<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 JUNE 30, 2004
                           COMMISSION FILE NO. 0-18602

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

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

    3905 ANNAPOLIS LANE 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 July 30, 2004, was:

          Common Stock, $.01 par value         30,700,789 shares

<PAGE>

                                      INDEX

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

ITEM 1.      Financial Statements (Unaudited)

                   Consolidated Balance Sheets as of
                   June 30, 2004, and December 31, 2003                            3

                   Statements of Operations for the three and six
                   months ended June 30, 2004 and 2003                             4

                   Statements of Cash Flows for the six
                   months ended June 30, 2004 and 2003                             5

                   Notes to Consolidated Financial Statements                    6 - 7

ITEM 2.      Management's Discussion and Analysis of
             Financial Condition and Results of Operations                       8 - 18

ITEM 3.      Quantitative and Qualitative Disclosures About Market Risk            19

ITEM 4.      Controls and Procedures                                               19

PART II.     OTHER INFORMATION

ITEM 2.      Changes in Securities, Use of Proceeds, and Issuer Purchases of
             Equity Securities                                                     20

ITEM 4.      Submission of Matters to a Vote of Security Holders                   20

ITEM 6.      Exhibits and Reports on Form 8-K                                      20

SIGNATURES                                                                         22

EXHIBIT INDEX                                                                      23
</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>
                                                                  JUNE 30,       DECEMBER 31,
                                                                    2004            2003
                                                                 ----------      -----------
                                                                 (unaudited)
<S>                                                              <C>             <C>
ASSETS
Current assets:
    Cash and cash equivalents                                    $   21,242      $     6,472
    Short-term investments                                              250            2,003
    Accounts receivable, net                                          6,560            4,939
    Inventories                                                      20,194           20,377
    Other current assets                                                575              508
                                                                 ----------      -----------

Total current assets                                                 48,821           34,299

Furniture, machinery and equipment, net                               5,810            5,895
Inventories                                                          10,000           17,000
Intangible assets                                                    18,688           18,500
Other assets                                                            436              440
                                                                 ----------      -----------
Total assets                                                     $   83,755      $    76,134
                                                                 ==========      ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:

    Accounts payable                                             $    2,295      $       989
    Due to related party                                                217              217
    Accrued payroll and expenses                                      1,556            1,343
    Accrued distributor liabilities                                     559              475
                                                                 ----------      -----------

Total current liabilities                                             4,627            3,024

Due to related party                                                    199              307
Shareholders' equity:
    Common stock, $.01 par value:
        authorized 40,000,000 shares; issued and
        outstanding 30,698,789 and 26,778,557 shares at
         June 30, 2004 and December 31, 2003                            307              268
    Additional paid-in capital                                      136,155          123,412
    Deferred compensation                                               (61)             (70)
    Accumulated other comprehensive income                               59               51
    Accumulated deficit                                             (57,531)         (50,858)
                                                                 ----------      -----------
Total shareholders' equity                                           78,929           72,803
                                                                 ----------      -----------
Total liabilities and shareholders' equity                       $   83,755      $    76,134
                                                                 ==========      ===========
</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 JUNE 30,      SIX MONTHS ENDED JUNE 30,
                                                                 ---------------------------      -------------------------
                                                                    2004           2003             2004            2003
                                                                    ----           ----             ----            ----
<S>                                                              <C>             <C>             <C>             <C>
Net sales                                                         $   7,548       $   4,246       $  14,242       $   8,211
Cost of goods sold                                                    5,428           3,248          10,194           5,997
                                                                 ----------      ----------      ----------      ----------
Gross profit                                                          2,120             998           4,048           2,214

Operating expenses:
    Sales and marketing                                               3,950           2,388           7,616           3,542
    Research and development                                            186             442             373             828
    General and administrative                                        1,367           1,043           2,748           2,030
                                                                 ----------      ----------      ----------      ----------
Total operating expenses                                              5,503           3,873          10,737           6,400
                                                                 ----------      ----------      ----------      ----------
Operating loss                                                       (3,383)         (2,875)         (6,689)         (4,186)

