##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-K
 Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the Fiscal Year Ended December 31, 2007
Commission File No. 0-18602
 ATS MEDICAL, INC.
  Minnesota
    
    41-1595629(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)3905 Annapolis Lane NorthMinneapolis, Minnesota
    
    55447(Address of principal executive offices)
    
    (Zip Code)
   Title of each class:
    
    Name of each exchange on which registered:Common stock, $.01 par value
    
    NASDAQ Global Market
  o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESConfidential Separation AgreementList of SubsidiariesConsent of Grant Thornton LLPConsent of Ernst & Young LLPCertification of Chief Executive OfficerCertification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer    Table of Contents  
 PART I
 
 ITEM 1. BUSINESS
 OVERVIEW
    
    
    Surgical Treatment of Atrial Fibrillation In November 2004 we entered into a
distribution agreement with CryoCath Technologies, Inc. (CryoCath) to distribute a set of
products for the surgical treatment of atrial fibrillation. In June 2007, we acquired this
business from CryoCath for approximately $22.0 million. In 2007, we had revenue from these
products of approximately $9.7 million or 19.5% of our revenue compared to $4.6 million or
11.3% of our revenue in 2006 and $2.5 million or 7.1% of our revenue in 2005.
    
    Heart Valve Repair In June 2005, we entered into a development and distribution
agreement with Genesee BioMedical, Inc. (GBI), under which we co-developed a novel line
of mitral valve repair rings and bands. In 2007, we had revenue from these products of
approximately $1.8 million compared to $1.0 million in 2006 and no revenue in 2005.
    
    Tissue Heart Valves In September 2006, we acquired 3F Therapeutics, Inc. (3F
Therapeutics or 3F), which had developed a line of tissue heart valves based on a unique
design. Approval of the first generation tissue valve in the United States is anticipated
in the latter half of 2008 with three platforms for deployment, including less invasive
sutureless designs. Revenues from our limited commercialization efforts outside the United
States totaled approximately $0.5 million in 2007.
     BUSINESS STRATEGY
  
    
    Increase market share of all our core products, including the ATS Open
Pivot® Heart Valve, ATS CryoMazeTM Surgical Ablation products, ATS
Simulus® Flexible annuloplasty repair rings and bands and the ATS 3F® Aortic
Bioprosthesis tissue heart valve.
    
    Broaden our relationships with cardiac surgeons by selectively adding new medical
devices to our product portfolio.
    
    Leverage our investments in our marketing and sales infrastructure.
    
    Lower our cost of goods sold.
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OUR MARKETS AND PRODUCTS
 Heart Valve Therapy
  Prosthetic Heart Valve Market
 Overview
     Our Mechanical Heart Valve Products
   
    
    Open pivot areas are exposed to the washing action of flowing blood with each cardiac
cycle
    
    A thin but durable pyrolytic carbon orifice surrounded by a titanium strengthening band
    
    Low profile design
    
    Multiple sewing cuff options
    
    Bileaflet valve design
    
    Enhanced radiopacity
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
    
    Open pivot washing contributes to low thromboembolic complications
    
    Improved patient quality of life through lower noise levels
    
    Improved hemodynamic efficiencies
    
    Ease of implantation and valve rotation
    
    Improved follow-up diagnostic capability
    Our Tissue Heart Valve Products
  ATS 3F Aortic Bioprosthesis
   
    
    Tubular valve design, which mimics native aortic valve in form and function
    
    Stentless design
    
    Pericardial tissue
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
    
    Excellent hemodynamics through large effective orifice areas and low pressure gradients
    
    Maintains natural sinus function for potential improvements in hemodynamic performance
and durability
    
    No anticoagulation required
  TM  .
  Prosthetic Heart Valve Competition
    Heart Valve Repair Market
 Overview
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Our Heart Valve Repair Products
  ® ® ® 
  
    
    Generous suture target area
    
    Semi-rigid ring employs unique Flex-zone flexible anterior segment with semi-rigid
posterior segment
    
    Adjustable flexible ring can be adjusted symmetrically or asymmetrically after
implantation
  
    
    Ease of suture placement in traditional open chest repair procedures
    
    Readily accommodates robotic or minimally invasive surgical approaches
    
    Semi-rigid ring accommodates anterior annular movement while allowing for posterior
annular remodeling
    
    Adjustable ring allows precise matching with individual patient anatomy
 Heart Valve Repair Market Competition
  Surgical Cardiac Ablation Market
 Overview
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Our Surgical Cryotherapy Products
     
    
    The ablation probe is malleable to conform to the shape of the tissue.
    
    The probes feature a sleeve to adjust the lesion length.
    
    Argon-based cryoablation freezes rapidly and can reach temperatures as low as -160C.
    
    The size and malleability of the probe allow it to be easily used in minimally invasive
access sites and robotic manipulation.
  
    
    Cryoablation adheres to the heart tissue during therapy, keeping the device in place.
    
    Cryoablation does not produce thrombus.
    
    Cryoablation preserves the integrity of the hearts collagen matrix.
    
    Cryoablation can safely create all of the lesion lines of the Maze procedure.
    Surgical Cardiac Ablation Competition
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MARKETING, SALES AND DISTRIBUTION
 Overview
  U.S. Marketing and Sales
  International Marketing, Sales and Distribution
   Competition
  7




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MANUFACTURING AND SUPPLY
       RESEARCH AND DEVELOPMENT
  8




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FINANCIAL INFORMATION ABOUT SEGMENTS
  SEASONALITY
  PATENTS AND PROPRIETARY TECHNOLOGY
      ® ®
 GOVERNMENT REGULATION
 United States
  9




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International
   10




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THIRD-PARTY REIMBURSEMENT
     PRODUCT LIABILITY AND INSURANCE
   EMPLOYEES
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EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionMichael D. Dale
    
    
    48
    
    
    Chairman, Chief Executive Officer and PresidentJeremy J. Curtis
    
    
    35
    
    
    Vice President, Worldwide MarketingMichael R. Kramer
    
    
    32
    
    
    Chief Financial OfficerDavid R. Elizondo
    
    
    40
    
    
    Vice President, Research and Development and
General Manager, Tissue Operations
 Michael D. Dale
 Jeremy J. Curtis
 Michael R. Kramer
 David R. Elizondo
 AVAILABLE INFORMATION
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ITEM 1A. RISK FACTORS
  If our productse do not achieve widespread market acceptance in the United States, our operating
results will be harmed and we may not achieve profitability.
  We currently rely on the ATS mechanical heart valve as our primary source of revenue. If we are
not successful in selling this product, our operating results will be harmed.
  The anticipated benefits associated with our recent acquisitions may not be realized.
  We may have difficulty integrating recently acquired businesses and may incur substantial costs in
connection with the integration process.
  
    
    our current lack of expertise and experience in manufacturing the CryoCath products
because we did not acquire any employees from CryoCath in connection with the
acquisition of the surgical cryoablation business of CryoCath;
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
    
    costs and delays in implementing manufacturing systems and procedures in connection
with the acquisition of the CryoCath assets;
    
    difficulties in transitioning manufacturing from the CryoCath facilities into our
corporate facility;
    
    difficulties retaining and integrating management and other key employees of 3F in
connection with the 3F acquisition;
    
    challenges associated with integrating the acquired businesss products and
operations into our facility and business;
    
    diversion of management resources from the business of the combined company and
integration activities;
    
    reduction or loss of customer sales due to the potential for market confusion,
hesitation and delay; and
    
    difficulty in combining distribution arrangements for the combined companys
products and services.
   In 2002, we began using a combination of direct sales persons and independent manufacturing
representatives to sell our products in the United States. If our U.S. sales strategy is not
successful, we will not be able to continue our operations as planned.
  We currently depend on the marketing and sales efforts of international independent distributors.
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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.
    
    
    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;
    
    greater difficulty in collecting payments from product sales; and
    
    lengthy/extended credit terms.
 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.
   Purchase accounting treatment of the merger with 3F and acquisition of the surgical cryoablation
assets of CryoCath could result in net losses for the foreseeable future.
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If we do not receive shareholder approval to issue an equity warrant to Alta Partners VIII, L.P.
(Alta) in exchange for their cash warrant, our cash balances may be insufficient to settle the
cash liability upon exercise, we may need to raise additional equity or incur debt to settle this
liability and our earnings may be adversely affected.
  We have a history of regularly raising funds and incurring debt to fund net losses. If our current
cash and investment balances are inadequate to carry us to profitability, we may need to raise
equity or incur debt in the future.
  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.
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Our future results will be harmed if the use of mechanical heart valves declines or if our tissue
heart valves cannot be successfully marketed.
  Our business may be adversely affected if we are unable to maintain our strategic distribution
arrangements.
  We ultimately may experience a delay in introducing, or may not successfully complete development
of, products that are currently under development, resulting in harm to our business.
  New products or technologies developed by others could render our product obsolete.
  The acquisition of the surgical cryoablation assets of CryoCath may result in a loss of customers
and suppliers.
  We license patented technology and other proprietary rights from CarboMedics. If these agreements
are breached or terminated, our right to manufacture the ATS mechanical heart valve could be
terminated.
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A delay or interruption in our manufacturing of pyrolytic carbon components could delay product
delivery or force us to cease operations.
  Because we have limited manufacturing experience with some of our products, we may not realize the
expected cost savings related to manufacturing our own products. In addition, we could experience
production delays and significant additional costs.
  
    
    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.
  We are reliant upon CryoCath for the supply of products of our surgical cryoablation business.
  Our business could be seriously harmed if third-party payers do not reimburse the costs for our
products.
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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.
  Our business would be adversely affected if we are not able to protect our intellectual property
rights.
  We may be sued by third parties claiming that our products infringe 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.
  
    
    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 may encounter litigation that could have a material impact on our business.
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We are subject to extensive governmental regulation, which is costly, time consuming and can
subject us to unanticipated delays or could ultimately preclude us from marketing and selling our
products.
  
    
    obtain the approval of the FDA or international regulatory authorities where our
products are not yet marketed;
    
    after obtaining approval or clearance of the FDA or international regulatory
authorities, maintain the approval of the FDA and international regulatory authorities
to continue selling and manufacturing our heart valves;
    
    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.
   The price of our common stock has been volatile, which may result in losses to investors.
  
    
    the success of our management in operating ATS effectively;
    
    the failure of our heart valves 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.
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Our charter documents and Minnesota law may discourage and could delay or prevent a takeover of our
company.
  
