<PAGE>

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                              --------------------

                                    FORM 10-Q

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


               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
                          COMMISSION FILE NO. 0-18602

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

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

  3905 ANNAPOLIS LANE N., SUITE 105
  MINNEAPOLIS, MINNESOTA                                    55447
(Address of principal executive offices)                 (Zip Code)

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

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

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

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                               Yes X     No


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

                               Yes X     No

      The number of shares outstanding of each of the registrant's classes of
common stock as of November 10, 2003, was:

       Common Stock, $.01 par value             26,744,932 shares
<PAGE>
                                      INDEX

<TABLE>
<CAPTION>
                                                                        Page(s)
                                                                        -------
<S>                                                                     <C>
PART I.  FINANCIAL INFORMATION

ITEM 1.  Financial Statements (Unaudited)

             Consolidated Balance Sheets as of
             September 30, 2003, and December 31, 2002                    3

             Statements of Operations for the three and nine
             months ended September 30, 2003 and 2002                     4

             Statements of Cash Flows for the nine
             months ended September 30, 2003 and 2002                     5

             Notes to Consolidated Financial Statements                 6 - 8

ITEM 2.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations                  8 - 19

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk       20

ITEM 4.  Controls and Procedures                                          20

PART II. OTHER INFORMATION

ITEM 2.  Changes in Securities and Use of Proceeds                        21

ITEM 6.  Exhibits and Reports on Form 8-K                                 21

SIGNATURES                                                                22

EXHIBIT INDEX                                                             24
</TABLE>


                                       2
<PAGE>
                          PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                ATS MEDICAL, INC.

                           CONSOLIDATED BALANCE SHEETS

                 (in thousands, except per share and share data)

<TABLE>
<CAPTION>
                                                                SEPTEMBER 30,     DECEMBER 31,
                                                                    2003              2002
                                                                -------------     ------------
                                                                 (unaudited)
<S>                                                             <C>               <C>
ASSETS
Current assets:
    Cash and cash equivalents                                    $   5,652         $   7,472
    Short-term investments                                           3,245             2,502
   Accounts receivable, net                                          4,223             3,557
   Inventories                                                      16,929            15,876
   Other current assets                                                728               382
                                                                 ---------         ---------
Total current assets                                                30,777            29,789

Furniture, machinery and equipment, net                              6,036             6,026
Inventories                                                         28,000            37,000
Technology license                                                  18,500            18,500
Other assets                                                           439               441
                                                                 ---------         ---------
Total assets                                                     $  83,752         $  91,756
                                                                 =========         =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                              $     792         $     511
   Due to related party                                                192               192
   Accrued reorganization charges                                       87               493
   Accrued payroll and expenses                                      1,106               322
   Accrued distributor liabilities                                     548             1,597
    Notes payable                                                       --             5,000
                                                                 ---------         ---------
Total current liabilities                                            2,725             8,115

Due to related party                                                   289               434
Long-term debt                                                          --             9,080

Shareholders' equity:
   Common stock, $.01 par value:
     authorized 40,000,000 shares; issued and
     outstanding 26,726,240 and 22,305,920 shares at
      September 30, 2003 and December 31, 2002                         267               223
   Additional paid-in capital                                      122,989           111,474
   Accumulated other comprehensive loss                                 (3)               (4)
   Accumulated deficit                                             (42,515)          (37,566)
                                                                 ---------         ---------
Total shareholders' equity                                          80,738            74,127
                                                                 ---------         ---------
Total liabilities and shareholders' equity                       $  83,752         $  91,756
                                                                 =========         =========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                       3
<PAGE>
                               ATS MEDICAL, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (unaudited)
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                         THREE MONTHS ENDED SEPTEMBER 30,    NINE MONTHS ENDED SEPTEMBER 30,
                                         --------------------------------    -------------------------------
                                              2003             2002               2003             2002
                                            --------         --------           --------         --------
<S>                                      <C>                 <C>             <C>                 <C>
Net sales                                   $  4,639         $  3,184           $ 12,850         $  9,562
Cost of goods sold                             3,255            2,179              9,252            7,194
                                            --------         --------           --------         --------
Gross profit                                   1,384            1,005              3,598            2,368

Operating expenses:
   Research and development                      384              346              1,213            1,940
   Sales and marketing                         2,809              389              6,350            2,692
   General and administrative                  1,091              635              3,121            2,089
   Impairment of technology license               --               --                 --            8,100
   Reorganization expense                         --               23                 --              888
   Extinguishment of debt                     (2,575)              --             (2,575)              --
                                            --------         --------           --------         --------
Total operating expenses                       1,709            1,393              8,109           15,709
                                            --------         --------           --------         --------
Operating loss                                  (325)            (388)            (4,511)         (13,341)

Net interest income (expense)                     18             (201)              (438)             (99)
                                            --------         --------           --------         --------
Net loss                                    ($   307)        ($   589)          ($ 4,949)        ($13,440)
                                            ========         ========           ========         ========
Net loss per share
   Basic and diluted                        ($  0.01)        ($  0.03)          ($  0.21)        ($  0.60)
Weighted average number of shares
  used in calculation
   Basic and diluted                          24,743           22,271             23,138           22,245
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                       4
<PAGE>
                                ATS MEDICAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                                   (unaudited)
                                 (in thousands)