Net interest income (expense)                                            15            (228)             16            (457)
                                                                 ----------      ----------      ----------      ----------

Net  loss                                                        ($   3,368)     ($   3,103)     ($   6,673)     ($   4,643)
                                                                 ==========      ==========      ==========      ==========
Net  loss per share:
    Basic and diluted                                            ($    0.12)     ($    0.14)     ($    0.25)     ($    0.21)

Weighted average number of shares used in calculation:

    Basic and diluted                                                27,159          22,325          26,978          22,322
</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>
                                                                  SIX MONTHS ENDED JUNE 30,
                                                                  -------------------------
                                                                    2004            2003
                                                                    ----            ----
<S>                                                              <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                         ($   6,673)     ($   4,643)
Adjustments to reconcile net loss to net cash
    used in operating activities:
    Depreciation                                                        532             379
    Loss on disposal of equipment                                         2               2
    Compensation expense on stock options                                34               3
    Imputed interest long-term debt                                       -             320
    Changes in operating assets and liabilities:
        Accounts receivable                                          (1,621)           (359)
        Inventories                                                   7,183           5,177
        Prepaid expenses                                                (67)           (221)
        Other assets                                                      4               3
        Accounts payable and accrued expenses                         1,495            (733)
                                                                 ----------      ----------
Net cash provided by (used in) operating activities                     889             (72)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments                                     (996)         (2,490)
Sale of short-term investments                                        2,749           3,994
Payment for technology license                                         (188)              -
Purchases of furniture, machinery and equipment                        (449)           (385)
                                                                 ----------      ----------
Net cash provided by investing activities                             1,116           1,119

CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sales of common stock                              12,757               8
                                                                 ----------      ----------
Net cash provided by financing activities                            12,757               8
                                                                 ----------      ----------
Effect of exchange rate changes on cash                                   8               9
                                                                 ----------      ----------
Increase in cash and cash equivalents                                14,770           1,064

Cash and cash equivalents at beginning of period                      6,472           7,472
                                                                 ----------      ----------
Cash and cash equivalents at end of period                        $  21,242       $   8,536
                                                                 ==========      ==========
</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 2003.

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 its 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             Six months ended
                                                                          June 30,                      June 30,
                                                                  -----------------------       -----------------------
(in thousands, except per share data)                               2004           2003           2004           2003
-------------------------------------                               ----           ----           ----           ----

<S>                                                              <C>            <C>            <C>            <C>
Net loss, as reported                                            ($  3,368)     ($  3,103)     ($  6,673)     ($  4,643)

Subtract:  Total stock-based employee compensation
         expense determined under fair value based
         method for all awards                                        (579)          (334)        (1,252)          (436)
                                                                 ---------      ---------      ---------      ---------
Pro forma net loss                                               ($  3,947)     ($  3,437)     ($  7,925)     ($  5,079)
                                                                 =========      =========      =========      =========
Net loss per share:
         As reported
              Basic and diluted                                  ($   0.12)     ($   0.14)     ($   0.25)     ($   0.21)
         Pro forma
              Basic and diluted                                  ($   0.15)     ($   0.15)     ($   0.29)     ($   0.23)
</TABLE>

                                       6
<PAGE>

NOTE 3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                                              June 30,      December 31,
      (in thousands)                                            2004            2003
      --------------                                          --------      ------------
<S>                                                          <C>            <C>
Raw materials                                                $    7,707      $   12,033
Work in process                                                  10,358           9,615
Finished goods                                                   12,329          15,929
Obsolescence reserve                                               (200)           (200)
                                                             ----------      ----------
Total, net                                                   $   30,194      $   37,377
                                                             ==========      ==========

Balance sheet classification

Current assets                                               $   20,194      $   20,377
Non-current assets                                               10,000          17,000
                                                             ----------      ----------
Total, net                                                   $   30,194      $   37,377
                                                             ==========      ==========
</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 $10.0 million and $17.0
million of inventories as noncurrent assets at June 30, 2004 and December 31,
2003, respectively.