    
    No cumulative voting by shareholders for directors;
    
    The ability of our Board of Directors to control its size, to create new
directorships and to fill vacancies;
    
    The ability of our Board of Directors, 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 of Directors to amend the bylaws; and
    
    Restrictions under Minnesota law regarding mergers or other business combinations
between us and any holder of 10% or more of our outstanding common stock.
 
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  
 ITEM 3. LEGAL PROCEEDINGS
 Abbey Litigation
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CarboMedics Litigation
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  22




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market Information
  High
    
    LowFiscal Year 2006:First Quarter
    
    $
    3.15
    
    
    $
    2.46Second Quarter
    
    $
    3.00
    
    
    $
    2.27Third Quarter
    
    $
    2.80
    
    
    $
    2.06Fourth Quarter
    
    $
    2.63
    
    
    $
    2.05
 High
    
    LowFiscal Year 2007:First Quarter
    
    $
    2.39
    
    
    $
    2.05Second Quarter
    
    $
    2.08
    
    
    $
    1.54Third Quarter
    
    $
    2.01
    
    
    $
    1.54Fourth Quarter
    
    $
    2.21
    
    
    $
    1.57
 Holders
  Dividends
  Repurchases of Common Stock
  Sales of Unregistered Securities
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Performance Graph
  
 Name
    
    2002
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007NASDAQ Medical Dev/Ins/Sup
    
    $
    100.00
    
    
    $
    147.95
    
    
    $
    173.33
    
    
    $
    190.30
    
    
    $
    200.58
    
    
    $
    255.03Standard & Poors 500 Stock Index
    
    
    100.00
    
    
    
    126.38
    
    
    
    137.75
    
    
    
    141.88
    
    
    
    161.20
    
    
    
    166.89ATS Medical, Inc.
    
    
    100.00
    
    
    
    900.00
    
    
    
    1,035.56
    
    
    
    613.33
    
    
    
    460.00
    
    
    
    491.11
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ITEM 6. SELECTED FINANCIAL DATA
 Year Ended December 31,(in thousands, except per share data)
    
    2007
    
    2006
    
    2005
    
    2004
    
    2003Statement of Operations Data:Net sales
    
    $
    49,587
    
    
    $
    40,449
    
    
    $
    34,636
    
    
    $
    28,015
    
    
    $
    18,484Cost of sales
    
    
    21,238
    
    
    
    19,568
    
    
    
    22,828
    
    
    
    21,227
    
    
    
    17,632Gross profit
    
    
    28,239
    
    
    
    20,881
    
    
    
    11,808
    
    
    
    6,788
    
    
    
    852Operating expenses:Sales and marketing
    
    
    24,633
    
    
    
    21,008
    
    
    
    18,948
    
    
    
    16,520
    
    
    
    10,180Research and development
    
    
    7,546
    
    
    
    3,381
    
    
    
    1,733
    
    
    
    1,011
    
    
    
    1,764Acquired in-process research
and development
    
    
    3,500
    
    
    
    14,400
    
    
    
    
    
    
    
    
    
    
    
    General and administrative
    
    
    10,417
    
    
    
    8,786
    
    
    
    7,314
    
    
    
    5,954
    
    
    
    4,350Amortization of intangibles
    
    
    2,516
    
    
    
    106
    
    
    
    
    
    
    
    
    
    
    
    Intangible asset impairment
    
    
    755
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distributor termination expense
    
    
    
    
    
    
    733
    
    
    
    
    
    
    
    
    
    
    
    Gain on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,575
    )Total operating expenses
    
    
    49,367
    
    
    
    48,414
    
    
    
    27,995
    
    
    
    23,485
    
    
    
    13,719Operating loss
    
    
    (21,128
    )
    
    
    (27,533
    )
    
    
    (16,187
    )
    
    
    (16,697
    )
    
    
    (12,867
    )Interest income (expense)
    
    
    (1,822
    )
    
    
    (1,669
    )
    
    
    (338
    )
    
    
    54
    
    
    
    (425
    )Other income, net
    
    
    61
    
    
    
    1,528
    
    
    
    2,131
    
    
    
    
    
    
    
    Net loss before income taxes
    
    
    (22,889
    )
    
    
    (27,674
    )
    
    
    (14,394
    )
    
    
    (16,643
    )
    
    
    (13,292
    )Income tax expense
    
    
    119
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    ($23,008
    )
    
    
    ($27,674
    )
    
    
    ($14,394
    )
    
    
    ($16,643
    )
    
    
    ($13,292
    )Net loss per share:Basic
    
    
    ($0.44
    )
    
    
    ($0.83
    )
    
    
    ($0.46
    )
    
    
    ($0.58
    )
    
    
    ($0.55
    )Diluted
    
    
    ($0.44
    )
    
    
    ($0.83
    )
    
    
    ($0.46
    )
    
    
    ($0.58
    )
    
    
    ($0.55
    )Weighted average number of shares outstanding:Basic
    
    
    52,589
    
    
    
    33,537
    
    
    
    31,009
    
    
    
    28,856
    
    
    
    24,076Diluted
    
    
    52,589
    
    
    
    33,537
    
    
    
    31,009
    
    
    
    28,856
    
    
    
    24,076
 As of December 31,(in thousands)
    
    2007
    
    2006
    
    2005
    
    2004
    
    2003Balance Sheet Data:Cash, cash equivalents and short-term investments
    
    $
    14,669
    
    
    $
    10,704
    
    
    $
    21,709
    
    
    $
    15,994
    
    
    $
    8,475Working capital
    
    
    30,216
    
    
    
    32,976
    
    
    
    46,417
    
    
    
    41,459
    
    
    
    31,275Total assets
    
    
    105,897
    
    
    
    85,840
    
    
    
    85,443
    
    
    
    79,051
    
    
    
    76,134Long-term liabilities, excluding current maturities
    
    
    25,416
    
    
    
    18,588
    
    
    
    19,679
    
    
    
    1,826
    
    
    
    307Shareholders equity
    
    
    64,956
    
    
    
    57,890
    
    
    
    57,529
    
    
    
    69,441
    
    
    
    72,803
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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Executive Overview
   ® .
 ® ®
  ®
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®
  Critical Accounting Policies and Estimates
  Revenue Recognition Policy.
  Allowance for Doubtful Accounts.
 Inventory Valuation.
 27




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Intangible Assets. Goodwill and Other Intangible Asset
 Deferred Tax Assets.
 Convertible Debt and Derivative Instruments. Accounting for Derivative Instruments and Hedging
Activities,
 Stock-Based Compensation. Share-Based Payment
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Results of Operations
  Increase (Decrease)
    
    
    
    
    
    
    
    
    
    Increase (Decrease)(In thousands)
    
    2007
    
    2006
    
    $
    
    %
    
    2006
    
    2005
    
    $
    
    %Net sales
    
    $
    49,587
    
    
    $
    40,449
    
    
    $
    9,138
    
    
    
    22.6
    %
    
    $
    40,449
    
    
    $
    34,636
    
    
    $
    5,813
    
    
    
    16.8
    %Cost of goods sold
    
    
    21,348
    
    
    
    19,568
    
    
    
    1,780
    
    
    
    9.1
    %
    
    
    19,568
    
    
    
    22,828
    
    
    
    (3,260
    )
    
    
    (14.3
    )%Gross profit
    
    
    28,239
    
    
    
    20,881
    
    
    
    7,358
    
    
    
    35.2
    %
    
    
    20,881
    
    
    
    11,808
    
    
    
    9,073
    
    
    
    76.8
    %Operating expenses:Sales and marketing
    
    
    24,633
    
    
    
    21,008
    
    
    
    3,625
    
    
    
    17.3
    %
    
    
    21,008
    
    
    
    18,948
    
    
    
    2,060
    
    
    
    10.9
    %Research and development
    
    
    7,546
    
    
    
    3,381
    
    
    
    4,165
    
    
    
    123.2
    %
    
    
    3,381
    
    
    
    1,733
    
    
    
    1,648
    
    
    
    95.1
    %Acquired in-process R&D
    
    
    3,500
    
    
    
    14,400
    
    
    
    (10,900
    )
    
    
    (75.7
    )%
    
    
    14,400
    
    
    
    
    
    
    
    14,400
    
    
    
    Distributor termination expense
    
    
    
    
    
    
    733
    
    
    
    733
    
    
    
    (100.0
    )%
    
    
    733
    
    
    
    
    
    
    
    733
    
    
    
    General and administrative
    
    
    10,417
    
    
    
    8,786
    
    
    
    1,631
    
    
    
    18.6
    %
    
    
    8,786
    
    
    
    7,314
    
    
    
    1,578
    
    
    
    21.6
    %Amortization of intangibles
    
    
    2,516
    
    
    
    106
    
    
    
    2,410
    
    
    
    2,273.6
    %
    
    
    106
    
    
    
    
    
    
    
    106
    
    
    
    Impairment of intangibles
    
    
    755
    
    
    
    
    
    
    
    755
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    49,367
    
    
    
    48,414
    
    
    
    953
    
    
    
    2.0
    %
    
    
    48,414
    
    
    
    27,995
    
    
    
    20,419
    
    
    
    72.9
    %Operating loss
    
    
    (21,128
    )
    
    
    (27,533
    )
    
    
    (6,405
    )
    
    
    (23.3
    )%
    
    
    (27,533
    )
    
    
    (16,187
    )
    
    
    11,346
    
    
    
    70.1
    %Interest expense, net
    
    
    (1,822
    )
    
    
    (1,669
    )
    
    
    153
    
    
    
    9.2
    %
    
    
    (1,669
    )
    
    
    (338
    )
    
    
    1,331
    
    
    
    393.8
    %Other income, net
    
    
    61
    
    
    
    1,528
    
    
    
    (1,467
    )
    
    
    (96.0
    )%
    
    
    1,528
    
    
    
    2,131
    
    
    
    (603
    )
    
    
    28.3
    %Net loss before income taxes
    
    
    (22,889
    )
    
    
    (27,674
    )
    
    
    (4,785
    )
    
    
    (17.3
    )%
    
    
    (27,674
    )
    
    
    (14,394
    )
    
    
    13,280
    
    
    
