##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 27, 2008
 Commission File Number: 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 N., Suite 105Minneapolis, Minnesota
    
    55447(Address of Principal Executive Offices)
    
    (Zip Code)
 (763) 553-7736
 (Registrants Telephone Number, Including Area Code)
 Not Applicable
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
  o þ
  Common Stock, $.01 par value
    
    62,485,828 shares




---



##### 



TABLE OF CONTENTS
 Page(s)PART I. FINANCIAL INFORMATIONITEM 1. Financial Statements (Unaudited):Consolidated Balance Sheets as of September 27, 2008 and
December 31, 2007
    
    3Consolidated Statements of Operations for the three and
nine month periods ended September 27, 2008 and
September 30, 2007
    
    4Consolidated Statements of Cash Flow for the nine month
periods ended September 27, 2008 and September 30, 2007
    
    5Notes to Consolidated Financial Statements
    
    6-15ITEM 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    16-24ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    24-25ITEM 4. Controls and Procedures
    
    25PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    26-27ITEM 1A. Risk Factors
    
    27-28ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    28ITEM 6. Exhibits
    
    28-29SIGNATURES
    
    30EXHIBIT INDEX
    
    31EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 
 ATS Medical, Inc.
Consolidated Balance Sheets
 September 27,
    
    
    December 31,2008
    
    
    2007(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    7,512
    
    
    $
    10,480Short-term investments
    
    
    
    
    
    
    4,189Accounts receivable, net
    
    
    11,839
    
    
    
    11,186Inventories
    
    
    20,181
    
    
    
    18,743Prepaid expenses
    
    
    932
    
    
    
    1,143Total current assets
    
    
    40,464
    
    
    
    45,741Leasehold improvements, furniture and equipment, net
    
    
    7,288
    
    
    
    7,739Goodwill
    
    
    17,016
    
    
    
    15,175Other intangible assets
    
    
    32,932
    
    
    
    35,604Other assets
    
    
    1,436
    
    
    
    1,638Total assets
    
    $
    99,136
    
    
    $
    105,897Liabilities and shareholders equityCurrent liabilities:Current maturities of bank notes payable
    
    $
    2,646
    
    
    $
    2,457Accounts payable
    
    
    4,977
    
    
    
    4,794Accrued compensation
    
    
    2,703
    
    
    
    2,361Accrued distributor liabilities
    
    
    349
    
    
    
    791Warrant liability
    
    
    
    
    
    
    3,913Payable to CryoCath Technologies, Inc.
    
    
    1,866
    
    
    
    Other accrued liabilities
    
    
    1,678
    
    
    
    1,209Total current liabilities
    
    
    14,219
    
    
    
    15,525Convertible senior notes payable, net of unamortized
discounts and bifurcated derivatives of $4,898 and
$4,964 at September 27, 2008 and December 31, 2007
    
    
    17,502
    
    
    
    17,436Payable to CryoCath Technologies, Inc.
    
    
    
    
    
    
    1,742Bank notes payable
    
    
    4,631
    
    
    
    6,143Deferred income taxes
    
    
    239
    
    
    
    95Shareholders equity:Common stock, $.01 par value:Authorized shares - 150,000,000 at September
27, 2008 and
100,000,000 at December 31, 2007Issued and outstanding shares- 62,407,864 at
September 27,
2008 and 59,512,085 at December 31, 2007
    
    
    624
    
    
    
    595Additional paid-in capital
    
    
    205,106
    
    
    
    196,108Accumulated deficit
    
    
    (143,403
    )
    
    
    (132,577
    )Accumulated other comprehensive income
    
    
    218
    
    
    
    830Total shareholders equity
    
    
    62,545
    
    
    
    64,956Total liabilities and shareholders equity
    
    $
    99,136
    
    
    $
    105,897
 The accompanying notes are an integral part of the consolidated financial statements.
 3




---



##### Table of Contents



ATS Medical, Inc.
 Consolidated Statements of Operations
 (Unaudited)
 Three months ended September 27 (30)
    
    
    Nine months ended September 27 (30)2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    16,044
    