NOTE 4. COMPREHENSIVE INCOME

Comprehensive income for the Company includes net income from 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 5. NEW PRONOUNCEMENTS

In December 2003, the FASB issued FASB Interpretation No. 46R (FIN 46R),
Consolidation of Variable Interest Entities, which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in an
entity through means other than voting rights and accordingly should consolidate
the entity. The Company believes it has no variable interest entities and,
therefore, FIN 46R did not have an impact on the Company's consolidated
financial statements.

NOTE 6. ACQUISITION OF LICENSING AGREEMENT

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

NOTE 7. SHAREHOLDER'S EQUITY

On June 28, 2004, in a private placement, the Company issued 3.7 million shares
of common stock and received $12.4 million, net of accrued offering costs.

NOTE 8. SUBSEQUENT EVENT

On July 28, 2004, the Company entered into an agreement with Silicon Valley Bank
to establish a secured revolving credit facility for $8.5 million. Under terms
of the agreement, the Company will receive a $2.5 million three-year term loan
as well as a two year $6 million line of credit. The credit facility contains
two financial covenants: a leverage ratio, and a required minimum tangible net
worth.

                                       7
<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.

EXECUTIVE OVERVIEW

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

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

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

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

With inventory purchases exceeding sales through the years, we have built
inventory levels that today provide a source of cash. We are drawing down these
paid-for inventories and using the cash it generates to fund operations. Our
manufacturing facility for pyrolytic carbon components has been producing
limited quantities. We will increase production in this facility during the last
half of 2004. Once we have exhausted our high priced components, we expect to
have lower manufacturing costs per valve which will allow us to realize higher
gross profit in more international markets.

In June 2002, we reorganized the company laying off more than half of the work
force including all executive management. With the hiring of a new president
late in 2002, we started the process of rebuilding our sales and marketing
teams, especially in the United States. This rebuilding is the most significant
factor contributing to our increase in expense levels during 2003 and into 2004.
Because sales prices in the United States exceed selling prices elsewhere, we
feel that our future success will depend on achieving increased market share in
the U.S. Our U.S. sales as a percentage of our overall sales have grown from 4%
in 2000 to 34% during the first half of 2004.

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

                                       8
<PAGE>

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.

RESULTS OF OPERATIONS

The following table compares the dollar and percentage change in the Statements
of Operations for the three and six month periods ended June 30, 2004 and 2003.

<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED JUNE 30,                    SIX MONTHS ENDED JUNE 30,
                                 ----------------------------------------------  -------------------------------------------
                                                                  Increase                                     Increase
                                                                 (Decrease)                                    (Decrease)
                                    2004         2003         $             %       2004         2003        $           %
                                  ---------    --------    --------      -----    ---------    --------    --------    -----
<S>                              <C>          <C>         <C>            <C>     <C>          <C>         <C>          <C>
Net sales                         $   7,548    $  4,246    $  3,302       77.8%   $  14,242    $  8,211    $  6,031     73.5%
Cost of goods sold                    5,428       3,248       2,180       67.1%      10,194       5,997       4,197     70.0%
                                 ----------   ---------   ---------      -----   ----------   ---------   ---------    -----
Gross profit                          2,120         998       1,122      112.4%       4,048       2,214       1,834     82.8%
Gross profit %                         28.1%       23.5%                               28.4%       27.0%
Operating expenses:
    Sales and marketing               3,950       2,388       1,562       65.4%       7,616       3,542       4,074    115.0%
    Research and development            186         442        (256)     -57.9%         373         828        (455)   -55.0%
    General and administrative        1,367       1,043         324       31.1%       2,748       2,030         718     35.4%
                                 ----------   ---------   ---------      -----   ----------   ---------   ---------    -----
Total operating expenses              5,503       3,873       1,630       42.1%      10,737       6,400       4,337     67.8%
                                 ----------   ---------   ---------      -----   ----------   ---------   ---------    -----
Operating loss                       (3,383)     (2,875)       (508)     -17.7%      (6,689)     (4,186)     (2,503)   -59.8%

Net interest income (expense)            15        (228)        243      106.6%          16        (457)        473    103.5%
                                 ----------   ---------   ---------      -----   ----------   ---------   ---------    -----

