UNITED STATES
                       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 JULY 31, 1998

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
              For transition period from ____________ to___________

                        Commission file number 001-12567
                              POSSIS MEDICAL, INC. 
             (Exact name of registrant as specified in its charter)

       Minnesota                                       41-0783184 
(State or other jurisdiction of                     (I.R.S. Employer
 incorporation or organization)                    Identification No.)

           9055 Evergreen Blvd, NW, Minneapolis, Minnesota 55433-8003
               (Address of principal executive offices) (Zip Code)
        Registrant's telephone number, including area code: 612-780-4555
        SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: None
          SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
                        Common Stock, 40 Cents Par Value
                        Preferred Shares Purchase Rights

     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  the  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. (X)

     Aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of October 12, 1998 was approximately $60,508,771.

     The number of shares  outstanding  of the  registrant's  common stock as of
October 12, 1998: 12,254,941.

     Certain  responses  in Part III are  incorporated  herein by  reference  to
information  contained in the Company's  definitive Proxy Statement for its 1998
annual  meeting  to  be  filed  on  or  before  October  30,  1998 ("The  Proxy
Statement").

<PAGE>

                              POSSIS MEDICAL, INC.

Forward-Looking Statements

     This  report on Form  10-K,  including  the  description  of the  Company's
business, its Year 2000 readiness,  and Management's  Discussion and Analysis of
Financial Condition and Results of Operations, contains certain "forward-looking
statements" as defined in the Private Securities  Litigation Reform Act of 1995.
Such statements relating to future events and financial  performance,  including
the  submission of  applications  to the Food and Drug  Administration  ("FDA"),
revenue and expense levels and future capital requirements,  are forward-looking
statements that involve risks and uncertainties, including the Company's ability
to meet its timetable for FDA  submissions,  the review time at the FDA, changes
in the  Company's  marketing  strategies,  the  Company's  ability to  establish
product  distribution  channels,   changes  in  manufacturing  methods,   market
acceptance of the AngioJet System,  changes in the level of capital expenditures
by  hospitals,  the  levels  of  sales  of the  Company's  products  that can be
achieved,  ability to raise additional  capital and other risks set forth in the
cautionary  statements  included in Exhibit 99 to the  Company's  report on Form
10-Q dated April 30, 1998, filed with the Securities and Exchange Commission.


                                     PART I
Item 1.  Business:

General

     Possis Medical, Inc. (the Company) was incorporated in 1956 and went public
in 1960 as Possis Machine  Corporation.  Initial operations consisted of design,
manufacturing,  and sales of  industrial  equipment and a division that provided
temporary technical personnel.  The Company's  involvement with medical products
began in 1976, when it sold its rights to a patented bileaflet  mechanical heart
valve,  which it had obtained from Zinon C. Possis,  the founder of the Company,
to St. Jude Medical,  Inc. for royalty payments based on St. Jude's valve sales.
In 1982 a subsidiary was  established to focus initially on the development of a
synthetic  blood vessel used to bypass blocked  coronary  arteries.  In the late
1980's the Company decided to leverage existing management expertise and entered
the pacemaker lead  business.  The strategic role of the pacemaker lead business
was to  provide  cash  flow to fund the  development  of  synthetic  grafts  and
thrombectomy  systems  and to give the  Company  access to and name  recognition
within the medical  device  industry.  In 1990 the Company  made the decision to
focus on medical products and subsequently divested all non-medical  operations,
beginning with its Technical Services division in September 1991 followed by its
industrial  equipment subsidiary and related land and buildings in January 1994.
See Note 2 of Notes to Consolidated  Financial  Statements contained in Part II,
Item 8. These sales enabled  Possis to focus its human and  financial  resources
exclusively on its other products, which are currently in clinical trials and in
early stages of commercialization.

<PAGE>

Products

     ANGIOJET(R)  RHEOLYTIC(TM)  THROMBECTOMY  SYSTEM.  The development of blood
clots in various  sites within the  vascular  system is common and is one of the
leading  causes of  morbidity  and death.  Blood clots may be caused by multiple
factors,  including  cardiovascular disease,  trauma,  impediment of normal flow
during  interventional  procedures  using catheters and needles or prolonged bed
rest. If a blood clot becomes large enough,  it can block an artery,  preventing
oxygenated  blood from reaching the organ or tissue  supplied by the artery.  In
addition,  if a blood clot breaks off it can travel through the  bloodstream and
block  oxygenated  blood flow to other organs and tissue.  Conditions  caused by
blood clots include peripheral  ischemia,  which can lead to limb loss, vascular
access failure,  pulmonary embolism, acute myocardial infarction (heart attack),
stroke and deep vein obstruction.

     Currently,  the two primary methods of removing  intravascular  blood clots
are  thrombolytic  drugs and  mechanical  devices.  Thrombolytic  drug treatment
involves the  administration of a drug designed to dissolve the blood clot in an
intensive or critical care  setting.  Thrombolytic  drugs may require  prolonged
infusion  to be  effective,  and then may only  partially  remove  the clot.  In
addition,  thrombolytic drugs may require significant time to take effect, which
is costly in an intensive or critical care setting,  and may cause uncontrolled,
life-threatening bleeding.  Mechanical devices such as the Fogarty-type catheter
operate  by  inflating  a  balloon  past the  point of the  blood  clot and then
dragging  the  blood  clot  out  of  the  patient's  body  through  the  artery.
Fogarty-type  catheters  require  surgical  intervention,  which  may  result in
overnight  hospital stays, are more limited in their  applications and may cause
significant vascular trauma.

     The Company  believes that its AngioJet System  represents a novel approach
to the removal of blood clots from arteries, veins and grafts and offers certain
potential advantages over current methods of treatment. The AngioJet System is a
minimally  invasive  catheter system  designed for rapidly  removing blood clots
with minimal vascular trauma.  The system's  components include a reusable drive
unit, a high-pressure  single use pump and a single use, small diameter (5F, 1.7
mm) catheter.  In early stages of commercialization and in U.S. clinical trials,
the AngioJet  System has  demonstrated  the ability to remove blood clots within
seconds  to  minutes  without  surgical  intervention  and  without  the risk of
uncontrolled bleeding.

     The AngioJet System removes blood clots through the percutaneous  insertion
of the catheter over a guidewire into the patient's  blood vessel which is, with
the aid of  fluoroscopy,  directed to the site of the blood clot. The drive unit
is activated to deliver  pressurized  saline  through tiny holes in the catheter
tip. These waterjets create a suction effect that cleans the blood clot from the
vessel wall,  breaks it into small fragments and, in order to prevent  formation
of a new blood clot downstream, propels the debris down the central lumen of the
catheter and into a collection bag attached to the drive unit,  without the need
for a separate suction or vacuum device. Unlike certain other mechanical devices
that are able only to create  channels  through blood clots of a size similar to
that of the catheter used, the AngioJet System's waterjet  technology enables it
to break up large blood clots in vessels much larger than the catheter diameter.

     Because the Possis  AngioJet  System is unlike any  existing  procedure  or
device,  market  potential  though  difficult to  quantify,  may be estimated by
determining the number of thrombectomy  and  thrombolysis  procedures  performed
using other  therapies and devices and estimating the number of procedures  that
might reasonably be replaced or supplemented by using the AngioJet System.

<PAGE>

     The Compan's  marketing  analysis  indicates  that the versatile  AngioJet
System  may be  effective  for  the  treatment  of  various  blood  clot-induced
conditions  throughout  the body.  The  following  table shows the locations and
conditions  where  the  AngioJet  System  may be used.  In  addition,  the table
indicates the annual incidences  worldwide and the Company's  estimated AngioJet
System annual market potential.

<TABLE>
<CAPTION>
                                                       Estimated
                                                         Annual        Annual
                                                       Worldwide       Market
                                                       Incidence     Potential
      Location                    Condition            (Patients)     (Units) 
 <S>                     <C>                           <C>          <C>  
 Cerebral                Stroke                         1,100,000     500,000
 Venous Cerebral Sinus   Stroke                             4,500       2,000
 Cervical Carotid        Stroke                             6,600       1,000
 Lungs                   Pulmonary Embolism             1,000,000     200,000
 Coronary                Heart Attacks and              5,300,000     550,000
                         Unstable Angina
 A-V Access              Hemodialysis Graft Thrombosis    400,000     190,000
 Legs                    Leg Artery and                 1,300,000     220,000
                         Graft Thrombosis
 Venous                  Deep Vein Thrombosis           2,500,000     900,000

        Total                                          11,611,100   2,563,000

</TABLE>

     The  Company's  established  price for the single use catheter and the pump
set to the hospital  (worldwide) is between $600 and $1,450.  The list price for
the drive unit in the U.S.  is $25,000.  Outside the U.S.  the list price of the
drive unit to the  Compan's  independent  distributors  is between  $25,000 and
$40,000.  The  average  mechanical  thrombectomy  procedure  is  performed  in a
surgical setting with an overnight  hospital stay and could result in charges to
the patient exceeding $20,000. In contrast,  lytic drug therapy may cost $500 to
$5,000 for the drug plus  hospital and procedure  charges,  resulting in a total
patient cost of as much as $25,000. In October 1998, David J. Cohen, MD, of Beth
Israel  Deaconess   Medical  Center,   Boston,   Massachusetts,   presented  his
preliminary  cost-effectiveness study results based on the Company's 349 patient
coronary  clinical  trial,  at  the  Transcatheter  Cardiovascular  Therapeutics
Symposium.  The  preliminary  results  indicate  AngioJet System reduced 30-day,
in-house  hospital  costs by $2,000 to $3,000 per patient as compared to the use
of the blood  clot-dissolving  drug  urokinase.  Dr.  Cohen  plans to  present a
12-month cost comparison,  including physician costs, at the American College of
Cardiology meeting in March 1999.

     On December 6, 1996 the Company  received FDA  clearance  to commence  U.S.
marketing of the AngioJet System with labeling claims for removal of blood clots
from  grafts  used by  patients  on kidney  dialysis.  In July 1997 the  Company
submitted a 510(k)  application  to the FDA seeking  clearance  to expand  label
claims for its AngioJet System to include use in peripheral  arteries and bypass
grafts in the U.S. The Company expects an FDA decision on the application  early
in calendar 1999.

<PAGE>

     In  September  1998,  Possis  submitted  to the FDA a  pre-market  approval
("PMA")  seeking  approval to market its  AngioJet  System to remove blood clots
from  coronary  arteries and bypass  grafts.  The FDA targets  completion of its
review and a response  to the  Company  within 180 days.  The PMA  presents  the
results of a 349 patient randomized trial comparing AngioJet System treatment to
intracoronary  infusion of the blood clot-dissolving drug urokinase for patients
with  demonstrated  clot in native  coronary  arteries and saphenous vein bypass
grafts.   The  randomized  trial  showed  that  AngioJet  System  treatment  had
significantly better outcomes than the urokinase treatment for procedure success
and device success.  AngioJet System treatment also had lower  in-hospital major
cardiac  complications,  including  fewer  bleeding  complications  and vascular
complications.  Also, the results of a cost-effectiveness trial run concurrently
with the coronary  AngioJet trials show that the AngioJet System treatment costs
are,  on  average,  significantly  lower than those  associated  with the use of
urokinase.  Detailed  clinical  results will be presented  for the first time by
Steven Ramee, MD, at the American Heart Association meeting in November 1998.

     PERMA-FLOW(R)  CORONARY BYPASS GRAFT. Coronary artery bypass graft ("CABG")
surgery is performed to treat impairment of blood flow to portions of the heart.
CABG  surgery  involves  the  grafting  of one or more  vessels  to the heart to
re-route blood around blocked coronary arteries.

     Autogenous  grafts  (using  the  patient's  own  saphenous  vein or mammary
artery) have been successfully used in CABG procedures for a number of years and
have shown a relatively  high patency rate (80% to 90% for  saphenous  veins and
over 90% for mammary  arteries one year after surgery) with  negligible  risk of
tissue  rejection.  However,  the surgical  harvesting of vessels for autogenous
grafts involves  significant  patient trauma and expense.  In addition,  not all
patients  requiring CABG surgery have  sufficient  native vessels as a result of
previous bypass  surgeries,  or their vessels may be of inferior  quality due to
trauma or disease.  Cryopreserved saphenous veins are available, but these veins
often deteriorate due to the body's immune system attacking the graft.

     The Possis Perma-Flow Graft is a synthetic graft 5mm in diameter for use in
CABG  surgery.  The  Perma-Flow  Graft is intended  initially to provide a graft
alternative  to patients who require  bypass  surgery but have  insufficient  or
inadequate native vessels as a result of repeat procedures,  trauma,  disease or
other factors.  The Company  believes,  however,  that the Perma-Flow  Graft may
ultimately be used as a substitute for native saphenous veins, thus avoiding the
trauma and expense associated with the surgical harvesting of veins.

     The  Perma-Flow  Graft is made of ePTFE,  a standard  graft  material,  and
contains a molded silicone venturi-shaped  flow-resistance element approximately
2mm in diameter.  The Perma-Flow  Graft is designed to be implanted by initially
suturing it to the vena cava, followed by side-to-side anastomoses (connections)
of the graft to the coronary arteries beyond the blockages and then suturing the
graft to the aorta.  The formation of this  artery-to-vein  shunt is designed to
create a continuous blood flow at a sufficiently  high rate through the graft to
reduce the  incidence of blood clot  formation,  the major reason for  synthetic
graft failure in the past.  The flow  resistance  element is designed to prevent
excessive  shunting  of blood to the vena  cava and to  maintain  high  arterial
pressure for effective coronary perfusion.

<PAGE>

     Company  research  indicates  that  in  1998  approximately   700,000  CABG
procedures will be performed worldwide,  of which approximately  370,000 will be
performed in the United States.  Approximately 10% of these CABG procedures will
be performed on patients who had  previously  undergone  bypass  surgery.  It is
anticipated  that the number of repeat  CABGs will  continue  to  increase  as a
percentage  of  procedures  performed.  Currently,  approximately  70%  of  CABG
procedures are performed  utilizing the saphenous  vein.  Based upon  interviews
with cardiovascular  surgeons,  including those involved in the clinical trials,
the Company  believes that patients  whose native  vessels are not available for
use  in  bypass  surgery  comprise  approximately  1% of  those  receiving  CABG
procedures,  or approximately  7,000 annually.  If initial use of the Perma-Flow
Graft is shown to be clinically acceptable,  the Company believes that the graft
may be used for these patients.  The Company further  believes that if long-term
clinical  results are  acceptable  to  clinicians  (generally  greater  than 50%
patency  five  years  after  implant),  the  graft may  ultimately  be used as a
substitute for native saphenous veins.