    
    $
    12,157
    
    
    $
    47,789
    
    
    $
    35,370Cost of goods sold
    
    
    6,570
    
    
    
    5,313
    
    
    
    19,077
    
    
    
    15,411Gross profit
    
    
    9,474
    
    
    
    6,844
    
    
    
    28,712
    
    
    
    19,959Operating expenses:Sales and marketing
    
    
    7,059
    
    
    
    5,576
    
    
    
    20,693
    
    
    
    17,614Research and development
    
    
    1,843
    
    
    
    1,815
    
    
    
    6,351
    
    
    
    5,373Acquired in-process research
and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,500General and administrative
    
    
    2,431
    
    
    
    2,211
    
    
    
    8,199
    
    
    
    7,318Amortization of intangibles
    
    
    891
    
    
    
    802
    
    
    
    2,672
    
    
    
    1,631Intangible asset impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    755Total operating expenses
    
    
    12,224
    
    
    
    10,404
    
    
    
    37,915
    
    
    
    36,191Operating loss
    
    
    (2,750
    )
    
    
    (3,560
    )
    
    
    (9,203
    )
    
    
    (16,232
    )Net interest expense
    
    
    (700
    )
    
    
    (515
    )
    
    
    (1,976
    )
    
    
    (1,267
    )Other income (expense), net
    
    
    (241
    )
    
    
    766
    
    
    
    637
    
    
    
    655Net loss before income taxes
    
    
    (3,691
    )
    
    
    (3,309
    )
    
    
    (10,542
    )
    
    
    (16,844
    )Income tax expense
    
    
    (55
    )
    
    
    (1
    )
    
    
    (284
    )
    
    
    (3
    )Net loss
    
    $
    (3,746
    )
    
    $
    (3,310
    )
    
    $
    (10,826
    )
    
    $
    (16,847
    )Net loss per share:Basic and diluted
    
    $
    (0.06
    )
    
    $
    (0.06
    )
    
    $
    (0.18
    )
    
    $
    (0.33
    )Weighted average number of
shares outstanding:Basic and diluted
    
    
    62,300
    
    
    
    59,224
    
    
    
    60,691
    
    
    
    50,290
 The accompanying notes are an integral part of the consolidated financial statements .
 4




---



##### Table of Contents



ATS Medical, Inc.
Consolidated Statements of Cash Flow
(Unaudited)
 Nine months ended September 27 (30)2008
    
    
    2007Operating activities:Net loss
    
    $
    (10,826
    )
    
    $
    (16,847
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    4,331
    
    
    
    3,174Stock compensation expense
    
    
    1,184
    
    
    
    1,175Acquired in-process research and development
    
    
    
    
    
    
    3,500Impairment of intangibles
    
    
    
    
    
    
    755Deferred income taxes
    
    
    144
    
    
    
    Non-cash interest expense
    
    
    499
    
    
    
    385Change in value of warrant liability and convertible senior
notes derivatives
    
    
    (286
    )
    
    
    (208
    )Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    (652
    )
    
    
    1,093Inventories
    
    
    (1,436
    )
    
    
    1,049Prepaid expenses
    
    
    211
    
    
    
    91Accounts payable and accrued expenses
    
    
    710
    
    
    
    (1,635
    )Net cash used in operating activities
    
    
    (6,121
    )
    
    
    (7,468
    )Investing activities:Payments for business acquisitions
    
    
    (2,000
    )
    
    
    (21,074
    )Business acquisition costs
    
    
    
    
    
    
    (1,807
    )Purchases of short-term investments
    
    
    (938
    )
    
    
    Maturities of short-term investments
    
    
    5,127
    
    
    
    6,034Payments for technology and distribution licenses
    
    
    
    
    
    
    (202
    )Purchases of leasehold improvements, furniture and equipment
    
    
    (1,208
    )
    
    
    (617
    )Other
    
    
    
    
    
    
    (36
    )Net cash provided by (used in) investing activities
    
    
    981
    
    
    
    (17,702
    )Financing activities:Advances on bank notes payable
    
    
    
    
    
