Back to GetFilings.com






SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
MINNEAPOLIS, MINNESOTA 55447
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (612) 553-7736

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

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

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

Yes _X_ No ___

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )

The aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 19, 1999 was approximately $122,044,521 (based on the
last sale price of such stock as reported by the NASDAQ National Market).

The number of shares outstanding of each of the registrant's classes of
common stock as of March 19, 1999 was:

Common Stock, $.01 par value 17,838,679 shares

DOCUMENTS INCORPORATED BY REFERENCE

Pursuant to General Instruction G(3), the responses to Items 10, 11, 12
and 13 of Part III of this report are incorporated herein by reference to
certain information contained in the Company's definitive proxy statement for
its 1999 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission on or before April 30, 1999.



ATS MEDICAL, INC.
1998 FORM 10-K

PART I

ITEM 1. BUSINESS

GENERAL

ATS Medical, Inc. ("ATS Medical" or the "Company") manufactures and markets a
pyrolytic carbon bileaflet mechanical heart valve. The Company began selling the
ATS Medical(TM) valve (the "Valve") in international markets in 1992. In
December, 1996 the U.S. Food and Drug Administration ("FDA") approved the
Company's Investigational Device Exemption ("IDE") allowing the Company to
initiate a clinical study of the Valve with the eventual goal of regulatory
approval in the United States.

THE ATS OPEN PIVOT VALVE

The ATS Open Pivot Bileaflet(TM) valve is designed to advance the standard of
existing mechanical heart valves by combining a proprietary open pivot design
and certain innovative features with the widely accepted biocompatibility and
durability of pyrolytic carbon. The following characteristics are the primary
advances of the ATS Medical valve:

POTENTIAL FOR REDUCED RATES OF THROMBOEMBOLIC COMPLICATIONS

The proprietary open pivot areas of the ATS Medical valve feature
spherical protrusions from the orifice that match spherical notches in the
leaflets. The pivot areas project into the normal blood flow pattern where
the pivots are washed by the flowing blood.

POTENTIAL FOR IMPROVED BLOOD FLOW EFFICIENCIES

The Valve's orifice is a solid pyrolytic carbon ring. By eliminating the
graphite substrate used in some valves, the Company is able to make the
orifice durable and thin, thereby resulting in a larger average inside
diameter. This design characteristic results in blood flow efficiencies
which should reduce the workload on the heart.

POTENTIAL FOR EASE OF IMPLANT

The ATS Medical valve has a low profile design to avoid complications in
the implant procedure. The orifice also is rotatable, thereby allowing the
surgeon to optimize valve orientation by adjusting the position of the
leaflets after the Valve has been sutured in the natural anatomical
position in the patient's heart. The packaging and accessories of the
Valve also are designed to facilitate the implant procedure by including
all of the required items pre-assembled in a sterilized dual barrier
container.


1


POTENTIAL FOR IMPROVED FOLLOW-UP DIAGNOSTIC CAPABILITY

The ATS Medical valve eases the follow-up diagnostic process by being
highly visible to x-rays. The titanium stiffening ring provides a clear
image on x-rays taken from any angle. The leaflets also have a high
percentage of tungsten impregnated in the substrate, making them highly
visible to x-rays. This increased visibility to x-rays assists
cardiologists during follow-up examinations.

POTENTIAL FOR IMPROVED PATIENT QUALITY OF LIFE THROUGH LOWER NOISE LEVELS

Initial clinical reports and preliminary studies indicate that the ATS
Medical valve is substantially quiet and below the threshold of hearing
for most patients. The Company believes that the reduced noise level of
the Valve further improves the quality of life of the patient.

CLINICAL DATA AND TESTING RESULTS

The Company began the development of the ATS Medical valve in November 1990.
During 1991 and 1992, the Company performed in vitro and animal testing of the
Valve. The in vitro testing included accelerated wear testing which subjected
the Valves to repeated opening and closing at speeds and forces greatly in
excess of those found in the human heart. The Company has accumulated wear data
in excess of 600 million cycles or equivalent to 15 years of performance in a
human. The results of these accelerated wear tests show average wear rates
similar to control valves. The results of the animal testing and the other in
vitro testing also show performance characteristics similar to control valves.

Beginning in May 1992, after obtaining approval from its Medical Advisory Board,
the Company commenced human implants in international markets. Through January
1, 1999, the Company estimates that over 28,000 ATS Medical valves have been
implanted in patients outside of the United States. The Company has received
implant registration data from over 172 institutions in 26 countries which have
implanted the ATS Medical valve in patients. Published reports have documented
the clinical performance of the ATS Medical valve.

PROSTHETIC HEART VALVE MARKET

Prosthetic heart valves have been in general use since the 1960's and represent
an estimated $600 million worldwide market. The worldwide prosthetic heart valve
market has grown at a rate of 3 to 4 percent annually over the last 6 years,
principally due to the expansion of cardiovascular surgery facilities into the
developing markets.

The worldwide prosthetic heart valve market is projected to continue to increase
at annual rates of 3 to 5 percent due to the aging of the population and the
expansion of cardiovascular surgery in international markets. One of the
principal causes of valve replacement is the deterioration of natural valves
through the aging process, with the average age of valve replacement patients in
excess of 50 years. As this segment of the population increases, the market for
prosthetic heart valves is expected to increase. In addition, rheumatic heart
disease is a principal cause of valve replacement, particularly in areas where
penicillin has been unavailable until relatively recently. As


2


cardiovascular surgery facilities expand in developing markets, the number of
prosthetic heart valve implants is expected to increase.

Replacement heart valves are categorized as one of two types: mechanical or
tissue. Mechanical valves are made from materials such as metals, ceramics,
carbon or plastics. Tissue valves are made from animal or cadaver tissue or in
some cases the patient's own tissue. A majority of the prosthetic heart valves
implanted worldwide are mechanical valves. As life expectancies increase,
cardiac surgeons have been less likely to use tissue valves in older patients
and thereby subject the patient to the risks of a possible re-operation.
Mechanical valves are also used in many instances to replace degenerative
prosthetic tissue valves. In 1997, however, two of the largest competitors in
the industry introduced new tissue valves. The impact of these new tissue valves
on the relative number of mechanical and tissue valves implanted remains to be
seen.

MARKETING AND SALES

The Company's marketing strategy is to combine the substantial cardiovascular
sales experience of its senior officers with a network of experienced
independent distributors to sell the Valve internationally while pursuing
regulatory approval in the United States.

Manuel A. Villafana and Richard W. Kramp, the Company's Chief Executive Officer
and Chief Operating Officer, respectively, previously recruited, selected and
managed the independent distributor network of St. Jude Medical, Inc. ("St.
Jude"). St. Jude was founded in 1976 by Mr. Villafana to develop a bileaflet
mechanical heart valve that has become the world's most frequently implanted
prosthetic heart valve and is currently the industry standard. Mr. Kramp headed
St. Jude's worldwide sales and marketing efforts for almost 10 years.

Since 1992, the Company has contracted with independent distributors in most of
the developed international markets. The Company believes that this independent
distributor network provides a rapid and cost efficient means of expanding the
acceptance of the Valve in a wide range of international markets through an
experienced sales force. The selection of an independent distributor does not
involve significant expense to the Company and does not expose the Company to
currency fluctuation risk because the distributor purchases Valves directly from
the Company in United States dollars. The Company has been able to attract
experienced mechanical valve sales organizations familiar with local markets and
customs to act as distributors.

The Company has a standard distributor agreement with variations for certain
distributors. Most of the distributor agreements establish quotas for sales of
the Valve in the distributor's territory. Most of the distributor agreements
also provide for termination at the option of the Company upon the departure of
certain key employees of the distributor or the change in control of ATS
Medical.

At December 31, 1998, the Company had contracts with 30 distributors covering 37
countries outside the United States. Sales to four of these distributors
represented over 50% of total sales for each of the past three years. The table
below outlines the sales of our top four distributors in the respective
countries in which they operate:


3


Sales as a Percentage of Total Revenue
--------------------------------------

1998 1997 1996
---- ---- ----
Japan 19.2% 17.2% 14.0%
France 16.0 11.2 9.2
Germany 15.1 16.7 24.0
Spain 8.1 9.4 11.3

In 1998 the Company increased its sales management team by promoting Mr. Frank
Santiago to the position of Vice President of Sales and Marketing. Mr.
Santiago's strong background in cardiovascular products, distributor
negotiations and his knowledge of the USA market will further strengthen our
international sales effort and allow us to begin planning our entrance into the
domestic valve market upon approval of our products by the FDA.

The Company sells the Valves to each distributor F.O.B. Minneapolis. The Company
allows the return of unused Valves as long as the Valve has not been opened and
the sterilization date has not expired.

The loss of any one distributor or group of distributors could cause a
disruption in sales and have an adverse impact on the Company's reported
financial results. Management attempts to foster good working relationships with
its distributors and believes that there would be alternative distributors
available to represent the Valve in most markets should it become necessary to
replace one or more of the distributors.

The Company supports its independent distributors through the Company's sales,
marketing and customer service personnel. The Company displays the Valve at
major international, national and regional medical meetings attended by
cardiovascular surgeons and cardiologists. The Company also develops and
distributes product brochures and product information bulletins and conducts
product training sessions. When feasible, the Company also responds to special
requests from physicians for supporting accessories and custom devices.

During 1998 the exchange rate for the U.S. Dollar remained strong relative to
many international currencies. Currencies in the Far East were particularly
weakened and since the Company sells in U.S. Dollars these currency changes
were, in effect, price increases. In markets where the currency change was
particularly dramatic such as Korea, sales actually declined because the Company
could not reduce prices enough to retain some accounts.

COMPETITION

The mechanical heart valve market is highly competitive with one dominant
company, St. Jude Medical, Inc. Other companies that sell mechanical valves
include Medtronic, Inc., CarboMedics, Inc. ("CMI"), Baxter Edwards and Sorin
Biomedica sPa. Medtronic, Inc. sells a monoleaflet mechanical valve that was
introduced in the late 1970's as well as several tissue valves. CMI, which
manufactures pyrolytic carbon components for the Company's valve, markets a
bileaflet pyrolytic carbon valve with cavity pivot areas resembling those in the
St. Jude valve. CMI introduced its


4


bileaflet valve in international markets in 1986 and in 1993 received FDA
approval to sell the valve in the United States. Baxter Edwards markets a
bileaflet valve supplied by Sorin in international markets. The valve has a
special cuff manufactured by Baxter. Sorin Biomedica sPa is an Italian company
that sells a monoleaflet and a bileaflet mechanical valve. These and other
competitors have significantly greater financial resources than the Company. The
Company is aware of several companies that are developing new prosthetic heart
valves. Several companies are developing and testing new autologous (created
from the patient's own tissue) valves, more durable tissue valves and new
bileaflet and trileaflet mechanical designs. Advancements also are being made in
surgical procedures such as mitral valve reconstruction, whereby the natural
mitral valve is repaired, thereby delaying the need for a replacement valve.
Other companies are pursuing biocompatible coatings to be applied to mechanical
valves in an effort to reduce the incidence of thromboembolic events and to
treat tissue valves to forestall or eliminate calcific degeneration in these
valves.