Net  loss                        ($   3,368)  ($  3,103)  ($    265)      -8.5%  ($   6,673)  ($  4,643)  ($  2,030)   -43.7%
                                 ==========   =========   =========      =====   ==========   =========   =========    =====
</TABLE>

The following table presents the statement of operations as a percentage of net
sales for the three and six month periods ended June 30, 2004 and 2003:

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED   SIX MONTHS ENDED
                                                    JUNE 30,           JUNE 30,
                                                    --------           --------
                                               2004        2003     2004     2003
                                               ----        ----     ----     ----
<S>                                           <C>         <C>      <C>       <C>
Net sales                                     100.0%      100.0%   100.0%    100.0%
Cost of goods sold                             71.9%       76.5%    71.6%     73.0%
                                              -----       -----    -----     -----
Gross profit                                   28.1%       23.5%    28.4%     27.0%
Operating expenses:
    Sales and marketing                        52.3%       56.2%    53.5%     43.1%
    Research and development                    2.5%       10.4%     2.6%     10.1%
    General and administrative                 18.1%       24.6%    19.3%     24.7%
                                              -----       -----    -----     -----
Total operating expenses                       72.9%       91.2%    75.4%     77.9%
                                              -----       -----    -----     -----
Operating loss                                -44.8%      -67.7%   -47.0%    -51.0%

Net interest income (expense)                   0.2%       -5.4%     0.1%     -5.5%
                                              -----       -----    -----     -----
Net  loss                                     -44.6%      -73.1%   -46.9%    -56.5%
                                              =====       =====    =====     =====
</TABLE>

                                       9
<PAGE>

NET SALES. The following table compares net sales between the three and six
month periods ended June 30, 2004 and 2003:

<TABLE>
<CAPTION>
                                       Three months ended June 30,                 Six months ended June 30,
                            -------------------------------------------   ------------------------------------------
                                                    Increase                                       Increase
   (in thousands)             2004       2003      (Decrease)      %        2004         2003     (Decrease)     %
   --------------           ---------   ---------   ---------    -----    ---------   ---------   ---------    -----
<S>                         <C>         <C>        <C>           <C>      <C>         <C>         <C>          <C>
United States               $   2,462   $   1,053   $   1,409    133.8%   $   4,852   $   1,906   $   2,946    154.6%

Outside United States           5,086       3,193       1,893     59.3%       9,390       6,305       3,085     48.9%
                            ---------   ---------   ---------    -----    ---------   ---------   ---------    -----
Total                       $   7,548   $   4,246   $   3,302     77.8%   $  14,242   $   8,211   $   6,031     73.5%
                            =========   =========   =========     ====    =========   =========   =========     ====
</TABLE>

<TABLE>
<CAPTION>
                                                2004 Change in                        2004 Change in
                                     --------------------------------       --------------------------------
                                     Average                                Average
                                      Sales       Unit                       Sales       Unit
                                      Price       Sales        Total         Price       Sales        Total
                                     -------      -----        -----        -------      -----        -----
<S>                                  <C>          <C>          <C>          <C>          <C>          <C>
United States                          0.9%       133.2%       133.8%         3.3%       146.4%       154.6%

Outside United States                  5.6%        50.7%        59.3%        -7.1%        60.4%        48.9%
                                      ----        -----        -----         ----        -----        -----
Total                                 12.2%        58.4%        77.8%         2.8%        72.3%        73.5%
                                      ====        =====        =====         ====        =====        =====
</TABLE>

<TABLE>
<CAPTION>
                                      Three months ended        Six months ended
                                           June 30,                  June 30,
                                      ------------------       -------------------
                                       2004        2003         2004         2003
                                       ----        ----         ----         ----
<S>                                   <C>         <C>          <C>          <C>
Share of total sales:

United States                          32.6%       24.8%        34.1%        23.2%

Outside United States                  67.4%       75.2%        65.9%        76.8%
                                      -----       -----        -----        -----
Total                                 100.0%      100.0%       100.0%       100.0%
                                      =====       =====        =====        =====
</TABLE>

In June 2002, the majority of our U.S. sales persons were terminated. In the
fourth quarter of 2002, we hired a new CEO and began building our "new sales
organization" in the U.S. consisting of four area directors managing 30 sales
territories. Our representation within these territories now consists of both
direct sales representatives and independent agents. This new sales organization
and overall greater sales efforts contributed to our increase in sales in 2004
as compared to 2003 and to our sales within the U.S. accounting for a larger
percentage of overall sales.