<TABLE>
<CAPTION>
                                                         NINE MONTHS ENDED SEPTEMBER 30,
                                                         -------------------------------
                                                             2003             2002
                                                           --------         --------
<S>                                                      <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                   ($ 4,949)        ($13,440)
Adjustments to reconcile net loss to net cash
   used in operating activities:
   Depreciation                                                 583              537
   Loss on disposal of equipment                                  2               30
   Compensation expense on stock options                          5               --
   Imputed interest long-term debt                              320              239
   Impairment of technology license                              --            8,100
   Extinguishment of debt                                    (2,575)              --
   Changes in operating assets and liabilities:
     Accounts receivable                                       (666)             206
     Inventories                                              7,947            1,063
     Prepaid expenses                                          (346)             336
     Other assets                                                 2               (1)
     Accounts payable and accrued expenses                     (360)            (579)
                                                           --------         --------
Net cash used in operating activities                           (37)          (3,509)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of short-term investments                           (4,231)          (2,612)
Payments for technology license                             (12,000)              --
Sale of short-term investments                                3,488            8,812
Purchases of furniture, machinery and equipment                (595)             (98)
Proceeds on disposal of equipment                                --              165
                                                           --------         --------
Net cash provided by (used in) investing activities         (13,338)           6,267

CASH FLOWS FROM FINANCING ACTIVITIES

Net proceeds from sale of common stock                       11,555              108
                                                           --------         --------
Net cash provided by financing activities                    11,555              108
                                                           --------         --------

Increase (decrease) in cash and cash equivalents             (1,820)           2,866
Cash and cash equivalents at beginning of period              7,472            5,079
                                                           --------         --------
Cash and cash equivalents at end of period                 $  5,652         $  7,945
                                                           ========         ========
</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.


                                       5
<PAGE>
                                ATS MEDICAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The consolidated financial statements included in this Form 10-Q have been
prepared by ATS Medical, Inc. without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). The consolidated
financial statements include the accounts of the company and its subsidiaries,
and all significant inter-company accounts and transactions are eliminated in
consolidation. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to these
rules and regulations. The year-end balance sheet was derived from audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States. These unaudited
consolidated interim financial statements should be read in conjunction with the
Company's consolidated financial statements and related notes included in its
Annual Report on Form 10-K for 2002.

These statements reflect, in management's opinion, all adjustments (which
include only normal, recurring adjustments) necessary for a fair presentation of
the financial position and the results of operations and cash flows for the
periods presented. The results of operations for any interim period may not be
indicative of results for the full year.

NOTE 2. STOCK-BASED COMPENSATION

The Company accounts for it stock-based employee compensation plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. The exercise price of
the Company's employee stock options generally equals the market price of the
underlying stock on the date of grant for all options granted, and thus, under
APB 25, no compensation expense is recognized. Stock options granted to
non-employees are valued and accounted for in accordance with Financial
Accounting Statement No. 123, Accounting for Stock-Based Compensation (FAS 123).
Accordingly, these costs are charged to operating expenses over the vesting
period of the option.

The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provisions of FAS 123 to
stock-based employee compensation.

<TABLE>
<CAPTION>
                                                          Three months ended                 Nine months ended
                                                             September 30,                     September 30,
                                                       -------------------------         -------------------------
(in thousands, except per share data)                    2003             2002             2003             2002
                                                       --------         --------         --------         --------
<S>                                                    <C>              <C>              <C>              <C>
Net loss, as reported                                  ($   307)        ($   589)        ($ 4,949)        ($13,440)

Subtract:  Total stock-based employee
compensation

      expense determined under fair value based
      method for all awards                                (424)            (296)            (835)            (805)
                                                       --------         --------         --------         --------
Pro forma net loss                                     ($   731)        ($   885)        ($ 5,784)        ($14,245)
                                                       ========         ========         ========         ========
Net loss per share:
      As reported

         Basic and diluted                             ($  0.01)        ($  0.03)        ($  0.21)        ($  0.60)
      Pro forma
         Basic and diluted                             ($  0.03)        ($  0.04)        ($  0.25)        ($  0.64)
</TABLE>


                                       6
<PAGE>
NOTE 3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                  September 30,     December 31,
(in thousands)                        2003             2002
                                  -------------     ------------
<S>                               <C>               <C>
Raw materials                       $ 13,281         $ 14,476
Work in process                        9,808           10,169
Finished goods                        22,040           28,431
Obsolescence reserve                    (200)            (200)
                                    --------         --------
Total, net                          $ 44,929         $ 52,876
                                    ========         ========
Balance sheet classification

Current assets                      $ 16,929         $ 15,876
Noncurrent assets                     28,000           37,000
                                    --------         --------
Total, net                          $ 44,929         $ 52,876
                                    ========         ========
</TABLE>


The Company maintains significant levels of inventory that exceed current
demand. Management believes that these excess quantities will be utilized over
several years. Therefore, the Company has classified $28.0 million and $37.0
million of inventories as noncurrent assets at September 30, 2003 and December
31, 2002.