The Company believes that the most important factors in a physician's selection
of a particular prosthetic valve are the physician's perceived benefits of the
valve and the physician's confidence in the valve design. As a result, valves
that have developed a favorable clinical performance record have a significant
marketing advantage over new valves. In addition, negative publicity resulting
from isolated incidents can have a significant negative effect on a valve's
overall acceptance. The Company competes with existing mechanical heart valves
by combining the technical features of the Valve with the sales and heart valve
marketing experience of its key management and independent distributors. The
Company's success is dependent upon the surgeon's willingness to use a new
prosthetic heart valve as well as the future clinical performance of the Valve
compared with the more established competition.

The Company believes that mechanical heart valves are currently being marketed
to hospitals at prices that vary significantly from country to country due to
market conditions, currency valuations, distributor mark-ups and government
regulations. The Company believes that, after distributor mark-up, the ATS
Medical valve sells at or above the current price of other valves in most
markets. In many markets, government agencies are imposing or proposing price
controls or restrictions on medical products. The Company works with its
independent distributors to price the Valve in each market to meet these
limitations. In addition, the Company's primary competitors have the ability,
due to their internal carbon manufacturing facilities and economies of scale, to
manufacture their valves at lower cost than the Company can manufacture the ATS
Medical valve. The market leader has utilized price as a method to compete in
several markets over the past year or two.

MANUFACTURING AND COMPONENT SUPPLY

The basic design from which the ATS Medical valve evolved was developed by CMI.
CMI is the largest and most experienced manufacturer of pyrolytic carbon
components used in mechanical heart valves. CMI has designed and patented
numerous mechanical valves. CMI was in possession of a partially developed valve
when it received a license from St. Jude Medical which allowed it to pursue the
valve it is currently marketing. CMI offered to license the patented and
partially developed valve to ATS Medical if ATS would complete the development
and agree to purchase its components from CMI according to the terms of a supply
agreement (the "Supply Agreement").

The Company commenced its valve development program by entering into four
agreements with CMI: a license agreement, a development agreement, a supply
agreement and an option agreement.


5


Under the terms of the license agreement with CMI (the "License Agreement"), the
Company received a royalty-free worldwide exclusive license to the licensed
patent. The License Agreement does not include the right to manufacture the
pyrolytic carbon components, except that if CMI is unable to produce the
components, the Company has the right and license to make or have made
components. The License Agreement may be terminated by CMI or CMI may declare
the license to be non-exclusive if the Company fails to meet the minimum
purchase requirements under the Supply Agreement. Upon satisfaction of the
Company's minimum purchase requirements under the Supply Agreement, the Company
will have a paid-up, exclusive, royalty-free, worldwide license to the licensed
patent. At the same time it entered into the License Agreement, the Company
entered into a development agreement (the "Development Agreement") with CMI to
complete design development of the pyrolytic carbon components and perform
testing of the Valve. The Development Agreement provided that CMI, at the
Company's direction, perform preliminary tests of the Valve and assist the
Company in making changes in the design. As a result of these tests and certain
design changes initiated by the Company, the Company finalized the design of the
Valve and filed and received an additional U.S. patent covering the design
modifications. The design improvements and the U.S. patent covering the
modifications are the exclusive property of the Company. This today is the ATS
Open Pivot Bileaflet valve.


In late 1992, upon completion of the Development Agreement, the Company began
purchasing sets of Valve components from CMI under the Supply Agreement. The
Company and CMI entered into an amendment to the Supply Agreement in December
1993 that modified the minimum purchase requirements. The Supply Agreement, as
amended, has a term of 15 contract years and provides that the Company purchase
a minimum number of Valve components in each of the first eight contract years.
The sixth contract year was completed in December 1998. The total commitment for
the next two contract years is approximately $33 million. If the minimum
purchase requirements are not met during any of the first eight contract years,
CMI may terminate the License Agreement or may declare the License Agreement to
be non-exclusive. The Company may not purchase Valve components from any source
other than CMI during the first eight contract years unless CMI is unable to
deliver suitable components. After the eighth contract year, the Company must
purchase the lower of either certain specified amounts or the number of Valves
sold and/or disposed of by any means by the Company. The price for each Valve
component set is determined for all fifteen contract years, with a price
reduction for volume purchases and sales into certain developing countries, and
a yearly price adjustment for changes in the U.S. Department of Labor Employment
Cost Index.

The Company's manufacturing operation consists of fabricating the sewing cuff
and assembling, inspecting, testing and packaging all of the components into a
finished Valve. The standard Valve is available in seven sizes ranging from 19mm
to 31mm in diameter, with each size available with sewing cuffs for either
aortic valve or mitral valve replacement. An extended sewing cuff is available
with the pyrolytic carbon components of a 31mm mitral valve to create a 33mm
valve for special mitral valve replacements.

The Company introduced the Advanced Performance ("AP") series of the ATS Medical
valve in international markets in early 1994 and is available in seven sizes
ranging from 16mm to 28mm in diameter. The AP series consists of a reconfigured
sewing cuff, allowing a larger valve to be used in small anulus situations.


6


The Company introduced an Aortic Valved Graft ("AVG") to international markets
in 1997. The AVG consists of an ATS Medical valve connected to a collagen
impregnated vascular graft. It is used in cases where the aortic valve and a
portion of the ascending aorta must be replaced.

The Company receives, inspects and assembles components in its Minneapolis,
Minnesota facility. The Valve is then assembled, inspected, packaged and
sterilized for shipment to distributors.

At any time during the ninth through the fifteenth contract years of the Supply
Agreement, the Company may exercise an option to acquire the carbon technology
necessary to manufacture the Valve under an option agreement with CMI (the
"Option Agreement"). The option may be exercised by paying a one time fee to
CMI. The Option Agreement may be terminated by CMI if the Company fails to meet
the minimum purchase levels for any of the first eight contract years of the
Supply Agreement or if the Company purchases carbon components from a source
other than CMI at any time during the term of the Supply Agreement.

PATENTS AND PROPRIETARY TECHNOLOGY

The Company's policy is to protect its proprietary position by, among other
methods, obtaining United States and international patents to protect
technology, inventions and improvements important to the development of its
business. The Company has received a royalty-free license under the CMI Patent,
subject to certain continuing component purchase requirements. See
"Business--Manufacturing and Component Supply." The Company refined the design
of the Valve to make it suitable for implantation and filed an additional United
States patent application covering the design improvements. The United States
patent on the design improvements was issued in October 1994. The Company also
has filed patent applications in Japan, Belgium, France, Germany, Netherlands,
Spain, Switzerland and the United Kingdom relating to the design improvements,
and patents have been granted in all countries except Japan, where the
application remains pending. No assurance can be given that pending patent
applications will be approved or that any patents will not be challenged or
circumvented by competitors.

The Company also relies on trade secrets and technical know-how in its
manufacture and marketing of the Valve. The Company typically requires its
employees, consultants and contractors to execute appropriate confidentiality
agreements with respect to the Company's proprietary information.

The Company claims trademark protection to ATS Medical(TM) and ATS Open
Pivot(TM).

FDA AND OTHER GOVERNMENT REGULATIONS

As a manufacturer of medical devices, the Company is subject to extensive
regulation by the United States Food and Drug Administration (the "FDA") and, in
some jurisdictions, by state and foreign governmental authorities. These
regulations govern the introduction of new medical devices, the observance of
certain standards with respect to the manufacture, testing and labeling of such
devices, the maintenance of certain records, the ability to track devices and
the reporting of potential product defects and other matters. These regulations
have a material impact on the Company. Developments such as the enactment of the
Safe Medical Devices Act of 1990 reflect a trend toward more stringent product
regulation by the FDA. Recently, the FDA has pursued a more rigorous


7


enforcement program to ensure that regulated businesses comply with applicable
laws and regulations.

The sale and use of mechanical heart valves is regulated extensively in the
United States by the FDA. Pursuant to the Medical Device Amendments of 1976 to
the Federal Food, Drug and Cosmetic Act, medical devices intended for human use
are classified into three categories, Classes I, II and III, depending on the
degree of regulatory control to which they will be subject. Mechanical heart
valves are considered to be Class III devices which are subject to the strictest
testing requirements. Before clinical studies to determine safety and
effectiveness in humans can begin, a battery of laboratory and animal tests must
be conducted. The Company has proceeded with these pre-clinical tests on the
Valve since 1991.

The Company received approval of an Investigational Device Exemption ("IDE")
Application in December, 1996. The IDE allows limited clinical studies in the
U.S. during which the Company must submit reports to the FDA regarding testing
and patient follow-up. The IDE study and follow-up is expected to take at least
one more year. After obtaining sufficient data from its clinical studies, the
Company may submit a Pre-Market Approval ("PMA") application. The PMA review
process is extremely lengthy and no assurance can be given concerning the
ultimate timing or outcome of a PMA application. Upon approval of a PMA, the
Company would be able to commence full marketing of the Valve in the United
States.

In addition to the FDA approval process, the Company is subject to significant
additional FDA and other United States regulations. The Company's standard
operating procedures and system of documentation used in the manufacturing
process will be subject to the FDA's Quality Systems Regulations ("QSR's") which
incorporates guidelines for Good Manufacturing Practices ("GMP's"). The Company
also will become subject to periodic inspections by the FDA to audit compliance
with QSR's. To the extent the Company will sell the Valve to Medicare or
Medicaid beneficiaries, the Company will become subject to the "fraud and abuse"
laws and regulations promulgated by the U.S. Department of Health and Human
Services and the U.S. Health Care Finance Administration. These regulations
prohibit direct or indirect payment arrangements designed to induce or encourage
the purchase or recommendation of products reimbursable under Medicaid or
Medicare. The Company also will be required to comply with various FDA
regulations for advertising, labeling, patient tracking, post market studies and
reporting of any adverse experience. The FDA actively enforces regulations and
the failure to comply with applicable regulatory requirements can result in
fines, seizures, recalls and criminal prosecutions.

Regulation of heart valves varies widely in foreign countries, but generally is
less stringent than in the United States. Foreign countries vary from having no
regulations to having pre-market notice to a pre-market approval process. The
Company or its independent distributor must obtain the appropriate approval, if
any, from each country's regulatory agency prior to marketing the Valve in that
country. The Company received CE Mark approval for all European Union Countries
in March, 1995. The Company will continue to be subjected to various audits and
tests under the European Community directives. In June 1996, the Company
received approval to begin commercial sales in the Japanese market through a
Shonin regulatory approval obtained by its distributor, Century Medical, Inc. In
September 1998, the Company received approval from the Therapeutic Goods
Administration for commercial sales in Australia. The Company is in the process
of pursuing regulatory approval for the Valve in Canada.


