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, 1996

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

                          Commission file number 0-944

                                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

     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  nonaffiliates  of the
registrant as of October 21, 1996 was approximately $189,196,000.

     The number of shares  outstanding  of the  registrant's  common stock as of
October 21, 1996:  12,061,317.

     Certain  responses  in Part III are  incorporated  herein by  reference  to
information  contained in the Company's  definitive Proxy Statement for its 1996
annual meeting to be filed on or before October 31, 1996.
<PAGE>

                              POSSIS MEDICAL, INC.

Forward-Looking Statements

     Report on Form 10-K,  including the  description of the Company's  business
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  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, (which is largely out of the Company's
control),   changes  in  the   Company's   marketing   strategies,   changes  in
manufacturing  methods,  the  Company's  dependence  on patents and  proprietary
technology,  the levels of sales of the Company's  products that can be achieved
and other risks detailed from time to time in the Company's  various  Securities
and Exchange  Commission  filings.  The Company can provide no assurance that it
will achieve significant sales or obtain the necessary FDA approvals in a timely
manner or at all.

                                     PART I

Item 1.  Business:

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 (the "St.  Jude
Royalties").  See Note 6 of Notes to Consolidated Financial Statements contained
in Part II, Item 8. 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 Notes 2 and 12 of Notes to  Consolidated
Financial  Statements  contained  in Part II,  Item 8. 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. In connection
with this  sale,  the  Company  received  $1.1  million in cash and the right to
receive  royalty  payments over a twelve-month  period.  See Note 11 of Notes to
Consolidated  Financial Statements contained in Part II, Item 8. The sale of the
pacemaker  lead  business  has enabled  Possis to focus its human and  financial
resources  exclusively  on its other  products,  which are currently in clinical
trials in the United States and in early stages of  commercialization in Europe,
Japan and Canada.
<PAGE>
Products

     ANGIOJET  THROMBECTOMY  SYSTEM.  The  development of blood clots in various
parts of the  vascular  system is  common  and is one of the  leading  causes of
morbidity  and death.  Blood clots may be caused by various  factors,  including
cardiovascular disease,  trauma,  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 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 several administrations 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  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 vascular trauma.

     Possis believes that its AngioJet  System  represents a new 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  principal  components are a reusable
drive unit, a high-pressure single use pump and a single use small diameter (3.5
to 5F or 1.2 to 1.7 mm)  catheter.  In early  clinical  use  outside  the United
States and in U.S.  clinical  trials,  the AngioJet System has  demonstrated the
ability to remove blood clots within minutes without  surgical  intervention and
without the risk of uncontrolled bleeding.

     The AngioJet System removes blood clots through the non-surgical  insertion
of the catheter over a guidewire into the patient's  blood vessel and then, with
the aid of fluoroscopy,  the catheter is directed to the site of the blood clot.
The drive unit is then  activated  to deliver  pressurized  saline  through tiny
openings in the catheter's  tip. These small waterjets clean the blood clot from
the  vessel  wall,  break it into  small  fragments  and,  in  order to  prevent
formation  of a new blood clot  downstream,  propel 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 from  vessels  much larger
than its catheter diameter.
<PAGE>

     Because the Possis  AngioJet  System is unlike any  existing  procedure  or
device,  market  potential is  difficult  to  quantify,  but may be estimated by
determining the number of thrombectomy  and  thrombolytic  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.

     Based  upon  information  provided  by  medical  practitioners  and its own
analysis,  the Company believes that the AngioJet System may potentially be used
for alternative or supplemental  therapy for the 60,000 thrombectomy  procedures
using lytic drugs, the 380,000 thrombectomy  procedures using mechanical devices
and the 60,000 thrombolysis/revision procedures involving dialysis access grafts
estimated  to be  performed  each year in the United  States.  The Company  also
believes  that the  AngioJet  System  may be used in  Percutaneous  Transluminal
Angioplasty   ("PTA")   procedures  that  involve  the  presence  of  clinically
significant  clot.  The Company also believes that of the five million  patients
with deep vein thrombosis, 10% would be suitable for treatment with the AngioJet
System.  Additionally,  the  Company  believes  that the  approximately  600,000
patients with  pulmonary  embolism  annually in the United States are candidates
for treatment with the AngioJet System. Further, the Company estimates that more
than 550,000  patients  annually are candidates for AngioJet System treatment of
failed or occluded  saphenous vein grafts,  unstable angina and acute myocardial
infarction.  An emerging market for  interventional  therapy is the treatment of
the brain and the Company  believes its  technology  may be suitable for 500,000
neuro procedures annually including stroke victims.

     Although  the Company  has not yet  established  pricing  for the  AngioJet
System,  it  anticipates  that the  price to the  hospital  for the  single  use
catheter and pump set will be between $800 and $1,500 and for the drive unit the
price will be between  $30,000 and  $60,000.  The Company  cannot  estimate  the
ultimate  charge for this  procedure  to the  patient.  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.
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.

     The Company is currently  conducting  clinical  trials in the United States
with the AngioJet System for removing blood clots from  peripheral  arteries and
vascular  grafts and for use in removing blood clots from coronary  arteries and
coronary  bypass  grafts.  Possis  received  FDA  approval to initiate  clinical
testing of its AngioJet  System for use in removing blood clots from  peripheral
arteries and vascular grafts in December 1992. The first patient was enrolled in
the trial in July 1993 and by March 31, 1994,  Phase 1 of the trial,  consisting
of 19 patients undergoing 23 treatments, was complete and the summary report had
been submitted to the FDA. In July 1994, the Company received  approval from the
FDA to commence Phase 2 of the trial, in which patients receive, on a one-to-one
randomized  basis,  treatment with either the AngioJet  System or a Fogarty-type
catheter  already  marketed for blood clot removal.  As of September  1996,  187
patients had been treated in both phases of the trial, of which 108 were treated
with the AngioJet System. The Company expects to receive a response from the FDA
in  December  1996 and is making  plans to  introduce  the  AngioJet  System for
peripheral use to the U.S. market in early 1997.
<PAGE>

     In March 1996,  Possis  received FDA approval to initiate  Phase 2 clinical
testing of its  AngioJet  System for use in removing  blood clots from  coronary
arteries and bypass grafts. As of September 1996, 74 patients have been enrolled
in  Phase 2  comparing  the  performance  of the  AngioJet  System  to the  drug
urokinase.  The Company  believes that the coronary  application of the AngioJet
System will be subject to a PMA approval  process and  anticipates  filing a PMA
application in 1997.