    
    8,600Repayments on bank notes payable
    
    
    (1,323
    )
    
    
    (2,327
    )Net proceeds from sales of common stock and warrants
    
    
    4,002
    
    
    
    31,210Other
    
    
    108
    
    
    
    116Net cash provided by financing activities
    
    
    2,787
    
    
    
    37,599Effect of foreign exchange rate changes
    
    
    (615
    )
    
    
    (215
    )Increase (decrease) in cash and cash equivalents
    
    
    (2,968
    )
    
    
    12,214Cash and cash equivalents at beginning of period
    
    
    10,480
    
    
    
    4,612Cash and cash equivalents at end of period
    
    $
    7,512
    
    
    $
    16,826Significant non-cash transactions:Transfer of warrant liability to additional paid-in capital
    
    $
    3,670
    
    
    $
    Issuance of common stock for acquisition of intangible assets
    
    
    
    
    
    
    500Assumption of liabilities in connection with asset acquisition
    
    
    
    
    
    
    2,429License agreement intangible asset tendered in asset acquisition
    
    
    
    
    
    
    1,765
 The accompanying notes are an integral part of the consolidated financial statements .
 5




---



##### Table of Contents



ATS Medical, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
 Note 1. Basis of Presentation
     Note 2. Common Stock and Stock-Based Compensation
 Stock-Based Compensation
 Share-Based Payment
  WeightedStock Options Outstanding
    
    
    
    
    
    
    
    
    
    
    Average OptionUnder the Plans
    
    
    Non-Plan
    
    
    
    
    
    
    Exercise PriceISO
    
    
    Non-ISO
    
    
    Options
    
    
    Total
    
    
    Per ShareBalance at December 31, 2007
    
    
    669,875
    
    
    
    299,000
    
    
    
    1,696,950
    
    
    
    2,665,825
    
    
    $
    3.02Options granted
    
    
    125,900
    
    
    
    
    
    
    
    
    
    
    
    125,900
    
    
    
    1.57Options exercised
    
    
    (24,750
    )
    
    
    
    
    
    
    (56,250
    )
    
    
    (81,000
    )
    
    
    0.94Options canceled
    
    
    (125,375
    )
    
    
    
    
    
    
    (110,000
    )
    
    
    (235,375
    )
    
    
    4.28Balance at September 27, 2008
    
    
    645,650
    
    
    
    299,000
    
    
    
    1,530,700
    
    
    
    2,475,350
    
    
    $
    2.90
  6




---



##### Table of Contents



Weighted
    
    
    WeightedAverage
    
    
    AverageNumber of
    
    
    Award Date
    
    
    RemainingShares
    
    
    Fair Value
    
    
    Contractual TermUnvested at December 31, 2007
    
    
    2,037,538
    
    
    $
    2.06
    
    
    2.09 yearsAwards granted
    
    
    2,125,921
    
    
    
    2.01
    
    
    
    Awards vested
    
    
    (490,307
    )
    
    
    2.29
    
    
    
    Awards forfeited
    
    
    (204,263
    )
    
    
    2.09
    
    
    
    Unvested at September 27, 2008
    
    
    3,468,889
    
    
    $
    2.00
    
    

2.34 years
   Three months ended
    
    
    Nine months endedSeptember 27 (30)
    
    
    September 27 (30)(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Stock compensation expense included in:Sales and marketing expenses
    
    $
    258
    
    
    $
    314
    
    
    $
    701
    
    
    $
    687General and administrative expenses
    
    
    157
    
    
    
    238
    
    
    
    483
    
    
    
    488Total stock compensation expense
    
    $
    415
    
    
    $
    552
    
    
    $
    1,184
    
    
    $
    1,175Stock compensation expense per share
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.02
    Private Placements of Common Stock
   7




---



##### Table of Contents



Nine months endedSeptember 27 (30)(in thousands)
    
    2008
    
    
    2007Warrant liability balance at beginning of period
    
    $
    3,913
    
    
    $
    Valuation of warrants upon issuance
    
    
    
    
    
    
    3,261Total losses (gains) included in other expense (income):First quarter
    
    
    (1,521
    )
    