8


PRODUCT LIABILITY AND INSURANCE

Cardiovascular device companies are subject to an inherent risk of product
liability and other liability claims in the event that the use of their products
results in personal injury. A mechanical heart valve is a life-sustaining
device, and the failure of any mechanical heart valve usually results in the
death of the patient. ATS Medical has not received any reports of mechanical
failure of the Valves implanted to date and has not experienced any product
liability claims. Any future significant failure of the ATS Medical Valve would
subject the Company to substantial litigation, damages and adverse publicity.

The Company currently maintains a $35 million product liability insurance
policy. A $5 million product liability insurance policy is required by the
Supply Agreement. The Company is financially responsible for any uninsured
claims or claims which exceed the insurance policy limits. At the present time,
product liability insurance is expensive for mechanical valves. If insurance
becomes completely unavailable, the Company must either develop a self-insurance
program or sell without insurance, and the Company would be required to obtain
the consent of CMI. The development of a self-insurance program would require
significant capital.

CMI has made no warranty on the Valve components. The Company has agreed to hold
CMI harmless and indemnify CMI in the event claims are made or damages are
assessed against CMI as a result of the Valve.

EMPLOYEES

As of January 1, 1999, the Company had 74 full-time employees, of whom 18 were
engaged in regulatory affairs and quality assurance, 35 in production and 21 in
administrative, purchasing and marketing activities.


9


ITEM 2. PROPERTIES

The Company currently maintains administrative offices, production and
engineering facilities in 23,912 square feet of leased space in a suburb of
Minneapolis, Minnesota. The lease expires on February 28, 2003. The Company
believes the current facility is adequate for its near-term needs.


ITEM 3. LEGAL PROCEEDINGS

None


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

None


10


EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company are as follows:

NAME AGE POSITION

Manuel A. Villafana 58 Chairman and Chief Executive Officer
Richard W. Kramp 53 President and Chief Operating Officer
Russell W. Felkey 48 Executive Vice President of Regulatory Affairs
and Secretary
John H. Jungbauer 49 Vice President, Treasurer and Chief Financial Officer
Frank R. Santiago 47 Vice President, Sales and Marketing

MANUEL A. VILLAFANA, a founder of the Company, has served as Chief Executive
Officer and Chairman of the Board since the Company's inception in 1987. From
1983 to 1987, Mr. Villafana served as Chairman of GV Medical, Inc., a company
co-founded by Mr. Villafana to develop, manufacture and market the LASTAC
System, a laser transluminal angioplasty catheter system. From 1976 to 1982, Mr.
Villafana served as President and Chairman of St. Jude Medical, Inc., a company
founded by Mr. Villafana to develop, manufacture and market a prosthetic
bileaflet heart valve manufactured from pyrolytic carbon. From 1972 to 1976, Mr.
Villafana served as President and Chairman of Cardiac Pacemakers, Inc., a
company founded by Mr. Villafana to develop, manufacture and market a new
generation of lithium powered pacemakers.

RICHARD W. KRAMP has served as President and Chief Operating Officer and a
Director of the Company since joining the Company in March 1988. Prior to
joining the Company, Mr. Kramp was Vice President of Sales and Marketing for St.
Jude Medical, Inc., where Mr. Kramp served in a variety of sales and marketing
capacities from 1978 to 1988. From 1976 through 1978, Mr. Kramp served as
Illinois Sales Manager for Life Instruments, a distributor of cardiovascular
products. From 1972 to 1976, Mr. Kramp was the Senior Design Engineer and then
Supervisor of Electrical Design for Cardiac Pacemakers, where he designed the
first lithium powered demand pacemaker for which he received a U.S. patent. Mr.
Kramp also is a director of MedAmicus, Inc., a medical products company.

RUSSELL W. FELKEY has served as Executive Vice President of Regulatory Affairs
of the Company since April 1991 and has served as Secretary since October, 1995.
From 1989 to 1991, Mr. Felkey was Vice President of Regulatory Affairs and
Quality Assurance at Cardiovascular Imaging Systems, Inc., a company involved in
the development of peripheral and coronary ultrasound catheters. From 1984 to
1989, Mr. Felkey was Vice President of Regulatory Affairs at GV Medical, Inc.

JOHN H. JUNGBAUER has served as Vice President of the Company since April 1,
1995 and has served as Treasurer and Chief Financial Officer of the Company
since October 1990. From 1988 to 1990, Mr. Jungbauer was Executive Vice
President of Titan Medical, Inc., a medical products company. Prior to 1987, Mr.
Jungbauer was Vice President of Finance at St. Jude Medical, Inc.


11


FRANK R. SANTIAGO has served as Vice President of Sales and Marketing of the
Company since June 1998 and has served as Director of Sales and Marketing since
June 1997. From March 1985 to March 1997, Mr. Santiago owned and operated
Hemotech Systems, a cardiovascular products and services company providing
services such as ambulatory recording of electrocardiograms and blood pressure.
Prior to 1987, Mr. Santiago was a cardiovascular specialist at American
Edwards/Baxter, a regional training manager in various sales and marketing
divisions at Johnson and Johnson and a product specialist at Ayerst
Laboratories/American Home Products.


12


MEDICAL ADVISORY BOARD

The Company has a Medical Advisory Board that meets periodically to review and
guide the design and testing of the Valve as well as to provide assessments of
potential new cardiovascular products. The members of the Medical Advisory Board
are as follows:

DR. DEMETRE M. NICOLOFF is a world-renowned cardiac surgeon practicing with
Cardiac Surgical Associates in association with the Minneapolis Heart Institute
and St. Paul Heart and Lung Center. Previously, Dr. Nicoloff was an Associate
Professor of Surgery at the University of Minnesota and taught in the Department
of Surgery at the University of Minnesota for over 15 years. Dr. Nicoloff
participated in the first human implant of the ATS Medical valve in May 1992.
Dr. Nicoloff also participated in the design of the first generation of
bileaflet valves and performed the first human implant of the most frequently
implanted mechanical bileaflet valve. Dr. Nicoloff previously was a member of
the Scientific Advisory Board of St. Jude Medical, Inc. Dr. Nicoloff received
his medical degree from Ohio State University.

DR. H. DAVID FRIEDBERG is a Clinical Professor of Medicine and Cardiology at the
University of South Florida. Dr. Friedberg is certified in cardiac pacing and
electrophysiology. He is a Fellow of the American College of Cardiology,
American College of Chest Physicians and the Council of Clinical Cardiology of
the American Heart Association. Dr. Friedberg participated in the first implant
of the ATS Medical valve in May 1992. Dr. Friedberg previously was a member of
the Scientific Advisory Board of St. Jude Medical, Inc. Dr. Friedberg obtained
his medical degree in South Africa and performed his internal medicine studies
and residencies in London, England.


13


PART II


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

The Company's common stock (the "Common Stock") is traded on the Nasdaq National
Market under the symbol "ATSI." The following table sets forth the high and low
sale prices since January 1, 1997. Prices represent transactions between dealers
and do not reflect retail markups, markdowns or commissions.

1998 HIGH LOW 1997 HIGH LOW

First Quarter $8.18 $4.75 First Quarter $8.50 $6.50
Second Quarter 8.37 6.37 Second Quarter 7.00 4.75
Third Quarter 8.00 5.00 Third Quarter 6.63 5.00
Fourth Quarter 7.69 4.31 Fourth Quarter 7.25 4.75

As of December 31, 1998 there were 602 record holders of the Common Stock. The
Company has not paid cash dividends and has no present intentions of paying cash
dividends on its Common Stock.


14


ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data of the Company have been
derived from its financial statements for the years ended December 31, 1998,
1997, 1996, 1995 and 1994, which financial statements have been audited by Ernst
& Young LLP. The data should be read in conjunction with the Company's audited
financial statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
herein.



Year ended December 31,
STATEMENTS OF OPERATIONS DATA: --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------

REVENUES:
Net sales ................................... $ 17,960,483 $ 14,515,915 $ 11,859,765 $ 9,300,540 $ 6,763,408
Less cost of goods sold ..................... 11,328,647 9,428,959 7,474,065 6,011,025 4,189,426
------------ ------------ ------------ ------------ ------------

GROSS PROFIT FROM OPERATIONS ............ 6,631,836 5,086,956 4,385,700 3,289,515 2,573,982

OPERATING EXPENSES:
Research, development and engineering ....... 1,484,989 1,058,318 617,571 718,189 640,032
Selling, general and administrative ......... 3,591,551 3,339,488 3,065,402 2,549,570 1,993,447
------------ ------------ ------------ ------------ ------------

TOTAL EXPENSES FROM OPERATIONS .......... 5,076,540 4,397,806 3,682,973 3,267,759 2,633,479
Interest income ............................. 1,355,647 1,427,363 641,375 752,880 74,706
Interest expense ............................ 0 0 0 (31,224) (31,317)
Income taxes ................................ (72,000) (13,846) (22,500) (28,888) (25,243)
------------ ------------ ------------ ------------ ------------

NET INCOME (LOSS) ............................ $ 2,838,943 $ 2,102,667 $ 1,321,602 $ 714,524 ($ 41,351)
============ ============ ============ ============ ============

NET INCOME PER SHARE:
Basic ...................................... $ 0.16 $ 0.12 $ 0.09 $ 0.05 $ 0.00
Diluted .................................... $ 0.16 $ 0.12 $ 0.08 $ 0.05 $ 0.00

Cash dividends declared ...................... 0 0 0 0 0
Weighted average number of shares outstanding:
Basic ...................................... 17,737,887 17,284,784 15,168,958 14,184,395 11,177,881
Diluted .................................... 18,130,540 17,872,989 16,303,317 15,116,443 11,177,881


December 31,
--------------------------------------------------------------------------------
BALANCE SHEET DATA: 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------

Cash and cash equivalents .................... $ 7,754,077 $ 4,568,332 $ 2,320,010 $ 2,213,632 $ 628,368
Working capital .............................. 54,229,241 52,375,893 30,643,942 27,802,438 11,214,977
Total assets ................................. 58,431,376 54,386,031 33,320,300 31,329,128 14,558,450
Long-term debt ............................... 0 0 0 0 0
Total liabilities ............................ 2,611,801 863,292 1,393,561 2,269,707 1,790,773
Accumulated deficit .......................... (15,652,311) (18,491,255) (20,593,921) (21,915,523) (22,630,047)
Shareholders' equity ......................... 55,819,575 53,522,739 31,926,739 29,059,421 12,767,677



15


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS


YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997

Net sales for the year ended December 31, 1998 increased 24% to $17,960,483
compared to $14,515,915 for the year ended December 31, 1997. Unit sales
increased 22% in 1998 compared to 1997 which is more than four times the rate of
unit growth in the overall heart valve market. The two largest revenue increases
in 1998 over 1997 were in France and Japan. Combined these two markets
represented 59% of the total revenue increase. The Company sells to independent
distributors with assigned territories (generally a specific country or region)
who in turn sell the Valve to hospitals or clinics. The Company sells in U.S.
dollars so currency risk is borne by the distributor. As the dollar increases in
value against the distributor's local currency, the cost of the Valve increases
for the distributor even though ATS does not change the selling price. For 1998
the sales growth over the corresponding period was achieved in spite of
significant price competition from other valve manufacturers and the increased
strength of the U.S. dollar relative to almost all foreign currencies. During
1998 and 1997 the Company was selling Valves in most developed countries and
several lesser developed countries ("LDC's") so sales growth came primarily from
increased usage in existing markets. In 1996 and each of the previous years, a
portion of the sales increase came from opening new markets as well as increased
usage within existing markets.