    92.3
    %Income tax expense
    
    
    119
    
    
    
    
    
    
    
    119
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    ($23,008
    )
    
    
    ($27,674
    )
    
    
    ($4,666
    )
    
    
    (16.9
    )%
    
    
    ($27,674
    )
    
    
    ($14,394
    )
    
    $
    13,280
    
    
    
    92.3
    %
  2007
    
    2006
    
    2005Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    43.1
    %
    
    
    48.4
    %
    
    
    65.9
    %Gross profit
    
    
    56.9
    %
    
    
    51.6
    %
    
    
    34.1
    %Operating expenses:Sales and marketing
    
    
    49.7
    %
    
    
    51.9
    %
    
    
    54.7
    %Research and development
    
    
    15.2
    %
    
    
    8.4
    %
    
    
    5.0
    %Acquired in-process R&D
    
    
    7.1
    %
    
    
    35.6
    %
    
    
    0.0
    %Distributor
termination expense
    
    
    0.0
    %
    
    
    1.8
    %
    
    
    0.0
    %General and administrative
    
    
    21.0
    %
    
    
    21.7
    %
    
    
    21.1
    %Amortization of intangibles
    
    
    5.1
    %
    
    
    0.3
    %
    
    
    0.0
    %Impairment of intangibles
    
    
    1.5
    %
    
    
    0.0
    %
    
    
    0.0
    %Total operating expenses
    
    
    99.6
    %
    
    
    119.7
    %
    
    
    80.8
    %Operating loss
    
    
    -42.6
    %
    
    
    -68.1
    %
    
    
    -46.7
    %Interest expense, net
    
    
    -3.7
    %
    
    
    -4.1
    %
    
    
    -1.0
    %Other income, net
    
    
    0.1
    %
    
    
    3.8
    %
    
    
    6.2
    %Net loss before income taxes
    
    
    -46.2
    %
    
    
    -68.4
    %
    
    
    -41.6
    %Income tax expense
    
    
    0.2
    %
    
    
    0.0
    %
    
    
    0.0
    %Net loss
    
    
    -46.4
    %
    
    
    -68.4
    %
    
    
    -41.6
    %
 29




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##### Table of Contents



Net Sales.
 Increase
    
    
    
    
    
    
    
    
    
    Increase(In thousands)
    
    2007
    
    2006
    
    $
    
    %
    
    2006
    
    2005
    
    $
    
    %United States and
Canada
    
    $
    18,874
    
    
    $
    15,704
    
    
    $
    3,170
    
    
    
    20.2
    %
    
    $
    15,704
    
    
    $
    13,194
    
    
    $
    2,510
    
    
    
    19.0
    %Outside U. S. and
Canada
    
    
    30,713
    
    
    
    24,745
    
    
    
    5,968
    
    
    
    24.1
    %
    
    
    24,745
    
    
    
    21,442
    
    
    
    3,303
    
    
    
    15.4
    %Total
    
    $
    49,587
    
    
    $
    40,449
    
    
    $
    9,138
    
    
    
    22.6
    %
    
    $
    40,449
    
    
    $
    34,636
    
    
    $
    5,813
    
    
    
    16.8
    %
  2007
    
    2006
    
    2005United States and Canada
    
    
    38.1
    %
    
    
    38.8
    %
    
    
    38.1
    %Outside U. S. and Canada
    
    
    61.9
    %
    
    
    61.2
    %
    
    
    61.9
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Increase
    
    
    
    
    
    
    
    
    
    Increase(In thousands)
    
    2007
    
    2006
    
    $
    
    %
    
    2006
    
    2005
    
    $
    
    %Heart valve therapy
    
    $
    38,558
    
    
    $
    35,343
    
    
    $
    3,215
    
    
    
    9.1
    %
    
    $
    35,343
    
    
    $
    31,652
    
    
    $
    3,691
    
    
    
    11.7
    %Surgical arrhythmia therapy
    
    
    9,689
    
    
    
    4,554
    
    
    
    5,135
    
    
    
    112.8
    %
    
    
    4,554
    
    
    
    2,455
    
    
    
    2,099
    
    
    
    85.5
    %Surgical tools and accessories
    
    
    1,340
    
    
    
    552
    
    
    
    788
    
    
    
    142.7
    %
    
    
    552
    
    
    
    529
    
    
    
    23
    
    
    
    4.3
    %Total
    
    $
    49,587
    
    
    $
    40,449
    
    
    $
    9,138
    
    
    
    22.6
    %
    
    $
    40,449
    
    
    $
    34,636
    
    
    $
    5,813
    
    
    
    16.8
    %
    Cost of Goods Sold and Gross Profit.
 30




---



##### Table of Contents



Sales and Marketing.
  Research and Development.
 Acquired In-Process R & D.
  31




---



##### Table of Contents



General and Administrative.
    Amortization of Intangibles.
 Impairment of Intangibles
 Net Interest Expense .
  32




---



##### Table of Contents



Net Other Income
 Accounting for Derivative Instruments and Hedging Activities.
  Income Taxes
  Net Loss.
 Liquidity and Capital Resources
  Operating Activities.
 33




---



##### Table of Contents



Investing Activities.
   Financing Activities.
     34




---



##### Table of Contents



Cash Management
   Off-Balance Sheet Arrangements
  Contractual Obligations
  Payments Due By PeriodLess
    
    
    
    
    
    
    
    
    
    MoreThan
    
    1-3
    
    3-5
    
    Than 5(in thousands)
    
    Total
    
    1 year
    
    Years
    
    Years
    
    YearsConvertible notes payable (1)
    
    $
    46,592
    
    
    $
    1,344
    
    
    $
    4,032
    
    
    $
    4,032
    
    
    $
    37,184Bank notes payable (1)
    
    
    10,086
    
    
    
    3,179
    
    
    
    6,907
    
    
    
    
    
    
    
    Operating leases
    
    
    2,073
    
    
    
    836
    
    
    
    1,237
    
    
    
    
    
    
    
    Purchase commitments (2)
    
    
    21,750
    
    
    
    10,000
    
    
    
    11,750
    
    
    
    
    
    
    
    Total
    
    $
    80,501
    
    
    $
    15,359
    
    
    $
    23,926
    
    
    $
    4,032
    
    
    $
    37,184
 
 (1)
    
    Includes interest payments.(2)
    
    Includes mechanical heart valve component purchases under our supply agreement with CarboMedics.
CarboMedics has filed a complaint against us alleging that CarboMedics is obligated to
supply these mechanical heart valve components under a long-term supply agreement. We believe that the
complaint is without merit, that CarboMedics has repudiated and breached the supply
agreement, and that we may have affirmative claims against CarboMedics. Although
CarboMedics initially sought specific performance and claimed damages of approximately $20
million, it has since withdrawn its request for specific performance and revised its
damages estimate to $13.6 million before accounting for net present value adjustments,
interest, attorneys fees, and costs. See Item 3 Legal Proceedings  CarboMedics
Litigation. Cautionary Statements
  35




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##### Table of Contents



ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
 ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  36




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##### Table of Contents



ITEM 9A.
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Managements Report on Internal Control over Financial Reporting
    Changes in Internal Control Over Financial Reporting
  
 ITEM 9B.
    
    OTHER INFORMATION
  37




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##### Table of Contents



PART III
 
 ITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
    
 ITEM 11.
    
    EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
  38




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 Financial Statements
 Our Consolidated Financial Statements and the Independent
Registered Public Accounting Firms Reports thereon are
included herein (page numbers refer to pages following the
signature page of this Annual Report on Form 10-K):Reports of Independent Registered Public Accounting Firms
    
    Page F-1 through F-3Consolidated Balance Sheets as of December 31, 2007 and 2006
    
    Page F-4Consolidated Statements of Operations for the years ended
December 31, 2007, 2006, and 2005
    
    Page F-5Consolidated Statement of Changes in Shareholders Equity
for the years ended December 31, 2007, 2006, and 2005
    
    Page F-6Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006, and 2005
    
    Page F-7Notes to Consolidated Financial Statements for the years
ended December 31, 2007, 2006, and 2005
    
    Page F-8 through
F-30
 Financial Statement Schedules
 ATS MEDICAL, INC.
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 Additions -Charged toBalance at
    
    Charged to
    
    Other
    
    
    
    
    
    Balance atBeginning
    
    Costs and
    
    Accounts -
    
    Deductions -
    
    End ofDescription
    
    of Period
    
    Expenses
    
    Describe
    
    Describe
    
    PeriodValuation Accounts:Deducted from asset accounts:Year ended December 31, 2007:Allowance for doubtful accounts
    
    $
    537
    
    
    $
    250
    
    
    $
    
    
    
    $
    (562
    ) (1)
    
    $
    225Allowance for obsolete inventories
    
    
    608
    
    
    
    (117
    )
    
    
    
    
    
    
    
    
    
    
    491Year ended December 31, 2006:Allowance for doubtful accounts
    
    
    360
    
    
    
    493
    
    
    
    11
    (4)
    
    
    (327
    ) (1)
    
    
    537Allowance for obsolete inventories
    
    
    215
    
    
    
    50
    
    
    
    436
    (3)
    
    
    (93
    ) (2)
    
    
    608Year Ended December 31, 2005:Allowance for doubtful accounts
    
    
    388
    
    
    
    
    
    
    
    
    
    
    
    (28
    ) (1)
    
    
    360Allowance for obsolete inventories
    
    
    200
    
    
    
    50
    
    
    
    
    
    
    
    (35
    ) (2)
    
    
    215
 
 (1)
    
    Uncollectible accounts written off, net of recoveries.(2)
    
    Changes in estimate recovered through a reduction in expenses.(3)
    
    Obsolescence reserve for inventories recorded in connection with the purchase accounting for
the 3F acquisition.(4)
    
    Allowance for doubtful accounts recorded in connection with the purchase accounting for the 3F
acquisition.
  39




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##### Table of Contents



Exhibits
 ExhibitNumber
    
    Description2.1***
    
    Agreement and Plan of Merger, dated as of January 23, 2006, by and among ATS Medical, Inc.,
Seabiscuit Acquisition Corp.; 3F Therapeutics, Inc.; and Boyd D. Cox, as Stockholder
Representative (Incorporated by reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K filed on January 26, 2006).2.2
    