     Currently,  no  synthetic  coronary  graft  has been  approved  by the FDA.
Cryopreserved saphenous veins are currently not regulated by the FDA and sell to
U.S.  hospitals  for  approximately  $3,500 to $4,000.  The Company  anticipates
pricing  for  the  Perma-Flow  Graft  will  be  competitive  with  cryopreserved
saphenous veins.

     The Company  received  FDA  approval to  initiate  clinical  testing of its
Perma-Flow Graft in November 1991. In July 1995, the Company  received  approval
to commence Phase 2 of the study comprising 150 additional  patients at up to 20
U.S.  sites.  As of August 1998,  32 Phase 1 and 90 Phase 2 study  patients have
been enrolled at 20 sites.  Angiographic  results at 30 days  following  surgery
have been  reported on 97  patients,  which  confirmed  173 of 191  side-to-side
anastomoses to be patent (providing blood to the coronary arteries). Within this
30-day interval, of the remaining 25 patients, angiographic results were not yet
reported  for 16 and nine  died of causes  reported  by the  investigator  to be
unrelated  to the graft.  In  addition,  angiographic  follow-up  was  performed
approximately 12 months from implant on 52 patients,  which confirmed that 61 of
104 anastomoses were patent.  The Company  anticipates  filing a PMA application
for U.S. marketing authorization in 2003.

     In April 1998, the Company received  Humanitarian  Device Exemption ("HDE")
approval  from the FDA,  clearing the way for U.S.  marketing of the  Perma-Flow
Graft for patients who require coronary bypass surgery,  but who have inadequate
blood vessels of their own for use in the surgery.

     PERMA-SEA(R)  GRAFT.  Patients suffering from renal disease may be required
to undergo  long-term  kidney  dialysis.  The majority of these patients require
long-term  vascular  access  to  facilitate  treatment.  A point of  access  for
dialysis  needles  may be  created  by  connecting  an artery  and a vein in the
patient's arm.  However,  because kidney  dialysis  therapy  typically  requires
patients  to  undergo  blood  dialysis  treatment  three  times per week,  these
connections  often become  unusable over time.  Other methods of vascular access
for kidney dialysis such as temporary catheters are not designed for long-term
use.

     A synthetic graft may be implanted in kidney  dialysis  patients to provide
the necessary  vascular access.  The vast majority of these synthetic grafts are
made  of  ePTFE.  The use of  synthetic  grafts  currently  available  is  often
accompanied  by  excessive  bleeding  when the  dialysis  needle  is  withdrawn,
requiring a nurse to apply  pressure to help stop the bleeding and requiring the
patient to remain in the treatment area until the bleeding has been stopped.  In
addition,  to limit the risk of graft infection  following  implant,  at least a
two-week healing period  following  implantation is required to allow for tissue
ingrowth into the graft before initiating dialysis.

<PAGE>

     In September  1998,  the Company  received FDA  marketing  approval for its
Perma-Seal Graft. The Possis Perma-Seal Graft is a self-sealing  synthetic graft
comprised of silicone elastomers,  with a winding of polyester yarn encapsulated
within its wall, and is manufactured  using proprietary  electrostatic  spinning
technology  developed by the Company.  The Company  believes that its Perma-Seal
Graft offers  advantages  over currently  used  synthetic  grafts because of its
needle hole sealing  capability.  The Company believes that this  characteristic
will  be  effective  in  sealing  puncture  sites  in the  grafts  with  minimal
compression  time and bleeding as compared with other currently  available graft
products and, as a result,  will reduce  dialysis  procedure and  administrative
time per patient and the costs associated therewith. In addition, because of its
ability to seal a needle  puncture  without  depending on tissue  ingrowth,  the
Perma-Seal  Graft may  provide  an option  for  patients  who  require  dialysis
immediately after implant.

     Approximately 210,000 patients in the United States undergo kidney dialysis
each year, of which  approximately  80,000 receive  vascular  access  procedures
utilizing either natural vessel grafts or synthetic  access grafts.  The Company
estimates  that of these  patients  approximately  63,000 are  implanted  with a
synthetic  graft.  The Company  believes that  worldwide,  approximately  93,000
synthetic grafts are implanted annually

     The  U.S.   hospital   prices  of  ePTFE  and  biological   graft  products
manufactured  by certain other  manufacturers  currently range from $400 to $700
per unit,  depending on length,  style, and configuration.  Final pricing of the
Company's  Perma-Seal  Graft has not been  established,  but is expected to fall
within this range.


Research and Development

     The Company's  product  development  efforts for its existing  products are
focused  primarily  on  clinical  testing,   obtaining   necessary  FDA  product
registrations and validating  manufacturing processes. The Company's new product
development efforts are focused primarily on developing additional  applications
of the AngioJet Thrombectomy System, including carotid,  neurovascular and large
vessel  applications.  The Company also  believes its  AngioJet  technology  has
application beyond thrombectomy,  such as for minimally invasive tissue removal.
Research and  development  expenses are generally  incurred for product  design,
development  and  qualification,  development  and  validation of  manufacturing
process,  conduct of clinical  trials,  and seeking and  obtaining  governmental
approvals.  The  Company's  research  and  development  expenses are expected to
increase as the  Company  continues  its  clinical  trials and  current  product
development plans.

     As of September 30, 1998, the Company  employed  approximately 52 full-time
employees  in research  and  development,  including  43 in new product  concept
screening,  prototype building,  product and process development and validation,
and nine in regulatory and clinical affairs. The Company performs  substantially
all of its research  and  development  activities  at its  headquarters  in Coon
Rapids, Minnesota. The Company spent $5.2 million, $5.0 million and $3.2 million
in fiscal 1998,  1997, and 1996,  respectively,  on medical product research and
development.

<PAGE>

Marketing and Sales

     The  Company  is  marketing  its  AngioJet  System  and graft  products  to
interventional  radiologists and cardiologists  and also to physician  specialty
groups, including vascular, cardiovascular and thoracic surgeons. The Company is
currently  marketing the AngioJet System for  hemodialysis  graft thrombosis and
plans to market the system for other peripheral  vessel and graft  applications,
targeting interventional radiologists,  vascular surgeons and some cardiologists
who perform percutaneous transluminal angioplasty ("PTA") and other thrombectomy
or lytic  procedures.  The  AngioJet  System for coronary  applications  will be
marketed  primarily  to  interventional  cardiologists  and some  cardiovascular
surgeons.  The  AngioJet  System  for  stroke  treatment  will  be  marketed  to
interventional neuroradiologists and cardiologists. The primary customer for the
Perma-Flow  Graft  is  expected  to  be  cardiovascular  surgeons  and  thoracic
surgeons.  The  initial  focus  of the  Company's  marketing  will be for use in
procedures  involving patients having inadequate native vessels.  The Perma-Seal
Graft will be marketed  to  vascular  surgeons,  who  typically  are the primary
decision  makers with  respect to the  placement of vascular  access  grafts for
patients  receiving  dialysis  for renal  failure.  The Company will also target
other  clinicians   influential  in  dialysis  treatment  selection,   including
nephrologists, internists, and dialysis unit technicians.

     The Company is currently  marketing its AngioJet  System outside the United
States using an  independent  distributor  network.  The Company  currently  has
distributorship  agreements  with 18  distributors  covering  Belgium,  Denmark,
Italy, Greece, Luxembourg, The Netherlands, Norway, Spain, Switzerland, Austria,
France,  Saudi Arabia,  Israel,  Australia,  Russia,  Japan,  India, and Taiwan.
Generally, the distributorship  agreements are for an initial five-year term and
provide that the distributors, at their own expense, will investigate, negotiate
and obtain  regulatory  approvals  for the  Company's  products in the specified
territory.  The Company closed its European distribution center once it received
regulatory  clearance  in  Europe  for  all of its  products  as it is now  more
cost-effective to ship products  directly to European  customers from the United
States. All sales made to the Company's independent distributors are denominated
in United States dollars.

     On December 6, 1996,  the Company  received FDA  clearance to commence U.S.
marketing of the AngioJet Rheolytic Thrombectomy System with labeling claims for
removal of blood clots from grafts  used by  patients  on kidney  dialysis.  The
Company is marketing and  distributing  the AngioJet System in the United States
utilizing a direct sales force.

     In early 1995, the Company  entered into a 10 year  distribution  agreement
with C. R.  Bard  ("Bard")  pursuant  to  which  the  Company  granted  Bard the
exclusive   worldwide  right  to  market,  sell  and  distribute  the  Company's
Perma-Seal Graft. The initial grafts were shipped to Bard in May 1996.  However,
in January 1997,  the Company  terminated  the agreement with Bard. In September
1998,  the Company  received  FDA  approval to commence  U.S.  marketing  of the
Perma-Seal Graft.

     In March 1996, the Company entered into a three year Distribution Agreement
with Baxter Healthcare  Corporation  ("Baxter") granting Baxter worldwide rights
to market,  sell and distribute the Perma-Flow  Graft.  The initial  shipment of
Perma-Flow  Grafts was made in July 1996.  However,  in April 1998,  the Company
modified the Agreement  with Baxter,  under which Baxter  retains  non-exclusive
distribution rights outside of the United States, but has no distribution rights
in the United States for the remaining term of the Distribution Agreement.

<PAGE>

     In January 1998, the Company  engaged Salomon Smith Barney to assist in the
development  and  implementation  of a strategic  plan  designed to maximize the
value of the Company's  vascular graft business.  The Company expects to make an
announcement regarding this project within the next several weeks.

     Promotional  activities by the Company are designed primarily to enlist the
support of key medical  opinion  leaders in the United  States and  abroad.  The
Company  believes  that  opinion  leader  publications  in medical  journals and
presentations  at medical  meetings  will be  especially  important to encourage
broad  acceptance of its products.  Other marketing  activities  include medical
journal advertising and supporting studies designed to gather cost effectiveness
data of the Company's products compared to conventional treatment.


Patents, Patent Applications, Licenses and Proprietary Rights

     The  Company's  success  depends and will continue to depend in part on its
ability to maintain  patent  protection for products and processes,  to preserve
its trade secrets and to operate without  infringing the  proprietary  rights of
third parties.  The Company's policy is to attempt to protect its technology by,
among other things,  filing patent applications for technology that it considers
important to the development of its business.  The Company  currently holds five
United States patents and 17 foreign patents related to the Perma-Flow Graft and
has two  patent  applications  pending  in the  United  States  and four  patent
applications  pending in foreign  jurisdictions.  The Company holds three United
States patents  relating to the AngioJet  System.  In addition,  the Company has
twelve United States and nine foreign patent  applications  pending  relating to
the AngioJet System.  Two of the pending  applications in the United States have
allowed  claims  and  will  issue  upon   completion  of  final   administrative
requirements.  Three AngioJet System patent  applications  have been accepted by
foreign  jurisdictions.  In connection  with the  Perma-Seal  Graft,  two United
States patents are pending and four foreign patent applications are pending. The
validity and breadth of claims  covered in medical  technology  patents  involve
complex legal and factual questions and, therefore,  may be highly uncertain. No
assurance can be given that the Company's  pending  applications  will result in
patents being issued or, if issued, that such patents, or the Company's existing
patents,  will  provide a  competitive  advantage,  or that  competitors  of the
Company will not design around any patents  issued to the Company.  In addition,
no assurance can be given that third parties will not receive patent  protection
on their own waterjet devices.

     The Company has acquired  rights  through  licensing  agreements to patents
relating to processes  used in the  manufacture  of synthetic  vascular  grafts.
Under  these  agreements,  Possis is  required  to pay  certain  annual fees and
royalties  based on net sales of products using the technology  covered by these
patents.

     The Company requires its employees having access to proprietary information
to execute  non-disclosure  agreements upon  commencement of employment with the
Company.  These agreements  generally provide that all confidential  information
developed or made known to the  individual  by the Company  during the course of
the individual's  employment with the Company is to be kept confidential and not
disclosed to third parties.

<PAGE>

     There can be no assurance that the Company's non-disclosure  agreements and
other  safeguards  will  protect its  proprietary  information  and  know-how or
provide  adequate  remedies for the Company in the event of unauthorized  use or
disclosure of such information, or that others will not be able to independently
develop such information. There has been substantial litigation regarding patent
and  other  intellectual   property  rights  in  the  medical  device  industry.
Litigation, which could result in substantial cost to and diversion of effort by
the  Company,  may be  necessary to enforce  patents  issued to the Company,  to
protect  trade secrets or know-how  owned by the Company,  to defend the Company
against  claimed  infringement  of the  rights  of others  or to  determine  the
ownership,  scope or  validity  of the  proprietary  rights of the  Company  and
others.  An adverse  determination  in any such  litigation  could  subject  the
Company to significant  liabilities to third parties,  could require the Company
to seek  licenses  from  third  parties  and  could  prevent  the  Company  from
manufacturing, selling or using its products, any of which could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.


Competition

     The Company's products will compete with a number of different products and
treatment methods for the conditions they address. The Company believes that its
AngioJet System will face intense  competition  from a variety of treatments for
the ablation and removal of blood clots,  including thrombolytic drug therapies,
surgical  intervention,  balloon embolectomy,  mechanical and laser thrombectomy
devices,  ultrasound ablators,  and other thrombectomy devices based on waterjet
systems that are currently being developed by other companies.

     The Company is not aware of any synthetic  graft being  developed that will
compete  with the  Perma-Flow  Graft and  believes it is the first  developer to
obtain FDA approval for clinical trials with a synthetic  coronary bypass graft.
The  Company's  Perma-Seal  Graft  will  compete  with  ePTFE  grafts  and other
synthetic grafts with needle sealing properties.

     The medical products market is characterized by rapidly evolving technology
and intense  competition.  The future  success of the Company will depend on its
ability to keep pace with advancing technology and competitive innovations. Many
potential  competitors  have  significantly  greater  research  and  development
capabilities,   experience  in  obtaining  regulatory   approvals,   established
marketing  and  financial  and  managerial  resources  than  the  Company.  Many
potential  competitors  have  developed  or  are in the  process  of  developing
technologies  that are,  or in the  future  may be,  the  basis for  competitive
products,  some of which may employ an entirely  different  approach or means of
accomplishing  the desired  therapeutic  effect than products being developed by
the Company.