    
    Second quarter
    
    
    1,278
    
    
    
    279Third quarter
    
    
    
    
    
    
    (408
    )Transfer to additional-paid-in-capital
    
    
    (3,670
    )
    
    
    Warrant liability balance at end of period
    
    $
    
    
    
    $
    3,132
  Note 3. Acquisitions
 Acquisition of Assets from CryoCath Technologies, Inc.
 ®
  Purchase Price.
 8




---



##### Table of Contents



Cash paid (includes $0.9 million post-closing purchase price reduction
and $2.0 million manufacturing transition payments)
    
    $
    23,074License payments made under prior Distribution and Agent 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 purchase price
    
    $
    28,293
 Purchase Price Allocation.
 Current assets
    
    $
    951Fixed assets
    
    
    761Definite-lived intangible assets subject to amortization
    
    
    11,800Goodwill
    
    
    11,888Acquired in-process research and development
    
    
    3,500Current liabilities
    
    
    (607
    )Total purchase price allocation
    
    $
    28,293
  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
    
    $
    11,888Acquired in-process research
and development
    
    $
    3,500
   Pro Forma Results of Operations
  9




---



##### Table of Contents



Nine monthsendedSeptember 30,(in thousands, except per share data)
    
    2007Net sales
    
    $
    39,734Net loss
    
    $
    (13,077
    )Net loss per share  basic and diluted
    
    $
    (0.23
    )
  Note 4. Inventories
  September 27,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Raw materials
    
    $
    4,424
    
    
    $
    3,655Work-in-process
    
    
    4,927
    
    
    
    2,920Finished goods
    
    
    10,830
    
    
    
    12,168$
    20,181
    
    
    $
    18,743
 Note 5. Comprehensive Income (Loss)
  10




---



##### Table of Contents



Note 6. Intangible Assets
 Indefinite-lived Intangibles and Impairment Policy
 Goodwill and Other Intangible Assets,
 Intangible Asset Impairment
  Intangible Asset Purchases
   Note 7. Long-Term Debt
 Convertible Senior Notes Payable
  Accounting for Derivative Instruments and Hedging Activities,
  11




---



##### Table of Contents



Bank Notes Payable
      Subordinated Credit Agreement
    12




---



##### Table of Contents



Note 8. Income Taxes
  Note 9. Fair Value Measurements
 Fair Value Measurements.
  
    
    Level 1  quoted prices in active markets for identical assets and liabilities.
    
    Level 2  observable inputs other than quoted prices in active markets for identical
assets and liabilities.
    
    Level 3  unobservable inputs in which there is little or no market data available,
which require the reporting entity to develop its own assumptions.
  The Fair Value Option for
Financial Assets and Financial Liabilities Accounting for
Certain Investments in Debt and Equity Securities
 Note 10. Recently Issued Accounting Pronouncements
 Business
Combinations
 13




---



##### Table of Contents



11. Litigation
 Abbey Litigation
    14




---



##### Table of Contents



CarboMedics Litigation
    15




---



##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This document contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Words such as may, expect, believe, anticipate or
estimate identify such forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, and actual results may differ materially from those expressed
in such forward-looking statements. The factors that could cause such material differences are
identified in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December
31, 2007. We undertake no obligation to correct or update any forward-looking statements, whether
as a result of new information, future events or otherwise. You are advised, however, to consult
any future disclosures we make on related subjects in future filings with the SEC.
 Executive Overview
  ®
 .
 ® ®
   16




---



##### Table of Contents



®
 ®
  Critical Accounting Policies and Estimates
   17




---



##### Table of Contents



Results of Operations
  Three months ended September 27 (30)
    
    Nine months ended September 27 (30)Increase (Decrease)
    
    
    
    
    
    
    
    
    
    Increase (Decrease)(in thousands)
    
    2008
    
    2007
    
    $
    
    %
    
    2008
    
    2007
    
    $
    
    %Net sales
    
    $
    16,044
    
    
    $
    12,157
    
    
    $
    3,887
    
    
    
    32.0
    %
    
    $
    47,789
    
    
    $
    35,370
    
    
    $
    12,419
    
    
    