NOTE 4. IMPAIRMENT OF TECHNOLOGY LICENSE

During the first quarter of 2002, the Company evaluated the carrying value of
its technology license asset of $13 million in accordance with the provisions of
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets. Utilizing a discounted cash flow model, that analysis
indicated the asset's carrying value was recoverable and the Company recognized
no impairment as a result of the adoption of SFAS No. 142. In the second quarter
of 2002, the Company experienced decreased sales volumes, decreased average
selling prices and initiated certain restructuring activities pertaining to its
executive team and the manner in which it sells its product from a direct sales
force to a hybrid sales force of a few direct salespeople and several
independent manufacturer's representatives. In response to these conditions, the
Company modified its pricing strategy and sales volume estimates in conjunction
with the reorganization plan implemented and the increased competitive pressures
in the European market. As a result of these conditions and changes, the Company
revised its expectations of the sales volume estimates and its selling prices of
the heart valve in the cash flow model to evaluate the recoverability of its
technology license. When compared to the revised fair value as calculated by
discounting the changed future cash flows at June 30, 2002, the Company
determined a non-cash charge representing an impairment of this asset needed to
be recognized in the amount of $8.1 million in the second quarter. This charge
also reflected in part the effect of the amended milestone payments in the early
years of the technology transfer agreement relative to the benefits of lower
cost carbon not being realized until future years after the depletion of
inventories on hand at the time of the analysis. There is no additional
impairment of the technology license at September 30, 2003.

NOTE 5. WARRANTIES

The Company adopted Financial Accounting Standards Board Interpretation No. 45,
Guarantor's accounting and disclosure requirements for guarantees, including
indirect indebtedness to others (FIN 45), during the first quarter of 2003. FIN
45 requires disclosures concerning the Company's obligations under certain
guarantees.

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


                                       7
<PAGE>
NOTE 6. COMPREHENSIVE LOSS

Comprehensive loss for the Company includes net loss and foreign currency
translation which is charged or credited to the cumulative translation account
within shareholders' equity. Gains and losses from foreign currency translation
are not material.

NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS

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

NOTE 8. EXTINGUISHMENT OF DEBT

On August 21, 2003, the Company paid Centerpulse USA Holdings Co.(Centerpulse)
$12 million in exchange for cancellation of all of the Company's payment
obligations under its carbon technology agreement with Carbomedics Inc. and now
owns the technology license. Prior to this agreement, the Company was obligated
to pay Centerpulse an aggregate of $28.2 million under the technology agreement
over a period of approximately four years. These payments were accrued as
milestones were met. Of the total $28 million, there were two uncompleted
milestones totaling $12 million that were not accrued. Since the amount accrued
exceeded the amount due, a non-cash gain on the extinguishment of debt in the
amount of $2.6 million on this transaction was realized during the three month
period ended September 30, 2003.

NOTE 9. SHAREHOLDER'S EQUITY

On August 11, 2003, in a private placement, the Company issued 4.4 million
shares of common stock and received $11.6 million, net of offering costs.


                                       8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and
Results of Operations 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. Some of the factors that could cause such
material differences are identified in "Cautionary Statements." 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. Management's
discussion and analysis of financial condition and results of operations are
based upon the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect (1) the reported amounts of assets, liabilities, revenues,
and expenses; and (2) the related disclosure of contingent assets and
liabilities. At each balance sheet date, we evaluate our estimates and
judgements. The critical accounting policies that are most important to fully
understanding and evaluating the financial condition and results of operations
are discussed in our most recent Annual Report on Form 10-K on file with the
SEC.

Overview

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

We commenced selling the ATS heart valve in international markets in 1992.
Internationally, we generally sell the valve to independent distributors with
assigned territories (generally a specific country or region) who in turn sell
the valve to hospitals or clinics. In France, we sell our valves directly to
hospitals. In the United States, we sell directly to hospitals through a
combination of a direct sales force and independent distributors.


                                       9
<PAGE>
Results of Operations

The following is a discussion of the results of our operations for the three and
nine month periods ended September 2003 and 2002.

The following table compares the dollar and percentage change in the Statements
of Operations for the three and nine month periods ended September 2003 and
2002.