     PERMA-FLOW  GRAFT.  Coronary  artery  bypass  graft  ("CABG")  surgery  is
performed  to treat  impairment  of blood flow to  portions  of the heart.  CABG
surgery  involves  the  addition  of one or more  new  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 no risk of tissue
rejection.  However,  the surgical  harvesting of vessels for autogenous  grafts
involves significant 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.

     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  an
alternative to patients with  insufficient or inadequate  native vessels for use
in bypass  surgery 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 the vein.

     The Perma-Flow Graft is made of ePTFE, a standard grafting  marterial,  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 finally 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.

     The Company  believes that in 1995  approximately  540,000 CABG  procedures
were performed worldwide,  of which approximately  300,000 were performed in the
United  States,  and  that  approximately  20% of  these  CABG  procedures  were
performed on patients who had previously  undergone bypass surgery.  The Company
further believes that the number of repeat  procedures will continue to increase
as a percentage of procedures performed,  as the number of patients who have the
procedure  increases.  Currently,  approximately  70%  of  CABG  procedures  are
performed   utilizing  the  saphenous  vein.  Based  upon  its  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 4% of those receiving CABG procedures,  or
approximately  20,000 annually,  and that approximately 80,000 patients annually
are determined by the treating physician to have native vessels inadequate to be
used in bypass  surgery.  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.
<PAGE>

     Currently,  no  synthetic  coronary  graft  has been  approved  by the FDA.
Cryopreserved  saphenous  veins sell to hospitals  for  approximately  $3,500 to
$4,000 in the United States. 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
sites.  As of September 1996, 32 Phase 1 and 20 Phase 2 study patients have been
enrolled at 10 sites.  Angiographic  results at 30 days  following  surgery have
been reported on 38 patients,  which confirmed 77 of 80 side-to-side anastomoses
to be patent  (providing  blood to the  coronary  arteries).  Within this 30-day
interval,  of the remaining 14 patients,  angiographic results were not reported
for nine and five 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 13 patients,  which  confirmed  that 19 of 25 anastomoses
were patent.  The Company believes this performance is substantially  equivalent
to saphenous  vein. The Company  anticipates  filing a PMA  application for U.S.
marketing authorization in 1998.

     PERMA-SEAL 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.

     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 may
offer 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.
<PAGE>

     Approximately 170,000 patients in the United States undergo kidney dialysis
each year, of which  approximately  140,000 receive  vascular access  procedures
utilizing either natural vessel grafts or synthetic  access grafts.  The Company
estimates  that of these  patients  approximately  40,000 are  implanted  with a
synthetic graft.  The Company  believes that a comparable  market exists outside
the United States as well.

     The 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.  Although final pricing of the
Company's  Perma-Seal Graft will depend upon manufacturing  costs,  distribution
methods, and competitive pressures, the Company anticipates that pricing for the
Perma-Seal Graft will be at a premium relative to standard ePTFE graft products.

     In July 1992,  Possis received FDA approval to initiate clinical testing of
its  Perma-Seal  Graft.  The study is  randomized  on a  one-to-one  basis  with
patients  receiving either a Perma-Seal Graft or a conventional  ePTFE graft. As
of September  1996, 205 patients at five clinical sites had been enrolled in the
study, 104 of which had received the Perma-Seal  Graft.  Clinical data indicates
that Perma-Seal  Graft patients who have been accessed for dialysis have reduced
compression  times to stop bleeding after removing the dialysis  needles and the
graft can be used for dialysis the same day it is implanted. The Company filed a
510(k)  application for marketing  authorization with the FDA in August 1994. In
May 1995, the Company received a request for additional information from the FDA
and the Company  responded to the request on August 31, 1995. In November  1995,
the FDA responded to the 510(k) with additional  questions and in February 1996,
the FDA told the  Company it wanted to see data on 124 study  patients  followed
for 12 months.  The Company expects to resubmit the 510(k)  application in early
calendar 1997.


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 venous and neuro applications,
and on utilizing its  Perma-Flow  Graft and  Perma-Seal  Graft  technologies  to
develop other graft products,  including  endovascular stent grafts. The Company
also believes its AngioJet technology has application beyond  thrombectomy,  for
minimally  invasive  tissue  removal.  Research  and  development  expenses  are
generally   incurred  for  product  design,   development   and   qualification,
manufacturing process development and validation, the conduct of clinical trials
and governmental  approvals.  The Company's research and development  expense is
expected to increase as the Company  continues  its clinical  trials and current
product development plans.

     As of September 30, 1996, the Company  employed  approximately 35 full-time
employees  in research  and  development,  including  24 in new product  concept
screening, protoype building, product and process development and validation and
11 in quality  systems,  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 $3.2 million, $3.3 million and $3.7
million in fiscal 1996, 1995 and 1994, respectively, on medical product research
and development.
<PAGE>

Marketing and Sales

     The Company  expects to market its  AngioJet  System and graft  products to
physician  specialty groups,  including  vascular  surgeons,  cardiovascular and
thoracic surgeons, interventional radiologists and interventional cardiologists.
The Company will initially  market the AngioJet  System for peripheral  arterial
and vascular graft thrombosis,  targeting  vascular surgeons and  interventional
clinicians who perform PTA and other thrombectomy or lytic procedures.  AngioJet
Systems  for   coronary   applications   will  be  marketed  to   interventional
cardiologists  and  cardiovascular   surgeons.  The  primary  customer  for  the
Perma-Flow  Graft is expected  to be the  cardiovascular  surgeon  and  thoracic
surgeon.  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
decisionmakers  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.

     Possis is currently marketing its AngioJet System outside the United States
using  an  independent   distributor  network.  The  Company  has  entered  into
distributorship  agreements  with 16  distributors  covering  Belgium,  Denmark,
Germany, Greece, Italy, Luxembourg, The Netherlands, Norway, Spain, Switzerland,
Austria,  France, Sweden, Saudi Arabia, Israel,  Australia,  New Zealand, Russia
and Japan.  Generally,  the distributorship  agreements are for a 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. Possis Medical Europe B.V., the Company's subsidiary in The
Netherlands,  acts as a point of centralized  warehousing  and  distribution  in
Europe in order to enhance  response  time,  efficiency  and service to European
customers.  All  sales  made  to  the  Company's  independent  distributors  are
denominated in United States dollars.