Government Regulation

     Government  regulation  in the  United  States  and  other  countries  is a
significant  factor in the development  and marketing of the Company's  products
and  in  the  Company's  ongoing  manufacturing  and  research  and  development
activities. The Company and its products are regulated by the FDA under a number
of statutes, including the Food, Drug and Cosmetic ("FDC) Act.

<PAGE>

     Under the FDC Act, medical devices are classified into one of three classes
(i.e.,  Class I, II or III) on the basis of the  controls  deemed  necessary  to
reasonably ensure their safety and effectiveness. Class I devices are subject to
the least extensive controls, as the safety and effectiveness  reasonably can be
assured through general  controls (e.g.,  labeling,  premarket  notification and
adherence to Good Manufacturing  Practices (GMP)). For Class II devices,  safety
and  effectiveness  can be assured  through the use of special  controls  (e.g.,
performance  standards,  post market  surveillance,  patient  registries and FDA
guidelines).   Class  III  devices  (i.e.,  life-sustaining  or  life-supporting
implantable  devices, or new devices which have been found, or are determined to
be not substantially equivalent to legally marketed devices) require the highest
level of control, including premarket approval by the FDA to ensure their safety
and effectiveness.

     If a manufacturer  or  distributor of medical  devices can establish that a
proposed device is  "substantially  equivalent" to a legally marketed Class I or
Class II medical  device or to a Class III medical  device for which the FDA has
not required a PMA  application,  the  manufacturer  or distributor may seek FDA
marketing  clearance for the device by filing a 510(k)  notification.  Following
submission of the 510(k)  notification,  the manufacturer or distributor may not
place the device into  commercial  distribution  in the United  States  until an
order has been issued by the FDA.  The FDA's  target for issuing  such orders is
within 90 days of submission, but the process can take significantly longer. The
order may  declare  the FDA's  determination  that the device is  "substantially
equivalent" to another legally  marketed device and allow the proposed device to
be marketed  in the United  States.  The FDA may,  however,  determine  that the
proposed  device  is  not  substantially   equivalent  or  may  require  further
information,  such as  additional  test  data,  before  making  a  determination
regarding  substantial  equivalence.  Any adverse  determination  or request for
additional  information  could delay market  introduction  and have a materially
adverse effect on the Company's continued operations.

     If a manufacturer or distributor of medical devices cannot establish that a
proposed  device is  substantially  equivalent to another  device via the 510(k)
process,  the manufacturer or distributor must seek PMA approval of the proposed
device.  A PMA  application  must be  submitted,  supported by  extensive  data,
including  pre-clinical and clinical trial data to prove the safety and efficacy
of the device.  Generally,  a company is  required to obtain an  Investigational
Device  Exemption  ("IDE")  before it commences  clinical  testing in the United
States in support of such a PMA.  The FDA  monitors  and oversees the conduct of
clinical trials under IDE.  Although by statute the FDA has 180 days to review a
PMA  application  once it has been  accepted  for filing,  during  which time an
advisory committee may also evaluate the application and provide recommendations
to the FDA,  PMA reviews  often  extend  over a  significantly  protracted  time
period, usually 12 to 24 months or longer from filing. Accordingly, there can be
no  assurance  that FDA review of any PMA  application  submitted by the Company
will not encounter  prolonged delays or that the data collected and submitted by
the Company in its PMA will support approval.

     In 1996,  FDA issued  regulations  for HDE. These  regulations  permit that
certain  devices,   if  intended  for  a  small  (less  than  4,000  per  year),
medically-defined group of patients, may qualify as Humanitarian Use Devices and
be  authorized  for sale in the U.S.  under a  temporary  exemption  from PMA or
510(k)  requirements.  An HDE is  authorized  by the  FDA  upon  approval  of an
appropriate  HDE  submission.  Such  submissions  must  establish the safety and
probable  benefit of the device for the proposed  intended  use. An HDE approval
lasts 12  months,  but may be  extended  with  subsequent  submissions.  Devices
marketed  under  an HDE may  simultaneously  undergo  clinical  trials  under an
approved IDE, and be submitted  for clearance or approval  under a 510(k) or PMA
for a different or broader indication.

<PAGE>

     Labeling and promotional activities are subject to scrutiny by the FDA and,
in certain  instances,  by the Federal  Trade  Commission.  The FDA also imposes
post-marketing  controls  on the  Company and its  products,  and  registration,
listing, medical device reporting, post-market surveillance, device tracking and
other  requirements  on medical  devices.  Failure to meet these  pervasive  FDA
requirements or adverse FDA determinations  regarding the Company's clinical and
pre-clinical   trials  could  subject  the  Company   and/or  its  employees  to
injunction, prosecution, civil fines, seizure or recall of products, prohibition
of sales or suspension or withdrawal of any previously granted approvals.

     The FDC Act regulates the Company's  manufacturing  and quality  systems by
requiring the Company to demonstrate compliance with current GMP as specified in
published FDA  regulations.  The FDA monitors  compliance  with GMP by requiring
manufacturers  to  register  with  the  FDA,  which  subjects  them to  periodic
unannounced  FDA  inspections  of  manufacturing  facilities.  If  violations of
applicable  regulations  are  noted  during  FDA  inspections  of the  Company's
manufacturing facilities,  the continued marketing of the Company's products may
be adversely affected. Such regulations are subject to change and depend heavily
on regulatory interpretations.

     There  can  be  no  assurance   that  future   changes  in  regulations  or
interpretations  made by the  FDA or  other  regulatory  bodies,  with  possible
retroactive effect, will not adversely affect the Company.

     The Company has complied with ISO 9001  compliance GMP  requirements in the
past and  believes  it will be able to comply  with all  applicable  regulations
regarding the manufacture and sale of medical devices.

     The  export and sale of medical  devices  outside of the United  States are
subject  to  United   States   export   requirements   and  foreign   regulatory
requirements.  A device under a U.S. IDE may be exported to any country, so long
as its import to the receiving  country  complies with its  requirements.  Legal
restrictions  on the sale of  imported  medical  devices  vary from  country  to
country. The time required to obtain approval by a foreign country may be longer
or shorter than that required for FDA approval, and the requirements may differ.
For countries in the European  Union,  in January  1995,  CE Mark  certification
procedures  became available for medical devices,  the successful  completion of
which would allow  certified  devices to be placed on the market in all European
Union  countries.  After June 1998,  medical devices may not be sold in European
Union  countries  unless they display the CE Mark. The Company  received CE Mark
approval for its current products in July 1997.

<PAGE>

Employees

     As of September  30, 1998,  the Company had 179  full-time  employees,  one
part-time employee and eight contract employees.  Of these full-time  employees,
52 are in research and development,  58 are in manufacturing and production,  10
are in quality  systems,  6 are in  facilities/maintenance,  36 are in sales and
marketing  and 17 are in  management or  administrative  positions.  None of the
Company's  employees  are  covered by a  collective  bargaining  agreement,  and
management considers its relations with its employees to be good.


Item 2.  Properties:

     The  Company  leases   approximately  51,000  square  feet  of  office  and
manufacturing  space  (including   approximately  6,500  square  feet  of  clean
manufacturing  space) at 9055  Evergreen  Boulevard NW,  Minneapolis,  Minnesota
55433-8003. See Note 7 of Notes to Consolidated Financial Statements in Part II,
Item 8.


Item 3.  Legal Proceedings:

None


Item 4.  Submission of Matters to a Vote of Security-Holders:

None

<PAGE>

                      EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>

        Name           Age                   Position                              
       
<S>                     <C>  <C>               
 Robert G. Dutcher      53   Director, Chief Executive Officer and President
 Joseph J. Afryl Jr     50   Vice President, Sales
 Russel E. Carlson      52   Vice President, Finance and Chief Financial Officer
 Irving R. Colacci      45   Vice President, Legal Affairs and Human Resources
                               General Counsel and Secretary
 James D. Gustafson     42   Vice President, Quality Systems and
                               Regulatory/Clinical Affairs
 T. V. Rao              55   Vice President/General Manager, AngioJet Business
 Robert J. Scott        53   Vice President, Manufacturing Operations

</TABLE>

     Robert G. Dutcher has served as President and Chief  Executive  Officer and
has been a director  of the Company  since  October  1993.  From June 1992 until
October 1993,  Mr.  Dutcher  served as Executive  Vice President of the Company.
Since 1987,  he has served as President  and Chief  Operating  Officer of Possis
Holdings,  Inc. (a subsidiary formerly known as Possis Medical,  Inc.). Prior to
joining the Company,  Mr. Dutcher had served in several positions (most recently
as Director of Research and  Development)  at Medtronic,  Inc.  since 1972.  Mr.
Dutcher received a master's degree in biomedical engineering from the University
of Minnesota.


     Joseph J. Afryl Jr has served as Vice  President of the Company since April
1994. Prior to joining the Company,  Mr. Afryl served as Vice President of Sales
and Marketing for  Bio-Vascular,  Inc. from July 1992 to March 1994, as Director
of Sales for Angeion  Corporation  from September 1991 through July 1992, and as
Director of Marketing at St. Jude Medical, Inc. from May 1987 to September 1991.
Each of these companies is a manufacturer of medical devices.


     Russel E. Carlson  joined the Company in  September  1991 and has served as
Vice President and Chief Financial Officer of the Company since June 1992. Prior
to  joining  the  Company,  Mr.  Carlson  had been  Chief  Financial  Officer of
SpectraScience,  Inc.  (formerly GV Medical,  Inc.), a medical  device  company,
since September 1989 and had served in eight financial management positions with
The Pillsbury Company, a food manufacturer and processor, since 1972.


     Irving R. Colacci has served as Vice  President  and General  Counsel since
December 1993, and as Secretary and Corporate  Counsel of the Company since July
1988. Prior to joining the Company, Mr. Colacci had been an attorney at Dorsey &
Whitney LLP.

<PAGE>

     James D.  Gustafson  has served as a Vice  President  of the Company  since
January 1, 1994 and has been Director of Quality Systems and Regulatory/Clinical
Affairs for Possis Holdings, Inc. since June 1993. Prior to joining the Company,
Mr. Gustafson had served as a Manager of Clinical and Regulatory  Affairs and of
Clinical  Programs at St. Jude  Medical,  Inc., a medical  device  manufacturer,
since June 1989, and as a Senior  Clinical  Scientist at Shiley,  Inc.,  Irvine,
California,  since  March  1985.  Mr.  Gustafson  received a master's  degree in
management from University of Redlands and a master's degree in biology from the
University of California at Irvine.

     T. V. Rao joined the  Company in June 1998 as Vice  President  and  General
Manager of AngioJet Thrombectomy business. Prior to joining the Company, Mr. Rao
served as Vice  President of Sales and  Marketing for Angeion  Corporation  from
July 1995 to June 1998,  as Vice  President of Sales and Marketing for Brunswick
Biomedical  Corporation  from  July  1994 to June  1995 and  served  in  several
positions (most recently as Director of Marketing,  Tachyarrhythmia Business) at
Medtronic Inc. since 1980. Mr. Rao holds a master's  degree in business from the
College  of St.  Thomas  and a  bachelor's  degree  with  honors  in  mechanical
engineering from Madras, India.

     Robert J. Scott has served as Vice  President of the Company since December
1993 and as Vice President of Manufacturing  Operations of Possis Holdings, Inc.
since 1988 and was Director of  Manufacturing  Operations  for Possis  Holdings,
Inc. from 1984 through 1988. Prior to joining the Company,  Mr. Scott had served
as a consultant to various medical and nonmedical manufacturing companies and as
Manufacturing  Manager for Aequitron  Medical,  Inc. and  Resistance  Technology
Incorporated and in various positions for Daig Corporation and Medtronic, Inc.

<PAGE>

                                     PART II


     Item 5. Market for the Registrant's  Common Equity and Related  Stockholder
Matters:

     The Company had 1,618 common  shareholders  of record at July 31, 1998. The
common stock is traded on The Nasdaq  Stock  Market under the symbol POSS.  High
and low closing sale prices for each quarter of fiscal years ended July 31, 1998
and 1997 are presented below:

<TABLE>
<CAPTION>
                            1998                     1997 
                         High    Low             High    Low
  QUARTER:
<S>                     <C>     <C>             <C>     <C>
    First............   15.25   11.00           19.00   14.25
    Second...........   15.00   10.38           22.00   15.88
    Third............   17.00   12.50           20.50   11.50
    Fourth...........   14.75    9.25           17.38   13.50

</TABLE>

     Additional  information  is  contained  in Note 5 of Notes to  Consolidated
Financial Statements included in Part II, Item 8.

     The Company has not paid cash dividends on its common stock since 1983. The
Company  currently  intends to retain all  earnings  for use in its business and
does not anticipate paying cash dividends in the foreseeable future.

Item 6.  Selected Financial Data:


                             SELECTED FINANCIAL DATA
                      POSSIS MEDICAL, INC. AND SUBSIDIARIES
                              YEARS ENDED JULY 31,

<TABLE>
<CAPTION>

In Thousands Except Earnings Per Share Data
                                           1998      1997       1996       1995        1994
<S>                                      <C>       <C>         <C>        <C>         <C>
INCOME STATEMENT DATA:
Operating revenues-
 Continuing operations..................  $6,118    $4,834     $1,606     $3,207      $6,315
Net income (loss):
 Continuing operations.................. (11,969)   (8,608)    (8,578)    (5,153)     (1,246)
 Discontinued operations................    --         112        405        421         523
Net income (loss) per common share -
 basic and diluted:
 Continuing operations..................    (.98)     (.71)      (.74)      (.53)       (.15)
 Discontinued operations................    --         .01        .04        .04         .06
Weighted average shares outstanding.....  12,191    12,099     11,611      9,726       8,436

BALANCE SHEET DATA:
 Working capital........................ $16,598   $16,840    $24,780     $6,846      $4,007
 Total assets...........................  23,897    22,423     29,361     10,321       8,882
 Long-term debt,
  excluding current maturities..........  11,493        10         39         93          80
 Shareholders' equity...................   8,744    19,800     27,597      8,648       5,684

</TABLE>

<PAGE>

     Item 7.  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations:

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

     The  Company  was  incorporated  in 1956 and went  public in 1960 as Possis
Machine Corporation.  Initial operations consisted of design,  manufacturing and
sales of industrial  equipment and a division that provided temporary  technical
personnel.  The Company's  involvement with medical products began in 1976, when
it sold its rights to a patented bileaflet  mechanical heart valve, which it had
obtained from Zinon C. Possis, the founder of the Company,  to St. Jude Medical,
Inc. for royalty  payments based on St. Jude's valve sales. In 1982 a subsidiary
was  established  to focus  initially on the  development  of a synthetic  blood
vessel used to bypass blocked coronary arteries.  In the late 1980's the Company
decided to leverage existing management expertise and entered the pacemaker lead
business.  The strategic role of the pacemaker lead business was to provide cash
flow to fund the development of synthetic grafts and thrombectomy systems and to
give the  Company  access to and name  recognition  within  the  medical  device
industry. In 1990 the Company made the decision to focus on medical products and
subsequently divested all non-medical  operations,  beginning with its Technical
Services  division  in  September  1991  followed  by its  industrial  equipment
subsidiary  and related land and buildings in January 1994.  See Note 2 of Notes
to  Consolidated  Financial  Statements.  In  March  1994 the  Company  sold its
pacemaker lead business  because it anticipated that revenues from this business
would  decrease  due to a pacemaker  lead  technology  shift.  This sale enables
Possis  to focus  its human and  financial  resources  exclusively  on its other
products,  which  are  currently  in  clinical  trials  and in early  stages  of
commercialization.