    Amendment No. 1 to Agreement and Plan of Merger, dated as of June 13, 2006, by and among ATS
Medical, Inc., Seabiscuit Acquisition Corp., 3F Therapeutics, Inc. and Boyd D. Cox, as
stockholder representative (Incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on June 19, 2006).2.3
    
    Amendment No. 2 to Agreement and Plan of Merger, dated as of August 10, 2006, by and among
the Company, Seabiscuit Acquisition Corp., 3F Therapeutics, Inc. and Boyd D. Cox, as
stockholder representative (Incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on August 15, 2006).2.4
    
    Escrow Agreement, effective as of September 29, 2006, by and among the Company, Boyd D. Cox,
as stockholder representative and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit
2.4 to the Companys Annual Report on Form 10-K for the year ended December 31, 2006).2.5***
    
    Option and Asset Purchase Agreement, dated as of May 31, 2005, by and among ATS Medical,
Inc., em Vascular, Inc., Keith L. March, M.D., John Havek, Walter L. Sembrowich and James E.
Shapland II (Incorporated by reference to Exhibit 2.5 to the Companys Annual Report on Form
10-K for the year ended December 31, 2006).2.6
    
    Letter Amendment, dated as of November 29, 2006, to the Option and Asset Purchase Agreement,
dated as of May 31, 2005, by and among ATS Medical, Inc., em Vascular, Inc., Keith L. March,
M.D., John Havek, Walter L. Sembrowich and James E. Shapland II, (Incorporated by reference to
Exhibit 2.6 to the Companys Annual Report on Form 10-K for the year ended December 31, 2006).2.7***
    
    Asset Purchase Agreement dated June 18, 2007 by and between ATS Medical, Inc. and CryoCath
Technologies Inc. (Incorporated by reference to Exhibit 2.1 to the Companys Current Report on
Form 8-K filed on June 25, 2007).3.1
    
    Second Restated Articles of Incorporation of ATS Medical, Inc. (Incorporated by reference to
Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30,
2006 (the September 2006 Form 10-Q)).3.2
    
    Bylaws of the Company, as amended February 13, 2007 (Incorporated by reference to Exhibit
10.2 to the Companys Current Report on Form 8-K filed on February 20, 2007).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)).4.2
    
    Indenture, dated as of October 7, 2005, between ATS Medical, Inc. and Wells Fargo Bank,
National Association, as Trustee (Incorporated by reference to Exhibit 4.1 of the Companys
Current Report on Form 8-K filed on October 12, 2005 (the October 12, 2005 Form 8-K)).4.3
    
    First Supplemental Indenture, dated October 13, 2005, to the Indenture dated as of October 7,
2005, by and between ATS Medical, Inc. and Wells Fargo Bank, National Association, as Trustee
(Incorporated by reference to Exhibit 4.3 of the Companys October 18, 2005 Form 8-K).
 40




---



##### Table of Contents



ExhibitNumber
    
    Description4.4
    
    Form of 6% Convertible Senior Notes due 2025 (Incorporated by reference to Exhibit 4.1 of the
Companys Current Report on Form 8-K filed on October 18, 2005 (the October 18, 2005 Form
8-K)).4.5
    
    Form of Warrant (Incorporated by reference to Exhibit 4.2 of the Companys October 18, 2005
Form 8-K).4.6
    
    Form of Warrant (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on
Form 8-K filed on March 16, 2007).4.7
    
    Warrant, dated June 28, 2007, issued by ATS Medical, Inc. to Alta Partners VIII, L.P.
(Incorporated by reference to Exhibit 10.4 to the Companys Current Report on Form 8-K filed
on July 5, 2007).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, as amended through September 25, 2006
(Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed
on September 29, 2006).10.3
    
    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)).10.4
    
    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).10.5
    
    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).10.6
    
    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).10.7
    
    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
Companys Annual Report on Form 10-K for the year ended December 31, 1996 (the 1996 Form
10-K)).10.8*
    
    O.E.M. Supply Contract dated September 24, 1990, with CarboMedics, Inc. (Incorporated by
reference to Exhibit 10.10 to the 1996 Form 10-K).10.9*
    
    License Agreement dated September 24, 1990, with CarboMedics, Inc. (Incorporated by
reference to Exhibit 10.11 to the 1996 Form 10-K).10.10**
    
    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)).10.11
    
    Helix BioCore, Inc. Self-Insurance Trust Agreement dated February 28, 1991 (Incorporated by
reference to Exhibit 10.13 to the 1996 Form 10-K).10.12*
    
    Amendment 1 to License Agreement dated December 16, 1993, with CarboMedics, Inc.
(Incorporated by reference to Exhibit 10.17 to the 1993 Form 10-K).10.13*
    
    Amendment 4 to O.E.M. Supply Contract dated December 16, 1993, with CarboMedics, Inc.
(Incorporated by reference to Exhibit 10.18 to the 1993 Form 10-K).
 41




---



##### Table of Contents



ExhibitNumber
    
    Description10.14*
    
    Amendment 5 to O.E.M. Supply Contract dated September 1, 1994, with CarboMedics, Inc.
(Incorporated by reference to Exhibit 10.19 to the 1994 Form 10-K).10.15
    
    Letter Agreement between the Company and Sulzer CarboMedics, Inc., dated June 27, 2002
(Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for
the quarter ended June 20, 2002).10.16
    
    Form of International Distributor Agreement (Incorporated by reference to Exhibit 10.22 to
the 1994 Form 10-K).10.17
    
    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).10.18
    
    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).10.19
    
    1998 Employee Stock Purchase Plan, as amended through September 25, 2006 (Incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on September 29,
2006).10.20*
    
    Carbon Agreement by and between Sulzer CarboMedics, Inc. and ATS Medical, Inc., dated
December 29, 1999 (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).10.21*
    
    Amendment 7 to OEM Supply Contract by and between Sulzer CarboMedics, Inc. and ATS Medical,
Inc., dated December 29, 1999 (Incorporated by reference to Exhibit 99.2 to the January 2000
Form 8-K).10.22*
    
    Amendment 2 to License Agreement by and between Sulzer CarboMedics, Inc. and ATS Medical,
Inc., dated December 29, 1999 (Incorporated by reference to Exhibit 99.3 to the January 2000
Form 8-K).10.23
    
    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 Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000).10.24
    
    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 Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000).10.25
    
    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)).10.26*
    
    Amendment 8 to OEM Supply Contract by and between Sulzer CarboMedics, Inc. and ATS Medical,
Inc., dated November 3, 2000 (Incorporated by reference to Exhibit 10.33 to the 2000 Form
10-K).10.27
    
    Form of U.S. Distribution Agreement (Incorporated by reference to Exhibit 10.34 to the 2002
Form 10-K).10.28
    
    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 Quarterly Report
on Form 10-Q for the quarter ended September 30, 2003).10.29**
    
    Form of Employee Stock Option Agreement under the companys 2000 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report of Form 10-Q for
the quarter ended September 30, 2004 (the September 2004 Form 10-Q)).
 42




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##### Table of Contents



ExhibitNumber
    
    Description10.30**
    
    Form of Non-Qualified Stock Option Agreement under the Companys 2000 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.3 to the Companys September 2004 Form 10-Q).10.31**
    
    Form of Non-Plan Non-Qualified Stock Option Agreement (Incorporated by reference to Exhibit
10.4 to the Companys September 2004 Form 10-Q).10.32*
    
    Development and License Agreement dated as of April 26, 2004 between the Company and ErySave
AB (Incorporated by reference to Exhibit 10.1 to the Companys September 2004 Form 10-Q).10.33
    
    Credit Agreement between Silicon Valley Bank and the Company, dated July 28, 2004
(Incorporated by reference to Exhibit 10.1 to the Companys September 2004 Form 10-Q).10.34
    
    Amendment No. 10 to Lease Agreement between the Company and St. Paul Properties, Inc. dated
as of October 1, 2004 (Incorporated by reference to Exhibit 10.40 to the Companys Annual
Report on Form 10-K for the year ended December 31, 2004 (the 2004 Form 10-K)).10.35
    
    Letter Agreement between the Company and Centerpulse USA Holding Co. dated July 9, 2003
(Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed
on September 26, 2003).10.36
    
    Amendment dated June 22, 2005, to Development and License Agreement between the Company and
ErySave AB (Incorporated by reference to Exhibit 10.1 of the Companys Quarterly Report on
Form 10-Q for the quarter June 30, 2005 (the June 2005 Form 10-Q)).10.37*
    
    Marketing Services Agreement with Alabama Tissue Center, Inc. (also known as Regeneration
Technologies, Inc.  Cardiovascular), a subsidiary of Regeneration Technologies, Inc.,
effective as of July 21, 2005 (Incorporated by reference to Exhibit 10.43 of the Companys
Annual Report on Form 10-K for the year ended December 31, 2005 (the 2005 Form 10-K)).10.38*
    
    Exclusive Development, Supply and Distribution Agreement with Genesee BioMedical, Inc.,
dated June 23, 2005 (Incorporated by reference to Exhibit 10.44 of the 2005 Form 10-K).10.39
    
    Amendment Agreement, dated March 24, 2005, to the Credit Agreement between Silicon Valley
Bank and the Company, dated July 28, 2004 (Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on March 30, 2005).10.40
    
    Securities Purchase Agreement, dated as of October 6, 2005, by and among ATS Medical, Inc.
and the Buyers listed on the Schedule of Buyers attached thereto as Exhibit A (Incorporated by
reference to Exhibit 10.1 of the Companys October 12, 2005 Form 8-K).10.41
    
    Amendment No. 1, dated October 12, 2005, to the Securities Purchase Agreement by and among
ATS Medical, Inc. and the Buyers listed therein, dated as of October 6, 2005 (Incorporated by
reference to Exhibit 10.1 of the Companys October 18, 2005 Form 8-K).10.42
    
    Registration Rights Agreement, dated as of October 7, 2005, by and among ATS Medical, Inc.
and the Buyers listed on the Schedule of Buyers attached thereto as Exhibit A (Incorporated by
reference to Exhibit 10.2 of the Companys October 12, 2005 Form 8-K).10.43
    
    Amendment No. 1, dated October 13, 2005, to the Registration Rights Agreement by and among
ATS Medical, Inc. and the Buyers listed therein, dated as of October 7, 2005 (Incorporated by
reference to Exhibit 10.2 of the Companys October 18, 2005 Form 8-K).10.44
    