The average selling price of the Valve increased 3% from 1997 to 1998. Given the
current strength of the U.S. dollar and the pricing strategies of its
competitors the Company does not expect to be able to raise prices in 1999.

Prior to January 1997, all sales of Valves were to customers outside of the
United States. In 1997 and 1998 the Company has been conducting a clinical study
of the Valve at fifteen hospitals in the United States. During the study, Valves
are provided to the hospitals at prices designed to recover some of the costs of
the clinical study.

Cost of sales for 1998 totaled $11,328,647 or 63% of sales compared to
$9,428,959 or 65% of sales for 1997. The price of the carbon components
contained in the Valves sold in 1998 decreased 4% as compared to the cost of
carbon components contained in the Valves sold in 1997. Based upon the Company's
internal sales projections, the price of the carbon contained in Valves sold in
1999 is expected to be 3% higher than in 1998. The Company purchases pyrolytic
carbon components for the Valve from CarboMedics, Inc. ("CMI"). Approximately
80% of the total cost of a valve is contained in the cost of the carbon
components. The price of the components is set under a multi-year supply
agreement between the Company and CMI. The price was established in 1990, and
varies according to annual volume and is adjusted annually according to
increases in the U.S. Department of Labor Employment Cost Index. The Company
uses the first-in first-out ("FIFO") method of accounting for inventory.
Approximately 14% of the valves sold in 1998 were made with carbon purchased in
1995 (under FIFO) and the remainder with carbon purchased in 1996. The cost of
carbon components, after giving effect to volume discounts and inflationary
adjustments rose 3.3% in 1995 (the third contract


16


year), decreased 7% in 1996, rose 3% in 1997 and rose 3.2% in 1998. For 1999
(the seventh contract year) the Company expects to pay 3.2% more for carbon
components than in 1998.

Gross profit totaled $6,631,836 for the year ended December 31, 1998 or 37% of
sales, compared to gross profit of $5,086,956 or 35% of sales for year ended
December 31, 1997. The increase in average selling price accounted for most of
the gross profit increase. This improvement, along with the 4% decrease in
carbon component prices and operating efficiencies accounts for the gross profit
increase.

Research, development and engineering expenses totaled $1,484,989 for the year
ended December 31, 1998 versus $1,058,318 for the year ended December 31, 1997.
The majority of the increase is related to the costs associated with the
Company's U.S. clinical study. Approximately 27% and 42% of research and
development expenses for the years ended December 31, 1998 and 1997,
respectively, were for testing and outside consulting services related to the
Valve. During the year ended December 31, 1997 a significant component of the
development expense was for work on an aortic valved graft ("AVG"). The AVG is a
standard ATS Medical, Inc. replacement aortic heart valve sutured at the end of
a collagen impregnated dacron tube. This product extension is used in surgeries
where the patient's aorta and aortic valve are damaged or degenerated. Most
other valve manufacturers provide a similar product. This development project
was completed in 1997 and there was not a similar project expense in 1998.

The Company began human implants in the United States under an Investigational
Device Exemption ("IDE") in January 1997. The Company sells the Valves to the
hospitals involved in the study and the cost of the Valve is eligible for
reimbursement by Medicare and most private pay insurance companies. The Company
is responsible for reimbursing the hospital for certain additional tests and
procedures required by the clinical protocol. The estimated total cost of
follow-up is accrued at the time of the sale as research and development
expense.

Selling, general and administrative expenses totaled $3,591,551 for the year
ended December 31, 1998, an increase from the $3,339,488 reported for the year
ended December 31, 1997. The year ended December 31, 1997 included $153,921 for
separation pay related to the shutdown of the Company's subsidiary in Glasgow,
Scotland. The increase in selling, general and administrative expenses for the
year ended December 31, 1998 compared to 1997 is in part because salaries and
benefits increased 14% in 1998. The Company had 78 employees at December 31,
1998 compared to 65 employees at December 31, 1997.

Interest income totaled $1,355,647 for the year ended December 31, 1998 compared
to $1,427,363 for the year ended December 31, 1997. The decrease in interest
income in 1998 was the result of lower average investable cash balances during
1998 and lower interest rates. Cash on hand at December 31, 1998 is less than
the amount on hand at December 31, 1997. Interest income in 1999 is expected to
be approximately 50% less than in 1998. The Company is investing cash in carbon
and the completion of a large quantity of valves in anticipation of the market
release of the Valve in the United States.

Net income totaled $2,838,943 for the year ended December 31, 1998 compared to
$2,102,667 for the year ended December 31, 1997. The $866,146 increase in
operating income in 1998 as compared to 1997 was the primary factor in the
increase in net income.


17


The Company has accumulated net operating loss carryforwards for U.S. tax
purposes. Section 382 of the Internal Revenue Code of 1986, as amended,
provides, in part, that if an "ownership change" occurs with respect to any
corporation with net operating loss carryforwards, such as the Company, the net
operating loss carryforwards can be used to offset future income only to the
extent of the annual "Section 382 limitation." An ownership change generally
occurs if there has been more than a 50 percent change in the stock ownership of
a corporation over a three year period. The Section 382 limitation is an amount
determined by multiplying the value of the corporation's stock on the date of an
ownership change by the federal long-term tax-exempt rate in effect for the
month of the ownership change. As a result of Section 382, utilization of all or
a portion of a corporation's net operating loss carryforwards may be limited.
The Company believes that as a result of the Company's registered direct equity
offering in early 1995 and the sale of 1,568,940 shares of common stock in 1997,
the Company experienced an ownership change, and the Company's ability to fully
utilize $15 million of its existing net operating loss carryforwards will be
restricted to approximately $3 million per year. Due to the application of the
annual Section 382 limitation and the other provisions of Section 382, some of
the net operating loss carryforwards of the Company may expire before they can
be used by the Company to reduce its federal income tax liabilities.

Income taxes for years ended December 31, 1998 and 1997 are mostly due to
alternative minimum tax on earnings. The alternative minimum tax can be used as
a credit against future regular tax liabilities, however, the Company has
provided 100% valuation allowances against this credit and all of its other tax
attributes. The Company will recognize the benefit of its tax attributes when it
is more likely than not that these benefits will be realized.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996

Net sales totaled $14,515,915 for the year ended December 31, 1997, an increase
of $2,656,150 or 22% over the net sales of $11,859,765 reported for the year
ended December 31, 1996. Unit sales increased 25% from 1996. During 1997 the
exchange rate for many currencies fell in value relative to the U.S. dollar. In
Europe, these changes caused a decrease in value for some currencies of as much
as 15%. The consequence of this currency change is the same as a price increase
to our distributors. The Company responded in select countries by lowering the
dollar price of the Valve.

Cost of goods sold increased 26% to $9,428,959 for the year ended December 31,
1997 from $7,474,065 for the year ended December 31, 1996. Cost of goods sold as
a percentage of sales increased from 63% for the year ended December 31, 1996 to
65% for the year ended December 31, 1997, primarily due to lower average selling
prices.

Gross profit increased from $4,385,700 for the twelve months ended December 31,
1996 to $5,086,956 for the twelve months ended December 31, 1997. Gross profit
as a percent of sales was 35% in 1997 and 37% in 1996. The decrease in the
average selling price per unit was the most significant factor in the erosion of
the gross margin.

Research, development and engineering expenses totaled $1,058,318 for the year
ended December 31, 1997 compared to $617,571 for the year ended December 31,
1996. During 1997 the Company completed design and testing on a product
extension, the aortic valve graft (AVG). This effort accounted for 20% of 1997
research and development expense with most of the remainder being spent


18


on the clinical study of the Valve. The Company's research efforts in 1996 were
on improved package design and tooling for Valve assembly. Approximately 58% of
1997 and 56% of 1996 R & D expenses related to the clinical study of the Valve
outside the United States and physical testing of the Valve and related
consulting to support the Company's IDE application to the FDA.

Selling, general and administrative expenses increased 9% from $3,065,402 for
the year ended December 31, 1996 to $3,339,488 for the year ended December 31,
1997. This increase resulted from primarily two factors in 1997. In October 1997
the Company closed its facility in Scotland and consolidated those operations at
its Plymouth, Minnesota headquarters. One-time costs associated with this
closing of approximately $225,000 were charged to selling, general and
administrative expense in 1997. Second, the Company increased the number of
employees from 50 in 1996 to 65 in 1997. In November, 1996 the Company sponsored
the Second International Symposium on the ATS Medical Heart Valve at an expense
of approximately $333,000.

Following the Company's $14.75 million stock sale in February 1997 and $4.7
million warrant exercise in March 1997, the Company had substantially more cash,
cash equivalents and short-term investments earning interest. Interest income in
1997 increased to $1,427,363 for the year ended December 31, 1997 compared to
$641,375 for the year ended December 31, 1996.

The Company recorded $13,846 and $22,500 in income tax expense for 1997 and
1996, respectively. These taxes arose from the Alternative Minimum Tax and
certain items of income in the United Kingdom.

Net income increased to $2,102,667 for the twelve months ended December 31, 1997
from $1,321,602 for the twelve months ended December 31, 1996. The increase in
interest income was the major factor in the increase in net income.

Net income per share (diluted) increased from $.08 for 1996 to $.12 for 1997.
Weighted average number of shares outstanding increased 14% due to option and
warrant exercises, and the sale of shares to ITOCHU Corp.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and marketable securities decreased by $4,943,546 from
$25,550,508 at December 31, 1997 to $20,606,962 at December 31, 1998. Inventory
purchases and accounts receivable growth, less the increase in accounts payable
and net earnings, caused the Company to have negative cashflow from operations.

During 1998 the Company purchased $13.9 million of heart valve components in
accordance with the terms of its long-term supply agreement with CarboMedics,
Inc. (the "Supply Agreement"). During the contract years 1999 and 2000 the
Company is obligated to purchase an aggregate of approximately $33 million of
components ($14.4 million in 1999).

The minimum purchases under the Supply Agreement are not tied to sales of the
Company's Valve and the Company does not expect sales of the Valve to exceed the
minimum purchase requirements under the Supply Agreement until the Valve is
approved for sale in the United States. After the Company


19


purchases the minimum required Valves under the CMI supply agreement for the
Year 2000, the Company will be obligated under the Supply Agreement only to buy
what it sells.

Accounts receivable increased from $4,446,834 at December 31, 1997 to $5,820,699
at December 31, 1998. Most of the Company's sales have been to customers in
international markets and while the Company attempts to set standard 60 day
terms for receivables, competitive pressures and geographical economic
situations have caused the Company to selectively extend the terms for payment.
At December 31, 1998, the account balance for one customer was 26% of
outstanding receivables. The Company has done business with this customer since
1992 and the size of the receivable, while substantial, is consistent with the
growth of business in this market and in line with the size of the customer's
overall business.