     Over the past  several  fiscal  years,  the  Company has  transitioned  its
revenue  stream from pacemaker  leads and royalty  revenues to revenues from the
sale of its new products and related sales agreements.  The resulting cash flow,
together  with the  approximately  $34.0 million net proceeds from the Company's
calendar  1994 and 1995 common stock  offerings  and the $12.0  million from the
issuance of 5%  convertible  subordinated  debentures in 1998,  has been used to
fund the Company's operations, including research and development related to its
products.  Possis  does not  expect to  become  profitable  unless  it  achieves
significant  sales in the United  States  and its  products  receive  additional
United States Food and Drug Agency ("FDA") marketing approvals.  There can be no
assurance that significant sales or additional marketing approvals will occur.

Results of Operations

Fiscal Years ended July 31, 1998, 1997 and 1996

     Total revenue increased 27% and 201% in fiscal 1998 and 1997, respectively,
compared to prior years. The main factor in the product sales increase in fiscal
1998 and 1997 was the December 1996 FDA clearance to commence U.S.  marketing of
the  AngioJet(R)  Rheolytic(TM)  Thrombectomy  System,  with labeling claims for
removal of blood clots from grafts  used by  patients on kidney  dialysis.  U.S.
AngioJet  System  product  revenue was $6,013,000 and $2,633,000 for fiscal 1998
and 1997,  respectively.  The fiscal 1998 U.S. product revenue increased by 128%
over fiscal 1997.

<PAGE>

     Since the U.S. market  introduction of the AngioJet System, the Company has
listed its AngioJet System drive unit, considered capital equipment,  at $80,000
to hospitals.  Despite  employing a variety of flexible  drive unit  acquisition
programs including outright purchase,  rental, lease and fee-per-procedure,  the
Company sold only 12 drive units to U.S.  hospitals  through  March 31, 1998. In
April 1998,  the  AngioJet  System  drive unit list price was reduced to $25,000
after a  successful  test of the lower  price in two of the  Company's  15 sales
territories.  A lower  drive  unit  sales  price  is  intended  to  improve  the
competitive  position  of the  AngioJet  System,  facilitate  evaluation  of the
technology,  ease sale closure on units currently  under  evaluation and provide
added time for the Company's  direct sales force to encourage use of the systems
currently  in the field.  Since the  lowering of the retail  price to $25,000 in
April 1998 there have been 19 drive units sold to U.S. hospitals versus 12 drive
units in the previous  sixteen  months.  The  purchasing  cycle for the AngioJet
System drive unit,  the Company  believes,  will vary from  purchasing the drive
unit with no evaluation to an evaluation period up to twelve months depending on
the customer's budget cycle.

     In  December  1997,  the Company  received  approval to commence a clinical
study of the  AngioJet  System  for use in the  treatment  of  stroke  caused by
blockage of the carotid arteries, the main vessels supplying blood to the brain.
The Company  believes that the  treatment of stroke is a  significant  marketing
opportunity  for the AngioJet  System.  In May 1998, the Company  introduced its
AV60 AngioJet Catheter. The AV60 Catheter has been designed specifically to more
effectively and efficiently remove blood clots from dialysis access grafts - the
indication for use for which Possis received FDA marketing  approval in December
1996.  In September  1998,  Possis  submitted  to the FDA a pre-market  approval
("PMA")  application  seeking  approval to market its AngioJet  System to remove
blood clots from  coronary  blood  vessels.  The FDA targets  completion  of its
review and a response to the Company  within 180 days.  However,  recent  actual
average elapsed time from Company  submission to FDA approval is 14 months.  The
PMA presents the results of a 349 patient  randomized  trial comparing  AngioJet
System treatment to  intracoronary  infusion of the blood  clot-dissolving  drug
urokinase for patients with  demonstrated  clot in native coronary  arteries and
saphenous vein bypass grafts.  The randomized  trial showed that AngioJet System
treatment had  significantly  better  outcomes than the urokinase  treatment for
procedure  success and device success.  AngioJet System treatment also had lower
in-hospital major cardiac complications,  including fewer bleeding complications
and vascular complications.  Also, the results of a cost-effectiveness trial run
concurrently  with the coronary  AngioJet  trials show that the AngioJet  System
treatment costs are on average  significantly  lower than those  associated with
the use of urokinase.  The Company believes that the treatment of blood clots in
coronary vessels is a significant marketing opportunity for the AngioJet System.
The Company expects the U.S.  AngioJet System sales will grow primarily  through
the addition of sales  people,  the  completion of clinical  trials  designed to
yield  additional FDA  label-approved  product uses, the publication of clinical
performance  and cost  effectiveness  data, and the  introduction  of additional
catheter designs.

     Foreign sales of the AngioJet System during fiscal 1998, 1997 and 1996 were
$351,000,  $806,000 and $919,000,  respectively.  The Company's  German AngioJet
System  distributor  was terminated in February 1997 which impacted  fiscal 1998
and 1997 foreign sales.  The Company is evaluating its European  AngioJet System
distribution  options.  Actions the Company is taking to improve AngioJet System
sales in Europe  include  conducting  European  cost  effectiveness  studies,  a
carotid  artery  study in  Germany,  a deep vein  thrombosis  study in Italy and
developing  European physician  advocates for the AngioJet System. In Japan, the
coronary  AngioJet System clinical study  enrollment was completed in April 1998
and a  regulatory  filing  with the  Japanese  Ministry of Health and Welfare is
planned in 1998.

<PAGE>

     During fiscal 1998, 1997 and 1996, sales of  Perma-Flow(R)  Coronary Bypass
Graft were  $105,000,  $58,000 and $111,000,  respectively.  In March 1996,  the
Company entered into a Distribution Agreement with Baxter Healthcare Corporation
("Baxter").  This Agreement  granted  Baxter  exclusive  worldwide  distribution
rights to the Perma-Flow  Coronary Bypass Graft for a three-year  term. In April
1998,   this   Distribution   Agreement  was  modified  with  Baxter   retaining
non-exclusive  distribution  rights  outside  the  United  States  but having no
distribution  rights  in  the  United  States  for  the  remaining  term  of the
Distribution  Agreement. In April 1998, the Company received Humanitarian Device
Exemption ("HDE") approval from the FDA, clearing the way for U.S.  marketing of
the Perma-Flow  Coronary  Bypass Graft for patients who require  coronary bypass
surgery  but who have  inadequate  blood  vessels  of  their  own for use in the
surgery.

     During fiscal 1997 and 1996, sales of  Perma-Seal(R)  Dialysis Access Graft
were  $124,000 and $163,000,  respectively.  There were no sales in fiscal 1998.
The decrease is due to the  termination  of the Company's  worldwide  Perma-Seal
Dialysis Access Graft distributor in January 1997. In September 1998 the Company
received FDA marketing approval for its Perma-Seal Graft.

     In January 1998, the Company  engaged Salomon Smith Barney to assist in the
development  and  implementation  of a strategic  plan  designed to maximize the
value of the Company's  vascular graft business.  The Company expects to make an
announcement regarding this project within the next several weeks.

     Sales  agreement  and other revenue  includes  $200,000 per year for fiscal
1997 and 1996 from Baxter  Healthcare  Corporation  paid to the Company  under a
supply and distribution  agreement for the Perma-Flow  Coronary Bypass Graft. In
addition,  fiscal 1997 sales agreement and other revenue includes  $1,799,000 in
cash  and  returned  unused  product  due to the  termination  of the  Company's
Perma-Seal  Graft  supply  and  distribution  agreement.  The  Company  received
$1,000,000 through July 31, 1996 from its Perma-Seal Graft distributor. See Note
9 of Notes to Consolidated Financial Statements.

     The Company is planning for  continued  growth in product  sales for fiscal
1999 and beyond and believes that for the next several years most of this growth
will come from AngioJet System sales in the U.S. marketplace.

     Cost of medical  products  increased 17% in fiscal 1998 and decreased 6% in
fiscal 1997,  compared to prior years.  Production expenses relating to vascular
grafts were $304,000,  $299,000 and  $1,555,000 for fiscal years 1998,  1997 and
1996,  respectively.  During most of fiscal 1998 and 1997, the Company worked to
validate the vascular  graft  production  processes and was not producing  graft
products. The cost of product and process validation is reported as research and
development expense.  AngioJet System production costs for fiscal 1998, 1997 and
1996 were $5,491,000,  $4,636,000 and $3,701,000,  respectively. The increase is
primarily due to significant  growth in AngioJet  System product sales.  Medical
product gross margins  improved by $2,443,000  and $1,980,000 in fiscal 1998 and
1997,  respectively,   compared  to  prior  years.  The  Company  believes  that
manufacturing  costs per unit  will be  reduced  as  product  sales and  related
production volumes grow and as identified  product and process  improvements are
made.  In  April  1997,  the  Company  received  full ISO  9001  quality  system
certification.  ISO  Certification  is  issued  by the  International  Standards
Organization  and  incorporates  standards of quality and excellence  recognized
worldwide in design, development, production, installation and service.

<PAGE>

     Selling,  general and  administrative  expenses  increased  $3,010,000  and
$1,494,000 in fiscal 1998 and 1997, respectively,  as compared to prior periods.
The primary  factor in fiscal 1998 and 1997 are  increased  sales and  marketing
expenses related to the establishment of a direct sales organization to sell the
AngioJet  System and  expenses of  marketing  the product in the United  States.
Based upon early  physician  interest,  the Company has grown the U.S.  AngioJet
System sales and marketing  organization from eight employees in January 1997 to
36  employees  in July  1998.  The  Company  plans on  increasing  its sales and
marketing  expenditures  in fiscal 1999 in order to maintain its existing direct
U.S.  sales  force at its  present  level and to expand its  marketing  efforts.
Subsequent to the AngioJet  System  receiving FDA approval for coronary use, the
Company  plans to  increase  the direct U.S.  sales  force to meet the  expected
demand for the Company's AngioJet System.

     Research and development  expenses  increased 5% and 57% in fiscal 1998 and
1997,  respectively,  as compared to prior periods. The fiscal 1998 increase was
due primarily to increased  expenses  relating to the Coronary  AngioJet  System
clinical  trial  and  the  development  of  new  AngioJet  System   thrombectomy
applications.  This  increase was offset by a reduction of expenses  relating to
the  Perma-Flow  Graft and  Perma-Seal  Graft  clinical  trials and  development
expenses. The fiscal 1997 increases were due primarily to vascular graft product
and production process validation  expenses and increased expenses of conducting
the Perma-Flow Graft and Coronary  AngioJet System clinical trials.  The Company
believes that research and development  expenses will continue to increase as it
completes the development of its current products, invests in development of new
AngioJet  System  thrombectomy  applications  and new AngioJet  technology-based
products.

     Interest  income  decreased in fiscal 1998 and 1997 from the previous years
due to the use of the Company's cash reserves to fund the Company's  operations.
The  $12,000,000  received  from the  issuance  of 5%  convertible  subordinated
debentures  had a  modest  impact  on  interest  income  in  fiscal  1998 due to
receiving it in July 1998.

     The Company recorded the final income relating to the sale of its Technical
Service division during the first quarter of fiscal 1997.


Liquidity and Capital Resources

     The Company's cash,  cash  equivalents  and marketable  securities  totaled
approximately  $13.8  million at July 31,  1998, a decrease of $1.0 million from
the prior year.  The primary  factors in the  reduction  of the  Company's  cash
position was the net loss of $12.0  million and the issuance of $12.0 million of
5% convertible subordinated debentures in July 1998.

<PAGE>

     During fiscal 1998,  cash used in operating  activities  was $11.8 million,
which  resulted  primarily  from an $12.0  million  net loss and a $1.8  million
increase  in  receivables,  inventories  and  other  current  assets,  offset by
depreciation, amortization, stock compensation and an increase in trade accounts
payable  and  accrued  liabilities  totaling  $2.0  million.  Cash  provided  by
investing  activities  was $10.4  million,  which resulted from the net proceeds
from the  sale/maturity  of marketable  securities of $11.0  million,  offset by
additions to plant and  equipment of  $614,000.  Net cash  provided by financing
activities  was $11.4  million,  which  resulted  from the net proceeds from the
issuance of 5% convertible  subordinated  debentures of $11.1 million,  proceeds
from long-term debt of $175,000 and the exercise of stock options of $142,000.

     During  fiscal 1997,  cash used in operating  activities  was $8.6 million,
which  resulted  primarily  from an $8.5  million  net loss  and a $1.7  million
increase  in  receivables,  inventories  and  other  current  assets,  offset by
depreciation,  amortization of goodwill,  stock  compensation and an increase in
trade  accounts  payable and accrued  liabilities  totaling $1.6  million.  Cash
provided by investing  activities was $4.4 million,  which resulted from the net
proceeds from the sale/maturity of marketable securities of $5.0 million, offset
by additions to plant and equipment of $613,000.  Net cash provided by financing
activities  was $332,000,  which  resulted  primarily from the exercise of stock
options of $405,000.

     During  fiscal 1996,  cash used in operating  activities  was $8.8 million,
which  resulted  primarily  from an $8.2  million  net loss  and a $1.9  million
increase  in  receivables,  inventories  and  other  current  assets,  offset by
depreciation,  amortization of goodwill,  stock  compensation and an increase in
trade accounts payable totaling $1.1 million.  Cash used in investing activities
was $15.6  million,  which  resulted  primarily from net purchases of marketable
securities  of $14.8  million  and  additions  of plant  and  equipment  of $1.5
million,  offset by the proceeds  from the sale of  discontinued  operations  of
$589,000.  Fiscal 1996  additions to plant  include  approximately  $1.2 million
associated with the Company's April 1996 relocation to a larger leased facility.
Proceeds from  discontinued  operations  increased  $240,000 in fiscal 1996 as a
result of the prepayment by Advanced  Technical  Services,  Inc.  ("ATS") of the
notes  receivable and estimated  royalty payments in connection with the sale of
ATS. See Note 2 of Notes to Consolidated Financial Statements. Net cash provided
by financing  activities  resulted  primarily  from the  Company's  October 1996
common stock offering netting approximately $26.7 million.