<TABLE>
<CAPTION>
                                      Three months ended September 30,                    Nine months ended September 30,
                                --------------------------------------------     ---------------------------------------------
(in thousands, except                                    Increase                                         Increase
percentages)                      2003        2002      (Decrease)      %          2003         2002     (Decrease)       %
                                --------    --------    ----------   -------     --------     --------   ----------    -------
<S>                             <C>         <C>         <C>          <C>         <C>          <C>        <C>           <C>
Net sales                       $  4,639    $  3,184     $  1,455       45.7%    $ 12,850     $  9,562    $  3,288        34.4%
Cost of goods sold                 3,255       2,179        1,076       49.4%       9,252        7,194       2,058        28.6%
                                --------    --------     --------    -------     --------     --------    --------     -------
Gross profit                       1,384       1,005          379       37.7%       3,598        2,368       1,230        51.9%
Gross profit %                      29.8%       31.6%                                28.0%        24.8%
Operating expenses:
  Research and development           384         346           38       11.0%       1,213        1,940        (727)      -37.5%
  Sales and marketing              2,809         389        2,420      622.1%       6,350        2,692       3,658       135.9%
  General and administrative       1,091         635          456       71.8%       3,121        2,089       1,032        49.4%
  Impairment of technology
license                               --          --           --         --           --        8,100      (8,100)     -100.0%
  Reorganization expense              --          23          (23)    -100.0%          --          888        (888)     -100.0%
  Extinguishment of debt          (2,575)         --       (2,575)        --       (2,575)          --      (2,575)         --
                                --------    --------     --------    -------     --------     --------    --------     -------
Total operating expenses           1,709       1,393          316       22.7%       8,109       15,709      (7,600)      -48.4%
                                --------    --------     --------    -------     --------     --------    --------     -------
Operating loss                      (325)       (388)          63      -16.2%      (4,511)     (13,341)      8,830       -66.2%

Net interest income (expense)         18        (201)         219     -109.0%        (438)         (99)       (339)      342.4%
                                --------    --------     --------    -------     --------     --------    --------     -------
Net  loss                       ($   307)   ($   589)    $    282      -47.9%    ($ 4,949)    ($13,440)   $  8,491       -63.2%
                                ========    ========     ========    =======     ========     ========    ========     =======
</TABLE>


The following table presents the statement of operations as a percentage of net
sales for the three and nine month periods ended September 2003 and 2002.


<TABLE>
<CAPTION>
                                   Three months ended      Nine months ended
                                      September 30,          September 30,
                                   ------------------      ------------------
                                    2003        2002        2003        2002
                                   ------      ------      ------      ------
<S>                                <C>         <C>         <C>         <C>
Net sales                          100.0%      100.0%      100.0%      100.0%
Cost of goods sold                  70.2%       68.4%       72.0%       75.2%
                                   -----       -----       -----       -----
Gross profit                        29.8%       31.6%       28.0%       24.8%
Operating expenses:
  Research and development           8.3%       10.9%        9.4%       20.3%
  Sales and marketing               60.6%       12.2%       49.4%       28.2%
  General and administrative        23.5%       19.9%       24.3%       21.8%
  Impairment of technology
license                              0.0%        0.0%        0.0%       84.7%
  Reorganization expense             0.0%        0.7%        0.0%        9.3%
  Extinguishment of debt           -55.5%        0.0%      -20.0%        0.0%
                                   -----       -----       -----       -----
Total operating expenses            36.8%       43.8%       63.1%      164.3%
                                   -----       -----       -----       -----
Operating loss                      -7.0%      -12.2%      -35.1%     -139.5%

Net interest income (expense)        0.4%       -6.3%       -3.4%       -1.0%

Net  loss                           -6.6%      -18.5%      -38.5%     -140.6%
                                   =====       =====       =====       =====
</TABLE>


                                       10
<PAGE>
NET SALES. The following table compares net sales between the three and nine
month periods ended September 2003 and 2002.

<TABLE>
<CAPTION>
                             Three months ended September 30,           Nine months ended September 30,
                            ----------------------------------       -----------------------------------
(in thousands)               2003     2002     Increase    %           2003      2002     Increase   %
                            ------   ------    --------  -----       -------    ------    --------  ----
<S>                         <C>      <C>       <C>       <C>         <C>        <C>       <C>       <C>
United States               $1,452   $  540      $  912  168.9%      $ 3,358    $1,984      $1,374  69.3%
Outside United States        3,187    2,644         543   20.5%        9,492     7,578       1,914  25.3%
                            ------   ------      ------  -----       -------    ------      ------  ----
Total                       $4,639   $3,184      $1,455   45.7%      $12,850    $9,562      $3,288  34.4%
                            ======   ======      ======  =====       =======    ======      ======  ====
Share of total sales:

United States                31.3%    17.0%                            26.1%     20.7%
Outside United States        68.7%    83.0%                            73.9%     79.3%
                            ------   ------                          -------    ------
Total                       100.0%   100.0%                           100.0%    100.0%
                            ======   ======                          =======    ======
</TABLE>

In the U.S., Canada, and France, our revenue is the selling price to the
hospital. In other non-U.S. markets, our revenue is the selling price to the
distributor.

In June 2002, the majority of our U.S. sales persons were terminated. In the
fourth quarter of 2002, we hired a new CEO and thereafter began building a "new
sales organization" in the U.S. consisting of four area directors and a
combination of direct sales representatives and independent manufacturer's
representatives. This new organization and overall greater efforts led to the
revenue increase in the U.S. with the U.S. now accounting for an increasing
percentage of total sales.

COST OF GOOD SOLD. To date, all purchased pyrolytic carbon components for the
ATS heart valve have come from Carbomedics, Inc. (Carbomedics) pursuant to a
multi-year supply agreement entered into in 1990. The cost of the pyrolytic
carbon components represents approximately 80% of the total cost of the ATS
heart valve. Under the supply agreement, the cost of the pyrolytic carbon
components has varied according to annual volume purchases and was adjusted
annually by reference to increases in the U.S. Department of Labor Employment
Cost Index.