     The Company will begin  commercial  marketing of the AngioJet System in the
United  States  following  receipt of FDA marketing  authorization.  The Company
intends to market  and  distribute  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.  Under the agreement,  Bard agreed to purchase the Perma-Seal
Graft from the Company at certain transfer  prices,  to purchase certain minimum
quantities and to make certain milestone payments to the Company relating to the
commercialization of the product. The initial grafts were shipped to Bard in May
1996 and the Company  expects  non-U.S.  sales of Perma-Seal  Grafts to begin in
fiscal 1997.

     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. Under the agreement, Baxter
agreed to purchase  the  Perma-Flow  Graft from the Company at certain  transfer
prices, to purchase certain quantities and to make certain milestone payments to
the Company based on the continuation of the agreement.  The initial shipment of
Perma-Flow  Grafts was made in July 1996 and the Company expects non-U.S.  sales
of the product to begin in fiscal 1997.
<PAGE>

     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 sales to key opinion leaders in European countries will be
especially  important to encourage  broader  acceptance of its products and will
give  the  Company   experience  in  marketing  its  products   prior  to  their
introduction  in the United  States.  Other  promotional  activities may include
publishing  analytical  papers,  making scientific  symposium  presentations and
conducting  comparative  clinical  trials  demonstrating  the  uses,  costs  and
effectiveness of the Company's products.


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  two  patent
applications pending in foreign jurisdictions. The Company also holds two United
States patents relating to the AngioJet System. In addition,  the Company has 11
United  States  and 13  foreign  patent  applications  pending  relating  to the
AngioJet System.  Two AngioJet System patent  applications have been accepted by
the European Patent Office.  In connection with the Perma-Seal Graft, one United
States patent is pending,  one of the claims included in which has been allowed,
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.  The Company is aware of one pending  foreign
patent  application  relating to a water jet system for  removing  blood  clots.
Although the application was filed after the AngioJet System patent application,
no assurance can be given that such third party will not receive a patent.

     The Company has acquired  rights  through  licensing  agreements to patents
relating to processes used in the  manufacture of the  Perma-Seal  Graft.  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
methods of treatment 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 aware  that  Cordis  Corporation  has a  waterjet-based  thrombectomy
system in early stage sales in Europe and Canada.

     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 grafts
with  needle  sealing  properties  marketed  by W. L. Gore and  Associates,  the
largest synthetic graft company, and other companies.

     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 and 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 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 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  preclinical  and clinical trial data to prove the safety and efficacy
of the  device.  Generally,  a company  is  required  to obtain an IDE before it
commences  clinical testing in the United States in support of such PMA. The FDA
monitors and oversees the use and  distribution  of such "research use only" and
"investigational use only" products. 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.

     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
preclinical 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.
<PAGE>

     The FDC Act  regulates  the  Company's  quality  control and  manufacturing
procedures 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 administrative 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 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 complied with its  requirements,  and so
long as at least one of the  industrialized  countries has ageeed to its import.
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 expects to obtain
the  right  to  affix  the CE Mark to its  products  in  1997.  There  can be no
assurance that Possis will be able to obtain regulatory  approvals or clearances
for its products in foreign countries.


Employees

     As of September 30, 1996, the Company had 138 full-time  employees and five
contract  employees.  Of  these  full-time  employees,  35 are in  research  and
development, 69 are in manufacturing and production, 8 are in quality systems, 5
are  in  facilities/maintenance,  and 21 are  in  management  or  administrative
positions. None of the Company's employees is 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 8 of Notes to Consolidated Financial Statements in Part II,
Item 8.
<PAGE>

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>
<S>                   <C>   <C>
 
       Name           Age                    Position                                 
Robert G. Dutcher     51    Director, Chief Executive Officer and President
Joseph J. Afryl Jr.   48    Vice President, Sales and Marketing
Russel E. Carlson     50    Vice President, Finance and Chief Financial Officer
Irving R. Colacci     43    Vice President, Human Resources, General Counsel
                               and Secretary
William J. Drasler    47    Vice President, Research and Development
James D. Gustafson    40    Vice President, Quality Systems and
                               Regulatory/Clinical Affairs
Robert J. Scott       51    Vice President, Manufacturing Operations
</TABLE>

     Robert G. Dutcher  served as Executive  Vice  President of the Company from
June 1992  until  October  1993 and has  served as  President,  Chief  Executive
Officer and a director of the Company  since  October 1993 and as President  and
Chief Operating Officer of Possis Holdings, Inc. (a subsidiary formerly known as
Possis Medical,  Inc.) since 1987. 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  Minneapolis,  Minnesota
medical device company, since September 1989 and had served in several financial
management  positions  with  The  Pillsbury  Company,  a food  manufacturer  and
processor, since 1972.

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

     William  J.  Drasler  has served as Vice  President  of the  Company  since
December 1993 and as Vice President of Research and  Development and Director of
New Product  Development of Possis  Holdings,  Inc. since 1986. Prior to joining
the Company,  Dr.  Drasler had served as an engineering  and program  manager at
SciMed Life Systems, Inc. since 1983. Dr. Drasler received a Ph.D. in biomedical
engineering and a M.S. in chemical engineering from the University of Minnesota.

     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.

     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
StockholderMatters:

     The Company had 1,781 common  shareholders  of record at July 31, 1996. 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, 1996
and 1995 are presented below:
<TABLE>
<CAPTION>
<S>                                               <C>           <C>             <C>            <C>
                                                          1996                          1995            
                                                   High          Low             High          Low
QUARTER:
        First...............................      17-5/8        12-1/4           6-3/4         5-1/2
        Second..............................      18-1/4        13-3/4           8-1/4         5-1/2
        Third...............................      19-3/4        14-1/8           9-1/4         6-3/8
        Fourth..............................      21-3/4        12-7/8          14-7/8         9-1/8
</TABLE>

