31     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).

10.32     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")).

10.33*    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).

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

10.35     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>


                                       31
<PAGE>
<TABLE>
<S>       <C>
10.36     2004 Management Incentive Compensation Plan.

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 this exhibit have been redacted.

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

(B)  1. REPORTS ON FORM 8-K

     We furnished (in accordance with Item 12 of Form 8-K) reports on Form 8-K
     under Items 7 and 12, as follows:

          On October 22, 2003, our results of operations and financial condition
          for the fiscal quarter ended September 30, 2003.

          On January 9, 2004, our results of operations and financial condition
          for the fiscal quarter ended December 31, 2003.

          On February 11, 2004, our results of operations and financial
          condition for the fiscal quarter ended December 31, 2003.


                                      32
<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 15, 2004                   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 and on the date indicated.

SIGNATURE                                         TITLE
---------                                         -----

/s/ Manuel A. Villafana                    Chairman and Director
----------------------------------------

                                           Chief Executive Officer,
                                           President and Director
/s/ Michael D. Dale                        (principal executive officer)
----------------------------------------

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

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

/s/ A. Jay Graf                            Director
----------------------------------------

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

/s/ Robert Munzenrider                     Director
----------------------------------------


                                       33
<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 Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
          September 30, 2000).

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).

10.10*    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).

10.11*    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).

10.12**   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")).
</TABLE>


                                       34
<PAGE>
<TABLE>
<S>       <C>
10.13     Helix BioCore, Inc. Self-Insurance Trust Agreement dated February 28,
          1991 (Incorporated by reference to Exhibit 10.13 to the 1996 Form
          10-K).

10.14*    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).

10.15*    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).

10.16*    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).

10.17     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).

10.18     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).

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

10.20**   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")).

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

10.22     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).

10.23**   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).

10.24     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).

10.25     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).

10.26**   1998 Management Incentive Compensation Plan (Incorporated by reference
          to Exhibit 10.25 to the 1998 Form 10-K).

10.27*    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").

10.28*    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>


                                       35
<PAGE>
<TABLE>
<S>       <C>
10.29*    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).

10.30     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).

10.31     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).

10.32     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")).

10.33*    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).

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

10.35     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).

10.36     2004 Management Incentive Compensation Plan.

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 this exhibit have been redacted.

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


                                       36
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
ATS Medical, Inc.

We have audited the accompanying consolidated statements of financial position
of ATS Medical, Inc. and subsidiaries as of December 31, 2003 and 2002, 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,
2003. Our audits also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ATS Medical, Inc.
and subsidiaries at December 31, 2003 and 2002, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.


                                        /s/ Ernst & Young LLP

Minneapolis, Minnesota
February 6, 2004


                                      F-1
<PAGE>
                                ATS Medical, Inc.

                  Consolidated Statements of Financial Position
                        (In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                                                               -------------------
                                                                 2003       2002
                                                               --------   --------
<S>                                                            <C>        <C>
ASSETS
Current assets:
   Cash and cash equivalents                                   $  6,472   $  7,472
   Short-term investments                                         2,003      2,502
                                                               --------   --------
                                                                  8,475      9,974
   Accounts receivable, less allowance of $270 in 2003
      and $420 in 2002                                            4,939      3,557
   Inventories                                                   20,377     15,876
   Prepaid expenses                                                 508        382
                                                               --------   --------
Total current assets                                             34,299     29,789

Leasehold improvements, furniture, and equipment, net             5,895      6,026

Inventories                                                      17,000     37,000

Technology license                                               18,500     18,500

Other assets                                                        440        441
                                                               --------   --------
Total assets                                                   $ 76,134   $ 91,756
                                                               ========   ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                            $    989   $    511
   Due to related party                                             217        192
   Accrued reorganization charges                                     9        493
   Accrued payroll and expenses                                   1,334        322
   Accrued distributor liabilities                                  475      1,597
   Notes payable                                                     --      5,000
                                                               --------   --------
Total current liabilities                                         3,024      8,115

Due to related party                                                307        434
Long-term debt                                                       --      9,080