Current liabilities increased from $863,292 at December 31, 1997 to $2,611,801
at December 31, 1998. The majority of the increase is in accounts payable and is
related to the amount owing to CarboMedics, Inc. under the Supply Agreement.

Based upon the Company's current rate of sales, its expected obligations under
the Supply Agreement and its expected expenses, the Company anticipates that
existing cash, cash equivalents and short-term investments will be sufficient to
satisfy its capital requirements through 2000. Beyond 2000 the Company should be
cashflow positive or at worst cashflow neutral barring a significant change in
the Company's business plan.

The Company does not use derivatives and therefore does not face market risk
from currency or interest rate changes on these types of instruments. There
would be no impact on the Company's operations from interest rate changes on
debt instruments since the Company has not used debt to finance its operations.
Assuming that interest rates on investment grade securities were to decrease by
10%, the Company's interest income would decrease by approximately $100,000
based on the level of investable funds available to the Company at December 31,
1998.

YEAR 2000 SITUATION

The "Year 2000 Problem" refers to a complex set of problems which may arise when
computer hardware or software is unable to distinguish between 21st century
dates and 20th century dates because the date code fields have been abbreviated
into two digits, i.e. 00. This problem could result in system failures or
miscalculations causing disruptions of business operations (including, among
other things, a temporary inability to process transactions, send invoices or
engage in other similar business activities). As a result, many companies'
computer systems and software will need to be upgraded or replaced in order to
comply with Year 2000 requirements. The potential global impact of the Year 2000
problem is not known, and, if not corrected in a timely manner, could affect the
Company and the U.S. and world economy generally.

The Company's products, including the ATS Medical heart valve, do not contain
any electronics or software and therefore will not be affected by the "Year 2000
Problem".

The Company's internal financial, manufacturing and other computer systems are
being reviewed to assess and remediate Year 2000 problems. The Company's
assessment of internal systems includes its


20


information technology ("IT") as well as non-IT systems (systems which contain
embedded technology and are used in manufacturing or process control equipment
containing microprocessors or other similar circuitry). As a result of this
review the Company determined that some of its equipment and software needed to
be upgraded or replaced. During 1998 the Company spent approximately $59,000 on
hardware and software some of which was necessary to eliminate potential Year
2000 problems. In addition, the Company will take delivery on custom measuring
equipment valued at $375,000 during the first quarter, 1999. The primary purpose
of this equipment is to improve processing of the Company's products but it will
also contain Year 2000 compliant software. The Company's 1999 budget for
hardware and software is $164,528 including the replacement or upgrade of
personal computers, workstations and software which are not currently Year 2000
compliant.

Since substantially all of this hardware and software is being purchased from
large, industry-leading vendors (i.e. Compaq, Lotus, and Microsoft), the Company
will rely on vendor certification and internal tests to determine Year 2000
compliance as opposed to hiring consultants to perform reviews. Such
certifications and tests are scheduled to be obtained or completed by the end of
the second quarter 1999.

In addition, during the first quarter of 1999 the Company is requesting
assurances from its major suppliers that they are addressing the Year 2000
problem and that products purchased by the Company from such suppliers will
function properly in the Year 2000. The Company has a significant inventory of
product components on hand, however, certain key components for the Valve are
available from a single supplier and a protracted Year 2000 problem for this
vendor could have an adverse impact on the Company. Contacts are also being made
with the Company's major customers. These contacts with the Company's suppliers
and customers are intended to help mitigate the possible external impact of the
Year 2000 problem. However, it is impossible to fully assess the potential
consequences in the event service interruption from suppliers occur or in the
event that there are disruptions in such infrastructure areas as utilities,
communications, transportation, banking and government.

The total estimated cost for resolving the Company's Year 2000 issues is
approximately $598,500, of which approximately $225,000 has been spent through
December 31, 1998. The total cost estimate includes the cost of replacing
non-compliant systems as a remediation cost in cases where the Company has
accelerated plans to replace such systems. Estimates of Year 2000 costs are
based on numerous assumptions, and there can be no assurance that the estimates
are correct or that actual costs will not be materially greater than
anticipated.

Based upon its assessments to date, the Company believes it will not experience
any material disruption in its operations as a result of Year 2000 problems to
internal financial, manufacturing and other process control systems, or in its
interface with major customers and suppliers. However, if major suppliers,
including those providing component parts, electricity, communications and
transportation services, experience difficulties resulting in disruption of
critical supplies or services to the Company, a shutdown of the Company's
operations could occur for the duration of the disruption. The Company has not
yet developed contingency plans to help provide continuity of normal business
operations in the event that problem scenarios arise, but it will assess the
need to develop such plans based on the outcome of compliance areas currently
under review, and the results of remaining survey feedback from its major
suppliers and customers. Assuming no major disruption in service from critical
third party providers, the Company believes that it will be able to manage the
Year 2000 transition without any material effect on the Company's results of
operations or financial position. There can be no assurance, however, that


21


unexpected difficulties will not arise and, if so, that the Company will be able
to timely develop and implement an effective contingency plan.

THE SINGLE EUROPEAN CURRENCY

A significant portion of the Company's sales occur in Europe. Effective January
1, 1999 various European countries began utilizing a single currency, the
"Euro". From January 1999 through December 2001, merchants will be encouraged to
discontinue using local country currencies and begin using the Euro to transact
business. Beginning in 2002, it will be required that business in the European
Community be conducted using the Euro. The Company sells to all of its customers
in U.S. Dollars and does not expect to have accounting system issues relative to
currency translation. The Company's selling prices are similar to most of its
European distributors and therefore should not cause significant disruption
whether in dollars or Euros. The Company and its distributors have not completed
an analysis of what actions competitors might take as a result of the Euro.
Europe is a very important market for the Company's Valve. Disruption or loss of
a portion of the Company's European business could have a material and adverse
impact on the Company's financial position.

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995

The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their business, 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 discussed in the statement. ATS Medical, Inc.
desires to take advantage of the safe harbor provisions with respect to any
forward-looking statements it may make in this filing, other filings with the
Securities and Exchange Commission and any public oral statements or written
releases. The words or phrases "will likely," "is expected," "will continue,"
"is anticipated," "estimate," "projected," "forecast," or similar expressions
are intended to identify forward-looking statements within the meaning of the
Act. Such statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected. The Company
cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made.

In accordance with the Act, the Company identifies the following important
general factors which if altered from the current status could cause the
Company's actual results to differ from those described in any forward-looking
statements: the continued acceptance of the Company's mechanical heart Valve in
international markets, the acceptance by the U.S. FDA of the Company's
regulatory submissions, the continued performance of the Company's mechanical
heart valve without structural failure, the actions of the Company's competitors
including pricing changes and new product introductions, the continued
performance of the Company's independent distributors in selling the Valve, the
actions of the Company's supplier of pyrolytic carbon components for the Valve
and the effect of the Year 2000 problem on the Company, its suppliers and its
customers. This list is not exhaustive, and the Company may supplement this list
in any future filing or in connection with the making of any specific
forward-looking statement.


22


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

The Company does not use derivatives and therefore does not face market risk
from currency or interest rate changes on these types of instruments. There
would be no impact on the Company's operations from interest rate changes on
debt instruments since the Company has not used debt to finance its operations.
Assuming that interest rates on investment grade securities were to decrease by
10%, the Company's interest income would decrease by approximately $100,000
based on the level of investable funds available to the Company at December 31,
1998.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company are included (with an index
listing all such statements) in a separate financial section at the end of this
Annual Report on Form 10-K.


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

None


23


PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

See Part I of this Report. Pursuant to General Instruction G(3), reference is
made to information contained under the heading "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement for its 1999 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission on or before April 30, 1999,
which information is incorporated herein.


ITEM 11. EXECUTIVE COMPENSATION

Pursuant to General Instruction G(3), reference is made to information contained
under the heading "Executive Compensation" and "Compensation of Directors" in
the Company's definitive proxy statement for its 1999 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before April 30, 1999, which information is incorporated herein, excluding the
"Report of the Compensation Committee Concerning Executive Compensation".


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

Pursuant to General Instruction G(3), reference is made to information contained
under the headings "Security Ownership of Certain Beneficial Owners and
Management" and "Election of Directors" in the Company's definitive proxy
statement for its 1999 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission on or before April 30, 1999, which
information is incorporated herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Pursuant to General Instruction G(3), reference is made to information contained
under the headings "Election of Directors" and "Executive Compensation" in the
Company's definitive proxy statement for its 1999 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission on or before April 30,
1999, which information is incorporated herein, excluding the "Report of the
Compensation Committee Concerning Executive Compensation".


24


PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K

(a) 1. FINANCIAL STATEMENTS

The financial statements of the Company are included (with an index listing all
such statements) in a separate financial section at the end of this Annual
Report on Form 10-K.

(a) 2. FINANCIAL STATEMENT SCHEDULES

The financial statement schedule is included (with an index listing such
schedule) in a separate financial section at the end of this Annual Report on
Form 10-K.

All other schedules have been omitted because of absence of conditions under
which they are required or because the required information is included in the
financial statements or notes thereto.

(a) 3. LISTING OF EXHIBITS

EXHIBIT
NUMBER DESCRIPTION

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")).

4.2 Form of Warrant issued in 1993 Private Placement (Incorporated by
reference to Exhibit 4.4 to the 1993 Form 10-K).

10.1** 1987 Stock Option and Stock Award Plan, as restated and amended to
date (Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).

10.2** Agreement between the Company and Manuel A. Villafana dated April
20, 1998 (Incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended June 30, 1998).


25


10.3 Lease Agreement between the Company and Crow Plymouth Land Limited
Partnership dated December 22, 1987 (Incorporated by reference to
Exhibit 10(d) to the Company's Registration Statement on Form S-18,
File No. 33-34785-C (The "Form S-18")).

10.4 Amendment No. 1 to Lease Agreement between the Company and Crow
Plymouth Land Limited Partnership, dated January 5, 1989
(Incorporated by reference to Exhibit 10(e) to the Form S-18).

10.5 Amendment No. 2 to Lease Agreement between the Company and Crow
Plymouth Land Limited Partnership, dated January 1989 (Incorporated
by reference to Exhibit 10(f) to the Form S-18).

10.6 Amendment No. 3 to Lease Agreement between the Company and Crow
Plymouth Land Limited Partnership, dated June 14, 1989 (Incorporated
by reference to Exhibit 10(g) to the Form S-18).

10.7 Amendment No. 4 to Lease Agreement between the Company and Plymouth
Business Center Limited Partnership, dated February 10, 1992
(Incorporated by reference to Exhibit 10.8 to the 1996 Form 10-K).

10.8 Development Agreement dated September 24, 1990, with CarboMedics,
Inc. (confidential treatment granted)* (Incorporated by reference to
Exhibit 10.9 to the 1996 Form 10-K).