     Additional  information  is  contained  in Note 5 of Notes to  Consoldiated
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
<TABLE>
<CAPTION>
In Thousands Except Earnings Per Share Data
<S>                                             <C>              <C>          <C>          <C>        <C>
                                                 1996            1995         1994         1993       1992
INCOME STATEMENT DATA:
Operating revenues-
     Continuing operations..................     $1,606          $3,207       $6,315       $8,342     $7,079
Net income (loss):
     Continuing operations..................     (8,578)         (5,153)      (1,246)        (181)       471
     Discontinued operations................        405             421          523       (1,331)       153
Net income (loss) per common share:
     Continuing operations..................       (.74)          (.53)         (.15)        (.02)       .06
     Discontinued operations................        .04            .04           .06         (.16)       .02
Weighted average shares outstanding.........     11,611           9,726        8,436        8,361      8,238

BALANCE SHEET DATA:
    Working capital.........................    $24,780          $6,846       $4,007       $5,183     $6,103
    Total assets............................     29,361          10,321        8,882       11,472     11,133
    Long-term debt,
        excluding current maturities........         39              93           80        1,279      1,313
    Shareholders' equity....................     27,597           8,648        5,684        5,947      6,969
</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 (the "St.  Jude
Royalties").  See Note 6 of Notes to Consolidated Financial Statements contained
in the Annual Report. 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 Notes 2 and 12 of Notes to  Consolidated
Financial  Statements  contained in the Annual Report. 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. In connection
with this  sale,  the  Company  received  $1.1  million in cash and the right to
receive  royalty  payments over a twelve-month  period.  See Note 11 of Notes to
Consolidated  Financial  Statements  contained in the Annual Report. The sale of
the pacemaker  lead business has enabled Possis to focus its human and financial
resources  exclusively  on its other  products,  which are currently in clinical
trials in the United States and in early stages of  commercialization in Europe,
Japan and Canada.

     Over the past three 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  1994 and
1995 Common Stock  offerings,  has been used to fund the  Company's  operations,
including research and development related to its products. With the sale of its
pacemaker lead business and the expiration of royalty  payments from St. Jude in
March  1995,  Possis  does not expect to become  profitable  unless it  achieves
significant  sales  outside the United  States and its products  receive  United
States  Food  and  Drug  Agency  ("FDA")  marketing  approval.  There  can be no
assurance that significant sales or marketing approvals will occur.
<PAGE>

Results of Operations

Fiscal Years ended July 31, 1996, 1995 and 1994

     Total revenues decreased 50% in fiscal 1996 and 60% in fiscal 1995 compared
to the prior years.  Significant  factors in the revenue declines were the March
1994 sale of the Company's  pacemaker  leads  business and the ending of the St.
Jude  Royalties  in March  1995.  Fiscal  1996  medical  products  revenues  are
primarily  non-U.S.  sales of the  AngioJet  Thrombectomy  System  to  prominent
physicians for early  clinical use. The Company also made the initial  shipments
of Perma-Flow and Perma-Seal Grafts to Baxter  Healthcare  Corporation and C. R.
Bard, respectively,  the Company's product marketing partners, both of which are
expected to begin product sales outside the United States in fiscal 1997.  Sales
agreement  revenue  received  during  fiscal  1996 and fiscal  1995 from  Baxter
Healthcare  Corporation and C. R. Bard was $0.2 million and $1.0,  respectively.
The Company  believes that future  revenues will come primarily from the sale of
its current products.

     Cost of medical  products for the years ended July 31, 1996,  1995 and 1994
includes  manufacturing  start-up expenses of approximately  $4.5 million,  $3.0
million and $2.3 million,  respectively.  The Company's products incorporate new
technology and their  manufacture  requires the development of new processes and
equipment.  Manufacturing  start-up  expense  includes excess labor and material
costs,  higher than normal levels of scrap product and unabsorbed  manufacturing
overhead  expense.  Additional  start-up  expenses  are  expected as the Company
continues to refine its manufacturing  processes and until the Company begins to
produce its products in higher volumes.

     Selling,  general and administrative  expense increased 44% to $3.1 million
in fiscal 1996 from $2.1  million in fiscal 1995 which  increased  24% from $1.7
million in fiscal 1994.  The increases in both years result from a 65-70% annual
growth in sales and marketing  expenditures for personnel,  travel,  conventions
and related expenses  necessary to broaden non-U.S.  distribution and to prepare
for FDA  marketing  clearance  of its  initial  products.  The  Company  expects
continued  increases in sales and marketing  expenditures  as it builds a United
States direct sales organization to sell the AngioJet Thrombectomy System and as
it develops the distribution systems for its other products.

     Research and development expenditures declined 4% in fiscal 1996 and 12% in
fiscal 1995 from prior year spending. The Company's research activities over the
last three years have been primarily  focused on completing  the  development of
its thrombectomy  system and two graft products,  including  product and process
development,   FDA-required  human  clinical  trials  and  filing  U.S.  product
registrations on two products. In addition,  the Company has a program to screen
new product  ideas and identify new product and business  opportunities  for the
future. FDA regulatory,  clinical study and product  registration costs were 15%
of total research and  development  spending in fiscal 1994 and increased to 68%
of total  spending  in fiscal  1996 as the  Company has moved into mid and later
stages of the clinical  process on its products.  Total research and development
expenditures are expected to grow in future years.

     Interest expense has decreased to approximately $14,000 in fiscal 1996 from
$24,000 in fiscal 1995 and $124,000 in fiscal  1994.  The Company used a portion
of the proceeds from its fiscal 1995 stock  offering to retire  $500,000 of debt
in early fiscal 1995. The Company  incurred a loss of  approximately  $64,000 in
fiscal 1996 on the sale of a U.S.  government  security.  The sale proceeds were
reinvested in government securities offering a greater return.
<PAGE>

Liquidity and Capital Resources

     The Company's  cash,  cash  equivalents  and  short-term  investments  were
approximately  $23.5 million at July 31, 1996, an increase of $16.8 million from
the prior  year.  The  primary  factor in the  improved  cash  position  was the
completion  in October 1995 of a stock  offering of  1,971,258  shares of common
stock by the Company netting the Company approximately $26.7 million.

     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  to 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 remaining royalty payments in connection with the
sale of ATS. See Note 2 of Notes to Consolidated Financial Statements.  Net cash
provided by financing  activities of $26.7 million  resulted  primarily from the
Company's  October  1996  common  stock  offering  netting  approximately  $26.7
million.