Shareholders' equity:
   Common Stock, $0.01 par value:
      Authorized shares - 40,000,000
      Issued and outstanding shares - 26,778,557 in 2003 and
         22,305,920 in 2002                                         268        223
   Additional paid-in capital                                   123,412    111,474
   Accumulated deficit                                          (50,858)   (37,566)
   Deferred compensation                                            (70)        --
   Accumulated other comprehensive income (loss)                     51         (4)
                                                               --------   --------
Total shareholders' equity                                       72,803     74,127
                                                               --------   --------
Total liabilities and shareholders' equity                     $ 76,134   $ 91,756
                                                               ========   ========
</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
                                                 -----------------------------
                                                   2003       2002       2001
                                                 --------   --------   -------
<S>                                              <C>        <C>        <C>
Net sales                                        $ 18,484   $ 13,301   $15,080
Cost of goods sold                                 17,632     12,307    10,310
                                                 --------   --------   -------
Gross profit                                          852        994     4,770

Operating expenses:
   Sales and marketing                             10,180      3,312     4,904
   Research and development                         1,764      2,425     3,906
   General and administrative                       4,350      3,114     3,844
   Impairment of technology license                    --      8,100        --
   Reorganization expenses                             --      1,130        --
   Gain on extinguishment of debt                  (2,575)        --        --
   Distributor termination expenses                    --        821        --
                                                 --------   --------   -------
Total operating expenses                           13,719     18,902    12,654
                                                 --------   --------   -------
Operating loss                                    (12,867)   (17,908)   (7,884)

Interest income                                        81        176     1,040
Interest expense                                     (506)      (480)       --
                                                 --------   --------   -------

Net loss                                         $(13,292)  $(18,212)  $(6,844)
                                                 ========   ========   =======

Net loss per share:
   Basic and diluted                             $  (0.55)  $  (0.82)  $ (0.31)

Weighted average number of shares outstanding:
   Basic and diluted                               24,076     22,259    22,159
</TABLE>

See accompanying notes.


                                      F-3
<PAGE>
                                ATS Medical, Inc.

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

<TABLE>
<CAPTION>
                                                               ACCUMULATED
                                                                  OTHER
                                COMMON STOCK     ADDITIONAL   COMPREHENSIVE
                               ---------------     PAID-IN        INCOME        DEFERRED     ACCUMULATED
                               SHARES   AMOUNT     CAPITAL       (LOSS)       COMPENSATION     DEFICIT      TOTAL
                               ------   ------   ----------   -------------   ------------   -----------   --------
<S>                            <C>      <C>      <C>          <C>             <C>            <C>           <C>
Balance at December 31, 2000   22,097    $221     $110,814         $--            $  --       $(12,510)    $ 98,525
Common Stock issued under
   the Employee Stock
   Purchase Plan                   40      --          211          --               --             --          211
Stock options exercised            67       1          330          --               --             --          331
Net loss and comprehensive
   loss for the year               --      --           --          --               --         (6,844)      (6,844)
                               ------    ----     --------         ---            -----       --------     --------
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
                               ======    ====     ========         ===            =====       ========     ========
</TABLE>

See accompanying notes.


                                      F-4
<PAGE>
                                ATS Medical, Inc.

                      Consolidated Statements of Cash Flows
                                 (In Thousands)

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31
                                                      ------------------------------
                                                        2003       2002       2001
                                                      --------   --------   --------
<S>                                                   <C>        <C>        <C>
OPERATING ACTIVITIES
Net loss                                              $(13,292)  $(18,212)  $ (6,844)
Adjustments to reconcile net loss to net
   cash used in operating activities:
      Depreciation                                         792        713        688
      Loss on disposal of equipment                          4         35         14
      Imputed interest long-term debt                      320        480         --
      Compensation expense stock options                   321         --         --
      Impairment of technology license                      --      8,100         --
      Gain on extinguishment of debt                    (2,575)        --         --
      Lower of cost or market adjustment                 4,400      2,200      1,000
      Changes in operating assets and liabilities:
         Accounts receivable                            (1,382)       526      2,498
         Prepaid expenses                                 (126)       188         46
         Other assets                                        1         (2)       (14)
         Inventories                                    11,099      2,273     (6,861)
         Accounts payable and accrued expenses             (42)       800     (1,081)
                                                      --------   --------   --------
Net cash used in operating activities                     (480)    (2,899)   (10,554)

INVESTING ACTIVITIES
Purchases of short-term investments                     (5,231)    (5,663)   (19,290)
Maturities of short-term investments                     5,729     10,860     27,865
Payments for technology license                        (12,000)        --     (5,000)
Purchases of leasehold improvements, furniture, and
   equipment                                              (665)      (186)    (3,288)
Proceeds on disposal of equipment                           --        165         --
                                                      --------   --------   --------
Net cash provided by (used in) investing activities    (12,167)     5,176        287

FINANCING ACTIVITIES
Net proceeds from issuance of common stock              11,592        120        542
                                                      --------   --------   --------
Net cash provided by financing activities               11,592        120        542

Effect of exchange rate changes                             55         (4)        --
                                                      --------   --------   --------
(Decrease) increase in cash and cash equivalents        (1,000)     2,393     (9,725)
Cash and cash equivalents at beginning of year           7,472      5,079     14,804
                                                      --------   --------   --------
Cash and cash equivalents at end of year              $  6,472   $  7,472   $  5,079
                                                      ========   ========   ========
</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) manufactures and markets a bileaflet mechanical
heart valve.