    Warrant Agent Agreement, dated as of October 7, 2005, between ATS Medical, Inc. and Wells
Fargo Bank, National Association, as Warrant Agent (Incorporated by reference to Exhibit 10.3
of the Companys October 12, 2005 Form 8-K).10.45**
    
    Form of Lock-Up Agreement with Executive Officers (Incorporated by reference to Exhibit
99.1 of the Companys Current Report on Form 8-K filed on December 29, 2005).
 43




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##### Table of Contents



ExhibitNumber
    
    Description10.46**
    
    Form of Restricted Stock Unit Agreement under the Companys 2000 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.53 of the 2005 Form 10-K).10.47
    
    Amendment, dated March 29, 2006, to the Loan and Security Agreement between Silicon Valley
Bank and the Company, dated July 28, 2004 (Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on April 3, 2006).10.48**
    
    Form of Change in Control Agreement executed by executive officers of the Company
(Incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for
the quarter ended June 30, 2006).10.49*
    
    Exclusive Distribution Agreement, effective as of October 1, 2006, by and between the
Company and Novare Surgical Systems, Inc. (Incorporated by reference to Exhibit 10.1 to the
Companys September 2006 Form 10-Q).10.50
    
    Amendment No. 2 dated September 1, 2006, to Original Lease Agreement dated April 29, 2000,
by and between the Company and St. Paul Properties, Inc. (Incorporated by reference to Exhibit
10.2 to the Companys September 2006 Form 10-Q).10.51
    
    Amendment No. 11 dated September 1, 2006, to Original Lease Agreement dated December 22,
1987, by and between the Company and St. Paul Properties, Inc. (Incorporated by reference to
Exhibit 10.3 to the Companys September 2006 Form 10-Q).10.52
    
    Amendment, dated August 15, 2006, to the Loan and Security Agreement between Silicon Valley
Bank and the Company, dated July 28, 2004 (Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on August 17, 2006).10.53*
    
    Amendment, effective as of January 1, 2007, to the Marketing Services Agreement with Alabama
Tissue Center, Inc. (Incorporated by reference to Exhibit 10.61 of the Companys Annual Report
on Form 10-K for the year ended December 31, 2006).10.54**
    
    Restricted Stock Unit Award Agreement, dated as of December 7, 2006, between the Company
and Richard A. Curtis (Incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on December 13, 2006).10.55**
    
    Form of Restricted Stock Unit Award Agreement for awards to Non-Employee Directors under
2000 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on February 20, 2007).10.56
    
    Amendment No. 4, dated February 15, 2007, to the Loan and Security Agreement between Silicon
Valley Bank and the Company, dated July 28, 2004 (Incorporated by reference to the Companys
Current Report on Form 8-K filed on February 23, 2007).10.57
    
    Securities Purchase Agreement, dated March 15, 2007, between the Company and Certain
Investors (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on March 16, 2007).10.58
    
    Registration Rights Agreement, dated March 15, 2007, between the Company and Certain
Investors (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form
8-K filed on March 16, 2007).10.59
    
    Confidential Separation and Release Agreement executed as of March 6, 2007 between Marc R.
Sportsman and the Company (Incorporated by reference to Exhibit 10.5 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).10.60
    
    Letter Agreement, dated June 7, 2007, by and among Endocare, Inc., CryoCath Technologies
Inc. and ATS Medical, Inc. (Incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on June 25, 2007).
 44




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##### Table of Contents



ExhibitNumber
    
    Description10.61
    
    License Agreement, dated June 28, 2007, by and between ATS Acquisition Corp. and CryoCath
Technologies Inc. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K filed on July 5, 2007).10.62
    
    Manufacturing Agreement, dated June 28, 2007, by and between ATS Acquisition Corp. and
CryoCath Technologies Inc. (Incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K filed on July 5, 2007).10.63
    
    Termination Agreement, dated June 28, 2007, by and between ATS Medical, Inc. and CryoCath
Technologies Inc. (Incorporated by reference to Exhibit 10.3 to the Companys Current Report
on Form 8-K filed on July 5, 2007).10.64
    
    Common Stock and Warrant Purchase Agreement, dated as of June 19, 2007, by and between ATS
Medical, Inc. and Alta Partners VIII, L.P. (Incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K filed on June 25, 2007).10.65
    
    Registration Rights Agreement, dated June 28, 2007, by and between ATS Medical, Inc. and
Alta Partners VIII, L.P. (Incorporated by reference to Exhibit 10.5 to the Companys Current
Report on Form 8-K filed on July 5, 2007).10.66
    
    Amendment, dated June 18, 2007, to the Loan and Security Agreement between Silicon Valley
Bank and the Company dated July 28, 2004 (Incorporated by reference to Exhibit 10.3 to the
Companys Current Report on Form 8-K filed on June 25, 2007).10.67**
    
    2007 ATS Medical Management Incentive Compensation Plan (Incorporated by reference to
Exhibit 10.9 of the Companys Quarterly Report on Form 10-Q for the quarter ended June 30,
2007).10.68
    
    First Amendment, dated February 29, 2008, to the Loan and Security Agreement between Silicon
Valley Bank and the Company dated July 28, 2004 (Incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K filed on March 6, 2008).10.69
    
    Second Amendment, dated February 29, 2008, to the Loan and Security Agreement between
Silicon Valley Bank and the Company dated July 28, 2004 (Incorporated by reference to Exhibit
10.2 to the Companys Current Report on Form 8-K filed on March 6, 2008).10.70
    
    Unconditional Guaranty, dated February 29, 2008, entered into by 3F Therapeutics and ATS
Acquisition Corp., in favor of Silicon Valley Bank (Incorporated by reference to Exhibit 10.3
to the Companys Current Report on Form 8-K filed on March 6, 2008).10.71
    
    Security Agreement, dated February 29, 2008, by and between Silicon Valley Bank, 3F
Therapeutics, Inc. and ATS Acquisition Corp. (Incorporated by reference to Exhibit 10.4 to the
Companys Current Report on Form 8-K filed on March 6, 2008).10.72
    
    Confidential Separation Agreement and Release, executed as of November 14, 2007, between
Richard A. Curtis and ATS Medical, Inc., filed herewith.21
    
    List of Subsidiaries, filed herewith.23.1
    
    Consent of Grant Thornton LLP, filed herewith.23.2
    
    Consent of Ernst & Young LLP, filed herewith.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, filed herewith.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, filed herewith.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, filed herewith.
 45




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##### Table of Contents



ExhibitNumber
    
    Description32.2
    
    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, filed herewith.
 
 *
    
    Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions
of these exhibits have been deleted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment.**
    
    Represents a management contract or compensatory plan or arrangement required to be filed as an
exhibit pursuant to Item 15 of Form 10-K.***
    
    Exhibits and Schedules to the acquisition agreement have been omitted but will be provided
supplementally to the Securities and Exchange Commission upon request. 46




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##### Table of Contents



SIGNATURES
  Dated:  March 14, 2008
    ATS MEDICAL, INC.By:
    /s/ Michael D. DaleMichael D. DaleChief Executive Officer  Signature
    
    Title/s/ Michael D. Dale

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


Michael R. Kramer
    
    Chief Financial Officer
(principal financial and accounting officer)/s/ Steven M. Anderson

Steven M. Anderson
    
    Director/s/ Robert E. Munzenrider

Robert E. Munzenrider
    
    Director/s/ Guy P. Nohra

Guy P. Nohra
    
    Director/s/ Eric W. Sivertson

Eric W. Sivertson
    
    Director/s/ Theodore C. Skokos

Theodore C. Skokos
    
    Director
 47




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Share-Based Payment.
 Internal ControlIntegrated Framework )
  
 F - 1




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##### Table of Contents



F - 2




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##### Table of Contents



Internal ControlIntegrated Framework
    Internal
ControlIntegrated Framework
   
 F - 3




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##### Table of Contents



(In Thousands, Except Share Data)
 December 312007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    10,480
    
    
    $
    4,612Short-term investments
    
    
    4,189
    
    
    
    6,09214,669
    
    
    
    10,704Accounts receivable, less allowance of $225 in
2007 and $537 in 2006
    
    
    11,186
    
    
    
    11,677Inventories
    
    
    18,743
    
    
    
    18,782Prepaid expenses
    
    
    1,143
    
    
    
    1,175Total current assets
    
    
    45,741
    
    
    
    42,338Leasehold improvements, furniture, and equipment, net
    
    
    7,739
    
    
    
    8,213Goodwill
    
    
    15,175
    
    
    
    5,092Other intangible assets
    
    
    35,604
    
    
    
    28,063Other assets
    
    
    1,638
    
    
    
    2,134Total assets
    
    $
    105,897
    
    
    $
    85,840Liabilities and shareholders equityCurrent liabilities:Current maturities of notes payable
    
    $
    2,457
    
    
    $
    1,133Accounts payable
    
    
    4,794
    
    
    
    3,183Accrued compensation
    
    
    2,361
    
    
    
    2,589Accrued distributor liabilities
    
    
    791
    
    
    
    1,024Warrant liability
    
    
    3,913
    
    
    
    Other accrued liabilities
    
    
    1,209
    
    
    
    1,433Total current liabilities
    
    
    15,525
    
    
    
    9,362Convertible senior notes payable, net of unamortized
discounts andbifurcated derivatives of $4,964 in
2007 and $5,006 in 2006
    
    
    17,436
    
    
    
    17,394Payable to CryoCath Technologies, Inc.
    