The supply agreement with Carbomedics is still in effect but has been
re-negotiated several times. Our current obligations under the supply agreement
call for future diminished purchase obligations starting in 2007 and continuing
through 2010.

We maintain significant levels of carbon components in inventory that exceed
current demand due to past purchase requirements under the supply agreement. In
addition, the cost of these components has been high and at times exceeded
selling prices necessitating lower of cost or market write-downs of inventories.
We have set up our own manufacturing facility and we expect to increase the
production of our own carbon components during 2004. As higher priced inventory
purchased from Carbomedics is replaced by lower cost inventory that we
manufacture, cost of goods sold will decrease as a percentage of net sales.

Our valves are made of materials that do not deteriorate. Other than the need
for periodic resterilization, the valves effectively have an infinite shelf
life. The approved sterilization shelf life of our valves ranges from three to
seven years depending on the type of valve and the market where it will be sold.

Selling prices vary significantly from market to market and generally are
highest in the United States and lower elsewhere, especially in less developed
countries. Accordingly, gross margins as a percentage of net sales will vary
depending on percentage of sales by market. During the three months ended
September 2003, higher margins due to increased sales in the United States were
more than offset by lower margins on sales to less developed countries.


                                       11
<PAGE>
During the nine-month period ended September, 2002, we recorded a lower cost or
market charge against certain inventories and included this $200,000 charge in
cost of goods sold. Without this charge, gross margin would have been $2.6
million, or 26.9%. These charges reflect our best estimate of future selling
prices that will be below inventory costs and are not part number specific. If
in the future these estimates change, additional lower of cost or market charges
may be necessary.

RESEARCH AND DEVELOPMENT. Research and development expenses include the costs to
develop and improve current and future products, the costs for regulatory and
clinical activities for these products, and the costs to set up and maintain our
carbon components manufacturing facility while it is in pre-production mode. The
operational qualification and validation of the carbon production equipment and
making pilot coating runs have been charged to research and development costs.

The following table compares the different components of research and
development costs for the three and nine month periods in 2003 to 2002.

<TABLE>
<CAPTION>
                                    Three months ended      Nine months ended
                                       September 30,           September 30,
                                    ------------------      ------------------
(in thousands)                       2003        2002        2003        2002
                                    ------      ------      ------      ------
<S>                                 <C>         <C>         <C>         <C>
Costs related to manufacturing
facility                            $  252      $  262      $  791      $1,518
All other R&D related costs            132          84         422         422
                                    ------      ------      ------      ------
Total                               $  384      $  346      $1,213      $1,940
                                    ======      ======      ======      ======
</TABLE>

On May 29, 2002, we received notification from the FDA of full approval of our
carbon manufacturing facility. The decrease in research and development expenses
during 2003 is attributable to the costs of setting up and qualifying our
manufacturing facility to receive this approval during the first half of 2002.
We expect to increase production capacity of our carbon components during 2004.
Accordingly, the costs of this facility that are now classified as research and
development costs will be included as costs of goods sold after the date on
which we commence increased production of these carbon components.

SALES AND MARKETING. Cost increases for the three and ninth periods in 2003 over
2002 were for the building of our "new sales and marketing organizations". In
June 2002, the majority of our U.S. sales persons were terminated. In the fourth
quarter of 2002, we hired a new CEO and thereafter began the process of hiring
and training the new employees in the new sales and marketing organizations. At
September 30, 2003, our sales organization consisted of 18 territory managers
and four area directors compared to only three territory managers and one area
director the previous year. We have substantially completed the hiring and
training of our sales and marketing organization.

GENERAL AND ADMINISTRATIVE. For the three and nine months ended September 2003
compared to the same periods in 2002, legal, accounting, and other professional
services increased by $171,000 and $276,000, respectively, substantially for
legal support, recruitment, and hiring of our new sales organization; and
management bonus accruals increased by $150,000 and $450,000, respectively, for
management's attainment of increased financial performance.

IMPAIRMENT CHARGE. During the first quarter of 2002, the Company evaluated the
carrying value of its technology license asset of $13 million in accordance with
the provisions of Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets. While this evaluation indicated that the asset's
carrying value was recoverable, changes in sales volumes and selling prices
during the second quarter of 2002 necessitated a revaluation of the
recoverability of that asset. As a result of this updated cash flow analysis, we
recorded an $8.1 million non-cash charge during the second quarter of 2002. We
believe our current carrying value of the technology license is recoverable and
no further impairment charges have been taken. For a more complete discussion of
this accounting issue, see Note 4, Impairment of Technology License in the Notes
to Consolidated Financial Statements.

REORGANIZATION EXPENSE. For the nine months ended September 30, 2002, we had
$0.9 million in reorganization expenses representing severance costs for
terminated employees. In June 2002, the Board of Directors decided to
significantly decrease our workforce. As part of these cost reduction measures,
one half of the workforce, including the executive officers of the Company, were
released from employment. At September 30, 2003, we had remaining


                                       12
<PAGE>
obligations relating to the June 2002 reorganization of $87,000. We expect these
obligations to be fully paid by the end of 2003.