     During  fiscal 1995,  cash used in operating  activities  was $1.9 million,
which resulted  principally  from the net loss of $4.7 million and a decrease in
accrued and other current  liabilities of $1.1 million,  offset by depreciation,
amortization of goodwill and stock compensation totaling $546,000 and a decrease
in accounts  receivable of $3.2 million.  Cash used in investing  activities was
$1.5  million,  which  resulted  primarily  from  net  purchases  of  marketable
securities  of $1.3 million and  additions  to plant and  equipment of $562,000,
offset by proceeds from the sale of  discontinued  operations  of $350,000.  Net
cash provided by financing  activities of $7.1 million resulted principally from
the September 1994 common stock offering of $7.2 million,  the exercise of stock
options of $297,000 and proceeds from notes  payable of $116,000,  offset by the
repayment of long-term debt of $595,000.

     During  fiscal 1994,  cash used in operating  activities  was $1.2 million,
which  resulted  principally  from a net  loss  before  gains on the sale of the
pacemaker  lead  business  and real  estate of  approximately  $2.3  million and
decreases  in accounts  payable and accrued  and other  current  liabilities  of
$825,000,   offset  by   depreciation,   amortization   of  goodwill  and  stock
compensation  totaling  $665,000 and a decrease in accounts  receivable  of $1.5
million.  Cash  provided by investing  activities  was $2.9  million,  including
primarily proceeds from the sale of discontinued  operations of $1.1 million and
proceeds  from the sale of real estate and the  pacemaker  lead business of $1.2
million  and $1.1  million,  respectively,  offset  by  additions  to plant  and
equipment  of  $554,000.  Net cash  used in  financing  activities  of  $460,000
resulted  principally  from  repayment of long-term  debt of $803,000  offset by
proceeds  from notes payable of $144,000 and proceeds from the issuance of stock
and exercise of options and warrants of $199,000.
<PAGE>

     The Company is growing non-U.S. sales of its current products, but sales to
date have been limited to influential healthcare  professionals to gain clinical
experience.  The thrombectomy  system clinical experience base has grown and the
Company believes non-U.S. sales will increase in countries where the Company has
distributor  presence  and  will  also  increase  as the  Company  broadens  its
distribution  to new  countries.  Non-U.S.  marketing of the Company's two graft
products is expected to begin in fiscal 1997. To sell its products in the United
States,  the Company must first obtain a clearance or an approval  from the FDA.
The Company expects to receive  marketing  clearance for one and possibly two of
its products  during  fiscal  1997,  which the Company  believes  will result in
increased  product  sales.  The Company can  provide no  assurance  that it will
obtain the U.S. FDA  clearances  and approvals  required to sell its products in
the United States in a timely manner or at all.

     The  Company  expects  it will  report  another  loss in fiscal  1997 as it
continues to incur  significant U.S.  clinical trial expenses and  manufacturing
and sales and marketing  start-up costs.  The Company  believes that the capital
available at July 31, 1996 plus the  expected  product  sales and revenues  from
sales  agreements will provide  sufficient cash to fund expected losses and meet
other cash usage needs until such time as it generates  positive cash flow.  The
Company can provide no assurance, however, that it will ever become profitable.
<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, 1996 and 1995 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,
1996.  Our audit also included the financial  statement  schedule  listed in the
Index at Item 14. These financial  statements and financial  statement  schedule
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these 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 audits 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, 1996 and 1995 and the  results of their  operations
and their  cash flows for each of the three  years in the period  ended July 31,
1996, 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.



Minneapolis, Minnesota
September 6, 1996
<PAGE>
<TABLE>
                                       POSSIS MEDICAL, INC. AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                                                       July 31, 1996            July 31, 1995
ASSETS
<S>                                                                     <C>                    <C>            
CURRENT ASSETS:
    Cash and cash equivalents (Note 1)............................      $ 7,688,507            $ 5,450,057
    Marketable securities (Note 1)................................       15,838,543              1,270,654
    Receivables:
      Trade (less allowance for doubtful accounts:
          $60,000 and $27,000, respectively)......................          389,983                 14,976
      Notes receivable (Note 2)...................................           --                    123,918
      Other.......................................................          218,154                204,297
    Inventories (Note 1):
      Parts.......................................................          755,081                489,418
      Work-in-process.............................................          898,721                427,495
      Finished goods..............................................          466,985                 94,101
    Prepaid expenses and other assets.............................          207,156                191,535
           Total current assets...................................       26,463,130              8,266,451


PROPERTY (Notes 1 and 3):
    Leasehold improvements........................................        1,090,935                175,556
    Machinery and equipment.......................................        2,782,287              2,287,755
    Assets in construction........................................           92,743                300,377
 
                                                                          3,965,965              2,763,688
    Less accumulated depreciation.................................       (1,482,233)            (1,303,021)
         Property - net...........................................        2,483,732              1,460,667

OTHER ASSETS:
    Goodwill (Note 1).............................................          413,922                485,922
    Notes receivable (Note 2).....................................            --                   108,153

TOTAL ASSETS......................................................      $29,360,784            $10,321,193
 

<FN>

See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                                       POSSIS MEDICAL, INC. AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS
                                                    (continued)

<CAPTION>
                                                                             July 31, 1996       July 31, 1995
<S>                                                                          <C>                 <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
    Trade accounts payable.............................................         $317,905              $159,365
    Accrued salaries, wages, and commissions...........................          725,988               693,402
    Current portion of long-term debt (Note 3).........................           73,386                82,925
    Other liabilities (Note 3).........................................          566,313               484,597
              Total current liabilities................................        1,683,592             1,420,289

DEFERRED REVENUE (Note 2)..............................................           41,768               132,912

LONG-TERM DEBT (Note 3)................................................           38,569                92,955

OTHER LIABILITIES......................................................           --                    27,380

COMMITMENTS AND CONTINGENCIES (Note 8)

SHAREHOLDERS' EQUITY (Note 5):
    Common stock-authorized, 20,000,000
        shares of $ .40 par value each; issued and outstanding,
        12,052,644 and 9,970,031shares, respectively...................        4,821,058             3,988,013
    Additional paid-in capital.........................................       40,688,535            14,201,925
    Unearned compensation..............................................         (102,690)              (50,387)
    Unrealized loss on investments.....................................         (145,276)               --
    Retained deficit...................................................      (17,664,772)           (9,491,894)
          Total shareholders' equity...................................       27,596,855             8,647,657
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................      $29,360,784           $10,321,193


<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                                       POSSIS MEDICAL, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                                YEARS ENDED JULY 31