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

COST OF GOOD SOLD. Our costs of goods sold as a percentage of net sales has
varied due to changes in average selling price. Our gross margin is anticipated
to improve as sales within the Unites States increase as a percentage of total
sales and as we start selling valves that have been entirely manufactured in our
facilities. Our inventories of high priced carbon components currently exceed
our expected sales during 2004.

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

                                       10
<PAGE>

required, there is no material risk that there would be the introduction and FDA
approval of another substrate that would replace pyrolytic carbon prior to the
end of the period over which we expect to sell our inventory of valves.

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 purchase obligations starting in 2007 and continuing through
2011.

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 will increase the
production of our own carbon components during 2004. In future years, 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.

SALES AND MARKETING. Cost increases in 2004 over 2003 were for the building of
our "new sales and marketing organizations". We have substantially completed the
hiring and training of our new sales and marketing organizations.

RESEARCH AND DEVELOPMENT. Research and development expenses include the costs to
develop and improve current and future products and the costs for regulatory and
clinical activities for these products. In addition, during 2003, the costs to
set up and maintain our carbon components manufacturing facility while it was in
pre-production mode and the operational qualification and validation of the
carbon production equipment and making pilot coating runs were charged to
research and development costs and totaled approximately $0.3 million and $0.5
million during the three and six months ended June 2003.

GENERAL AND ADMINISTRATIVE. Cost increases in the three month period ended June
2004 over 2003 were for employee salary and benefits of $0.1 million, corporate
insurance costs of $0.1 million, and outside consulting services relating to our
costs of documenting and testing internal controls of $0.1 million. For the six
month period ended June 2004 over 2003, cost increases for employee salary and
benefits were $0.3 million, corporate insurances of $0.2 million, and costs of
documenting and testing internal controls of $0.1 million.

NET INTEREST INCOME (EXPENSE). Prior to June 30, 2004 our interest expense was
primarily attributable to imputed interest on our long-term debt previously owed
to Centerpulse. Our interest income is primarily attributable to the investment
of our cash balances. On July 28, 2004, we entered into an agreement for a
credit facility consisting of a $2.5 million term loan and a $6.0 million line
of credit. On July 30, 2004 we fully drew down the term loan. Minimum interest
expense, including amortization of deferred financing costs will be
approximately $50,000 per quarter and could be higher if we borrow funds under
the line of credit.

INCOME TAXES. At the end of 2003, we have accumulated approximately $42 million
of net operating loss (NOL) carryforwards for U.S. tax purposes. We believe that
our ability to fully utilize the existing NOL carryforwards could be restricted
on a portion of the NOL for changes in control that may have occurred or may
occur in the future. We have not conducted a formal study of whether a change in
control of ATS has occurred in the past that impairs our NOL carryforwards
because we are unable to utilize such NOL carryforwards until we achieve
profitability and because this study would be very expensive to complete. When
we attain profitability, we will conduct a formal study of any restrictions on
our carryforwards. We have not recorded any net assets related to our NOL
carryforwards and other deferred items as we currently cannot determine that it
is reasonably likely that this asset will be realized and we, therefore, have
provided a valuation allowance for the entire asset.

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

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LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments were $21.5 million as of June
30, 2004 compared to $8.5 million as of December 31, 2003.

OPERATING ACTIVITIES. During the first six months of 2004, we received cash
payments from customers of $12.6 million. We made cash payments to employees and
suppliers of $11.6 million. Our operating loss during 2004 of $6.7 million was
substantially funded through the depletion of inventories. During 2003 and into
2004, we incurred significant expenses commercializing the ATS heart valve in
the United States. As we build sales in future periods and our cost of
inventories decrease, our operating losses will decrease and we will move
steadily towards a cash flow breakeven on sales and eventually to profitability.