    35.1
    %Cost of goods sold
    
    
    6,570
    
    
    
    5,313
    
    
    
    1,257
    
    
    
    23.7
    %
    
    
    19,077
    
    
    
    15,411
    
    
    
    3,666
    
    
    
    23.8
    %Gross profit
    
    
    9,474
    
    
    
    6,844
    
    
    
    2,630
    
    
    
    38.4
    %
    
    
    28,712
    
    
    
    19,959
    
    
    
    8,753
    
    
    
    43.9
    %Operating expenses:Sales and marketing
    
    
    7,059
    
    
    
    5,576
    
    
    
    1,483
    
    
    
    26.6
    %
    
    
    20,693
    
    
    
    17,614
    
    
    
    3,079
    
    
    
    17.5
    %Research and development
    
    
    1,843
    
    
    
    1,815
    
    
    
    28
    
    
    
    1.5
    %
    
    
    6,351
    
    
    
    5,373
    
    
    
    978
    
    
    
    18.2
    %Acquired in-process R & D
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    3,500
    
    
    
    (3,500
    )
    
    
    (100.0
    )%General and administrative
    
    
    2,431
    
    
    
    2,211
    
    
    
    220
    
    
    
    10.0
    %
    
    
    8,199
    
    
    
    7,318
    
    
    
    881
    
    
    
    12.0
    %Amortization of intangibles
    
    
    891
    
    
    
    802
    
    
    
    89
    
    
    
    11.1
    %
    
    
    2,672
    
    
    
    1,631
    
    
    
    1,041
    
    
    
    63.8
    %Impairment of intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    755
    
    
    
    (755
    )
    
    
    (100.0
    )%Total operating expenses
    
    
    12,224
    
    
    
    10,404
    
    
    
    1,820
    
    
    
    17.5
    %
    
    
    37,915
    
    
    
    36,191
    
    
    
    1,724
    
    
    
    4.8
    %Operating loss
    
    
    (2,750
    )
    
    
    (3,560
    )
    
    
    (810
    )
    
    
    (22.8
    )%
    
    
    (9,203
    )
    
    
    (16,232
    )
    
    
    (7,029
    )
    
    
    (43.3
    )%Net interest expense
    
    
    (700
    )
    
    
    (515
    )
    
    
    185
    
    
    
    35.9
    %
    
    
    (1,976
    )
    
    
    (1,267
    )
    
    
    709
    
    
    
    56.0
    %Other income (expense), net
    
    
    (241
    )
    
    
    766
    
    
    
    (1,007
    )
    
    
    (131.5
    )%
    
    
    637
    
    
    
    655
    
    
    
    (18
    )
    
    
    (2.7
    )%Net loss before income taxes
    
    
    (3,691
    )
    
    
    (3,309
    )
    
    
    382
    
    
    
    11.5
    %
    
    
    (10,542
    )
    
    
    (16,844
    )
    
    
    (6,302
    )
    
    
    (37.4
    )%Income tax expense
    
    
    (55
    )
    
    
    (1
    )
    
    
    54
    
    
    NM
    
    
    (284
    )
    
    
    (3
    )
    
    
    281
    
    
    NMNet loss
    
    $
    (3,746
    )
    
    $
    (3,310
    )
    
    $
    436
    
    
    
    13.2
    %
    
    $
    (10,826
    )
    
    $
    (16,847
    )
    
    $
    (6,021
    )
    
    
    (35.7
    )%
  Three months ended
    
    
    Nine months endedSeptember 27 (30)
    
    
    September 27 (30)2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    40.9
    %
    
    
    43.7
    %
    
    
    39.9
    %
    
    
    43.6
    %Gross profit
    
    
    59.1
    %
    
    
    56.3
    %
    
    
    60.1
    %
    
    
    56.4
    %Operating expenses:Sales and marketing
    
    
    44.0
    %
    
    
    45.9
    %
    
    
    43.3
    %
    
    
    49.8
    %Research and development
    
    
    11.5
    %
    
    
    14.9
    %
    
    
    13.3
    %
    
    
    15.2
    %Acquired in-process R & D
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    9.9
    %General and administrative
    