<CAPTION>
                                                                    1996                1995           1994
REVENUES:
<S>                                                              <C>                 <C>            <C>
     Medical products (Notes 9 & 10).........................    $1,156,170           $229,984      $3,140,335
     Net heart valve patent payments (Note 6)................        --              1,817,388       2,998,091
     Royalty payments relating to
         pacemaker lead business (Note 11)...................        --                410,118         176,292
     Sales agreement revenue (Note 13).......................       450,000            750,000          --
     Gain on sale of pacemaker lead
         business (Note 11)..................................        --                --              647,816
     Gain on sale of real estate (Note 12)...................        --                --              957,573
         Total revenues......................................     1,606,170          3,207,490       7,920,107

COST OF SALES AND OTHER EXPENSES:
     Cost of medical products ...............................     5,256,179          3,334,589       3,675,461
     Selling, general and administrative.....................     3,052,422          2,116,251       1,705,662
     Research and development (Note 9).......................     3,167,013          3,297,524       3,745,762
     Interest................................................        14,296             23,568         124,104
         Total cost of sales and other expenses..............    11,489,910          8,771,932       9,250,989

Operating Loss ..............................................    (9,883,740)        (5,564,442)     (1,330,882)

Interest income..............................................     1,369,453            411,696          84,639
Loss on sale of  investments.................................       (64,007)           --               --    
Loss from continuing operations..............................    (8,578,294)        (5,152,746)     (1,246,243)

Income from discontinued operations - net (Note 2)...........       405,416            420,901         523,504
Net Loss ....................................................   $(8,172,878)       $(4,731,845)      $(722,739)

Weighted average number
     of common shares outstanding............................    11,611,070          9,726,105       8,435,818
Earnings (loss) per common share:
     Continuing operations...................................         $(.74)             $(.53)          $(.15)
     Discontinued operations.................................           .04                .04             .06
     Net Loss                                                         $(.70)             $(.49)          $(.09)

<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                                       POSSIS MEDICAL, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                YEARS ENDED JULY 31
<CAPTION>
<S>
                                                                               1996             1995               1994
OPERATING ACTIVITIES:
                                                                           <C>              <C>                 <C>
     Net loss ......................................................       $(8,172,878)     $(4,731,845)        $(722,739)
     Adjustments to reconcile net loss to net
         cash used in operating activities:
     Loss on sale of marketable securities..........................            64,007           --                --
     Gain on sale of discontinued operations........................            --               --               (68,123)
     Loss on disposal of assets.....................................            24,239            5,631               245
     Gain on sale of lead business..................................            --               --              (647,816)
     Gain on sale of real estate....................................            --               --              (957,573)
     Depreciation...................................................           395,132          361,024           353,584
     Amortization of goodwill.......................................            72,000           72,000            72,000
     Stock compensation.............................................           505,432          113,298           238,930
     (Increase) decrease in receivables.............................          (741,886)       3,157,870         1,537,092
     (Increase) decrease in inventories.............................        (1,109,773)          32,610           (18,722)
     (Increase) decrease in other current assets....................           (19,968)          56,493          (159,734)
     Increase (decrease) in trade accounts payable..................           158,540           44,006          (457,786)
     Decrease in accrued and other current liabilities..............            (4,225)      (1,059,792)         (367,340)
         Net cash used in operating activities......................        (8,829,380)      (1,948,705)       (1,197,982)

INVESTING ACTIVITIES:
     Proceeds from sale of discontinued operations..................           589,441          349,679         1,111,792
     Additions to plant and equipment...............................        (1,453,379)        (561,817)         (553,506)
     Proceeds from sale of fixed assets.............................            10,945            2,728               430
     Proceeds upon disposal of real estate..........................            --                 -            1,200,000
     Proceeds upon sale of lead business............................            --                 -            1,100,000
     Purchase of marketable securities..............................       (17,992,853)     (11,431,373)         --
     Proceeds from sale/maturity of marketable securities...........         3,215,681       10,160,719          --      
     Net cash provided by (used in)
         investing activities.......................................       (15,630,165)      (1,480,064)        2,858,716

FINANCING ACTIVITIES:
     Proceeds from notes payable....................................            19,000          115,673           143,928
     Repayment of long-term debt....................................           (82,925)        (594,530)         (803,136)
     Proceeds from issuance of stock and exercise
         of options and warrants....................................        26,761,920        7,588,335           198,988
     Net cash provided by (used in)
         financing activities                                               26,697,995        7,109,478          (460,220) 


INCREASE  IN CASH AND CASH EQUIVALENTS..............................         2,238,450        3,680,709         1,200,514

CASH AND CASH EQUIVALENTS AT BEGINNING
  OF PERIOD.........................................................         5,450,057        1,769,348           568,834

CASH AND CASH EQUIVALENTS AT END OF PERIOD..........................        $7,688,507       $5,450,057        $1,769,348

SUPPLEMENTAL CASH FLOW DISCLOSURE:
     Cash paid for interest.........................................           $14,296          $23,568          $130,313
     Inventory transferred to fixed assets..........................            19,983           30,473            21,298
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>

                                       POSSIS MEDICAL, INC. AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENTS OF
                                          CHANGES IN SHAREHOLDERS' EQUITY


<CAPTION>
                                          Common Stock           Additional    Unearned     Unrealized
                                   Number of                      Paid-in       Stock        Loss on       Retained
                                    Shares         Amount         Capital     Compensation  Investments     Deficit          Total 
 
<S>                               <C>           <C>             <C>           <C>           <C>          <C>            <C>
BALANCE AT JULY 31, 1993........  8,419,803     $3,367,921      $6,912,420     $(295,668)       --        $(4,037,310)   $5,947,363


    Employee stock purchase
         plan...................     16,019          6,408          95,714        --            --             --           102,122
    Stock options issued to
        directors (Note 5)......       --             --            62,100        --            --             --            62,100
    Stock options exercised.....     20,430          8,172         109,855        --            --             --           118,027
    Unearned stock compensation
        amortization............       --             --              --         176,832        --             --           176,832
    Net loss....................       --             --              --          --            --         (722,739)      (722,739)
BALANCE AT JULY 31, 1994........  8,456,252      3,382,501       7,180,089      (118,836)       --         (4,760,049)     5,683,705


    Employee stock purchase
       plan.....................     10,932          4,373          65,319         --           --             --            69,692
    Stock options issued to
      directors (Note 5)........       --             --            44,849         --           --             --            44,849
    Stock options exercised.....    147,000         58,800         640,021                                                  698,821
    Stock retired...............    (58,281)       (23,312)       (378,229)        --           --             --          (401,541)
    Stock bonus.................     11,628          4,651          59,303         --           --             --            63,954
    Stock offering..............  1,402,500        561,000       6,590,573         --           --             --         7,151,573
    Unearned stock compensation
      amortization..............       --             --              --          68,449        --             --            68,449
    Net loss....................       --             --              --           --           --         (4,731,845)   (4,731,845)

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

<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 accompanying  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) (Note 2)
and Possis Medical Europe B.V., after  elimination of intercompany  accounts and
transactions.