     The Company believes that product sales of the AngioJet  System,  primarily
in the U.S.,  will yield  meaningful  sales growth going forward.  Concurrently,
sales and marketing  expenditures are planned to increase with the sales growth.
Research and development  expenditures are expected to grow as well. The Company
expects to report a loss for fiscal 1999. In addition,  the Company expects that
increasing  working capital  investments in trade receivables and inventory will
be required to support growing product sales.

     The  Company is  currently  evaluating  its  capital  needs and the options
available for raising cash,  including  monies that may be forthcoming  from the
Company's graft business  project.  Additional  capital will likely be sought in
fiscal 1999.

<PAGE>

Year 2000 ("Y2K")

     The  Company  established  a team in May 1998 to  assess  and  address  the
possible  exposures  related to the Y2K  issue.  The areas  under  investigation
include product issues, business computer systems,  production equipment, vendor
readiness and contingency plans.  Products currently sold by the Company are Y2K
compliant.  The Company does not use internally  developed computer software and
is therefore not anticipating major reprogramming efforts. The Company's primary
financial  and  operational  system  has been  assessed  and is  certified  "Y2K
Compliant."  There are several personal  productivity  applications that are not
currently  Y2K  compliant.   The  Company   expects  them  to  be  compliant  by
mid-calendar  1999.  Various personal computers are not currently Y2K compliant.
These  computers are planned to be replaced as part of the Company's  technology
update strategy.  None of these replacements have been accelerated and they have
no material effect on the Company consolidated  financial statements.  Equipment
used for production or quality control does not use dates to control operations.

     The Company mailed  questionnaires  to each of its  significant  vendors in
October 1998 to determine the extent to which the Company is vulnerable to those
third parties'  failure to remediate their own Y2K issues.  This assessment will
be  completed  by the  end of  calendar  1998.  In  addition,  the  Company  has
investigated its utility providers and believes they will be Y2K compliant.  The
Company  anticipates  developing a  contingency  plan once it has  completed its
assessment  of  significant  vendor  compliance  which will be no later than the
first quarter of calendar 1999. A contingency plan will be developed to minimize
the Company's exposure to work slowdowns or business  disruptions.  In the event
any vendors are not Y2K  compliant the Company will seek new vendors to meet its
production needs.

     The Company  has  budgeted  approximately  $50,000  for  expenses  directly
related to Y2K identification  and remediation of internal systems.  It has also
purchased  continuation of business and director's  liability related to the Y2K
issue.

     Although the Company does not at this time expect a  significant  impact on
its consolidated  financial position,  results of operations and cash flows, our
internal  review has not been  completed and there can be no assurance  that the
systems  of  other  companies  or the  systems  of the  Company  itself  will be
converted on a timely basis and will not have a corresponding  adverse effect on
the Company.


New Accounting Pronouncement

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related  Information," which is
required  to be adopted for the fiscal year  beginning  August 1, 1998.  At that
time, the Company will be required to disclose certain financial and descriptive
information  about its  operating  segments as  redefined  by SFAS No. 131.  The
Company  is in the  process  of  assessing  the  impact  of SFAS No.  131 on its
footnote disclosures.


Forward-Looking Statements

     This  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of  Operations  and certain other  sections of this 10-K,  including the
discussion  regarding Year 2000  compliance,  contain  certain  "forward-looking
statements" as defined in the Private Securities  Litigation Reform Act of 1995.
Such statements relating to future events and financial  performance,  including
the submission of applications to the FDA, revenue and expense levels and future
capital  requirements,  are  forward-looking  statements  that involve risks and
uncertainties,  including  the  Company's  ability to meet its timetable for FDA
submissions,  the review  time at the FDA,  changes in the  Company's  marketing
strategies,  the Company's ability to establish product  distribution  channels,
changes in  manufacturing  methods,  market  acceptance of the AngioJet  System,
changes in the levels of capital expenditures by hospitals,  the levels of sales
of the  Company's  products  that can be achieved,  ability to raise  additional
capital  and other  risks set forth in the  cautionary  statements  included  in
Exhibit 99 to the Company's report on Form 10-Q dated April 30, 1998, filed with
the Securities and Exchange Commission.

<PAGE>

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk:

     The Company  invests  its excess cash in money  market  mutual  funds.  The
market risk on such investments is minimal.

     The product sales for the Company's foreign  subsidiary are in U.S. Dollars
("USD").  At the end of fiscal  1998,  the  amount of  currency  held in foreign
exchange was approximately  $1,000 USD. The market risk on the Compan's foreign
subsidiary operations is minimal.

     At July 31, 1998,  all of the Compan's  outstanding  long-term  debt carry
interest at a fixed  rate.  There is no  material  market  risk  relating to the
Compan's long-term debt. The Company's 5% convertible  subordinated debentures,
issued July 15, 1998,  carry a fixed interest rate of 5%; are due July 15, 2004;
and are convertible  into common stock at a price  calculated per  predetermined
formulas  based  on the  market  price  of the  Company's  common  stock  over a
specified period of time.

<PAGE>

Item 8.  Financial Statements and Supplementary Data:









INDEPENDENT AUDITORS' REPORT


To the Shareholders of Possis Medical, Inc.:

     We have  audited the  accompanying  consolidated  balance  sheets of Possis
Medical,  Inc. and  subsidiaries  (the Company) as of July 31, 1998 and 1997 and
the related  consolidated  statements of operations,  cash flows, and changes in
shareholders'  equity for each of the three  years in the period  ended July 31,
1998. Our audits also included the financial  statement  schedule  listed in the
Index  at  Item  14.  These  consolidated  financial  statements  and  financial
statement  schedule are the  responsibility  of the  Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements 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  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
consolidated  financial  statement  presentation.  We  believe  that our  audits
provide a reasonable basis for our opinion.

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



Deloitte & Touche LLP
Minneapolis, Minnesota
August 28, 1998

<PAGE>


                                         POSSIS MEDICAL, INC. AND SUBSIDIARIES
                                               CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                      July 31, 1998          July 31, 1997
ASSETS

<S>                                                                     <C>                    <C>
CURRENT ASSETS:
    Cash and cash equivalents (Note 1)............................      $13,841,793            $ 3,849,194
    Marketable securities (Note 1)................................          --                  10,964,170
    Receivables:
      Trade (less allowance for doubtful accounts and returns:
          $150,000 and $80,000, respectively).....................        1,144,472                878,893
      Other.......................................................            3,091                120,558
    Inventories (Note 1):
      Parts.......................................................        1,085,236              1,242,580
      Work-in-process.............................................        1,740,834                940,918
      Finished goods..............................................        1,913,084              1,191,870
    Prepaid expenses and other assets.............................          313,158                264,117
     
           Total current assets...................................       20,041,668             19,452,300


PROPERTY (Notes 1 and 3):
    Leasehold improvements........................................        1,210,984              1,166,306
    Machinery and equipment.......................................        3,720,772              3,317,391
    Assets in construction........................................          113,094                 51,753
                                                                          5,044,850              4,535,450
    Less accumulated depreciation.................................        2,343,691              1,906,500
         Property - net...........................................        2,701,159              2,628,950

OTHER ASSETS:
    Deferred debt issue costs (Note 1)............................          884,105                --
    Goodwill (Note 1).............................................          269,922                341,922

TOTAL ASSETS......................................................      $23,896,854            $22,423,172

 
 











<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

<PAGE>


                                         POSSIS MEDICAL, INC. AND SUBSIDIARIES
                                               CONSOLIDATED BALANCE SHEETS
                                                       (continued)

<TABLE>
<CAPTION>

                                                                             July 31, 1998       July 31, 1997

LIABILITIES AND SHAREHOLDERS' EQUITY

<S>                                                                           <C>                 <C>                               
CURRENT LIABILITIES:
    Trade accounts payable.............................................       $1,245,552          $    648,502
    Accrued salaries, wages, and commissions...........................        1,060,687               762,587
    Current portion of long-term debt (Note 3).........................           97,713                28,356
    Clinical trials accrual............................................          335,067               879,166
    Litigation settlement..............................................          200,000                  --
    Other liabilities..................................................          504,624               294,002
Total current liabilities..............................................        3,443,643             2,612,613

LONG-TERM DEBT (Notes 1 and 3).........................................       11,492,661                10,213

OTHER LIABILITIES  (Note 5)............................................          216,200                 --

COMMITMENTS AND CONTINGENCIES (Note 8)

SHAREHOLDERS' EQUITY (Note 5):
    Common stock-authorized 100,000,000 shares,
         of $ .40 par value each; issued and outstanding,
        12,218,622 and 12,121,312 shares, respectively.................        4,887,449             4,848,525
    Additional paid-in capital.........................................       42,476,257            41,118,611
    Unearned compensation..............................................         (489,060)               --
    Unrealized loss on investments.....................................           --                    (5,836)
    Retained deficit...................................................      (38,130,296)          (26,160,954)
          Total shareholders' equity...................................        8,744,350            19,800,346
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................      $23,896,854           $22,423,172

 












<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

<PAGE>

                      POSSIS MEDICAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                               YEARS ENDED JULY 31
<TABLE>
<CAPTION>
                                                                          1998               1997            1996    
REVENUES:
<S>                                                                    <C>                <C>             <C>
     Medical products sales (Note 8)..............................     $6,117,850         $2,814,646      $1,156,170
     Sales agreement and other (Note 9)...........................          --             2,019,431         450,000
         Total revenues...........................................      6,117,850          4,834,077       1,606,170

COST OF SALES AND OTHER EXPENSES:
     Cost of medical products ....................................      5,794,901          4,934,887       5,256,179
     Selling, general and administrative..........................      7,555,616          4,545,937       3,052,422
     Research and development ....................................      5,193,787          4,964,239       3,167,013
     Interest.....................................................         40,599              5,422          14,296
         Total cost of sales and other expenses...................     18,584,903         14,450,485      11,489,910

Operating loss....................................................    (12,467,053)        (9,616,408)     (9,883,740)

Interest income...................................................        489,610          1,001,578       1,369,453
Gain (loss) on sale of  investments...............................          8,101              7,109         (64,007)         
Loss from continuing operations...................................    (11,969,342)        (8,607,721)     (8,578,294)

Income from discontinued operations - net (Note 2)................           --              111,539         405,416
Net loss .........................................................   $(11,969,342)       $(8,496,182)    $(8,172,878)

Weighted average number
     of common shares outstanding - basic and diluted.............     12,191,477         12,099,217      11,611,070
Earnings (loss) per common share - basic and diluted:
     Continuing operations    ....................................          $(.98)             $(.71)          $(.74)
     Discontinued operations  ....................................           --                  .01             .04
Net loss .........................................................          $(.98)             $(.70)          $(.70)

 










<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

<PAGE>


                      POSSIS MEDICAL, INC. AND SUBSIDIARIES
                      POSSIS MEDICAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                               YEARS ENDED JULY 31

<TABLE>
<CAPTION>
                                                                     
                                                                            1998             1997               1996   
<S>                                                                    <C>               <C>               <C>
OPERATING ACTIVITIES:
  Net loss .........................................................   $(11,969,342)     $(8,496,182)      $(8,172,878)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
  (Gain) loss on sale of marketable securities......................         (8,101)          (7,109)           64,007
  Loss on disposal of assets........................................         15,237            4,932            24,239
  Depreciation......................................................        774,027          473,816           395,132
  Amortization......................................................         84,832           72,000            72,000
  Stock compensation................................................        430,046          155,083           505,432
  Stock options issued to non-employees.............................         11,648            --               --
  Increase in receivables...........................................       (148,112)        (391,314)         (741,886)
  Increase in inventories...........................................     (1,613,285)      (1,286,860)       (1,109,773)
  Increase in other current assets..................................        (57,920)         (56,961)          (19,968)
  Increase in trade accounts payable................................        597,052          330,597           158,540
  Increase (decrease) in accrued and other current liabilities......        113,110          601,686            (4,225)
    Net cash used in operating activities...........................    (11,770,808)      (8,600,312)       (8,829,380)

INVESTING ACTIVITIES:
  Proceeds from sale of discontinued operations.....................         --               --               589,441
  Additions to plant and equipment..................................       (614,074)        (612,641)       (1,453,379)
  Proceeds from sale of fixed assets................................          2,100           20,954            10,945
  Purchase of marketable securities.................................        (13,612)      (1,990,718)      (17,992,853)
  Proceeds from sale/maturity of marketable securities..............     10,991,719        7,011,640         3,215,681
    Net cash provided by (used in)
     investing activities...........................................     10,366,133        4,429,235       (15,630,165)

FINANCING ACTIVITIES:
  Proceeds from notes payable and long-term debt....................     12,175,000           --                19,000
  Repayment of long-term debt.......................................        (28,356)         (73,386)          (82,925)
  Proceeds from issuance of stock and exercise
    of options and warrants.........................................        142,406          405,150        26,761,920
  Deferred debt issue costs.........................................       (891,776)          --                --    
    Net cash provided by financing activities.......................     11,397,274          331,764        26,697,995   

INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS..................................................      9,992,599       (3,839,313)        2,238,450

CASH AND CASH EQUIVALENTS AT BEGINNING
  OF YEAR...........................................................      3,849,194        7,688,507         5,450,057
CASH AND CASH EQUIVALENTS AT END OF YEAR............................    $13,841,793       $3,849,194        $7,688,507

SUPPLEMENTAL CASH FLOW DISCLOSURE:
  Cash paid for interest............................................$         1,262     $      5,422      $     14,296
  Inventory transferred to fixed assets.............................         16,288           32,279            19,983
  Issuance of restricted stock......................................        919,106           --                --
  Accrued payroll tax related to restricted stock...................        325,397           --                --
  Warrants issued related to convertible debt.......................        600,000           --                --

 

<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

<PAGE>


                      POSSIS MEDICAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF
                         CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>  
                                                                           Unearned   Unrealized
                                      Common Stock         Additional       Stock      Loss on
                                  Number of                  Paid-in        Compen-    Invest-      Retained
                                   Shares      Amount        Capital        sation      ments        Deficit        Total