PRINCIPLES OF CONSOLIDATION

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

CASH EQUIVALENTS

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

SHORT-TERM INVESTMENTS

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

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, 2003 and 2002. 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 $4.4
million, $2.4 million, and $1.0 million in 2003, 2002, and 2001, respectively,
and was included in cost of goods sold in the statement of operations.

At December 31, 2003 and 2002, 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 $17.0 million and $37.0 million of inventories as
non-current assets at December 31, 2003 and 2002, 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, 2003 and 2002, the deposits within the trust amounted to
$0.4 million.


                                       F-6
<PAGE>
                                ATS Medical, Inc.
                   Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LEASEHOLD IMPROVEMENTS, FURNITURE, AND EQUIPMENT

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

<TABLE>
<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 will be tested annually for impairment in accordance with
Statement of Financial Accounting Standards (SFAS) No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS.

IMPAIRMENT OF LONG-LIVED ASSETS

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

REVENUE RECOGNITION

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.

USE OF ESTIMATES

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

INCOME TAXES

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


                                       F-7
<PAGE>
                                ATS Medical, Inc.
                   Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 a 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.

STOCK-BASED COMPENSATION

The Company has a stock-based employee compensation plan, which is described
more fully in Note 7. This plan is accounted for under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Under APB
No. 25, when the exercise price of stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized,
and reflected in the net loss.

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>
                                                     YEAR ENDED DECEMBER 31
                                                 -----------------------------
                                                   2003       2002       2001
                                                 --------   --------   -------
<S>                                              <C>        <C>        <C>
Net loss as reported                             $(13,292)  $(18,212)  $(6,844)
Deduct total stock-based employee compensation
   expense determined under fair value-based
   method for all awards                           (1,357)    (1,149)   (1,909)
                                                 --------   --------   -------
Pro forma net loss                               $(14,649)  $(19,361)  $(8,753)
                                                 ========   ========   =======

Net loss per share:
   Basic and diluted - as reported               $  (0.55)  $  (0.82)  $ (0.31)
   Basic and diluted - pro forma                 $  (0.61)  $  (0.87)  $ (0.39)
</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 for 2003, 2002, and 2001: risk-free interest rate of 3.71%, 3.65%,
and 5.18%, respectively; dividend yield of 0%; volatility factor of the expected
market price of the Company's Common Stock of .93, .95, and .77, respectively;
and a weighted average expected life of the option of seven years.

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


                                       F-8
<PAGE>
                                ATS Medical, Inc.
                   Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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. For the year ended December 31, 2003, the effect of options was
anti-dilutive due to the net loss incurred during the period. Had net income
been achieved, approximately 1,182,000 of common stock equivalents would have
been included in the computation of diluted net income per share for the year
ended December 31, 2003.

RECLASSIFICATIONS

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

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES (FIN 46). FIN
46 requires companies that control another entity through interests other than
voting interests to consolidate the controlled entity. FIN 46 was effective
immediately for variable interest entities created, or in which the company
obtains an interest, after January 31, 2003. For all variable interest entities
created on or before January 31, 2003, the provisions are effective July 31,
2003. The Company does not believe it has interests in variable interest
entities.

2. SHORT-TERM INVESTMENTS

As of December 31, 2003 and 2002, the cost of short-term investments held by the
Company of $2.0 million and $2.5 million, respectively, which have maturity
dates of one year or less, approximated their fair value. As a result, no
unrealized gains or losses were recognized at December 31, 2003 and 2002.