    
    15.2
    %
    
    
    18.2
    %
    
    
    17.2
    %
    
    
    20.7
    %Amortization of intangibles
    
    
    5.6
    %
    
    
    6.6
    %
    
    
    5.6
    %
    
    
    4.6
    %Impairment of intangibles
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    2.1
    %Total operating expenses
    
    
    76.2
    %
    
    
    85.6
    %
    
    
    79.3
    %
    
    
    102.3
    %Operating loss
    
    
    (17.1
    )%
    
    
    (29.3
    )%
    
    
    (19.3
    )%
    
    
    (45.9
    )%Net interest income (expense)
    
    
    (4.4
    )%
    
    
    (4.2
    )%
    
    
    (4.1
    )%
    
    
    (3.6
    )%Other income (expense), net
    
    
    (1.5
    )%
    
    
    6.3
    %
    
    
    1.3
    %
    
    
    1.9
    %Net loss before income taxes
    
    
    (23.0
    )%
    
    
    (27.2
    )%
    
    
    (22.1
    )%
    
    
    (47.6
    )%Income tax expense
    
    
    (0.3
    )%
    
    
    0.0
    %
    
    
    (0.6
    )%
    
    
    0.0
    %Net loss
    
    
    (23.3
    )%
    
    
    (27.2
    )%
    
    
    (22.7
    )%
    
    
    (47.6
    )%
 18




---



##### Table of Contents



Net Sales.
 Three months ended September 27 (30)
    
    
    Nine months ended September 27 (30)Increase
    
    
    
    
    
    
    
    
    
    
    Increase(in thousands)
    
    2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %United States
    
    $
    5,847
    
    
    $
    5,095
    
    
    $
    752
    
    
    
    14.8
    %
    
    $
    18,274
    
    
    $
    13,400
    
    
    $
    4,874
    
    
    
    36.4
    %Outside United States
    
    
    10,197
    
    
    
    7,062
    
    
    
    3,135
    
    
    
    44.4
    %
    
    
    29,515
    
    
    
    21,970
    
    
    
    7,545
    
    
    
    34.3
    %Total
    
    $
    16,044
    
    
    $
    12,157
    
    
    $
    3,887
    
    
    
    32.0
    %
    
    $
    47,789
    
    
    $
    35,370
    
    
    $
    12,419
    
    
    
    35.1
    %
  Three months ended
    
    
    Nine months endedSeptember 27 (30)
    
    
    September 27 (30)2008
    
    
    2007
    
    
    2008
    
    
    2007United States
    
    
    36.4
    %
    
    
    41.9
    %
    
    
    38.2
    %
    
    
    37.9
    %Outside United States
    
    
    63.6
    %
    
    
    58.1
    %
    
    
    61.8
    %
    
    
    62.1
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Three months ended September 27 (30)
    
    
    Nine months ended September 27 (30)Increase (Decrease)
    
    
    Increase (Decrease)(in thousands)
    
    2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %Heart valve therapy
    
    $
    11,755
    
    
    $
    8,453
    
    
    $
    3,302
    
    
    
    39.1
    %
    
    $
    34,529
    
    
    $
    28,224
    
    
    $
    6,305
    
    
    
    22.3
    %Surgical arrhythmia
    
    
    4,011
    
    
    
    3,295
    
    
    
    716
    
    
    
    21.7
    %
    
    
    12,245
    
    
    
    6,114
    
    
    
    6,131
    
    
    
    100.3
    %Surgical tools and accessories
    
    
    278
    
    
    
    409
    
    
    
    (131
    )
    
    
    (32.0
    )%
    
    
    1,015
    
    
    
    1,032
    
    
    
    (17
    )
    
    
    (1.6
    )%Total
    
    $
    16,044
    
    
    $
    12,157
    
    
    $
    3,887
    
    
    
    32.0
    %
    
    $
    47,789
    
    
    $
    35,370
    
    
    $
    12,419
    
    
    