10.9 O.E.M. Supply Contract dated September 24, 1990, with CarboMedics,
Inc. (confidential treatment granted)* (Incorporated by reference to
Exhibit 10.10 to the 1996 Form 10-K).

10.10 License Agreement dated September 24, 1990, with CarboMedics, Inc.
(confidential treatment granted)* (Incorporated by reference to
Exhibit 10.11 to the 1996 Form 10-K).

10.11 Option Agreement dated September 24, 1990, with CarboMedics, Inc.
(confidential treatment granted)* (Incorporated by reference to
Exhibit 10.12 to the 1996 Form 10-K).

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

10.13 Amendment 1 to License Agreement dated December 16, 1993, with
CarboMedics, Inc. (Incorporated by reference to Exhibit 10.17 to the
1993 Form 10-K).

10.14 Amendment 4 to O.E.M. Supply Contract dated December 16, 1993, with
CarboMedics, Inc. (confidential treatment granted)* (Incorporated by
reference to Exhibit 10.18 to the 1993 Form 10-K).


26


10.15 Amendment 5 to O.E.M. Supply Contract dated September 1, 1994, with
CarboMedics, Inc. (confidential treatment granted)* (Incorporated by
reference to Exhibit 10.19 to the 1994 Form 10-K).

10.16 Amendment 1 to Option Agreement dated December 16, 1993, with
CarboMedics, Inc. (confidential treatment granted)* (Incorporated by
reference to Exhibit 10.19 to the 1993 Form 10-K).

10.17 Line of Credit dated August 11, 1994, between the Company and First
Bank National Association (Incorporated by reference to Exhibit 10.1
to the Company's Form 10-Q for the quarter ended September 30,
1994).

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

10.19** Form of Agreement between ATS Medical, Inc. and each officer dated
June 30, 1995 concerning severance benefits upon a change in control
(Incorporated by reference to Exhibit 10.23 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 (The "1995
Form 10-K")).

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

10.21 Amendment No. 5 to Lease Agreement between the Company and St. Paul
Properties, Inc., dated May 30, 1996 (Incorporated by reference to
Exhibit 10.22 to the 1996 Form 10-K).

10.22 Stock Purchase Agreement dated February 3, 1997 between ITOCHU
Corporation and the Company (Incorporated by reference to Exhibit 1
to Schedule 13D filed with respect to the Company by ITOCHU
Corporation on February 18, 1997).

10.23 Amendment No. 6 to Lease Agreement between the Company and St. Paul
Properties, Inc., dated November 25, 1997 (Incorporated by reference
to Exhibit 10.23 to the 1997 Form 10-K).

10.24 1998 Employee Stock Purchase Plan (Incorporated by reference to
Exhibit 4 to the Company's Registration Statement on Form S-8, File
No. 333-57527).

10.25** 1998 Management Incentive Compensation Plan.

23 Consent of Ernst & Young LLP.

24 Power of Attorney.

27 Financial Data Schedule.


27


*Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of this exhibit have been redacted.

**Represents a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.

(b) Reports on Form 8-K

None

(c) Exhibits

See Exhibit Index and Exhibits attached as a separate section of this report.

(d) Financial Statement Schedule

See Financial Statement Schedule attached on a separate section of this report.


28


SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: March 29, 1999 ATS MEDICAL, INC.


By /s/ John H. Jungbauer
----------------------------
John H. Jungbauer
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.



SIGNATURE TITLE


Manuel A. Villafana* Chairman, Chief Executive )
Officer, and Director )
(principal executive officer) )
)
Richard W. Kramp* President, Chief Operating )
Officer and Director ) By: /s/ John H. Jungbauer
) ---------------------
) John H. Jungbauer
John H. Jungbauer* Vice President, Treasurer ) Pro se and
and Chief Financial Officer ) Attorney-in-fact
(principal financial and )
accounting officer) )
) Dated: March 29, 1999
Charles F. Cuddihy, Jr.* Director )
)
David L. Boehnen* Director )
)
A. Jay Graf* Director )



*By Power of Attorney filed with this report as Exhibit 24 hereto.


29


ATS MEDICAL, INC.

ANNUAL REPORT ON FORM 10-K

YEAR ENDED DECEMBER 31, 1998

ITEM 8 AND ITEM 14(a) (1) AND (2) AND (d)

FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

COMMISSION FILE NUMBER 0-18602


30


ATS MEDICAL, INC.

FORM 10-K ITEM 8 AND ITEM 14(a) (1) and (2) and (d)

LIST OF FINANCIAL STATEMENTS AND STATEMENT SCHEDULE


The following financial statements of ATS Medical, Inc. are incorporated in Part
II, Item 8 and Part IV, Item 14(a)(1) of this Annual Report on Form 10-K by this
reference:

Report of Independent Auditors.

Consolidated Statements of Financial Position at December 31, 1998 and 1997.

Consolidated Statements of Income for the years ended December 31, 1998, 1997
and 1996.

Consolidated Statement of Changes in Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.

Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996.

Notes to Consolidated Financial Statements.


The following financial statement schedule of ATS Medical, Inc. is incorporated
in Part IV, Item 14(a)(2) and (d) of this Annual Report on Form 10-K by this
reference:

Schedule II - Valuation and Qualifying Accounts and Reserves


31


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Years ended December 31, 1998, 1997 and 1996

Page
----
Report of Independent Auditors...............................................F-1

Audited Consolidated Financial Statements

Consolidated Statements of Financial Position................................F-2

Consolidated Statements of Income............................................F-3

Consolidated Statement of Changes in Shareholders' Equity....................F-4

Consolidated Statements of Cash Flows........................................F-5

Notes to Consolidated Financial Statements...................................F-6




Report of Independent Auditors


Board of Directors and Shareholders
ATS Medical, Inc.

We have audited the accompanying consolidated statements of financial position
of ATS Medical, Inc. and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ATS Medical, Inc.
and subsidiary at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

Ernst & Young LLP

Minneapolis, Minnesota
February 5, 1999


F-1


ATS Medical, Inc.

Consolidated Statements of Financial Position


DECEMBER 31
1998 1997
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents $ 7,754,077 $ 4,568,332
Short-term investments 12,852,885 20,982,176
------------ ------------
20,606,962 25,550,508
Accounts receivable, less allowance of $185,000 in
1998 and $260,000 in 1997 5,820,699 4,446,834
Inventories 29,954,718 22,686,273
Prepaid expenses 458,663 555,570
------------ ------------
Total current assets 56,841,042 53,239,185

Furniture and equipment, net 1,202,784 776,187

Other assets 387,550 370,659
------------ ------------
Total assets $ 58,431,376 $ 54,386,031
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,355,443 $ 621,708
Accrued payroll and expenses 256,358 241,584
------------ ------------
Total current liabilities 2,611,801 863,292

Shareholders' equity:
Common Stock, $.01 par value:
Authorized shares--40,000,000
Issued and outstanding shares--17,824,137 in 1998
and 17,589,058 in 1997 178,241 175,891
Additional paid-in capital 71,249,846 71,797,796
Accumulated other comprehensive income 43,799 40,306
Accumulated deficit (15,652,311) (18,491,254)
------------ ------------
Total shareholders' equity 55,819,575 53,522,739
------------ ------------
Total liabilities and shareholders' equity $ 58,431,376 $ 54,386,031
============ ============


SEE ACCOMPANYING NOTES.


F-2


ATS Medical, Inc.

Consolidated Statements of Income


YEAR ENDED DECEMBER 31
1998 1997 1996
----------- ----------- -----------

Net sales $17,960,483 $14,515,915 $11,859,765
Cost of goods sold 11,328,647 9,428,959 7,474,065
----------- ----------- -----------
Gross profit 6,631,836 5,086,956 4,385,700

Expenses:
Research, development and engineering 1,484,989 1,058,318 617,571
Selling, general and administrative 3,591,551 3,339,488 3,065,402
----------- ----------- -----------
5,076,540 4,397,806 3,682,973
----------- ----------- -----------
Operating income 1,555,296 689,150 702,727

Interest income 1,355,647 1,427,363 641,375
----------- ----------- -----------

Income before income taxes 2,910,943 2,116,513 1,344,102
Income tax expense 72,000 13,846 22,500
----------- ----------- -----------
Net income $ 2,838,943 $ 2,102,667 $ 1,321,602
=========== =========== ===========

Net income per share:
Basic $ .16 $ .12 $ .09
Diluted $ .16 $ .12 $ .08

Weighted average number of shares outstanding:
Basic 17,737,887 17,284,784 15,168,958
Diluted 18,130,540 17,872,989 16,303,317



SEE ACCOMPANYING NOTES.


F-3


ATS Medical, Inc.

Consolidated Statement of Changes in Shareholders' Equity


ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------------ PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL INCOME DEFICIT TOTAL
---------------------------------------------------------------------------------------------

Balance at
December 31, 1995 14,963,604 $149,636 $ 50,777,154 $ 48,154 $(21,915,523) $ 29,059,421
Stock options exercised 58,643 586 129,804 -- -- 130,390
Stock warrants 265,795 2,658 1,406,357 -- -- 1,409,015
exercised

Change in unrealized loss
on short-term
investments, net of tax -- -- -- (7,262) -- (7,262)
Change in foreign
currency translation -- -- -- 13,573 -- 13,573
Net income for the year -- -- -- -- 1,321,602 1,321,602
------------
Comprehensive income 1,327,913
---------------------------------------------------------------------------------------------
Balance at
December 31, 1996 15,288,042 152,880 52,313,315 54,465 (20,593,921) 31,926,739
Common stock issued in
a private placement,
net of selling
expenses of $27,627 1,568,940 15,690 14,706,682 -- -- 14,722,373
Stock options exercised 26,327 263 41,451 -- -- 41,714
Stock warrants exercised 705,749 7,058 4,736,348 -- -- 4,743,405

Change in unrealized loss
on short-term
investments, net of tax -- -- -- (5,591) -- (5,591)
Change in foreign
currency translation -- -- -- (8,568) -- (8,568)
Net income for the year -- -- -- -- 2,102,667 2,102,667
------------
Comprehensive income 2,088,508
---------------------------------------------------------------------------------------------
Balance at
December 31, 1997 17,589,058 175,891 71,797,796 40,306 (18,491,254) 53,522,739
Common stock issued
under the Employee
Stock Purchase Plan 7,934 79 42,020 -- -- 42,099
Stock options exercised 227,145 2,271 (589,970) -- -- (587,699)

Change in foreign
currency translation -- -- -- 3,493 -- 3,493
Net income for the year -- -- -- -- 2,838,943 2,838,943
------------
Comprehensive income 2,842,436
---------------------------------------------------------------------------------------------
Balance at
December 31, 1998 17,824,137 $178,241 $ 71,249,846 $ 43,799 $(15,652,311) $ 55,819,575
=============================================================================================


SEE ACCOMPANYING NOTES.


F-4


ATS Medical, Inc.