    
    1,742
    
    
    
    Notes payable
    
    
    6,143
    
    
    
    1,194Deferred income taxes
    
    
    95
    
    
    
    Shareholders equity:Common stock, $0.01 par value:Authorized shares  100,000,000Issued and outstanding shares  59,512,085 in
2007 and 40,320,487 in 2006
    
    
    595
    
    
    
    403Additional paid-in capital
    
    
    196,108
    
    
    
    166,411Accumulated deficit
    
    
    (132,577
    )
    
    
    (109,569
    )Accumulated other comprehensive income
    
    
    830
    
    
    
    645Total shareholders equity
    
    
    64,956
    
    
    
    57,890Total liabilities and shareholders equity
    
    $
    105,897
    
    
    $
    85,840
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 4




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##### Table of Contents



(In Thousands, Except Per Share Amounts)
 Year Ended December 312007
    
    
    2006
    
    
    2005Net sales
    
    $
    49,587
    
    
    $
    40,449
    
    
    $
    34,636Cost of goods sold
    
    
    21,348
    
    
    
    19,568
    
    
    
    22,828Gross profit
    
    
    28,239
    
    
    
    20,881
    
    
    
    11,808Operating expenses:Sales and marketing
    
    
    24,633
    
    
    
    21,008
    
    
    
    18,948Research and development
    
    
    7,546
    
    
    
    3,381
    
    
    
    1,733Acquired in-process research and development
    
    
    3,500
    
    
    
    14,400
    
    
    
    Distributor termination expense
    
    
    
    
    
    
    733
    
    
    
    General and administrative
    
    
    10,417
    
    
    
    8,786
    
    
    
    7,314Amortization of intangibles
    
    
    2,516
    
    
    
    106
    
    
    
    Intangible asset impairment
    
    
    755
    
    
    
    
    
    
    
    Total operating expenses
    
    
    49,367
    
    
    
    48,414
    
    
    
    27,995Operating loss
    
    
    (21,128
    )
    
    
    (27,533
    )
    
    
    (16,187
    )Interest income
    
    
    720
    
    
    
    725
    
    
    
    323Interest expense
    
    
    (2,542
    )
    
    
    (2,394
    )
    
    
    (661
    )Other income, net
    
    
    61
    
    
    
    1,528
    
    
    
    2,131Net loss before income taxes
    
    
    (22,889
    )
    
    
    (27,674
    )
    
    
    (14,394
    )Income tax expense
    
    
    119
    
    
    
    
    
    
    
    Net loss
    
    $
    (23,008
    )
    
    $
    (27,674
    )
    
    $
    (14,394
    )Net loss per share:Basic and diluted
    
    $
    (0.44
    )
    
    $
    (0.83
    )
    
    $
    (0.46
    )Weighted average number of shares outstanding:Basic and diluted
    
    
    52,589
    
    
    
    33,537
    
    
    
    31,009
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 5




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##### Table of Contents



(In Thousands)
 AccumulatedOtherAdditional
    
    
    
    
    
    
    Compre-Common Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    hensive
    
    
    UnearnedShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    Compensation
    
    
    TotalBalance at December 31, 2004
    
    
    30,890
    
    
    $
    309
    
    
    $
    136,562
    
    
    $
    (67,501
    )
    
    $
    95
    
    
    $
    (24
    )
    
    $
    69,441Stock issued under the
Employee Stock Purchase Plan
    
    
    120
    
    
    
    1
    
    
    
    347
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    348Stock options exercised
    
    
    104
    
    
    
    1
    
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186Warrants issued in
connection with sale of
convertible debt securities
    
    
    
    
    
    
    
    
    
    
    1,522
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,522Unearned compensation
related to stock options and
awards
    
    
    
    
    
    
    
    
    
    
    1,127
    
    
    
    
    
    
    
    
    
    
    
    (1,127
    )
    
    
    Amortization of unearned
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    585
    
    
    
    585Comprehensive loss:Change in foreign
currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (159
    )
    
    
    
    
    
    
    (159
    )Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,394
    )
    
    
    
    
    
    
    
    
    
    
    (14,394
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,553
    )Balance at December 31, 2005
    
    
    31,114
    
    
    
    311
    
    
    
    139,743
    
    
    
    (81,895
    )
    
    
    (64
    )
    
    
    (566
    )
    
    
    57,529Stock issued under the
Employee Stock Purchase Plan
    
    
    104
    
    
    
    1
    
    
    
    217
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    218Stock options exercised
    
    
    48
    
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44Stock issued in connection
with the acquisition of 3F
Therapeutics
    
    
    9,000
    
    
    
    90
    
    
    
    26,010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,100Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    1,103
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,103Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )Reclassification of unearned
compensation in accordance
with the adoption of SFAS
123R
    
    
    
    
    
    
    
    
    
    
    (566
    )
    
    
    
    
    
    
    
    
    
    
    566
    
    
    
    Restricted stock units issued
    
    
    54
    
    
    
    1
    
    
    
    (95
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (94
    )Comprehensive loss:Change in foreign
currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    709
    
    
    
    
    
    
    
    709Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,674
    )
    
    
    
    
    
    
    
    
    
    
    (27,674
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,965
    )Balance at December 31, 2006
    
    
    40,320
    
    
    
    403
    
    
    
    166,411
    
    
    
    (109,569
    )
    
    
    645
    
    
    
    
    
    
    
    57,890Stock issued under the
Employee Stock Purchase Plan
    
    
    130
    
    
    
    2
    
    
    
    208
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210Stock options exercised
    
    
    524
    
    
    
    5
    
    
    
    475
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    480Stock issued in private
placement sales, net of
offering costs
    
    
    17,925
    
    
    
    179
    
    
    
    30,382
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,561Stock issued for purchase of
intangible assets
    
    
    224
    
    
    
    2
    
    
    
    498
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500Warrant issued in connection
with private placement stock
sale
    
    
    
    
    
    
    
    
    
    
    (3,261
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,261
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    1,454
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,454Restricted stock units issued
    
    
    389
    
    
    
    4
    
    
    
    (59
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (55
    )Comprehensive loss:Change in foreign
currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    
    
    
    
    185Net loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,008
    )
    
    
    
    
    
    
    
    
    
    
    (23,008
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,823
    )Balance at December 31, 2007
    
    
    59,512
    
    
    $
    595
    
    
    $
    196,108
    
    
    $
    (132,577
    )
    
    $
    830
    
    
    $
    
    
    
    $
    64,956
  F - 6




---



##### Table of Contents



(In Thousands)
 Year Ended December 312007
    
    2006
    
    2005Operating activities:Net loss
    
    $
    (23,008
    )
    
    $
    (27,674
    )
    
    $
    (14,394
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    4,622
    
    
    
    1,924
    
    
    
    1,563Loss on disposal of equipment
    
    
    
    
    
    
    26
    
    
    
    35Non-cash interest expense
    
    
    546
    
    
    
    463
    
    
    
    138Stock based compensation
    
    
    1,454
    
    
    
    1,103
    
    
    
    585Change in value of warrant liability and derivative liability
bifurcated from convertible senior notes
    
    
    554
    
    
    
    (1,528
    )
    
    
    (2,131
    )In-process research and development related to acquisitions
    
    
    3,500
    
    
    
    14,400
    
    
    
    Impairment of intangibles
    
    
    755
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    95
    
    
    
    
    
    
    
    Lower of cost or market adjustment
    
    
    
    
    
    
    
    
    
    
    700Changes in operating assets and liabilities, net of acquisition:Accounts receivable
    
    
    1,117
    
    
    
    1,010
    
    
    
    (2,560
    )Inventories
    
    
    669
    
    
    
    2,845
    
    
    
    5,317Accounts payable and accrued expenses
    
    
    121
    
    
    
    (2,075
    )
    
    
    292Other
    
    
    32
    
    
    
    (324
    )
    
    
    (163
    )Net cash used in operating activities
    
    
    (9,543
    )
    
    
    (9,830
    )
    
    
    (10,618
    )Investing activities:Purchases of short-term investments
    
    
    (4,140
    )
    
    
    (10,326
    )
    
    
    (5,503
    )Maturities of short-term investments
    
    
    6,043
    
    
    
    9,336
    
    
    
    8,106Payments for business acquisitions
    
    
    (21,074
    )
    
    
    
    
    
    
    Business acquisition costs, net of cash acquired
    
    
    (1,791
    )
    
    
    (717
    )
    
    
    Payments for other intangibles
    
    
    (277
    )
    
    
    (521
    )
    
    
    (1,817
    )Purchases of leasehold improvements, furniture, and equipment
    
    
    (748
    )
    
    
    (1,208
    )
    
    
    (2,278
    )Other
    
    
    (36
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (22,023
    )
    
    
    (3,436
    )
    
    
    (1,492
    )Financing activities:Proceeds from sale of convertible senior notes, warrants and
embedded derivatives, net of financing costs
    
    
    
    
    
    
    
    
    
    
    20,817Advances on bank notes payable
    
    
    8,600
    
    
    
    1,500
    
    
    
    Payments on bank notes payable
    
    
    (2,327
    )
    
    
    (909
    )
    
    
    (764
    )Net proceeds from issuance of common stock
    
    
    31,196
    
    
    
    123
    
    
    
    534Other
    
    
    168
    
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    37,637
    
    
    
    714
    
    
    
    20,587Effect of exchange rate changes
    
    
    (203
    )
    
    
    544
    
    
    
    (159
    )Increase (decrease) in cash and cash equivalents
    
    
    5,868
    
    
    
    (12,008
    )
    
    
    8,318Cash and cash equivalents at beginning of year
    
    
    4,612
    
    
    
    16,620
    
    
    
    8,302Cash and cash equivalents at end of year
    
    $
    10,480
    
    
    $
    4,612
    
    
    $
    16,620Supplemental cash flow information:Net cash paid during the year for interest
    
    $
    2,320
    
    
    $
    1,642
    
    
    $
    238Significant non-cash transactions:Issuance of common stock for acquisition of intangible assets
    
    
    500
    
    
    
    
    
    
    
    Assumption of liabilities in connection with asset acquisition
    
    
    2,429
    
    
    
    
    
    
    
    License agreement intangible asset tendered in asset acquisition
    
    
    1,765
    
    
    
    
    
    
    
    Reclassification of unearned compensation to additional paid-in
capital in accordance with the adoption of SFAS 123R
    
    
    
    
    
    
    566
    
    
    
    Reclassification of convertible note derivative liability against
related discount
    
    
    
    
    
    
    (1,627
    )
    
    
    Stock issued for acquisition
    
    
    
    
    
    
    26,100
    
    
    
    
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 7




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##### Table of Contents



1. Summary of Significant Accounting Policies
 Business Activity
   Principles of Consolidation
  Cash Equivalents
  Short-Term Investments
  Accounts Receivable
  Inventories
  F - 8




---



##### Table of Contents



2007
    
    2006Raw materials
    
    $
    3,655
    
    
    $
    4,615Work-in-process
    
    
    2,920
    
    
    
    2,948Finished goods
    
    
    12,168
    
    
    