<S>                              <C>         <C>           <C>           <C>       <C>           <C>             <C>
BALANCE AT JULY 31, 1995........  9,970,031  $3,988,013    $14,201,925   $ (50,387)$      --     $ (9,491,894)   $ 8,647,657

    Employee stock purchase
         plan...................     17,194       6,878        106,537        --          --             --          113,415
    Stock options issued to
        directors and distributors
        (Note 5)................       --          --          292,240        --          --             --          292,240
    Stock options exercised.....    123,800      49,520        858,030        --          --             --          907,550
    Stock retired..............     (47,639)    (19,056)      (857,074)       --          --             --         (876,130)
    Stock grants................     18,000       7,200        206,015    (265,500)       --             --          (52,285)
    Stock offering..............  1,971,258     788,503     25,880,862        --          --             --       26,669,365
    Unearned stock compensation
        amortization............       --          --             --       213,197        --             --          213,197
    Unrealized loss on investments     --          --             --          --      (145,276)          --         (145,276)
    Net loss....................       --          --             --          --          --       (8,172,878)    (8,172,878)

BALANCE AT JULY 31, 1996........ 12,052,644   4,821,058     40,688,535    (102,690)   (145,276)   (17,664,772)    27,596,855

    Employee stock purchase
         plan...................      8,537       3,415        123,616        --          --             --           127,031
    Stock options issued to
        directors (Note 5)......       --          --           52,393        --          --             --            52,393
    Stock options exercised.....     68,109      27,243        276,391        --          --             --           303,634
    Stock retired..............      (7,978)     (3,191)       (22,324)       --          --             --           (25,515)
    .Unearned stock compensation
        amortization............       --          --             --       102,690        --             --           102,690
    Unrealized gain on investments     --          --             --          --       139,440           --           139,440
    Net loss....................       --          --             --          --          --       (8,496,182)     (8,496,182)


BALANCE AT JULY 31, 1997........ 12,121,312   4,848,525     41,118,611        --        (5,836)   (26,160,954)     19,800,346
  
    Employee stock purchase
       plan.....................      7,811       3,124         69,909        --          --             --            73,033
    Stock options issued to
      directors and physicians
       (Note 5).................       --          --           60,455        --          --             --            60,455
    Stock options exercised.....     23,940       9,576         59,797        --          --             --            69,373
    Stock grants................     65,559      26,224        567,485    (919,106)       --             --          (325,397)
    Unearned stock compensation
      amortization..............       --          --             --       430,046        --             --           430,046
    Warrants issued.............       --          --          600,000        --          --             --           600,000
    Unrealized gain on
      investments...............       --          --             --          --         5,836           --             5,836
    Net loss....................       --          --             --          --          --      (11,969,342)    (11,969,342)


BALANCE AT JULY 31, 1998........ 12,218,622  $4,887,449    $42,476,257   $(489,060)$       --    $(38,130,296)    $ 8,744,350

 
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     Basis of Consolidation The consolidated  financial  statements  include the
accounts  of  Possis   Medical,   Inc.  (the   Company)  and  its   wholly-owned
subsidiaries, Possis Holdings, Inc., JEI Liquidation, Inc. (Jet Edge) and Possis
Medical   Europe  B.V.,   after   elimination  of   intercompany   accounts  and
transactions.

     Possis Medical,  Inc. is a developer,  manufacturer and marketer of medical
devices.  The  Company  was  incorporated  in  1956  and  has  operated  several
businesses  over the last 42 years.  In 1990 the Board of  Directors  decided to
focus on  medical  products,  which  led to the sale of the  Technical  Services
Division in 1991 and the Jet Edge industrial waterjet business in 1994. In March
1994 the Company sold its pacemaker lead business  because it  anticipated  that
revenues from this business  would  decline due to a pacemaker  lead  technology
shift.  The name of the Company was changed to Possis Medical,  Inc. in 1993. In
January 1995, the Company  established a 100% owned  subsidiary,  Possis Medical
Europe B.V., in the Netherlands to support  international  product distribution.
In December 1996,  Possis Medical received its first  AngioJet(R)  Rheolytic(TM)
Thrombectomy System U.S. marketing approval.

     The Company's  thrombectomy  and graft products  utilize new technology and
the production processes,  and production equipment used to manufacture them are
unique and have been designed and constructed by Company employees. In addition,
the medical  device  industry is subject to the laws and oversight of the United
States  Food and Drug  Administration  ("FDA")  as well as  non-U.S.  regulatory
bodies in countries where the Company does business.

     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 reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

     Inventories  Inventories  are stated at the lower of cost (on the first-in,
first-out basis) or market.

     Property,  Depreciation,  and Amortization  Property is carried at cost and
depreciated  using the  straight-line  method over the estimated useful lives of
the assets at the following annual rates:

        Leasehold improvements................................    10%
        Machinery and equipment...............................    10-33%

     Deferred Debt Issue Costs Deferred debt issue costs are being  amortized on
a  straight-line  basis over six years,  based on the term of the 5% convertible
subordinated debentures due 2004. Accumulated  amortization at July 31, 1998 was
$7,671.

     Original  Issue Discount  Original  issue discount is being  amortized on a
straight-line  basis  over six  years,  based on the term of the 5%  convertible
subordinated debentures due 2004.

<PAGE>
 
     The  original  amount  of  $600,000  was  the  value  associated  with  the
detachable   stock  warrants   issued  in  conjunction   with  the   convertible
subordinated debentures. Accumulated amortization at July 31, 1998 was $5,161.

     Goodwill  Goodwill is being amortized on a straight-line  basis over 13-1/2
years,   based  on  the  remaining   life  of  patent  rights   related  to  the
Perma-Flow(TM) Graft acquired in 1988. Accumulated amortization at July 31, 1998
and 1997 was $717,500 and $645,500, respectively.

     Income  Taxes The Company  accounts  for income  taxes under  Statement  of
Financial  Accounting Standard ("SFAS") No. 109,  "Accounting for Income Taxes."
Certain  items are  accounted  for tax  purposes in a different  period than for
financial statement purposes.

     Revenue  Recognition  Revenue  associated  with medical  products  sales is
recognized  when  products  are  shipped.   Revenue  under  product  supply  and
distribution  agreements is recognized  when the required  milestones  have been
achieved.

     Fair Value of Financial  Instruments  Marketable  securities are carried at
fair  value.  The  carrying  value of all other  financial  instruments,  except
long-term  debt,  approximates  fair value due to the  short-term  nature of the
instrument.  The carrying value of long-term debt approximates fair value due to
the fixed interest rates being consistent with current market rates of interest.

     Earnings  (Loss) Per Share The Company has adopted SFAS No. 128, "Earnings
per Share,"  effective  December 31, 1997.  SFAS No. 128 requires the Company to
report  both  basic  and  diluted  earnings  per  share  (EPS).  The  change  in
methodology  of the  basic and  diluted  EPS  calculations  had no effect on the
Company's EPS as previously reported.  Loss per share for 1998, 1997 and 1996 is
computed  by  dividing  the net loss by the  weighted  average  number of common
shares outstanding.  Warrants,  options, and convertible debentures representing
2,511,762, 1,359,344 and 1,046,187 shares of common stock at July 31, 1998, 1997
and 1996,  respectively,  have been excluded from the  computations  because the
effect is antidilutive.

     Cash  Equivalents  The Company  considers  highly liquid  investments  with
original maturities of three months or less to be cash equivalents.
 
     Marketable  Securities  All  Company  securities  as of July  31,  1997 are
classified  as  available-for-sale  and consisted  primarily of U.S.  government
securities.  These  investments are reported at fair value with a net unrealized
loss of $5,836 included in shareholders' equity as of July 31, 1997. During 1998
and  1997,   the  Company   sold   available-for-sale   securities   aggregating
approximately  $5,992,000 and $1,012,000,  realizing a gain of $8,101 and $7,109
in 1998 and 1997, respectively.

<PAGE>

     Impairment  of  Long-Lived  Assets  SFAS  No.  121,   "Accounting  for  the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of,"
requires that  long-lived  assets be reviewed for impairment  whenever events or
changes in circumstances indicate that the carrying value of an asset may not be
recoverable.  An impairment loss is recognized,  based on the difference between
the carrying value and the discounted cash flows of an asset, when the estimated
future  undiscounted  cash flows from the asset are less than the carrying value
of the  asset.  The  adoption  of SFAS No.  121 had no  material  effect  on the
consolidated financial statements.

     Segment  Reporting In June 1997, the Financial  Accounting  Standards Board
issued SFAS No. 131,  "Disclosures  about  Segments of an Enterprise and Related
Information,"  which is required  to be adopted  for the fiscal  year  beginning
August 1, 1998. At that time,  the Company will be required to disclose  certain
financial and descriptive  information about its operating segments as redefined
by SFAS No. 131. The Company is in the process of  assessing  the impact of SFAS
No. 131 on its footnote disclosures.

2.   DISCONTINUED OPERATIONS
     Technical  Services  Division On September  29, 1991,  the Company sold its
Technical Services division to Advance Technical Services,  Inc. ("ATS"),  which
is 51% owned by a former  officer of the  Company.  Under the terms of the sale,
the Company received  approximately  $550,000 in cash and a note of $250,000 for
the net assets of the business and realized a gain of $66,517. In addition,  the
Company  received a percentage of ATS's annual revenues in excess of a specified
amount  through  September  1996. As part of the sale, the Company also received
$200,000 in cash and a note of $500,000  for an  agreement  not to compete for a
five-year period;  income from the now complete agreement was recognized ratably
over the period of the agreement.

     During 1996, ATS prepaid the notes  receivable and the estimated  remaining
royalty  payments  in  connection  with the sale of ATS. At July 31,  1997,  all
amounts related to the Company's sale of ATS were paid in full.
 
     Income from  Discontinued  Operations  Operating  results of the  Technical
Services division were as follows for the years ended July 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                   1997           1996      

     <S>                                         <C>          <C>
     Sales  ...............................      $   --       $   --    
     Income from operations................      $   --       $     225
     Amortization of not-to-compete
        agreement..........................        41,768       154,647
     Percentage of ATS's revenues..........        69,771       250,544   
     Income from discontinued operations ..      $111,539      $405,416  

</TABLE>

<PAGE>

<TABLE>

<S>                                                                                            <C>               <C>
3.   LONG-TERM DEBT
     Long-term debt at July 31, 1998 and 1997 is as follows:                                       1998            1997    
     Unsecured convertible subordinated registered debentures due July 2004,
        face value of $12,000,000, net of unamortized original issue discount
        of $594,839 as of July 31, 1998, interest at 5% due the earlier of July
        2004 or conversion..............................................................       $11,405,161       $   --
     Notes payable, interest at 9.75%-10.15%, .principal and interest
        payable monthly, final payments due between November 1998 and
        December 1998, collateralized by the Company's equipment........................             4,513         25,269
     Noninterest bearing note payable, principal payable in 10 equal
        quarterly payments beginning January 1997, final payment due
        April 1999, unsecured...........................................................             5,700         13,300
     Note payable, interest at 4.5%, interest and principal due June
        1999 and June 2001, collateralized by the Company's equipment...................           175,000           --   
                                                                                                 11,590,374         38,569
       Less current maturities..........................................................           (97,713)       (28,356)
                                                                                               $11,492,661        $10,213

</TABLE>

     In July 1998,  the Company  received  $12,000,000  from the  issuance of 5%
convertible  subordinated  debentures  due 2004 and 110,640  warrants  valued at
$600,000.  The debentures are convertible  into common stock at a price equal to
$14.79 for a period of six  months;  thereafter,  the  conversion  price and the
maximum  number  of shares  available  for  conversion  will be  calculated  per
predetermined  formulas based on the market price of Company's common stock over
a specified  period of time.  The warrants are  exercisable  for common stock at
$15.58 per share.

4.   INCOME TAXES
     At July 31,  1998,  the Company has net  operating  loss  carryforwards  of
approximately  $34,167,000 for federal tax purposes which expire in 2003 through
2013 and  $11,053,000  for Minnesota  tax purposes  which expire in 2003 through
2013. In addition, at July 31, 1998 the Company has approximately $1,909,000 and
$455,000 in federal and state tax credits,  respectively,  substantially  all of
which are research and development  tax credits,  which expire from 2000 through
2013, and a $65,182 AMT credit which does not expire.

<PAGE>

     Deferred  tax  assets  and  liabilities  as of July  31,  1998 and 1997 are
described in the table below.  The Company has not recorded any net deferred tax
assets due to the uncertainty of realizing such assets:
                                                
<TABLE>                                                              
       
  
                                                    1998           1997
<S>                                            <C>            <C>
 Current assets (liabilities):
 Allowance for doubtful accounts.............  $    24,000    $    28,000
 Inventory...................................      150,000        284,000
 Accrued vacation............................       44,000         34,000
 Other  .....................................      150,000         57,000
                                                   368,000        403,000
 Valuation allowance.........................     (368,000)      (403,000)
 Net    .....................................  $      --      $      --    

 Long-term assets:
 Net operating losses........................  $12,700,000    $ 8,551,000
 Amortization of patents.....................      239,000        187,000
 Tax credits.................................    1,975,000      1,687,000
 Depreciation................................     (192,000)      (133,000)
                                                14,722,000     10,292,000
 Valuation allowance.........................  (14,722,000)   (10,292,000)
 Net    .....................................  $      --      $      --           

</TABLE>

     The effective income tax rate differed from the U.S. federal statutory rate
for each of the three years ended July 31, 1998, 1997 and 1996 as follows:

<TABLE>
                                              1998         1997        1996
<S>                                     <C>           <C>          <C>       
Tax benefit on loss from
  continuing operations computed at
  statutory rate of 34%...............  $(4,069,000)  $(2,889,000) $(2,778,000)
Decrease in tax benefit due to 
  nonrecognizable benefits of net 
  operating loss carryforwards 
  and others..........................    4,069,000     2,889,000     2,778,000
Total income tax expense
  continuing operations...............  $      --     $      --    $       --    

</TABLE>

5.    COMMON STOCK
     Stock Options Certain officers, directors, key employees, and certain other
individuals  may purchase  common stock of the Company under stock option plans.
In 1992,  the Company  established  the 1992 Stock  Compensation  Plan (the 1992
Plan), which replaced the 1983 and 1985 plans.  Although the 1983 and 1985 plans
remain in effect for options  outstanding,  no new options may be granted  under
these plans.
 