     The Company is a developer,  manufacturer  and marketer of medical devices.
The Company was  incorporated in 1956 and has operated  several  businesses over
the last 40 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.

     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 Agency  ("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 estimated useful lives of the
assets at the following annual rates:

  Leasehold improvements   .............................           3-10% 
  Machinery and equipment   .............................          10-25%

     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
Graft acquired in 1988.  Accumulated  amortization at July 31, 1996 and 1995 was
$573,500 and $501,500, 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.
<PAGE>

     Revenue  Recognition  Revenue  associated  with medical  products  sales is
recognized  when  products are shipped.  Heart valve patent  revenue and royalty
payments  related to the  pacemaker  leads  business  sale were accrued based on
estimated  sales of the  companies  making the royalty  payments.  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's outstanding stock options and stock
warrants are not considered in the computation of earnings per share because the
impact would be  antidilutive  because of the net loss. The  difference  between
primary and fully diluted earnings per share was not significant in any period.

     Cash  Equivalents  The Company  considers  highly liquid  investments  with
original maturities of three months or less to be cash equivalents.
 
     Marketable Securities Effective August 1, 1994 the Company adopted SFAS No.
115,  "Accounting for Certain  Investments in Debt and Equity  Securities."  All
Company securities as of July 31, 1996 are classified as available-for-sale  and
consist primarily of U.S. government securities.  These investments are reported
at fair value with a net unrealized loss of $145,276  included in  shareholders'
equity.  These  securities  have maturity dates ranging from January 15, 1997 to
March 5, 2001.  The  Company  utilizes  the  specific  identification  method in
computing  gains or losses.  During  1996 the  Company  sold  available-for-sale
securities aggregating  approximately  $1,941,000,  realizing a loss of $64,007.
There was no material  difference  between amortized cost and fair value for the
marketable securities at adoption or at July 31, 1995.

     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,"
was issued in March 1995 and will be adopted by the Company in fiscal 1997.  The
Company  does not expect  that  adoption of this  Standard  will have a material
impact on the consolidated financial statements.

     Stock-Based   Compensation   SFAS  No.123,   "Accounting   for  Stock-Based
Compensation,"  was  issued in  October  1995 and must be  adopted no later than
fiscal 1997, except for transactions  with  nonemployees  which is effective for
all  transactions  entered into  subsequent  to December  15, 1996.  The Company
intends  to  continue  to measure  compensation  cost for  employee-based  stock
compensation  plans under APB Opinion No. 25,  "Accounting  for Stock  Issued to
Employees,"  and  will  follow  the  disclosure  requirements  of SFAS  No.  123
beginning in fiscal 1997.
<PAGE>

2.   DISCONTINUED OPERATIONS

     Waterjet Equipment In January 1994, the Company sold its waterjet equipment
business (Jet Edge) to  TC/American  Monorail,  Inc. The sale resulted in a book
gain of $68,123.  Technical Services 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  will  receive a  percentage  of ATS's  annual  revenues  in excess of a
specified  amount through  September 1996, up to a maximum of $2,000,000.  These
amounts are recognized as income when received or when  collection is reasonably
assured.  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 this agreement is 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, 1996, the only
remaining balance  outstanding  related to the Company's sale of ATS is deferred
revenue of $41,768  related to estimated  royalties from August and September of
1996.

     Notes  receivable  related to the Technical  Services  division at July 31,
1995 are as follows:
<TABLE>
<CAPTION> 
 
<S>                                                                       <C>                     <C>
                                                                              1996                 1995    
     9% note receivable, due in 20 quarterly
        installments of principal and interest
        through October 1, 1996.......................................... $    --                 $62,500
     Note receivable, no interest, principal
        due in five equal annual installments
        on October 1, 1992 through
        October 1, 1996..................................................      --                 200,000
      Discount on noninterest bearing note
        (amortized over the term of the note)............................      --                 (30,429)
 
                                                                               --                 232,071
      Less current portion                                                     --                (123,918)             
 

                                                                          $    --                $108,153 
</TABLE>
             
     Income  from  Discontinued  Operations  Operating  results of the  waterjet
equipment business and Technical Services division were as follows for the years
ended July 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
                                                                     1996          1995            1994     
<S>                                                                <C>           <C>           <C>
     Sales  .....................................................  $   --        $   --        $3,400,170 
     Income from operations......................................  $    225      $ 87,306      $  142,259
     Amortization of not-to-compete
        agreement................................................   154,647       113,916         113,916
     Percentage of ATS's revenues................................   250,544       219,679         199,206 
        Income before income taxes...............................   405,416       420,901         455,381
     Gain on disposal of Jet Edge................................       --           --            68,123 
     Income from discontinued operations ........................  $405,416      $420,901      $  523,504 

</TABLE>
<PAGE>

3.   OTHER CURRENT LIABILITIES AND LONG-TERM DEBT

     Other current liabilities at July 31, 1996 and 1995 are as follows:
<TABLE> 
<CAPTION> 
                                               1996               1995  
<S>                                        <C>                <C>
Animal trial expense ..................... $ 23,292           $  19,344
Clinical trial expense ...................  378,638             243,202
Legal fees................................   15,183              96,900
Other.....................................  149,200             125,151                  
                                           $566,313           $ 484,597

     Long-term debt at July 31, 1996 and 1995 is as follows: 
                                              1996               1995    
 
Notes payable, interest at 8.25%-10.15%,
  principal and interest payable monthly, 
  final payments due between February 1997 
  and December 1998, collateralized by
  the Company's equipment.................   $92,955            $175,880
Noninterest bearing note payable, principal 
  repaid in 10 equal quarterly payments 
  beginning January 1997, final payment 
  due April 1999, unsecured................   19,000                 --   
                                             111,955             175,880
       Less current maturities.............  (73,386)            (82,925)
     
                                             $38,569             $92,955     
</TABLE>            
     Maturities  of  long-term  debt are  $73,386  in 1997,  $28,356 in 1998 and
$10,213 in 1999.