Consolidated Statements of Cash Flows


YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------------------

OPERATING ACTIVITIES
Net income $ 2,838,943 $ 2,102,667 $ 1,321,602
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 267,187 246,140 233,867
Loss on disposal of equipment 1,965 50,985 17,925
Changes in operating assets and liabilities:
Accounts receivable (1,373,865) (1,307,275) 85,548
Prepaid expenses 96,907 (87,322) (27,567)
Other assets (16,891) 17,574 (18,799)
Inventories (7,268,445) (4,444,207) (4,820,321)
Accounts payable and accrued expenses 1,748,509 (530,269) (876,146)
---------------------------------------------------
Net cash used in operating activities (3,705,690) (3,951,707) (4,083,891)

INVESTING ACTIVITIES
Purchases of short-term investments (20,103,048) (29,435,865) (9,486,341)
Maturities of short-term investments 28,232,339 16,315,717 12,382,440
Purchases of furniture and equipment (695,750) (178,748) (258,808)
---------------------------------------------------
Net cash provided by (used in) investing 7,433,541 (13,298,896) 2,637,291
activities

FINANCING ACTIVITIES

Net (payments) proceeds from issuance
(redemption) of Common Stock (545,599) 19,507,493 1,539,405
---------------------------------------------------
Net cash (used in) provided by financing
activities (545,599) 19,507,493 1,539,405

Effect of exchange rate changes on cash 3,493 (8,568) 13,573
---------------------------------------------------
Increase in cash and cash equivalents 3,185,745 2,248,322 106,378
Cash and cash equivalents at beginning of year 4,568,332 2,320,010 2,213,632
---------------------------------------------------
Cash and cash equivalents at end of year $ 7,754,077 $ 4,568,332 $ 2,320,010
===================================================


SEE ACCOMPANYING NOTES.


F-5


ATS Medical, Inc.

Notes to Consolidated Financial Statements (continued)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS ACTIVITY

ATS Medical, Inc. (the "Company") manufactures and sells a bileaflet mechanical
heart valve. The principal markets for the Company's mechanical heart valve
include Europe, Asia, Australia, South Africa and South America. The Company is
sponsoring clinical trials of the valve in Canada and the United States in order
to demonstrate safety and effectiveness and to be allowed to market the valve in
these countries.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, ATS Medical, Ltd., after elimination of significant
intercompany accounts and transactions.

CASH EQUIVALENTS

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

SHORT-TERM INVESTMENTS

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

INVENTORIES

Inventories are carried at the lower of cost (first-in, first-out basis) or
market. The majority of the inventories consist of purchased components.


F-6


ATS Medical, Inc.

Notes to Consolidated Financial Statements (continued)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

OTHER ASSETS

Prior to obtaining directors' and officers' liability insurance, the Company had
placed $387,550 and $370,659 as of December 31, 1998 and 1997, respectively, in
a self-insurance trust.

FURNITURE AND EQUIPMENT

Furniture and equipment are stated at cost. Depreciation is provided for at
rates calculated to amortize the cost of the property over its estimated useful
life (three to ten years) using the straight-line method. Leasehold improvements
are amortized over the related lease term or estimated useful life, whichever is
shorter.

REVENUE RECOGNITION

The Company recognizes revenue at the time of shipment and invoicing of the
product.

USE OF ESTIMATES

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

INCOME TAXES

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

STOCK-BASED COMPENSATION

The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.


F-7


ATS Medical, Inc.

Notes to Consolidated Financial Statements (continued)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET INCOME PER SHARE

Basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share gives effect to all dilutive
potential common shares outstanding during the year.

2. SHORT-TERM INVESTMENTS

As of December 31, 1998 and 1997, the cost of short-term investments held by the
Company approximated their fair market value of $12,852,885 and $20,982,176,
respectively. As a result no unrealized gains or losses were recognized at
December 31, 1998 and 1997.

All investments have maturity dates of one year or less.

3. FURNITURE AND EQUIPMENT

Furniture and equipment consists of the following:

DECEMBER 31
1998 1997
----------------------------------

Furniture and fixtures $ 181,947 $ 155,363
Equipment 1,506,627 1,321,068
Leasehold improvements 588,830 479,795
Construction in progress 318,907 67,420
----------------------------------
2,596,311 2,023,646
Less accumulated depreciation 1,393,527 1,247,459
----------------------------------
$1,202,784 $ 776,187
==================================


F-8


ATS Medical, Inc.

Notes to Consolidated Financial Statements (continued)


4. FINANCING ARRANGEMENT

The Company has a $5 million revolving line of credit with a bank which accrues
interest at a rate .5% below the bank's reference rate (7.25% at December 31,
1998) and is secured by a portion of the Company's short-term investments. The
Company must repay any amounts owed under the line of credit by June 30, 1999.
Interest on the line of credit is payable monthly. The Company had no borrowing
against this facility at December 31, 1998.

5. COMMON STOCK

In connection with its initial public offering, the Company sold a warrant to
the underwriters to purchase 160,000 shares of Common Stock exercisable at $4.20
per share. At December 31, 1996, there were 8,000 of the warrants outstanding.
In November 1997, the remaining warrants were exercised.

On March 2, 1995, the Company completed a public offering in which the Company
sold 3,600,000 shares of Common Stock at $4.50 per share, including warrants to
purchase an additional 900,000 shares of Common Stock exercisable at $6.75 per
share. As of December 31, 1996, the Company had 826,813 of these warrants
outstanding. During 1997, the holders exercised 697,749 of these warrants. The
remaining 129,064 warrants expired on March 2, 1997. The Company also issued a
warrant to the agent to purchase 180,000 shares of Common Stock at $5.40 per
share. In 1996, 121,059 shares were tendered in the exercise of the warrant to
purchase the 180,000 shares for a net issuance of 58,941 shares.

The Company has 2,030,403 shares of Common Stock reserved for issuance under
various option and warrant grants.

6. EMPLOYEE STOCK PURCHASE PLAN

In May 1998, the Company implemented the 1998 ATS Medical, Inc. 423 Employee
Stock Purchase Plan. Under the terms of the plan, employees are eligible to
purchase Common Stock of the Company on a quarterly basis. Employees can
purchase Common Stock at 85% of the lesser of the market price of the Common
Stock on the first day of the quarter or the last day of the quarter. During
July and October 1998, 3,929 and 4,005 shares of Common Stock were purchased
under the plan at $5.95 and $4.68 per share, respectively.


F-9


ATS Medical, Inc.

Notes to Consolidated Financial Statements (continued)


7. STOCK OPTIONS

The Company has a Stock Option and Stock Award Plan (the "Plan") under which
options to purchase Common Stock of the Company may be awarded to employees and
non-employees of the Company. The options may be granted under the Plan as
incentive stock options (ISO) or as non-qualified stock options (non-ISO).

The following table summarizes the options to purchase shares of the Company's
Common Stock under the Plan:



STOCK OPTIONS
OUTSTANDING
SHARES UNDER THE PLAN WEIGHTED AVERAGE
RESERVED --------------------------- EXERCISE PRICE
FOR GRANT ISO NON-ISO PER SHARE
-------------------------------------------------------------

Balance December 31, 1995 470,004 405,813 601,000 $ 2.56
Options granted (395,000) 299,500 95,500 9.00
Options exercised -- (29,643) (29,000) 2.22
Options canceled 38,125 (21,000) (17,125) 6.07
-------------------------------------------
Balance December 31, 1996 113,129 654,670 650,375 4.37
Additional shares reserved 1,000,000 -- --
Options granted (374,600) 284,928 89,672 5.51
Options exercised -- (7,500) (18,827) 1.59
Options canceled 151,250 (123,125) (28,125) 9.15
-------------------------------------------
Balance December 31, 1997 889,779 808,973 693,095 4.23
Options granted (47,500) 25,000 22,500 6.45
Options exercised -- (90,271) (271,173) .95
Options canceled 43,100 (18,100) (25,000) 6.86
-------------------------------------------
Balance December 31, 1998 885,379 725,602 419,422 $ 5.27
===========================================



F-10


ATS Medical, Inc.

Notes to Consolidated Financial Statements (continued)


7. STOCK OPTIONS (CONTINUED)

The following table summarizes information about stock options outstanding
including non-plan options to purchase 25,000 shares at December 31, 1998:



OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------- -------------------------------------- -----------------------

$1.00 - $ 3.63 519,045 3.92 years $3.34 519,045 $3.34
5.06 - 8.25 563,479 8.02 years 6.27 234,479 6.53
9.00 - 10.13 87,500 7.07 years 9.74 50,750 9.70
--------- ---------
$1.00 - $10.13 1,170,024 6.13 years $5.23 804,274 $4.67
========= =========


The weighted average fair value of options granted during the years ended
December 31, 1998, 1997 and 1996 was $6.45, $5.51 and $9.00, respectively.

Non-Plan options to purchase 25,000 and 32,500 shares exercisable at $3.63 per
share were outstanding at December 31, 1998 and 1997, respectively.

At December 31, 1998, 1997 and 1996, Plan and non-Plan options for 804,274,
984,218 and 816,421 shares of Common Stock, respectively, were exercisable at a
weighted average price of $4.67, $3.06 and $2.44 per share, respectively.
Options can be exercised by tendering shares previously acquired.

The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options.


F-11


ATS Medical, Inc.

Notes to Consolidated Financial Statements (continued)


7. STOCK OPTIONS (CONTINUED)

Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1998, 1997 and 1996: risk-free interest rate of 4.65%, 5.20% and
6.03%, respectively; dividend yield of 0%; volatility factor of the expected
market price of the Company's common stock of .79, .80 and .46 and a weighted
average expected life of the option of 6, 5 and 4 years, respectively.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:

1998 1997 1996
------------------------------------------
Pro forma net income $2,053,588 $1,634,401 $1,122,778

Pro forma net income per share:
Basic $ .12 $ .09 $ .07
Diluted $ .11 $ .09 $ .07

The pro forma effect on net income is not representative of the pro forma effect
on net income in future years because it does not take into consideration pro
forma compensation expense related to grants made prior to 1995.


F-12


ATS Medical, Inc.

Notes to Consolidated Financial Statements (continued)


8. LEASES

The Company has amended its operating lease for facilities in Plymouth,
Minnesota. The lease has a remaining life of 50 months and expires February 28,
2003. Future minimum lease payments under the agreement are as follows:

1999 $204,108
2000 204,108
2001 219,608
2002 222,708
2003 37,118
--------
$887,650
========

The rent expense was $198,408, $159,096 and $147,101 for 1998, 1997 and 1996,
respectively.

9. INCOME TAXES

At December 31, 1998, the Company had net operating loss carryforwards of
approximately $15,020,000 plus credits for increasing research and development
costs of approximately $616,000 and a credit of approximately $69,000 from
alternative minimum tax, which are available to offset future taxable income or
reduce taxes payable through 2012. The net operating loss carryforwards exclude
results of operations for ATS Medical, Ltd. for 1998, 1997 and 1996. The Company
paid income taxes of $72,000, $13,800 and $23,000 in 1998, 1997 and 1996,
respectively.


F-13


ATS Medical, Inc.