    11,219$
    18,743
    
    
    $
    18,782
 Other Assets
  Leasehold Improvements, Furniture, and Equipment
  Furniture and fixtures
    
    7 yearsEquipment
    
    5 to 17 yearsComputers
    
    2 years
  Indefinite-Lived Intangible Assets
 Goodwill and Other Intangible Assets,
 Revenue Recognition
   F - 9




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##### Table of Contents



Use of Estimates
  Advertising and Promotional Costs
  Foreign Currency Translation
   Income Taxes
 Accounting for Income Taxes
 Accounting for Uncertainty in Income Taxes Accounting for
Contingencies Accounting for Income Taxes
 Warranties
 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Indebtedness to Others
 F - 10




---



##### Table of Contents



Stock-Based Compensation
 Share-Based Payment
  Net Loss Per Share
  Convertible Debt and Derivative Instruments
 Accounting for Derivative Instruments and Hedging
Activities,
 2. Acquisitions
 Acquisition of Assets from CryoCath Technologies, Inc.
 ®
  F - 11




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##### Table of Contents



Purchase Price.
  Cash paid (includes $926 post-closing purchase price adjustment)
    
    $
    21,074License payments made under prior Distribution and Agency Agreements
    
    
    1,765Non-contingent cash payment to be made (discounted to present value
using discount rate of 9.25%)
    
    
    1,663Acquisition-related costs
    
    
    1,791Total preliminary purchase price
    
    $
    26,293
 Preliminary Purchase Price Allocation.
 Current assets
    
    $
    951Fixed assets
    
    
    761Definite-lived intangible assets subject to amortization
    
    
    11,800Goodwill
    
    
    10,047Acquired in-process research and development
    
    
    3,500Current liabilities
    
    
    (766
    )Total preliminary purchase price allocation
    
    $
    26,293
  Weighted AverageAmount
    
    
    Amortization(in thousands)
    
    Assigned
    
    
    PeriodDefinite-lived intangible assets:Existing technology  core
    
    $
    4,400
    
    
    16 yearsExisting technology  developed
    
    
    5,600
    
    
    5 yearsDistributor relationships
    
    
    1,500
    
    
    12 yearsProduct trademarks
    
    
    300
    
    
    10 yearsTotal definite-lived intangible assets
    
    $
    11,800
    
    
    10 yearsGoodwill
    
    $
    10,047Acquired in-process research
and development
    
    $
    3,500
  F - 12




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##### Table of Contents



Acquisition of 3F Therapeutics, Inc.
   Purchase Price.
  Fair value of ATS common stock
    
    $
    26,100Other estimated acquisition-related costs
    
    
    3,316$
    29,416
 Purchase Price Allocation.
 Cash
    
    $
    2,599Other current assets
    
    
    2,530Intangible assets subject to amortization
    
    
    7,150Goodwill
    
    
    5,128Other long-term assets
    
    
    519Acquired in-process research and development
    
    
    14,400Current liabilities
    
    
    (2,910
    )Total preliminary purchase price allocation
    
    $
    29,416
 F - 13




---



##### Table of Contents



Weighted AverageAmount
    
    
    Amortization(in thousands)
    
    Assigned
    
    
    PeriodDefinite-lived intangible assets:Technology  core
    
    $
    5,200
    
    
    20 yearsTechnology  developed
    
    
    700
    
    
    9 yearsTradenames and trademarks
    
    
    1,200
    
    
    15 yearsOther
    
    
    50
    
    
    7 yearsTotal definite-lived intangible assets
    
    $
    7,150
    
    
    18 yearsGoodwill
    
    $
    5,128Acquired in-process research
and development
    
    $
    14,400
    Pro Forma Results of Operations
  F - 14




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##### Table of Contents



Year Ended December 31,(in thousands, except per share data)
    
    2007
    
    
    2006
    
    
    2005Net sales
    
    $
    53,951
    
    
    $
    48,383
    
    
    $
    42,814License revenue
    
    
    
    
    
    
    11,031
    
    
    
    8,618Total revenue
    
    $
    53,951
    
    
    $
    59,414
    
    
    $
    51,432Net loss
    
    $
    (19,238
    )
    
    $
    (16,456
    )
    
    $
    (22,093
    )Net loss per share
 basic and diluted
    
    $
    (0.37
    )
    
    $
    (0.33
    )
    
    $
    (0.44
    )
    3. Short-Term Investments
  2007
    
    
    2006Commercial paper
    
    $
    4,189
    
    
    $
    1,940Corporate bonds
    
    
    
    
    
    
    1,879Certificates of deposit
    
    
    
    
    
    
    U.S. agency
    
    
    
    
    
    
    2,273$
    4,189
    
    
    $
    6,092
 F - 15




---



##### Table of Contents



4. Leasehold Improvements, Furniture, and Equipment, net
  2007
    
    
    2006Furniture and fixtures
    
    $
    608
    
    
    $
    556Equipment
    
    
    12,310
    
    
    
    10,967Leasehold improvements
    
    
    3,491
    
    
    
    3,473Construction in progress
    
    
    632
    
    
    
    54217,041
    
    
    
    15,538Less accumulated depreciation
    
    
    9,302
    
    
    
    7,325$
    7,739
    
    
    $
    8,213
 5. Private Placements of Common Stock
    F - 16




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##### Table of Contents



6. Goodwill and Other Intangible Assets
  Assets Subject to
    
    
    
    Assets Not Subject toAmortization
    
    
    
    AmortizationOther3F
    
    
    CryoCath
    
    
    
    
    
    
    Technology,
    
    
    
    CryoCathTechnology
    
    
    Technology
    
    
    Carbon
    
    
    Development
    
    
    
    Agency &&
    
    
    &
    
    
    Technology
    
    
    & Licensing
    
    
    
    DistributionTrademarks
    
    
    Trademarks
    
    
    License
    
    
    Agreements
    
    
    
    Agreements
    
    
    Goodwill
    
    
    
    TotalBalance at December 31, 2005
    
    
    
    
    
    
    
    
    
    $
    18,500
    
    
    $
    450
    
    
    
    $
    1,555
    
    
    
    
    
    
    
    $
    20,505Acquisition of 3F
    
    $
    7,150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,092
    
    
    
    
    12,242Cash Payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    304
    
    
    
    
    210
    
    
    
    
    
    
    
    
    514Amortization
    
    
    (106
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (106
    )Balance at December 31, 2006
    
    
    7,044
    
    
    
    
    
    
    
    18,500
    
    
    
    754
    
    
    
    
    1,765
    
    
    
    5,092
    
    
    
    
    33,155Acquisition of CryoCath
surgical cryoablation assets
    
    
    
    
    
    $
    11,800
    
    
    
    
    
    
    
    
    
    
    
    
    (1,765
    )
    
    
    10,047
    
    
    
    
    20,082Cash Payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    277
    
    
    
    
    
    
    
    
    36
    
    
    
    
    313Stock Payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    
    
    500Amortization
    
    
    (425
    )
    
    
    (841
    )
    
    
    (1,233
    )
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    
    
    (2,516
    )Asset impairment write-off
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (755
    )
    
    
    
    
    
    
    
    
    
    
    
    
    (755
    )Balance at December 31, 2007
    
    $
    6,619
    
    
    $
    10,959
    
    
    $
    17,267
    
    
    $
    759
    
    
    
    $
    
    
    
    $
    15,175
    
    
    
    $
    50,779
  2008
    
    $
    3,4682009
    
    
    3,2482010
    
    
    3,2332011
    
    
    3,1892012
    
    
    2,629$
    15,767
 Intangible Asset Purchases
    F - 17




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##### Table of Contents



Intangible Asset Impairment
  Change in Status of Indefinite-lived Intangible Asset
  Agency & Distribution Agreements Intangible Tendered in Asset Acquisition
  Goodwill
 Goodwill and Other Intangible Assets
 7. Long-Term Debt
 Convertible Notes Payable
   F - 18




---



##### Table of Contents



Accounting for Derivative Instruments and Hedging Activities,
 
    
    The embedded written option relating to the common stock that may be potentially
issuable upon conversion (conversion feature derivative)
    
    The option for Note holders to put back debt to the Company in connection with
certain corporate change of control transactions
    
    The provision relating to an additional payment in connection with the automatic
conversion of the Notes prior to October 15, 2008
    
    The provision to increase the conversion rate in the event of a change in control
transaction
   F - 19




---



##### Table of Contents



Notes Payable
       2008
    
    $
    2,4572009
    
    
    2,4572010
    
    
    2,4572011
    
    
    1,229$
    8,600
 F - 20




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##### Table of Contents



8. Employee Stock Purchase Plan
   Fiscal Year
    
    Number of Shares
    
    Price Range2007
    
    
    129,449
    
    
    
    $1.50$1.842006
    
    
    103,947
    
    
    
    $1.95$2.382005
    
    
    120,465
    
    
    
    $2.54$3.14
 9. Stock-Based Compensation and Equity Plans
 Stock-Based Compensation
 Share-Based Payment
  Fair Value.
 Assumptions used:
    
    2006
    
    2005Expected volatility
    
    
    0.83
    
    
    
    0.87Risk-free interest rate
    
    
    4.8
    %
    
    
    3.8
    %Expected life
    
    5 years
    
    7 yearsDividend yield
    
    
    0
    %
    
    
    0
    %Weighted average per share fair value of options granted
    
    $
    2.03
    
    
    $
    2.73
  F - 21




---



##### Table of Contents



Stock Compensation Expense. Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans
  (in thousands, except per share data)
    
    2007
    
    2006
    
    2005Stock compensation expense included in:Sales and marketing expenses
    
    $
    805
    
    
    $
    649
    
    
    $
    General and administrative expenses
    
    
    649
    
    
    
    454
    
    
    
    585Total stock compensation expense
    
    $
    1,454
    
    
    $
    1,103
    
    
    $
    585Stock compensation expense per share
    
    $
    0.03
    
    
    $
    0.03
    
    
    $
    0.02
  Forfeitures.
 2007
    
    2006First Quarter
    
    
    9.26
    %
    
    
    11.85
    %Second Quarter
    
    
    8.97
    %
    
    
    10.14
    %Third Quarter
    
    
    8.50
    %
    
    
    9.57
    %Fourth Quarter
    
    
    9.06
    %
    
    
    9.90
    %
  Pro Forma Information.
 F - 22




---



##### Table of Contents



(in thousands, except per share data)
    