EXTINGUISHMENT OF DEBT. On July 21, 2003 we entered into an agreement and on
August 21, 2003, we paid Centerpulse USA Holdings Co.(Centerpulse) $12 million
in exchange for cancellation of all of our payment obligations under our carbon
technology agreement and we would own a fully paid exclusive license to use the
carbon technology to produce components for our valve. Prior to this agreement,
we were obligated to pay Centerpulse an aggregate of $28.2 million under the
technology agreement over a period of approximately four years. These payments
were accrued as milestones were met. Of the total $28 million, there were two
uncompleted milestones totaling $12 million that were not accrued. Since the
amount accrued exceeded the amount due, we realized a non-cash gain on the
extinguishment of debt in the amount of $2.6 million on this transaction during
the three month period ended September 2003.

NET INTEREST INCOME (EXPENSE). Our interest expense was primarily attributable
to imputed interest on our long-term debt previously owed to Centerpulse. There
was no imputed interest during the quarter ended September 30, 2003 due to the
payoff agreement made with Centerpulse during the quarter. Our interest income
is primarily attributable to the investment of our cash balances.

INCOME TAXES. We have accumulated approximately $38 million of net operating
loss (NOL) carryforwards for U.S. tax purposes. We believe that our ability to
fully utilize the existing net operating loss carryforwards could be restricted
on a portion of the NOL for changes in control that may have occurred or may
occur in the future. We will conduct a formal study of any restrictions on our
carryforwards when we attain profitability. We have not recorded any assets or
liabilities related to our NOL carryforwards.

NET LOSS. Our decrease in net loss in 2003 resulted from increases in sales
offset by changes in operating costs, all of which are described above.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments were $8.9 million as of
September 30, 2003, compared to $10.0 million as of December 31, 2002.

CASH FLOWS FROM OPERATING ACTIVITIES. For the first nine months of 2003, net
cash used in operating activities was $37,000. Net loss plus the non-cash
expenses of depreciation and imputed interest expense less the non-cash gain on
the extinguishment of debt totaled a use of cash of $6.6 million. This was
offset by changes in operating assets and liabilities. Accounts receivable
increased $0.7 million due to increased sales volumes. Inventories decreased by
$7.9 million as we continue to deplete inventories. Other current assets
increased $0.3 million as payments were made during the third quarter of 2003 in
support of programs that will be expensed in the fourth quarter of 2003.
Accounts payable and accrued expenses decreased $0.4 million due to a $1.0
million payment in conjunction with the termination of our French distributor
offset by higher accounts payable and accrued bonuses.

CASH FLOWS FROM INVESTING ACTIVITIES. In July, 2003, we entered into an
agreement and in August we paid Centerpulse $12 million in exchange for
cancellation of all of our payment obligations under our carbon technology
agreement. As a result, we have no remaining payment obligations under the
carbon technology agreement and we own a fully paid exclusive worldwide license
to use the carbon technology to produce components for our valve.

CASH FLOWS FROM FINANCING ACTIVITIES. In August, 2003, we issued 4.4 million
shares of common stock in a private placement and received $11.6 million, net of
offering costs. We used these proceeds to pay Centerpulse $12 million in
exchange for cancellation of all of our payment obligations under the carbon
technology agreement.

CASH COMMITMENTS


                                       13
<PAGE>
We believe that funds generated from operations, together with our balances in
cash and cash equivalents and short term investments, will be sufficient to
finance current operations and planned capital expenditure requirements for at
least the next twelve months.

CAUTIONARY STATEMENTS

There are several important factors that could cause our actual results to
differ materially from our anticipated results. These factors, and their impact
on the success of our operations and our ability to achieve our goals, include
the following:

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

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

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

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

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

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

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


                                       14
<PAGE>
The ATS heart valve is sold internationally through independent distributors.
The loss of an international distributor could seriously harm our business and
results of operations if a new distributor could not be found on a timely basis
in the relevant geographic market. We do not control the amount and timing of
marketing resources that these third parties devote to our product. Furthermore,
to the extent we rely on sales through independent distributors, any revenues we
receive will depend primarily on the efforts of these parties. In addition, as
part of our agreement with our distributors, we provide for the repurchase of
unopened valves upon termination of the distributor by us. For example, in 2002,
we bought back $977,115 in inventory from our distributor for France and Belgium
in connection with the termination of our relationship with such distributor.
Buybacks of inventory could have an adverse impact on our results of operations
for the period in which it occurs.

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

As of September 30, 2003, more than 79% of our net sales are derived from
international operations. We expect that international sales will account for a
substantial majority of our revenue until the ATS heart valve receives wider
market acceptance from U.S. customers. Accordingly, any material decrease in
foreign sales may materially and adversely affect our results of operations.