     The 1992 Plan  authorizes  awards of the  following  types of  equity-based
compensation:   Incentive  Stock  Options,  Nonqualified  Stock  Options,  Stock
Appreciation  Rights,  Restricted Stock,  Deferred Stock, Annual Grants of Stock
Options to  Directors,  Stock Options to Directors in Lieu of  Compensation  for
Services rendered as Directors,  and Other Stock-Based Awards valued in whole or
in part by reference to stock of the Company.  No Incentive Stock Options may be
granted on or after August 1, 2002,  nor shall such options  remain valid beyond
ten years following the date of grant.

<PAGE>

     The total number of shares of stock reserved and available for distribution
under the 1992 Plan originally was 600,000 shares, a maximum of 350,000 of which
may be issued as Incentive  Stock Options.  The total number of shares  reserved
and available for distribution  under the plan was increased annually on January
2, 1993,  1994 and 1995, by 1% of the number of shares of the  Company's  common
stock  outstanding  at July 31 of the prior  fiscal  year.  In 1995 the  Company
amended  the 1992 Stock  Compensation  Plan by  increasing  the number of common
shares  issuable  under the plan each year from 1% to 2% of the total  number of
shares outstanding at July 31 of the prior fiscal year. In addition,  the number
of  common  shares  issuable  as  Incentive  Stock  Options  under  the plan was
increased to 1,000,000. In 1997, the Company amended the 1992 Stock Compensation
Plan by increasing  the number of shares  issuable under the Plan each year from
2% to 3% of the  total  number  of  shares  outstanding  at July 31 of the prior
fiscal  year.  At July 31,  1998,  there  were  1,443,571  shares  reserved  for
outstanding  options and 278,956 shares  available for granting of options under
the 1992 Plan.

     In 1983, the Company  established an Incentive Stock Option Plan. A maximum
of 545,000 shares were authorized  under the plan at an option price of at least
100% of the fair market value at date of grant.  The options become  exercisable
at date of grant,  except for those options granted after March 17, 1985,  which
vest ratably over a three or four year period. All options expire ten years from
date of grant.

     In 1985,  the Company  established a  Nonqualified  Stock Option Plan under
which a maximum of 200,000 shares were authorized to be granted at a price of at
least 100% of the fair market  value at date of grant.  The options vest ratably
over a three or four year period and expire not more than ten years from date of
grant.

     In fiscal 1998, 1997 and 1996, the Company  granted 8,874,  5,207 and 4,760
compensatory  options,  respectively,  to its outside  directors in lieu of cash
payments for directors fees. These options were granted under the 1992 Plan.

     A summary of changes in  outstanding  options  for each of the three  years
ended July 31, 1998 follows:

<TABLE>
                                             1998          1997           1996
<S>                                  <C>          <C>            <C>    
Shares under option at
  beginning of year..................    1,212,944       899,787        728,102
Options granted - 1992 plan..........      302,674       460,557        254,660
Options granted - Non plan...........         --            --           55,000
Options exercised....................      (23,940)      (68,109)      (123,800)
Options canceled.....................      (48,107)      (79,291)       (14,175)
Shares under option at end of year...    1,443,571     1,212,944        899,787
Shares exercisable at end of year....      691,209       581,238        348,204
Exercise price of options granted....  $5.50-16.69  $10.62-20.45    $8.75-17.50
Exercise price of options exercised..   $1.00-5.75  $1.00-14.625   $2.75-14.625
Market price of options exercised.... $13.13-19.25 $16.75-19.625   $13.75-21.25
Aggregate market value of options
  exercised..........................     $424,396    $1,241,296     $2,245,906

</TABLE>

<PAGE>

     Stock option  weighted  average  exercise  prices  during 1998 and 1997 are
summarized below:

<TABLE>
                                              1998           1997    
<S>                                          <C>            <C>      
Outstanding at beginning of year.......      $11.63         $ 9.15
Granted................................       13.55          15.81
Exercised..............................        4.20           4.46    
Canceled...............................       13.79          12.40  
Outstanding at end of year.............        2.10          11.63

</TABLE>
 
     The following table summarizes  information  concerning options outstanding
and exercisable options as of July 31, 1998:

<TABLE>
<CAPTION> 

      
         <S>
                                              Weighted
                                                Average
         Range of                             Remaining             Weighted-                               Weighted
         Exercise           Shares         Contractual Life          Average               Shares            Average
            Price        Outstanding            in Years         Exercise Price          Exercisable      Exercise Price
         <C>                  <C>                <C>                 <C>                   <C>              <C>
         $1 - $6              231,801            3.75                $  4.50               222,603          $  4.64
         $6 - $12             318,117            5.5                    9.00               261,967             8.59
         $12 - $17            678,803            8.2                   14.21               143,926            14.29
         $17 - $21            214,850            8.2                   18.22                62,713            18.21

</TABLE>

     In 1993, the Company granted 37,000 shares of restricted stock to employees
under the terms of the 1992 Plan,  which vested 7,400 shares each on December 2,
1993 and on June 3,  1994,  1995,  1996 and  1997.  Approximately  $128,000  was
accrued to pay the  estimated  withholding  taxes on those shares as  management
believes  that the  employees  would  elect to receive  fewer  shares in lieu of
paying the withholding taxes. In case of termination of the employees,  with the
exception  of those  shares  vesting  December  2, 1993,  unvested  shares  were
forfeited.  Unearned  compensation of $342,250 was recorded at the date of grant
and was recognized over the vesting period.  In 1996, the Company granted 18,000
shares of restricted  stock to employees  which vested 9,000 shares each on June
3, 1996 and 1997, under terms similar to the 1993 grants. Approximately $112,000
was accrued to pay the estimated withholding taxes on those shares as management
believed  that the  employees  would  elect to receive  fewer  shares in lieu of
paying the withholding taxes.  Unearned compensation of $265,500 was recorded at
the date of grant and was recognized over the vesting period.

     In fiscal 1998, the Company  granted  65,559 shares of restricted  stock to
employees under the terms of the 1992 Plan, which vested 21,853 shares each year
in fiscal years 1999, 2000 and 2001.  Approximately  $325,000 was accrued to pay
the estimated  withholding taxes on those shares as management believes that the
employees  will elect to receive fewer shares in lieu of paying the  withholding
taxes.  In case of termination of the employees,  unvested shares are forfeited.
Unearned compensation of $919,106 was recorded at the date of grant and is being
recognized over the vesting period.

     In fiscal  1998,  1997 and 1996,  total  compensation  expense of $430,046,
$102,690 and $213,197,  respectively,  was recognized on these  restricted stock
grants.

<PAGE>

     During 1996, the Company issued options to purchase 55,000 shares of common
stock to  various  distributors  of the  Company's  products.  The  options  are
exercisable  at $12.56 - $14.39 per share and expire in 2001.  Selling,  general
and administrative  expense of approximately $251,000 was recorded in connection
with these transactions.

     Effective August 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based  Compensation." As permitted by SFAS 123, the Company has elected to
continue following the guidance of APB No. 25 for measurement and recognition of
stock-based   transactions  with  employees.   No  compensation  cost  has  been
recognized  for stock  options  issued  under the 1992 Plan because the exercise
price for all options granted was at least equal to the fair value of the common
stock  at the  date of  grant  except  as  noted  previously  in this  note.  If
compensation cost for the Company's stock option and employee purchase plans had
been  determined  based on the fair value at the grant  dates for grants  during
1998,  1997 and 1996,  consistent  with the method provided in SFAS No. 123, the
Company's net loss and loss per share would have been as follows:

<TABLE>
<CAPTION>
  
                                           1998          1997          1996 
<S>                                   <C>            <C>           <C>     
  Net Loss:
      As reported.................... $(11,969,342)  $(8,496,182)  $(8,172,878)
      Pro forma......................  (14,122,375)   (9,752,401)   (8,617,407)
  Loss per Share-basic and diluted:
      As reported.................... $       (.98)  $      (.70)  $      (.70)
      Pro forma......................        (1.16)         (.81)         (.74)

</TABLE>

     The fair value of options  granted  under the various  option  plans during
1998  and 1997  was  estimated  on the  date of  grant  using  the  Black-Sholes
option-pricing  model  with  the  following  weighted  average  assumptions  and
results:

<TABLE>
                                                         1998            1997     
<C>                                                 <S>             <S>
   Dividend yield...............................           None            None
   Expected volatility..........................            47%             40%
   Risk-free interest rate......................           6.5%            6.5%
   Expected life of option......................        120 mo.         120 mo.
   Fair value of options on grant date..........     $2,795,547      $4,353,803

</TABLE>

     Stock  Warrants  Stock   purchase   warrants  held  by  unrelated   parties
representing  the right to purchase 26,400 shares of the Company's  common stock
at $8.52 a share were outstanding

     as of July 31, 1998. These warrants do not have an expiration date and must
be exercised if the market value of the Company's  common stock  exceeds  $22.73
per share for any sixty consecutive calendar days.

     On September 15, 1994,  warrants to purchase 120,000 shares of common stock
at $6.90 per share were issued to John G. Kinnard & Company in conjunction  with
the Company's  September  1994 public stock  offering.  As of July 31, 1997, all
such warrants were outstanding.

     In July  1998,  the  Company  issued to  various  investors  110,640  stock
purchase  warrants  in  conjunction  with  a  July  1998  private  placement  of
convertible  debentures (See Note 3). These warrants expire on July 15, 2002 and
are exercisable into common stock at $15.58 per share.

     Employee Stock  Purchase Plan The Employee  Stock Purchase Plan,  effective
January 1, 1991,  enables  eligible  employees,  through payroll  deduction,  to
purchase  the  Company's  common  stock at the end of each  calendar  year.  The
purchase  price is the lower of 85% of the fair market value of the stock on the
first or last day of the calendar year. The Company issued 7,811 shares in 1998,
8,537 shares in 1997 and 17,194 shares in 1996 under this plan.

<PAGE>

6.  401 K PLAN
     The  Company has an  employees'  savings  and profit  sharing  plan for all
qualified   employees  who  have  completed  six  months  of  service.   Company
contributions  are made at the  discretion of the Board of Directors  subject to
the maximum amount allowed under the Internal  Revenue Code.  Contributions  for
the years ended July 31, 1998, 1997 and 1996 were $154,863, $97,765 and $90,114,
respectively.

7.   COMMITMENTS AND CONTINGENCIES
     The  Company's  medical  products  operation  is  conducted  from a  leased
facility under an operating  lease which expires in 2006.  Rental payments under
the lease are  guaranteed by a letter of credit in the amount of $20,000 at July
31, 1998.  Rental  expense  charged to  operations  was $241,674 in fiscal 1998,
$237,742 in fiscal 1997,  and $329,340 in fiscal 1996. The future annual rentals
on this operating  lease are  approximately  $242,000 per year through 2006. The
lease is  noncancelable  before April 2001,  after which it can be canceled with
notice and payment of a termination fee.

     The Company is a defendant in various lawsuits  relating to business,  some
of which involve claims for unspecified  amounts.  Although the ultimate outcome
of these matters cannot be predicted with  certainty,  management  believes that
the outcome will not have a material adverse effect on the financial  statements
of the Company.

8.   SALES TO MAJOR CUSTOMERS
     The  Company's  continuing  operations  are in  one  segment,  the  design,
manufacture and  distribution of  cardiovascular  and vascular  medical devices.
Approximately  5% of 1998, 29% of 1997, and 80% of 1996's medical  product sales
were to foreign customers.  In 1998 and 1997 there were no individual  customers
with sales exceeding 10%. In 1996, sales to four customers amounted to 21%, 17%,
14% and 12% of medical products revenues,  and the receivables  related to these
customers were 21%, 2%, 0%, and 6% of total receivables, respectively.

9. PRODUCT SUPPLY AND DISTRIBUTION AGREEMENTS
     On  December  30,  1994,  the  Company  executed a Supply and  Distribution
Agreement with Bard Vascular Systems Division,  C.R. Bard, Inc.  ("Bard").  This
Agreement granted to Bard exclusive  worldwide sales and marketing rights to the
Possis Perma-Seal  Dialysis Access graft for an initial 10-year term,  renewable
for the life of applicable patents. Under this Agreement, through July 31, 1996,
the Company had received $1,000,000. In January 1997, the Company terminated the
Agreement with Bard. Upon termination,  the Company received  $1,750,000 in cash
and approximately $49,000 in returned unused product.

     On March 15, 1996 the Company  entered into a  Distribution  Agreement with
Baxter  Healthcare  Corporation   ("Baxter").   This  Agreement  granted  Baxter
exclusive worldwide distribution rights to the Possis Perma-Flow Coronary Bypass
Graft for a three-year  term.  Under this Agreement,  through July 31, 1997, the
Company  received  $400,000  and was  scheduled  to receive up to an  additional
$200,000,  on the second anniversary date of agreement  signing,  as long as the
agreement was still in effect.  In April 1998, this  Distribution  Agreement was
modified with Baxter retaining non-exclusive  distribution rights outside of the
United  States  but has no  distribution  rights in the  United  States  for the
remaining  term  of  the  Distribution   Agreement.   In  conjunction  with  the
modification, the Company waived the $200,000 second anniversary payment.

<PAGE>

     Item 9. Changes in and  disagreements  with  Accountants  on Accounting and
Financial Disclosure:

     During fiscal 1997 and 1998, there were no changes in or disagreements with
the Company's  independent certified public accountants on accounting procedures
or accounting and financial disclosures.

<PAGE>

                                    PART III


Item 10.  Directors and Executive Officers of the Registrant:

     Information  under the heading "Election of Directors" and"Compliance with
Section 16(a) of the Exchange Act" in the Proxy Statement is incorporated herein
by reference. The information regarding executive officers is included in Part I
of this report under the caption "Executive Officers of the Registrant."


Item 11.  Executive Compensation:

     Information regarding compensation of directors and officers for the fiscal
year ended July 31, 1998 is in the Proxy Statement and is incorporated herein by
reference.


Item 12.  Security Ownership of Certain Beneficial Owners and Management:

     The security  ownership of certain  beneficial  owners and management is in
the Proxy Statement and is incorporated herein by reference.


Item 13.  Certain Relationships and Related Transactions:

     Information  regarding related party  transactions is contained in "Certain
Relationships   and  Related   Transactions"  in  the  Proxy  Statement  and  is
incorporated herein by reference.