INVESTING ACTIVITIES. During the first six months of 2004 we purchased property
and equipment totaling $0.4 million. For the remainder of 2004, we expect to
purchase approximately $3.0 million of additional equipment, mainly in support
of increasing production in our pyrolytic carbon facility.

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

FINANCING ACTIVITIES. On June 28, 2004, we raised approximately $12.4 million in
a private placement of common stock. During the first six months of 2004, we
raised approximately $0.4 million through the issuance of common stock through
stock options and our employee stock purchase plan.

On July 28, 2004, we entered into a secured credit facility consisting of a $2.5
million term loan and a $6.0 million line of credit. The credit facility
contains two financial covenants: a leverage ratio, and a required minimum
tangible net worth. We are currently in compliance with both covenants.

CASH MANAGEMENT

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

Based upon the current forecast of sales and operating expenses, we anticipate
having cash to fund our operations through 2005. However, as identified under
the heading of "Cautionary Statements" below, any adverse change that affects
our revenue, access to the capital markets or future demand for our products
will affect our long term viability. Maintaining adequate levels of working
capital depends in part upon the success of our products in the marketplace, the
relative profitability of those products and our ability to control operating
and capital expenses. Funding of our operations in future periods may require
additional investments in ATS in the form of equity, debt or a combination of
both. There can be no assurance that we will achieve desired levels of sales or
profitability, or that future capital infusions will be available.

OFF-BALANCE SHEET ARRANGEMENTS

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

CAUTIONARY STATEMENTS

This document contains forward-looking statements within the meaning of federal
securities laws that may include statements regarding intent, belief or current
expectations of our Company and our management. The Private Securities
Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking
statements to encourage

                                       12
<PAGE>

companies to provide prospective information without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement. We
desire to take advantage of these "safe harbor" provisions. Accordingly, we
hereby identify the following important factors which could cause our actual
results to differ materially from any such results which may be projected,
forecast, estimated or budgeted by us in forward-looking statements made by us
from time to time in reports, proxy statements, registration statements and
other written communications, or in oral forward-looking statements made from
time to time by the company's officers and agents. We do not intend to update
any of these forward-looking statements after the date of this Form 10-K to
conform them to actual results.

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

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

WE CURRENTLY RELY ON THE ATS HEART VALVE AS OUR 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.

                                       13
<PAGE>

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

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

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

      For the first six months of 2004, 66% of our net sales are derived from
international operations. We expect that international sales will account for a
substantial majority of our revenue until the ATS heart valve receives wider
market acceptance from U.S. customers. Accordingly, any material decrease in
foreign sales may materially and adversely affect our results of operations.

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

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

      -     unforeseen changes in regulatory requirements and government health
            programs;

      -     weaker intellectual property rights protection in some countries;

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

      -     political and economic instability in our target markets; and

      -     greater difficulty in collecting payments from product sales.

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

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

      We are not currently profitable and have a very limited history of
profitability. As of June 30, 2004, we had an accumulated deficit of $57.5
million. We expect to incur significant expenses over the next several years as
we continue to devote substantial resources to the commercialization of the ATS
heart valve in the United States. We will not generate net income unless we are
able to significantly increase revenue from U.S. sales. If we continue to
sustain losses, we may not be able to continue our business as planned.

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

      The market for prosthetic heart valves is highly competitive. We expect
that competition will intensify as additional companies enter the market or
modify their existing products to compete directly with us. Our primary

                                       14
<PAGE>

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

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

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

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

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

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

      We purchased pyrolytic carbon components under a long-term supply
agreement with Carbomedics, Inc. (formerly Sulzer Carbomedics, Inc.) through
June 2002 and we are required to resume purchases of such components in 2007. To
date, our purchases of pyrolytic carbon components have exceeded our sales of
the ATS heart valves. We currently have in inventory enough pyrolytic carbon
components to satisfy our projected requirements through 2004. If we are unable
to achieve widespread acceptance for the ATS heart valve or if competitive
pressures result in price reductions, the value of the excess inventory would
likely decrease, which could seriously harm our results of operations and
financial condition. Because the pyrolytic carbon components are made to meet
the unique specifications of the ATS heart valve, our inventory may have little,
if any, value in the open market.