We sell in U.S. dollars to most of our customers abroad. An increase in the
value of the U.S. dollar in relation to other currencies can and has adversely
affected our sales outside of the United States. Our sales in Europe declined
36% for the year ended December 31, 2002 as compared to the year ended December
31, 2001. The decrease in sales was due primarily to the change in the value of
the U.S. dollar against the Euro, as well as competitor price pressure. Our
dependence on sales outside of the United States will continue to expose us to
U.S. dollar currency fluctuations for the foreseeable future.

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

      -     unforeseen changes in regulatory requirements and government health
            programs;

      -     weaker intellectual property rights protection in some countries;

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

      -     political and economic instability in our target markets; and

      -     greater difficulty in collecting payments from product sales.

In 2001, we experienced a slow collection of receivables from our Italian
distributor. As a result, we ceased recognizing sales to this distributor upon
shipment, and instead recognize sales to this distributor only upon receipt of
payment. Slow payment of receivables by other international distributors, or the
occurrence of any of the other factors listed above, could harm our ability to
successfully commercialize our product internationally and could harm our
business.

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

We are not currently profitable and have a very limited history of
profitability. As of December 31, 2002, we had an accumulated deficit of $37.6
million, and as of September 30, 2003, we had an accumulated deficit of $42.5
million. We expect to incur significant expenses over the next several years as
we continue to devote substantial resources to the commercialization of the ATS
heart valve in the United States. We will not generate net income unless we are
able to significantly increase revenue from U.S. sales. If we continue to
sustain losses, we may not be able to continue our business as planned.


                                       15
<PAGE>
WE CHANGED MANAGEMENT IN LATE 2002. OUR FAILURE TO RETAIN THE CURRENT MANAGEMENT
OR OUR MANAGEMENT'S FAILURE TO IMPROVE SALES AND ACHIEVE PROFITABILITY COULD
ADVERSELY IMPACT OUR RESULTS OF OPERATIONS.

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

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

The market for prosthetic heart valves is highly competitive. We expect that
competition will intensify as additional companies enter the market or modify
their existing products to compete directly with us. Our primary competitor, St.
Jude Medical, Inc., currently controls approximately 50% of the worldwide
mechanical heart valve market. Many of our competitors have long-standing FDA
approval for their valves and extensive clinical data demonstrating the
performance of their valves. In addition, they have greater financial,
manufacturing, marketing and research and development capabilities than we have.
For example, many of our competitors have the ability, due to their internal
carbon manufacturing facilities and economies of scale, to manufacture their
heart valves at a lower cost than we can manufacture our ATS heart valve. Our
primary competitor has recently used price as a method to compete in several
international markets. If heart valve prices decline significantly we might not
be able to compete successfully, which would harm our results of operations.

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

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

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

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

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

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


                                       16
<PAGE>
WE LICENSE PATENTED TECHNOLOGY AND OTHER PROPRIETARY RIGHTS FROM CARBOMEDICS. IF
THESE AGREEMENTS ARE BREACHED OR TERMINATED, OUR RIGHT TO MANUFACTURE THE ATS
HEART VALVE COULD BE TERMINATED.

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

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

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

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

Under our agreement with Carbomedics, we have been granted an exclusive
worldwide license to manufacture pyrolytic carbon components for the ATS heart
valve. We cannot be certain that our strategy to establish internal
manufacturing capabilities will result in a cost-effective means for
manufacturing the ATS heart valve. We have limited experience in manufacturing
pyrolytic carbon. Although we have an FDA-approved carbon manufacturing
facility, it is currently operating at the minimal level necessary to maintain
the plant and our technical expertise in producing carbon components. In the
future when we increase production at the plant we may encounter difficulties in
maintaining and expanding our manufacturing operations, including problems
involving:

      -     production yields;

      -     quality control;

      -     per unit manufacturing costs;

      -     shortages of qualified personnel; and

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

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

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

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

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


                                       17
<PAGE>
WE MAY FACE PRODUCT LIABILITY CLAIMS, WHICH COULD RESULT IN LOSSES IN EXCESS OF
OUR INSURANCE COVERAGE AND WHICH COULD NEGATIVELY AFFECT OUR ABILITY TO ATTRACT
AND RETAIN CUSTOMERS.

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

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

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

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

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

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

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

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

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

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

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

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

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

      -     comply with manufacturing and reporting requirements; and

      -     undergo rigorous inspections by these agencies.

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


                                       18
<PAGE>
THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE, WHICH MAY RESULT IN LOSSES TO
INVESTORS.

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

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

      -     the success of our management in operating ATS effectively;

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

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

      -     the status of component supply arrangements;

      -     changes in reimbursement policies;

      -     government regulation;

      -     developments in patent or other proprietary rights;

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

      -     general market conditions.

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

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

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

      -     No cumulative voting by shareholders for directors;

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

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

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

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


                                       19
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

CURRENCY FLUCTUATIONS. We maintain one subsidiary outside of the United States
whose operations are maintained in their local currency. All assets and
liabilities of this subsidiary are translated to U.S. dollars at quarter-end
exchange rates. Translation adjustments arising from the use of differing
exchange rates are included in accumulated other comprehensive loss in
shareholder's equity. Transactions with customers located outside of the United
States are denominated in U.S. dollars and therefore are not subject to currency
fluctuation risks.