3. LEASEHOLD IMPROVEMENTS, FURNITURE, AND EQUIPMENT, NET

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

<TABLE>
<CAPTION>
                                  DECEMBER 31
                                ---------------
                                 2003     2002
                                ------   ------
<S>                             <C>      <C>
Furniture and fixtures          $  372   $  361
Equipment                        2,918    2,340
Leasehold improvements           3,227    3,227
Construction in progress         3,309    3,309
                                ------   ------
                                 9,826    9,237
Less accumulated depreciation    3,931    3,211
                                ------   ------
                                $5,895   $6,026
                                ======   ======
</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


                                       F-9
<PAGE>
                                ATS Medical, Inc.
                   Notes to Consolidated Financial Statements

4. IMPAIRMENT OF TECHNOLOGY LICENSE (CONTINUED)

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 2003.

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 11).

6. 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 dollar 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.

7. 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>
   2003             36,762       $0.41 - $ 2.72
   2002            101,980        0.46 -   2.21
   2001             39,885        3.24 -  10.84
</TABLE>


                                      F-10
<PAGE>
                                ATS Medical, Inc.
                   Notes to Consolidated Financial Statements

8. 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 nonemployees 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, 2000           697,500     1,016,460     899,851        25,000        $8.15
   Options granted                    (496,857)      322,415     174,442            --         8.42
   Options exercised                        --       (40,115)     (1,439)      (25,000)        5.78
   Options canceled                     85,399      (108,874)    (25,325)           --         9.54
   ISO shares made non-qualified
      in 2001                               --       (81,050)     81,050            --           --
                                     ---------     ---------   ---------     ---------
Balance at December 31, 2001           286,042     1,108,836   1,128,579            --         8.17
   Options granted                    (595,000)      195,000     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
                                     =========     =========   =========     =========
</TABLE>

<TABLE>
<CAPTION>
                          OPTIONS OUTSTANDING              OPTIONS EXERCISABLE
                  --------------------------------------   ----------------------
                                  WEIGHTED
                                  AVERAGE       WEIGHTED                 WEIGHTED
                                 REMAINING       AVERAGE                  AVERAGE
    RANGE OF         NUMBER     CONTRACTUAL     EXERCISE     NUMBER      EXERCISE
EXERCISE PRICES   OUTSTANDING       LIFE          PRICE    EXERCISABLE     PRICE
---------------   -----------   -----------     --------   -----------   --------
<S>               <C>           <C>             <C>        <C>           <C>
 $0.35 - $ 1.82    1,911,250     9.05 years       $0.88       201,167      $0.44
  2.35 -   3.97    2,066,345     9.41 years        3.33        71,845       3.35
  5.06 -  12.44      931,201     5.53 years        8.29       772,839       8.17
                   ---------                                ---------
  0.35 -  12.44    4,908,796     8.54 years        3.32     1,045,851       6.35
                   =========                                =========
</TABLE>


                                      F-11
<PAGE>
                                ATS Medical, Inc.
                   Notes to Consolidated Financial Statements

8. COMMON STOCK AND STOCK OPTIONS (CONTINUED)

The weighted average fair value of options granted during the years ended
December 31, 2003, 2002, and 2001, was $2.05, $0.37, and $6.15, respectively.

At December 31, 2003, 2002, and 2001, Plan and non-Plan options for 1,045,851,
857,145, and 1,216,082 shares of Common Stock, respectively, were exercisable at
a weighted average price of $6.35, $7.61, and $7.49 per share, respectively.
Options can be exercised by tendering shares previously acquired.

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

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, the Company recognized $0.2
million of deferred compensation and $0.1 million of expenses related to those
non-Plan, non-employee options.

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, where the Company recognized $0.2 million in
compensation expense during 2003.

The Company has 2,723,670 shares of Common Stock reserved for issuance under the
Plans.

9. 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):

Year ending December 31:

<TABLE>
<S>                        <C>
2004                       $  429
2005                          447
2006                          419
2007                          427
2008                          376
2009 and thereafter           196
                           ------
                           $2,294
                           ======
</TABLE>

The rent expense was $0.3 million for 2003 and $0.4 million for 2002 and 2001.

10. INCOME TAXES

At December 31, 2003, the Company had net operating loss carryforwards of
approximately $41.8 million and credits for increasing research and development
costs of approximately $0.6 million, which are available to offset future
taxable income or reduce taxes payable through 2023. These loss carryforwards
will begin expiring in 2007. The credits continue to expire in 2004 through
2018.

Included as part of the Company's net operating loss carryforwards are
approximately $2.3 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.