    35.1
    %
   19




---



##### Table of Contents



Cost of Goods Sold and Gross Profit.
   Sales and Marketing.
  Research and Development.
 Acquired In-Process R & D.
 20




---



##### Table of Contents



General and Administrative.
    Amortization of Intangibles.
 Intangible Asset Impairment.
 Net Interest Expense .
   Other Income (Expense)
 21




---



##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 27 (30)
    
    
    September 27 (30)(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net realized foreign currency transaction gain (loss)
    
    $
    86
    
    
    $
    (17
    )
    
    $
    774
    
    
    $
    53Unrealized foreign currency gain (loss) related to
short-term intercompany balances with foreign
subsidiaries
    
    
    (340
    )
    
    
    334
    
    
    
    (423
    )
    
    
    394Net foreign currency transaction gain (loss)
    
    $
    (254
    )
    
    $
    317
    
    
    $
    351
    
    
    $
    447
 Accounting for Derivative
Instruments and Hedging Activities.
 Income Taxes
  Net Loss.
 Liquidity and Capital Resources
  Operating Activities.
 22




---



##### Table of Contents



Investing Activities.
  Financing Activities.
      23




---



##### Table of Contents



Cash Management
   Off-Balance Sheet Arrangements
  
 24




---



##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures About Market Risk











ITEM 4. Controls and Procedures


Evaluation of Disclosure Controls and Procedures






Changes in Internal Control over Financial Reporting




25



---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
 Abbey Litigation
    26




---



##### Table of Contents



CarboMedics Litigation
    
 ITEM 1A. Risk Factors
  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 current unprecedented volatility in the worldwide credit
and equity markets may have an impact on our ability to obtain future financing.
   We are currently engaged in litigation with CarboMedics. The CarboMedics litigation or other
litigation we may encounter could have a material adverse impact on our business.
  27




---



##### Table of Contents



ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
 ITEM 6. Exhibits
 3.1
    
    Third 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 quarterly period ended June
28, 2008).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).4.2
    
    Warrant, dated June 29, 2008, issued to Theodore C. Skokos (Incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K filed on July 2, 2008).10.1
    
    Subordinated Credit Agreement, dated June 29, 2008, by and between ATS Medical, Inc. and
Theodore C. Skokos (Incorporated by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K filed on July 2, 2008).10.2
    
    Amendment, dated June 30, 2008, 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 July 2, 2008).31.1
    
    Certification of Principal Executive Officer pursuant to Rules 13a-15(e)/15d-15(e) of the
Securities Exchange Act, as amended (Section 302 Certification).31.2
    
    Certification of Principal Financial Officer pursuant to Rules 13a-15(e)/15d-15(e) of the
Securities Exchange Act, as amended (Section 302 Certification).
 28




---



##### Table of Contents



32.1
    
    Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 (Section
906 Certification).32.2
    
    Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Section
906 Certification).
 29




---



##### Table of Contents



SIGNATURES
  Date:      November 6, 2008
    ATS MEDICAL, INC.By:
    /s/ Michael D. DaleMichael D. DaleChief Executive Officer
(Duly Authorized Officer) By:
    /s/ Michael R. KramerMichael R. KramerChief Financial Officer
(Principal Financial Officer) 30




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description3.1
    
    Third 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 quarterly period ended June 28, 2008).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).4.2
    
    Warrant, dated June 29, 2008, issued to Theodore C. Skokos (Incorporated by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K filed on July 2, 2008).10.1
    
    Subordinated Credit Agreement, dated June 29, 2008, by and between ATS Medical, Inc. and Theodore C. Skokos
(Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on July 2, 2008).10.2
    
    Amendment, dated June 30, 2008, 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 July 2, 2008).31.1
    
    Certification of the Principal Executive Officer pursuant to Rules 13a-15(e)/15d-15(e) of the Securities
Exchange Act, as amended (Section 302 Certification)31.2
    
    Certification of the Principal Financial Officer pursuant to Rules 13a-15(e)/15d-15(e) of the Securities
Exchange Act, as amended (Section 302 Certification)32.1
    
    Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 Certification)32.2
    
    Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 Certification)
 31