INFLATION. We do not believe that inflation has had a material effect on our
results of operations in recent years and periods. There can be no assurance,
however, that our business will not be adversely affected by inflation in the
future.

ITEM 4. CONTROLS AND PROCEDURES

A)    EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief executive
      officer and chief financial officer, after evaluating the effectiveness of
      our disclosure controls and procedures (as defined in the Exchange Act
      Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
      Quarterly Report on Form 10-Q, have concluded that, based on such
      evaluation, our disclosure controls and procedures were adequate and
      designed to ensure that material information relating to us and our
      consolidated subsidiaries, which we are required to disclose in the
      reports we file or submit under the Securities Exchange Act of 1934, was
      made known to them by others within those entities and reported within the
      time periods specified in the Securities and Exchange Commission's rules
      and forms.

B)    CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There were no
      changes in our internal control over financial reporting identified in
      connection with the evaluation of such internal control over financial
      reporting that occurred during our last fiscal quarter which have
      materially affected, or are reasonably likely to materially affect, our
      internal control over financial reporting.


                                       20
<PAGE>
                           PART II. OTHER INFORMATION

ITEM 2.     CHANGES IN SECURITIES AND USE OF PROCEEDS

            On August 8, 2003, the Company sold an aggregate of 4,400,000 shares
            of common stock at $2.80 per share for aggregate gross proceeds of
            $12.3 million. The purchases were made by 12 institutional investors
            or private investment funds. The issuance and sale of the shares
            were effected without registration under the Securities Act in
            reliance on Section 4(2) as a transaction by an issuer not involving
            a public offering and under the safe harbor provisions of Regulation
            D under the Securities Act. The purchasers were given access to
            information about the Company, represented that they were accredited
            investors able to bear the economic risk of loss of the investment
            and represented that the shares were being acquired for investment
            purposes only and not with a view to or for sale in connection with
            any distribution. U.S. Bancorp Piper Jaffray Inc. acted as placement
            agent for the sale of the shares.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

            (a)   Exhibits

                  3.1   Restated Articles of Incorporation, as amended to date
                        (Incorporated by reference to Exhibit 3.1 to the
                        Company's Annual Report on Form 10-K for the year ended
                        December 31, 1993 (the "1993 Form 10-K")).

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

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

                  10.1  Amendment No. 9 to the Lease agreement between the
                        Company and St. Paul Properties, Inc. dated September 9,
                        2003

                  31.1  Certification of Chief Executive Officer pursuant to
                        Rules 13a-15(e)/15d-15(e) (Section 302 Certification)

                  31.2  Certification of Chief Financial Officer pursuant to
                        Rules 13a-15(e)/15d-15(e) (Section 302 Certification)

                  32.1  Certification of the Chief Executive Officer pursuant to
                        18 U.S.C. Section 1350 (Section 906 Certification)

                  32.2  Certification of the Chief Financial Officer pursuant to
                        18 U.S.C. Section 1350 (Section 906 Certification)


                                       21
<PAGE>
            (b)   Reports on Form 8-K

                  (i)   The Company "furnished" (in accordance with Item 12 of
                        Form 8-K) to the SEC a Form 8-K on July 2, 2003
                        reporting under Item 12 that it had issued a press
                        release with respect to its financial results for the
                        quarter ended June 30, 2003 and providing a copy of the
                        press release as an exhibit under Item 7.

                  (ii)  The Company filed with the SEC a Form 8-K on September
                        26, 2003 reporting under Item 5 that (a) it had entered
                        into an agreement with Centerpulse USA Holdings Co. to
                        pay off the Company's obligations under its carbon
                        technology agreement with Carbomedics, Inc. and (b) it
                        had entered into stock purchase agreements with respect
                        to the sale of 4.4 million shares of common stock in a
                        private placement. The Company also provided copies of
                        the foregoing agreements as exhibits to the Form 8-K
                        under Item 7.


                                       22
<PAGE>
                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: November 14, 2003             ATS MEDICAL, INC.



                                    By: /s/ Michael D. Dale
                                        -------------------
                                        Michael D. Dale, Chief Executive Officer
                                        (Principal Executive Officer and
                                        Authorized Signatory)


                                    By: /s/ John R. Judd
                                        ----------------
                                        John R. Judd, Chief Financial Officer
                                        (Principal Accounting Officer)



                                       23
<PAGE>
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NUMBER    DESCRIPTION
<S>               <C>
10.1              Amendment No. 9 to the Lease agreement between the Company and
                  St. Paul Properties, Inc. dated September 9, 2003

31.1              Certification of the Chief Executive Officer pursuant to Rules
                  13a-15(e)/15d-15(e) (Section 302 Certification)

31.2              Certification of the Chief Financial Officer pursuant to Rules
                  13a-15(e)/15d-15(e) (Section 302 Certification)

32.1              Certification of the Chief Executive Officer pursuant to 18
                  U.S.C. Section 1350 (Section 906 Certification)

32.2              Certification of the Chief Financial Officer pursuant to 18
                  U.S.C. Section 1350 (Section 906 Certification)
</TABLE>


                                       24