                                      F-12
<PAGE>
                                ATS Medical, Inc.
                   Notes to Consolidated Financial Statements

10. INCOME TAXES (CONTINUED)

Components of deferred tax assets and liabilities are as follows (in thousands):

<TABLE>
<CAPTION>
                                                         DECEMBER 31
                                                     -------------------
                                                       2003       2002
                                                     --------   --------
<S>                                                  <C>        <C>
Deferred tax assets (liabilities):
   Net operating loss carryforwards                  $ 15,482   $ 10,661
   Research and development credits                       647        633
   Inventory reserves                                   1,962      1,158
   Depreciation                                           490        302
   Technology license amortization                     (1,672)    (1,016)
   Compensation reserves                                   90        277
   Other                                                  319        470
                                                     --------   --------
Net deferred tax assets before valuation allowance     17,318     12,485
Less valuation allowance                              (17,318)   (12,485)
                                                     --------   --------
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>
                                            2003     2002     2001
                                           -----    -----    -----
<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>

11. COMMITMENTS

In June 2002, the Company amended the supply and technology transfer agreements.
The amendment to the supply agreement suspended component set purchases until
January 2007. This postpones component purchases totaling approximately $23.5
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.

12. BENEFIT PLAN

The Company has a defined contribution salary deferral plan covering
substantially all employees under Section 401(k) of the Internal Revenue Code.
The plan allows eligible employees to contribute up to 12% of their annual
compensation, with the Company contributing an amount equal to 25% of each
employee's contribution. The Company recognized expense for contributions to the
plan of $64,451, $61,397, and $76,167, during 2003, 2002, and 2001,
respectively.


                                      F-13
<PAGE>
                                ATS Medical, Inc.
                   Notes to Consolidated Financial Statements

13. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

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

<TABLE>
<CAPTION>
                   2003   2002   2001
                   ----   ----   ----
<S>                <C>    <C>    <C>
Asia Pacific        32%    42%    34%
Europe              29     26     36
North America       28     19     19
Emerging Markets    11     13     11
</TABLE>

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

<TABLE>
<CAPTION>
             2003   2002   2001
             ----   ----   ----
<S>          <C>    <C>    <C>
Customer A   21.4%  31.3%  23.6%
Customer B     --   12.0   10.3
</TABLE>

The Company had balances owing by two customers, which represented 11%, 34%, and
4% of its outstanding accounts receivable balances, respectively, at December
31, 2003, 2002, and 2001.

14. 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.

15. REORGANIZATION EXPENSES

In June 2002, the Board of Directors decided to implement new cost containment
measures and to seek a new management team to lead the business. As part of
these cost-reduction measures, approximately one-half of the workforce,
including all of the executive officers of the Company, have been released from
employment. The Company had 46 employees at December 31, 2002 compared to 89
employees at December 31, 2001. The Company recorded an expense of $1.1 million
in conjunction with the reorganization in fiscal 2002. 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. Of the total reorganization expenses, $9,000 and $0.5
million had not been paid as of December 31, 2003 and 2002, respectively.

16. RELATED-PARTY TRANSACTION

For the years ended December 31, 2003, 2002, and 2001, the Company had a
consulting agreement with a director of the Company, which provided for future
annual compensation. The agreement provides for compensation through fiscal
2004. An expense has been recognized as a result of this agreement in the
amount of $0.1 million, $0.2 million, and $0.6 million for the years ended
December 31, 2003, 2002, and 2001, respectively. An expense for a portion of the
compensation was recognized at the time the agreement was signed, as the Company
has deferred only the fair value of expected services to be received under the
agreement.


                                      F-14
<PAGE>
                                ATS Medical, Inc.
                   Notes to Consolidated Financial Statements

17. QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly data for 2003 and 2002 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, 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 per share   $ (0.07)  $  (0.14)  $(0.01)  $ (0.31)

YEAR ENDED DECEMBER 31, 2002
Net sales                              $ 3,902   $  2,475   $3,184   $ 3,739
Gross profit                             1,211        151    1,005    (1,373)
Net loss                                (1,483)   (11,368)    (589)   (4,772)

Net basic and diluted loss             $ (0.07)  $  (0.51)  $(0.03)  $ (0.21)
</TABLE>

The Company recorded lower of cost or market value adjustments against
inventories of $4.4 million and $2.2 million in the fourth quarter of 2003 and
2002, respectively. In the third quarter of 2003, the Company recognized a $2.6
million gain on the extinguishment of debt.

In the second quarter of 2002, the Company recorded an $8.1 million impairment
of technology license.

In 2002, the Company recorded reorganization charges of $0.9 million and $0.2
million in the second quarter and fourth quarter, respectively. Gross profit in
the second quarter of 2002 was also affected by a $0.35 million sales rebate.


                                      F-15