    2005Net loss, as reported
    
    
    ($14,394
    )Less: Total stock-based employee compensation
expense determined under fair value based method for all awards
    
    
    (5,301
    )Pro forma net loss
    
    
    ($19,695
    )Net loss per share:As reportedBasic and diluted
    
    
    ($0.46
    )Pro formaBasic and diluted
    
    
    ($0.64
    )
 Equity Plans
   F - 23




---



##### Table of Contents



Stock Options.
 WeightedStock Options Outstanding
    
    
    
    
    
    
    
    
    
    Average OptionUnder the Plans
    
    Non-Plan
    
    
    
    
    
    Exercise PriceISO
    
    Non-ISO
    
    Options
    
    Total
    
    Per ShareOutstanding at December 31, 2004
    
    
    1,239,950
    
    
    
    460,500
    
    
    
    2,985,556
    
    
    
    4,686,006
    
    
    
    3.27Options granted
    
    
    750
    
    
    
    15,000
    
    
    
    293,000
    
    
    
    308,750
    
    
    
    3.49Options exercised
    
    
    (52,125
    )
    
    
    (2,500
    )
    
    
    (49,404
    )
    
    
    (104,029
    )
    
    
    1.82Options canceled
    
    
    (181,875
    )
    
    
    (123,000
    )
    
    
    (331,250
    )
    
    
    (636,125
    )
    
    
    4.78Outstanding at December 31, 2005
    
    
    1,006,700
    
    
    
    350,000
    
    
    
    2,897,902
    
    
    
    4,254,602
    
    
    
    3.09Options granted
    
    
    
    
    
    
    5,000
    
    
    
    
    
    
    
    5,000
    
    
    
    2.95Options exercised
    
    
    (7,625
    )
    
    
    
    
    
    
    (40,202
    )
    
    
    (47,827
    )
    
    
    0.92Options canceled
    
    
    (81,450
    )
    
    
    (56,000
    )
    
    
    (325,000
    )
    
    
    (462,450
    )
    
    
    4.57Outstanding at December 31, 2006
    
    
    917,625
    
    
    
    299,000
    
    
    
    2,532,700
    
    
    
    3,749,325
    
    
    $
    2.94Options granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    (21,500
    )
    
    
    
    
    
    
    (502,000
    )
    
    
    (523,500
    )
    
    
    0.92Options canceled
    
    
    (226,250
    )
    
    
    
    
    
    
    (333,750
    )
    
    
    (560,000
    )
    
    
    4.44Outstanding at December 31, 2007
    
    
    669,875
    
    
    
    299,000
    
    
    
    1,696,950
    
    
    
    2,665,825
    
    
    $
    3.02
  Options Outstanding atDecember 31, 2007
    
    
    Options Exercisable atWeighted
    
    
    December 31, 2007Weighted Average
    
    
    Average
    
    
    
    
    
    
    Weighted AverageRange of
    
    Number
    
    
    Remaining
    
    
    Exercise
    
    
    Number
    
    
    ExerciseExercise Prices
    
    Outstanding
    
    
    Contractual Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$  0.37$0.46
    
    
    505,000
    
    
    4.88 years
    
    $
    0.40
    
    
    
    505,000
    
    
    $
    0.400.51  2.51
    
    
    524,250
    
    
    5.20 years
    
    
    1.88
    
    
    
    524,250
    
    
    
    1.882.70  3.60
    
    
    524,200
    
    
    5.80 years
    
    
    3.29
    
    
    
    520,450
    
    
    
    3.293.64  3.80
    
    
    605,750
    
    
    5.81 years
    
    
    3.74
    
    
    
    605,750
    
    
    
    3.743.99  8.50
    
    
    476,625
    
    
    3.71 years
    
    
    5.41
    
    
    
    476,625
    
    
    
    5.419.88
    
    
    30,000
    
    
    2.34 years
    
    
    9.88
    
    
    
    30,000
    
    
    
    9.88$  0.37$9.88
    
    
    2,665,825
    
    
    5.10 years
    
    $
    3.02
    
    
    
    2,662,075
    
    
    $
    3.02
   F - 24




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##### Table of Contents



Restricted Stock Units.
 WeightedWeighted Average
    
    AverageAward Date
    
    RemainingNumber of Shares
    
    Fair Value
    
    Contractual TermUnvested at December 31, 2004
    
    
    
    
    
    
    
    
    
    
    Awards granted
    
    
    351,000
    
    
    $
    3.37Awards forfeited
    
    
    (3,000
    )
    
    
    3.66Unvested at December 31, 2005
    
    
    348,000
    
    
    
    3.25
    
    
    1.53 yearsAwards granted
    
    
    967,272
    
    
    
    2.73Awards vested
    
    
    (87,000
    )
    
    
    3.38Awards forfeited
    
    
    (58,750
    )
    
    
    3.11Unvested at December 31, 2006
    
    
    1,169,522
    
    
    $
    2.83
    
    
    2.03 yearsAwards granted
    
    
    1,537,184
    
    
    
    1.74Awards vested
    
    
    (419,055
    )
    
    
    2.75Awards forfeited
    
    
    (250,113
    )
    
    
    2.51Unvested at December 31, 2007
    
    
    2,037,538
    
    
    $
    2.06
    
    
    2.09 years
  10. Leases
  Year ending December 31:2008
    
    $
    8362009
    
    
    8122010
    
    
    3772011
    
    
    48$
    2,073
  11. Income Taxes
   F - 25




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##### Table of Contents



December 312007
    
    2006Current deferred tax assets
    
    $
    576
    
    
    $
    557Long-term deferred tax assets (liabilities):Net operating loss carryforwards
    
    
    56,383
    
    
    
    50,153Foreign net operating loss carryforwards
    
    
    419
    
    
    
    711Research and development credits
    
    
    1,507
    
    
    
    897Alternative minimum tax credits
    
    
    54
    
    
    
    31Depreciation
    
    
    1,020
    
    
    
    854Compensation accruals and reserves
    
    
    467
    
    
    
    495Deferred financing costs
    
    
    194
    
    
    
    108Convertible senior notes derivatives
    
    
    0
    
    
    
    (1,305
    )Technology license amortization
    
    
    (1,534
    )
    
    
    (1,311
    )Other intangible assets and goodwill
    
    
    (1,016
    )
    
    
    (2,606
    )Other
    
    
    835
    
    
    
    409Net long-term deferred tax assets
    
    
    58,329
    
    
    
    48,436Net deferred tax assets before valuation allowance
    
    
    58,905
    
    
    
    48,993Less valuation allowance
    
    
    (59,000
    )
    
    
    (48,993
    )Net deferred tax asset (liability)
    
    $
    (95
    )
    
    $
    
   2007
    
    2006
    
    2005Tax at statutory rate
    
    
    (34.0
    )%
    
    
    (34.0
    )%
    
    
    (34.0
    )%State income taxes
    
    
    (4.0
    )
    
    
    (4.0
    )
    
    
    (4.0
    )Permanent Differences
    
    
    (3.8
    )
    
    
    
    
    
    
    Other
    
    
    (1.4
    )
    
    
    
    
    
    
    Acquired in-process research and development
    
    
    
    
    
    
    17.7
    
    
    
    Impact of changes in valuation allowance
    
    
    43.7
    
    
    
    20.3
    
    
    
    38.00.5
    %
    
    
    
    %
    
    
    
    %
 Accounting for Uncertainty in Income Taxes Accounting for Contingencies Accounting for Income Taxes
 F -26




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##### Table of Contents



Balance at January 1, 2007
    
    $
    540,000Additions for tax positions of prior periods
    
    
    13,000Additions for tax positions related to the current period
    
    
    Reductions for tax positions of prior periods
    
    
    Reductions for tax positions related to the current period
    
    
    (23,000
    )Settlements with taxing authorities
    
    
    Lapse of applicable statute
    
    
    Balance at December 31, 2007
    
    $
    530,000
    12. Commitments
  13. Distributor Termination
  F -27




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##### Table of Contents



14. Benefit Plan
  15. Significant Customers and Concentration of Credit Risk
  2007
    
    2006
    
    2005United States and Canada
    
    
    38
    %
    
    
    39
    %
    
    
    38
    %Europe
    
    
    34
    %
    
    
    28
    %
    
    
    28
    %Asia Pacific
    
    
    22
    %
    
    
    25
    %
    
    
    26
    %Other Markets
    
    
    6
    %
    
    
    8
    %
    
    
    8
    %
   16. Quarterly Financial Data (Unaudited)
  QuarterFirst
    
    Second
    
    Third
    
    FourthYear ended December 31, 2007Net sales
    
    $
    10,796
    
    
    $
    12,417
    
    
    $
    12,157
    
    
    $
    14,217Gross profit
    
    
    6,243
    
    
    
    6,872
    
    
    
    6,844
    
    
    
    8,280Net loss
    
    
    (4,820
    )
    
    
    (8,717
    )
    
    
    (3,310
    )
    
    
    (6,161
    )Net basic and diluted loss per share
    
    $
    (0.11
    )
    
    $
    (0.18
    )
    
    $
    (0.06
    )
    
    $
    (0.10
    )Year ended December 31, 2006Net sales
    
    $
    9,730
    
    
    $
    10,857
    
    
    $
    9,122
    
    
    $
    10,740Gross profit
    
    
    4,732
    
    
    
    5,447
    
    
    
    5,228
    
    
    
    5,474Net loss
    
    
    (1,575
    )
    
    
    (2,764
    )
    
    
    (17,255
    )
    
    
    (6,080
    )Net basic and diluted loss per share
    
    $
    (0.05
    )
    
    $
    (0.09
    )
    
    $
    (0.55
    )
    
    $
    (0.15
    )
   F -28




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##### Table of Contents



17. Recently Issued Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities Accounting for Certain Investments in
Debt and Equity Securities
 Business Combinations
 18. Litigation
 Abbey Litigation
  F -29




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##### Table of Contents



CarboMedics Litigation
   F -30




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##### Table of Contents



ExhibitNumber
    
    Description10.72
    
    Confidential Separation Agreement and Release, executed as of November 14, 2007, between
Richard A. Curtis and ATS Medical, Inc., filed herewith.21
    
    List of Subsidiaries.23.1
    
    Consent of Grant Thornton LLP.23.2
    
    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.