Notes to Consolidated Financial Statements (continued)


9. INCOME TAXES (CONTINUED)

Components of deferred tax assets and liabilities are as follows:

DECEMBER 31
1998 1997
---------------------------
Deferred tax assets:
Net operating loss carryforwards $ 6,008,000 $ 7,100,000
Research and development credits 616,000 616,000
AMT credit 69,000 --
Accrued compensation 237,000 335,000
Other accrued expenses 61,000 49,000
---------------------------
6,991,000 8,100,000
Deferred tax liabilities:
Depreciation (557,000) (567,000)
---------------------------
Net deferred tax assets before valuation allowance 6,434,000 7,533,000
Less valuation allowance (6,434,000) (7,533,000)
---------------------------
Net deferred tax assets $ -- $ --
=========== ===========

The Company's ability to utilize its net operating loss carryforwards to offset
future taxable income is subject to certain limitations under Section 382 of the
Internal Revenue Code due to changes in the equity ownership of the Company.

Income tax expense consists of:

1998 1997 1996
---------------------------------------
Current:
Federal $52,000 $ 3,846 $ --
State 20,000 10,000 --
Foreign -- -- 22,500
---------------------------------------
$72,000 $13,846 $22,500
========================================


F-14


ATS Medical, Inc.

Notes to Consolidated Financial Statements (continued)


9. INCOME TAXES (CONTINUED)

Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:

1998 1997 1996
-----------------------------

Tax at statutory rate 34.0% 34.0% 34.0%
State income taxes 6.0 6.0 6.0
Foreign income taxes -- -- 1.7
Impact of net operating loss carryforwards (39.0) (39.0) (40.0)
-----------------------------
1.0% 1.0% 1.7%
=============================

10. COMMITMENTS

On September 24, 1990, the Company entered into various agreements with
CarboMedics, Inc. giving the Company the exclusive worldwide license to
manufacture and sell a bileaflet mechanical heart valve under patents held by
CarboMedics, Inc. As part of the agreements, the Company entered into a 15 year
supply contract that was amended in December 1993. Under the amended supply
contract, as of December 31, 1998, the Company remains obligated to purchase a
minimum of $33 million of component sets through December 7, 2000. Thereafter,
the Company must purchase the lower of either certain specified amounts or the
number of component sets sold and/or disposed of by the Company. Payments to
CarboMedics, Inc. were $14,454,642, $12,478,323 and $11,289,218 in 1998, 1997
and 1996, respectively.

At December 31, 1998, the Company's inventory is in excess of its current
requirements based on the recent level of sales. Management feels that excess
quantities will be utilized upon FDA approval of its technology and believes no
loss will be incurred on its disposition. As of December 31, 1998, management
cannot estimate a range of amounts of loss that could occur if FDA approval is
not granted. Management is unable to make a meaningful estimate of inventory
usage for the next twelve months and, accordingly, inventory is classified as a
current asset as of December 31, 1998.


F-15


ATS Medical, Inc.

Notes to Consolidated Financial Statements (continued)


11. BENEFIT PLAN

The Company has a defined contribution salary deferral plan covering
substantially all employees under Section 401(k) of the Internal Revenue Code.
The plan allows eligible employees to contribute up to 12% of their annual
compensation with the Company contributing an amount equal to 25% of each
employee's contribution. The Company realized expense for contributions to the
plan of $47,946, $40,920 and $38,125 during 1998, 1997 and 1996, respectively.

12. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in the fiscal year ended December 31, 1998. SFAS 131 establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. To date, the Company has
viewed its operations as principally one segment, the sale of a bileaflet
mechanical heart valve. As a result, the information disclosed herein,
materially represents all of the financial information related to the Company's
principal operating segment.

The Company derived the following percentages of its net sales from its
distributors in the following geographic markets where net sales exceeded 10% of
the consolidated total:

YEARS ENDED DECEMBER 31,
1998 1997 1996
--------------------------

Japan 19.2% 17.2% 14.0%
France 16.0 11.2 --
Germany 15.1 16.7 24.0
Spain -- -- 11.3

The Company had a balance owing by one distributor which represented 26% of its
outstanding accounts receivable at December 31, 1998.


F-16


ATS Medical, Inc.

Notes to Consolidated Financial Statements (continued)


13. EARNINGS PER SHARE

The following table sets forth the reconciliation of the denominator for the
calculation of basic and diluted earnings per share:



1998 1997 1996
------------------------------------------

Denominator for basic earnings per
share-weighted-average shares 17,737,887 17,284,784 15,168,958
Effect of dilutive securities:
Stock options 392,653 585,908 720,851
Warrants -- 2,297 413,508
------------------------------------------
Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions 18,130,540 17,872,989 16,303,317
==========================================


14. QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly data for 1998 and 1997 was as follows:



Quarter
First Second Third Fourth
----------------------------------------------------------

Year ended December 31, 1998:
Net Sales $4,248,720 $4,565,601 $4,138,721 $5,007,441
Gross Profit 1,608,745 1,750,626 1,545,562 1,726,903
Net Income 694,617 799,558 707,239 637,529
Earnings per share:
Basic $ 0.04 $ 0.04 $ 0.04 $ 0.04
Diluted 0.04 0.04 0.04 0.04

Year ended December 31, 1997:
Net Sales $3,444,650 $3,695,230 $3,469,000 $3,907,035
Gross Profit 1,272,562 1,397,647 1,216,454 1,200,293
Net Income 577,039 660,171 305,471 559,986
Earnings per share:
Basic $ 0.04 $ 0.04 $ 0.02 $ 0.03
Diluted 0.03 0.04 0.02 0.03



F-17


ATS MEDICAL, INC.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES



COL. A COL. B COL. C COL. D COL. E
Additions
(1) (2)
Charged Charged to
Balance at to Costs Other Balance at
Beginning and Accounts- Deductions- End of
Description of Period Expenses Describe Describe Period
-------- -------- ------ ----------- --------

Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $260,000 $ 20,000 -- $ 95,000(1) $185,000
-------- -------- ------ ----------- --------

Totals $260,000 $ 20,000 $0 $ 95,000 $185,000

Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $200,000 $ 60,000 -- -- $260,000
-------- -------- ------ ----------- --------

Totals $200,000 $ 60,000 $0 $0 $260,000

Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $150,000 $ 50,000 -- -- $200,000
-------- --------- ------- ----------- --------

Totals $150,000 $ 50,000 $0 $0 $200,000



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


32


EXHIBIT INDEX


EXHIBIT NUMBER DESCRIPTION PAGE


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")).

4.2 Form of Warrant issued in 1993 Private Placement (Incorporated by
reference to Exhibit 4.4 to the 1993 Form 10-K).

10.1** 1987 Stock Option and Stock Award Plan, as restated and amended to date
(Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997).

10.2** Agreement between the Company and Manuel A. Villafana dated April 20,
1998 (Incorporated by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarter ended June 30, 1998).

10.3 Lease Agreement between the Company and Crow Plymouth Land Limited
Partnership dated December 22, 1987 (Incorporated by reference to
Exhibit 10(d) to the Company's Registration Statement on Form S-18,
File No. 33-34785-C (The "Form S-18")).

10.4 Amendment No. 1 to Lease Agreement between the Company and Crow
Plymouth Land Limited Partnership, dated January 5, 1989 (Incorporated
by reference to Exhibit 10(e) to the Form S-18).

10.5 Amendment No. 2 to Lease Agreement between the Company and Crow
Plymouth Land Limited Partnership, dated January 1989 (Incorporated by
reference to Exhibit 10(f) to the Form S-18).

10.6 Amendment No. 3 to Lease Agreement between the Company and Crow
Plymouth Land Limited Partnership, dated June 14, 1989 (Incorporated by
reference to Exhibit 10(g) to the Form S-18).


33


10.7 Amendment No. 4 to Lease Agreement between the Company and Plymouth
Business Center Limited Partnership, dated February 10, 1992
(Incorporated by reference to Exhibit 10.8 to the 1996 Form 10-K).

10.8 Development Agreement dated September 24, 1990, with CarboMedics, Inc.
(confidential treatment granted)* (Incorporated by reference to Exhibit
10.9 to the 1996 Form 10-K).

10.9 O.E.M. Supply Contract dated September 24, 1990, with CarboMedics, Inc.
(confidential treatment granted)* (Incorporated by reference to Exhibit
10.10 to the 1996 Form 10-K).

10.10 License Agreement dated September 24, 1990, with CarboMedics, Inc.
(confidential treatment granted)* (Incorporated by reference to Exhibit
10.11 to the 1996 Form 10-K).

10.11 Option Agreement dated September 24, 1990, with CarboMedics, Inc.
(confidential treatment granted)* (Incorporated by reference to Exhibit
10.12 to the 1996 Form 10-K).

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

10.13 Amendment 1 to License Agreement dated December 16, 1993, with
CarboMedics, Inc. (Incorporated by reference to Exhibit 10.17 to the
1993 Form 10-K).

10.14 Amendment 4 to O.E.M. Supply Contract dated December 16, 1993, with
CarboMedics, Inc. (confidential treatment granted)* (Incorporated by
reference to Exhibit 10.18 to the 1993 Form 10-K).

10.15 Amendment 5 to O.E.M. Supply Contract dated September 1, 1994, with
CarboMedics, Inc. (confidential treatment granted)* (Incorporated by
reference to Exhibit 10.19 to the 1994 Form 10-K).

10.16 Amendment 1 to Option Agreement dated December 16, 1993, with
CarboMedics, Inc. (confidential treatment granted)* (Incorporated by
reference to Exhibit 10.19 to the 1993 Form 10-K).

10.17 Line of Credit dated August 11, 1994, between the Company and First
Bank National Association (Incorporated by reference to Exhibit 10.1 to
the Company's Form 10-Q for the quarter ended September 30, 1994).

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

10.19** Form of Agreement between ATS Medical, Inc. and each officer dated June
30, 1995 concerning severance benefits upon a change in control
(Incorporated by reference to


34


Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (The "1995 Form 10-K")).

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

10.21 Amendment No. 5 to Lease Agreement between the Company and St. Paul
Properties, Inc., dated May 30, 1996 (Incorporated by reference to
Exhibit 10.22 to the 1996 Form 10-K).

10.22 Stock Purchase Agreement dated February 3, 1997 between ITOCHU
Corporation and the Company (Incorporated by reference to Exhibit 1 to
Schedule 13D filed with respect to the Company by ITOCHU Corporation on
February 18, 1997).

10.23 Amendment No. 6 to Lease Agreement between the Company and St. Paul
Properties, Inc., dated November 25, 1997 (Incorporated by reference to
Exhibit 10.23 to the 1997 Form 10-K).

10.24 1998 Employee Stock Purchase Plan (Incorporated by reference to Exhibit
4 to the Company's Registration Statement on Form S-8, File No.
333-57527).

10.25** 1998 Management Incentive Compensation Plan.

23 Consent of Ernst & Young LLP.

24 Power of Attorney.

27 Financial Data Schedule.


*Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended,
confidential portions of this exhibit have been redacted.

**Represents a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.


35