<PAGE>

                                     PART IV


Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K:

(a)   1. Financial Statements
 
     The  following  financial  statements  of the  Company,  accompanied  by an
Independent Auditors' Report, are contained in Part II, Item 8:

     Consolidated Balance Sheets, July 31, 1998 and 1997

     Consolidated  Statements of  Operations  for each of the three years in the
period ended July 31, 1998

     Consolidated  Statements  of Cash Flows for each of the three  years in the
period ended July 31, 1998.

     Consolidated  Statements of Changes in Shareholders' Equity for each of the
three years in the period ended July 31, 1998.

     Notes to Consolidated Financial Statements

      2. Schedules
 
The following financial statement schedules are submitted herewith:

         Consent of independent certified public accountants.

         SCHEDULE II - Valuation Accounts

     Other  schedules  are  omitted  because  they are not  required  or are not
applicableor  because the  required  information  is  included in the  financial
statements listed above.

      3. Exhibits

     Certain of the following  exhibits are incorporated by reference from prior
filings.  The form with which each  exhibit was filed and the date of filing are
indicated on the following three pages.

<PAGE>


 Exhibit    Form      Date Filed                  Description 
                    

  3.1       10-K    Fiscal year ended  Articles of incorporation as amended
                    July 31, 1994      and restated to date

  3.2       S-2     Amendment No.1     Bylaws as amended and restated
                    August 9, 1994     to date

  4.1       8-A     December 13, 1996  Rights agreement, dated December 12,
                                       1996, between the Company and
                                       Norwest Bank Minnesota N.A., as
                                       rights agent

  4.2       S-2     Amendment No. 1    Form of Warrant to John G. Kinnard
                    August 9, 1994     and Company, Incorporated, included in
                                       underwriting agreement entered into
                                       between the Company and John G. 
                                       Kinnard and Company

  4.3      8-K     July 24, 1998       Convertible Debenture Purchase
                                       Agreement dated July 14, 1998

  4.4      8-K     July 24, 1998       Form of Series A 5% Convertible
                                       Debenture due July 15, 2004,
                                       dated July 14, 1998

  4.5      8-K     July 24, 1998       Registration Rights Agreement
                                       between the Company and
                                       purchasers of the Convertible Debt
                                       dated July 14, 1998

  4.6      8-K     July 24, 1998       Form of Redeemable Warrant to
                                       purchasers of the Convertible
                                       Debt dated July 15, 1998

  4.7      10-K    November 23, 1966   Debenture Agreement with St. Paul
                                       Fire and Marine Company and
                                       Western Life Insurance Company
                                       and form of debenture rates and
                                       warrants
 
  10.1     8-K     December 6, 1996    Settlement agreement and mutual
                                       release relating to the termination
                                       of the Perma-Seal supply and
                                       distribution agreement with C.R.Bard,Inc.

<PAGE>

 Exhibit    Form      Date Filed                  Description

  10.2      S-2     Amendment No.1     License agreement with Imperial
                    August 9, 1994     Chemical Industries Plc., dated
                                       April 15, 1991

  10.3      S-2     Amendment No.1     License agreement with the
                    August 9, 1994     University of Liverpool, dated
                                       May 10, 1990

  10.4      S-1     June 30, 1988      Form of indemnification agreement
                                       with officers and directors of
                                       Registrant

* 10.5      S-8     February 7, 1990   1983 Incentive Stock Option Plan as
                                       amended to date

* 10.6      S-1     June 30, 1988      1985 Nonqualified Stock Option
                                       Plan as amended to date

* 10.7      10-K    Fiscal year ended  Form of incentive stock option
                    July 31, 1989      agreement for officers

* 10.8      10-K    Fiscal year ended  Form of stock option agreement for
                    July 31, 1989      directors

* 10.9      S-8     June 16, 1998      1992 Stock Compensation Plan

* 10.10     10-K    Fiscal year ended  Form of restricted stock agreement
                    July 31, 1993      for officers (1992 Plan)

* 10.11     10-K    Fiscal year ended  Form of nonqualified stock option
                    July 31, 1993      agreement for officers (1992 Plan)

* 10.12     10-K    Fiscal year ended  Form of incentive stock option
                    July 31, 1993      agreement for officers (1992 Plan)

* 10.13     10-K    Fiscal year ended  Form of nonqualified stock option
                    July 31, 1993      agreement for 1992 directors' fees
                                       (1992 Plan)

* 10.14     10-K    Fiscal year ended  Form of nonqualified stock option
                    July 31, 1993      agreement for 1990 directors' fees

* 10.15     10-K    Fiscal year ended  Form of nonqualified stock option
                    July 31, 1993      agreement for 1989 directors' fees
<PAGE>

 Exhibit    Form      Date Filed                  Description
                               
                    

  10.16     10-Q    Quarter ended      Supply & distribution agreement
                    January 31, 1995   with Bard Vascular Systems
                                       Division, C.R.Bard, Inc.
 
  10.17     10-Q    Quarter ended      Lease agreement for corporate
                    January 31, 1996   headquarters and manufacturing
                                       facility dated December 15, 1995.

  10.18     8-K     March 28, 1996     Supply and distribution agreement
                                       with Edwards CVS Division, Baxter 
                                       Healthcare Corporation

  10.19     10-K    Fiscal Year ended  Addendum to Distributor Agreement
                    July 31, 1998      with Edwards CVS Division, Baxter
                                       Healthcare Corporation dated
                                       May 1, 1998

  21        10-K    Fiscal year ended  Subsidiaries of registrant
                    July 31, 1995

  23                                   Consent of independent certified
                                       public accountants

  27                                   Financial data schedule

  99        10-Q    Quarter ended      Investment risk factors
                    April 30, 1998

*    Indicates management contract or compensatory plan or arrangement.

(b)   Reports on Form 8-K


     During the quarter ended July 31, 1998,  the Company filed a report on Form
8-K dated July 14, 1998 reporting under Item 5 that the Company had entered into
the Convertible Debenture Purchase Agreement.

<PAGE>

SIGNATURES

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

POSSIS MEDICAL, INC.


by: /s/ Russel E. Carlson                       
         Russel E. Carlson
         Vice President of Finance
         Chief Financial and Accounting Officer

Dated:  October 16, 1998

     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                        Date      


/s/ Donald C. Wegmiller       Chairman of the Board            October 16, 1998
Donald C. Wegmiller


/s/ Robert G. Dutcher         Director, President and          October 16, 1998
Robert G. Dutcher             Chief Executive Officer


/s/ Dean Belbas               Director                         October 16, 1998
Dean Belbas


/s/ Seymour J. Mansfield      Director                         October 16, 1998
Seymour J. Mansfield


/s/ Whitney A. McFarlin       Director                         October 16, 1998
Whitney A. McFarlin

<PAGE>
                                                                    SCHEDULE II
                              POSSIS MEDICAL, INC.

VALUATION ACCOUNTS
YEARS ENDED JULY 31, 1998, 1997 AND 1996
_____________________________________________________________________________
<TABLE>
<CAPTION>

          Column A                      Column B           Column C         Column D          Column E                 

                                                           Additions
                                        Balance at         Charged to
                                        Beginning          Costs and        Deductions        Balance at
                 Description             of Year            Expenses        Write-offs        End of Year
<S>                                    <C>                 <C>              <C>                <C>

Allowance for doubtful accounts
and returns - deducted from trade
receivables in the balance sheet:

Year ended July 31, 1998               $    80,000         $  140,000       $ 70,000           $   150,000
Year ended July 31, 1997                    60,000             96,530         76,530                80,000
Year ended July 31, 1996                    27,019             50,000         17,019                60,000

Valuation allowance on
deferred tax asset:

Year ended July 31, 1998               $10,695,000         $4,395,000       $   --             $15,090,000
Year ended July 31, 1997                 7,657,000          3,038,000           --              10,695,000
Year ended July 31, 1996                 4,898,000          2,759,000           --               7,657,000

Reserve for inventory
obsolescence:

Year ended July 31, 1998               $    99,573         $   87,526       $106,151          $     80,948
Year ended July 31, 1997                   150,000             86,000        136,427                99,573
Year ended July 31, 1996                   125,000             38,795         13,795               150,000

</TABLE>

<PAGE>

                              POSSIS MEDICAL, INC.
                             FORM 10-K - ITEM 14(a)3

                                  EXHIBIT INDEX
Exhibit
Number                             Description    


  23             Consent of independent certified public accountants
 
  27             Financial data schedule

<PAGE>

                                                                     EXHIBIT 23





CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Possis Medical, Inc.:

     We consent to the  incorporation by reference in  Post-Effective  Amendment
No.  1 to  Registration  Statement  No.  33-5467  on  Form  S-8,  Post-Effective
Amendment No. 1 to Registration Statement No. 33-33416 on Form S-8, Registration
Statement No. 33-39987 on Form S-8, Registration  Statement No. 33-56728 on Form
S-8, and Registration  Statement No. 333-57289 on Form S-8 of our report,  dated
August 28, 1998, appearing in this Annual Report on Form 10-K of Possis Medical,
Inc. for the year ended July
31, 1998.



Deloitte & Touche LLP
Minneapolis, Minnesota
October 15, 1998

<PAGE>

                                  Exhibit 10.19
             ADDENDUM TO DISTRIBUTOR AGREEMENT DATED MARCH 15, 1996
                        BETWEEN POSSIS MEDICAL, INC. AND
               BAXTER HEALTHCARE CORPORATION, EDWARDS CVS DIVISION

     This Addendum is made  effective this first day of May 1998, by and between
Possis  Medical,   Inc.,  with  offices  located  at  9055  Evergreen  Boulevard
Northwest,   Minneapolis,   Minnesota  55433  ("PMI");   and  Baxter  Healthcare
Corporation,  Edwards  CVS  Division,  with  offices  located  at 17221 Red Hill
Avenue, Irvine, California 92614 (the "Distributor" or "Baxter").

WITNESSETH

     WHEREAS, the above-named parties have performed certain activities pursuant
to a Distributor  Agreement dated March 15, 1996 (the "Distributor  Agreement"),
and

     WHEREAS,  the parties  desire to revise said  Agreement in accordance  with
their mutual  agreement as to activities and rights that are to be applicable in
the future; and

     WHEREAS,  said revisions are incorporated  into this Addendum to Agreement,
which shall govern the  relationship  of the parties  until March 15, 1999,  the
original expiration date of the Distributor Agreement.

     NOW,  THEREFORE,  in  consideration  of the premises and performance of the
covenants herein contained, it is agreed that:

     1. This instrument, together with the Distributor Agreement dated March 15,
1996,  contains  the entire  agreement  of the  parties  relating to the subject
matter  hereof and may not be changed,  modified  or amended,  except by writing
signed by both parties.

     2. The $200,000.00 payment due from Baxter to PMI on the second anniversary
of execution of the Distributor Agreement, pursuant to Section II(A)(iii) of the
Distributor Agreement, is hereby waived by PMI.

     3. The exclusive  distribution rights granted to Baxter pursuant to Section
I(A) of the  Distributor  Agreement  are modified  such that Baxter shall retain
only  non-exclusive  distribution  rights outside of the United States and shall
have no  distribution  rights in the United States for the remaining term of the
Distributor Agreement.

     4.  Section  II(B) of the  Distributor  Agreement  is revised such that PMI
shall not be obligated to refund any previously paid installment payments in the
event that it terminates the Agreement pursuant to Section XII(C).

     5. Section I(E) of the Distributor  Agreement is deleted from the Agreement
in its entirety.

     6. The minimum purchase requirements,  pursuant to Section VI(A)&(B) of the
Distributor Agreement, are hereby waived.

     7. Section XII(H) of the Distributor Agreement is deleted in its entirety.

<PAGE>

     8.  Within  thirty  (30)  days,  or as  soon  thereafter  as is  reasonably
feasible,  Baxter will provide to PMI the  original  artwork and the original of
any other materials it generated in connection with the Product  Brochure,  Case
Study, Advertisement, and Implant Video used to promote the Perma-Flow(R) Graft.
All copies of such  materials  shall be destroyed by Baxter  within  thirty (30)
days of the  termination of the Distributor  Agreement,  except that one copy of
each of such materials shall be retained by Baxter for record keeping  purposes.
With respect to the  Investigators  Meeting  Proceedings  Booklet,  Baxter shall
transfer and assign to PMI the  copyright to such booklet.  Notwithstanding  its
receipt and use of these materials, PMI will not use the Baxter trademark on any
of its sales and marketing  materials and will not otherwise trade on the Baxter
or Edwards CVS Division name in the promotion of its products. In addition,  PMI
will not use such materials in its promotion of the Perma-Flow  Graft outside of
the United  States  until the  Distributor  Agreement  expires  or is  otherwise
terminated.

     9.  Section  XII(E)  of the  Distributor  Agreement  is  deleted  from  the
Agreement in its entirety. Upon any termination of this Agreement,  Baxter shall
immediately  cease using the name,  trademark,  service mark,  logo or any other
reference of or to PMI and shall,  at its expense,  surrender and deliver to PMI
within  thirty (30) days,  all  documents,  papers,  and records  which  contain
confidential  information  of PMI,  except  that one  copy of such  confidential
documents,  papers and records  shall be  retained by Baxter for record  keeping
purposes.

     10. In the event that PMI  appoints a  distributor  in Europe  prior to the
expiration  of  the  term  of the  Distributor  Agreement,  PMI or its  European
distributor will purchase Baxter's  remaining  inventory of Perma-Flow Grafts at
the price Baxter paid to PMI for said Grafts.

     11. Any communications  concerning the modified relationship between Baxter
and PMI made by PMI to Baxter's existing Perma-Flow customers, or made by PMI in
a press  release,  shall be  subject  to review and  approval  by  Baxter,  said
approval not to be unreasonably withheld.

     12. Upon the request of PMI, Baxter will transfer its regulatory submission
for Japan to PMI or another  distributor  appointed by PMI. In the event of such
transfer,  PMI shall pay Baxter  reasonable out of pocket  expenses  incurred by
Baxter in connection with such submission.

     13. Baxter's Perma-Flow Graft inventory,  whether in Baxter's possession in
Canada or held on consignment by clinical sites in Canada,  shall be repurchased
by PMI at the price Baxter paid to PMI for said grafts.

     14. PMI shall not distribute,  directly or through a distributor  appointed
by PMI,  Perma-Flow  Grafts  that bear the Baxter  trademark  and/or logo on its
packaging and/or instructions for use.


POSSIS MEDICAL, INC.               BAXTER HEALTHCARE CORPORATION

By:      /s/                       By:      /s/        
         Robert G. Dutcher                  Anita B. Bessler
Title:   President and CEO         Title:   President, Edwards CVS Division

Date:                              Date:   

<PAGE>