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

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

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

      We cannot be certain that, after our current inventory is exhausted,
sufficient quantities of pyrolytic carbon components will be available to
assemble the ATS heart valve. Other than our carbon facility, the only other
FDA-approved alternate supplier of our pyrolytic carbon components is
Carbomedics. Although we have a supply agreement with Carbomedics under which it
agrees to supply us with a minimum annual number of pyrolytic carbon components
in 2007 through 2011, the amounts available under this agreement are not
expected to be sufficient to 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.

                                       15
<PAGE>

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

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

      -     production yields;

      -     quality control;

      -     per unit manufacturing costs;

      -     shortages of qualified personnel; and

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

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

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

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

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

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

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

                                       16
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

      -     comply with manufacturing and reporting requirements; and

      -     undergo rigorous inspections by these agencies.

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

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

      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;

                                       17
<PAGE>

      -     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.

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<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

In the United States, Canada, and France, we sell our products directly to
hospitals. In other international markets, we sell our products to independent
distributors who, in turn, sell to medical hospitals. Loss, termination, or
ineffectiveness of distributors to effectively promote our product would have a
material adverse effect on our financial condition and results of operations.

Transactions with U.S. and non-U.S. customers and distributors, other than in
France, are entered into in U.S. dollars, precluding the need for foreign
currency hedges on such sales. Sales through our French subsidiary, which was
established in 2002 to replace a distributor, are in Euros, so we are subject to
profitability risk arising from exchange rate movements. We have not used
foreign exchange contract or similar devices to reduce this risk. We will
evaluate the need to use foreign exchange contracts or similar devices, if sales
in France increase substantially.

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

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

(b)   Changes in Internal Control

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

                                       19
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY
         SECURITIES

         On June 28, 2004, the Company sold an aggregate of 3,687,183 shares of
         common stock at $3.55 per share for aggregate gross proceeds of $13.1
         million. The purchases were made by 19 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. Adam,
         Harkness & Hill, Inc.. acted as placement agent for the sale of the
         shares.

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

         The annual meeting of shareholders of the Company was held on May 6,
         2004 at which time (i) four nominees were elected to the Board of
         Directors for one-year terms, and (ii) Ernst & Young LLP was approved
         as the independent auditors of the Company. Proxies for the Company
         were solicited pursuant to Section 14(a) of the Securities Exchange Act
         of 1934, as amended, and there was no solicitation in opposition to
         management's solicitations. All nominees for directors as listed in the
         proxy statement were elected. The voting results were as follows:

<TABLE>
<CAPTION>
                                          For        Withhold     Against    Abstain
                                          ---        --------     -------    -------
<S>                                   <C>            <C>          <C>        <C>
Election of Directors
      Michael D. Dale                 22,183,108       47,183           0          0
      David L. Boehnen                22,130,770       99,521           0          0
      Eric W. Sivertson               22,116,170      114,121           0          0
      Robert E. Munzenrider           22,142,608       87,683           0          0

Approval of Independent
      Auditors                        22,113,548            0      96,680     19,763
</TABLE>

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     Development and License Agreement dated as of April
                           26, 2004 between the Company and ErySave AB

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

                                       20
<PAGE>

                  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)

         (b)      Reports on Form 8-K

                  The Company "furnished" (in accordance with Item 12 of Form
                  8-K) to the SEC one Form 8-K as follows:

                           On April 30, 2004, the Company reported its results
                           of operations and financial condition for the fiscal
                           quarter ended March 31, 2004.

                  The Company filed (in accordance with Item 5 of Form 8-K) with
                  the SEC one Form 8-K as follows:

                           On June 28, 2004, our entering into stock purchase
                           agreements to sell 3,687,183 shares of our common
                           stock to institutional investors through our agent,
                           Adams, Harkness & Hill, Inc.

                                       21
<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: August 9, 2004            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)

                                       22
<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NUMBER                            DESCRIPTION
<S>             <C>
10.1            Development and License Agreement dated as of April 26, 2004
                between the Company and ErySave AB

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>

                                       23