     4.  INCOME  TAXES
      At July 31,  1996,  the Company  has net  operating  loss carryforwards of
approximately $14,145,000 for federal tax purposes which expire in 2003 through 
2011 and  $5,138,000  for Minnesota tax purposes which expire in 2003 through
2011.

     In addition,  at July 31, 1996 the Company has approximately  $1,441,000 in
federal tax credits,  substantially  all of which is a research and  development
tax credit,  which expire from 1999 through 2011, and a $65,182 AMT credit which
does not expire.

     Deferred  tax  assets  and  liabilities  as of July  31,  1996 and 1995 are
described in the table below.  The Company has not recorded any net deferred tax
assets due to the uncertainty of realizing such assets:
<PAGE>
<TABLE>
<CAPTION>
                                                         1996            1995    
<S>                                                  <C>           <C>
Current assets (liabilities):
Allowance for doubtful accounts..................... $  20,000     $   10,000
Inventory...........................................   302,000        294,000
Accrued vacation....................................    34,000         45,000
Other  .............................................    80,000         31,000
                                                       436,000        380,000
Less valuation allowance                              (436,000)      (380,000)
Net    ............................................. $   --        $    --    
Long-term assets:
Net operating losses................................ $4,891,000    $2,912,000
Amortization of patents.............................    142,000       122,000
Tax credits.........................................  1,506,000     1,480,000
Depreciation........................................    (74,000)        4,000
                                                      6,465,000     4,518,000
Less valuation allowance............................ (6,465,000)   (4,518,000)
Net    ............................................. $   --        $    --    
</TABLE> 
     
     The effective income tax rate differed from the U.S. federal statutory rate
for each of the three years ended July 31, 1996, 1995 and 1994 as follows:
<TABLE>
<CAPTION>
                                                       1996             1995           1994    
<S>                                                <C>               <C>              <C>
Tax benefit on loss from
 continuing operations computed at
 statutory rate of 34%..........................   $(2,916,620)     $(1,751,930)     $(423,640)
Decrease in tax benefit due to nonrecognizable
 benefits of net operating loss
 carryforwards..................................     2,916,620        1,751,930        423,640
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.  At July 31, 1996,  there were 1,587,519 shares reserved
and 1,024,531 shares available for granting 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 1996, 1995 and 1994, the Company granted 4,760, 11,574 and 16,560
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, 1996 follows: 
<TABLE>
<CAPTION>
                                                                    1996             1995         1994   
<S>                                                             <C>             <C>             <C>
     Shares under option at
        beginning of year..................................        728,102         880,478       761,835
     Options granted - 1992 plan...........................        254,660          33,374       163,560
     Options granted - Non plan............................         55,000          --            --
     Options exercised.....................................       (123,800)       (147,000)      (23,417)
     Options canceled......................................        (14,175)        (38,750)      (21,500) 
     Shares under option at end of year....................        899,787         728,102       880,478
     Shares exercisable at end of year.....................        348,204         497,841       551,603
     Exercise price of options granted.....................      $8.75-17.50     $3.875-7.75    $3.75-7.50
     Exercise price of options exercised...................      $2.75-14.625    $2.625-11.38   $2.75-8.625
     Market price of options exercised.....................      $13.75-21.25    $6.25-13.625   $5.71-10.25
     Aggregate market value of options
        exercised..........................................     $2,245,906      $1,180,469      $153,587
 </TABLE>

     In 1993, the Company granted 37,000 shares of restricted stock to employees
under the terms of the 1992 Plan,  which vest 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 will 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 that vested  December 2, 1993,  unvested  shares are
forfeited.  Unearned  compensation of $342,250 was recorded at the date of grant
and is being recognized over the vesting period. In addition, the Company issued
5,717  shares of deferred  stock under the 1992 Plan which were fully  vested at
July 31, 1993. In 1996 the Company granted 18,000 shares of restricted  stock to
employees  which vest 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  believes  that the
employees  will elect to receive fewer shares in lieu of paying the  withholding
taxes.  Unearned  compensation of $265,540 was recorded at the date of grant and
is being  recognized  over the vesting  period.  In fiscal 1996,  1995 and 1994,
total compensation expense of $213,197, $68,449 and $176,832,  respectively, was
recognized on these shares.
<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.  SG&A  expense of
approximately $251,000 was recorded in connection with these transactions.

     Stock  Warrants  Stock   purchase   warrants  held  by  unrelated   parties
representing  the  right to  purchase  an  aggregate  of  26,400  shares  of the
Company's common stock at $8.52 a share were outstanding at July 31, 1996. 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 a specified
period.

     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, 1996, all
such warrants were outstanding.

     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  17,194  shares in
1996, 10,932 shares in 1995 and 16,019 shares in 1994 under this plan.

     6. RELATED-PARTY  TRANSACTIONS
     The  Company  and  St.  Jude  Medical,   Inc.  (St.   Jude),  an  unrelated
corporation,  entered into an agreement  under which the Company  transferred to
St. Jude its entire  right,  title,  and  interest in the patents  relating to a
prosthetic heart valve developed by Z. C. Possis, former Chief Executive Officer
of the Company,  on his own time and without  consideration.  Under the terms of
the agreement,  St. Jude remitted  royalty payments to the Company through March
14, 1995 equal to 2% of St.  Jude's total net sales of heart valves in excess of
$4,052,000  per  year.  The  Company  paid  25% of such  payments  to a group of
individuals  including a shareholder  of the Company,  three  relatives of Z. C.
Possis and four unrelated  persons and 11.25% (7.5% through February 1992) to Z.
C. Possis or his estate.

     7. 401 K PLAN
     The  Company has an  employees'  savings  and profit  sharing  plan for all
qualified   employees  who  have   completed   one  year  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, 1996, 1995, and 1994 were $90,114, $77,907 and $98,417,
respectively.
<PAGE>

     8. LEASE COMMITMENTS
     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, 1996.  Rental expense charged against  earnings was $329,340 in fiscal 1996,
$379,706 in fiscal 1995,  and $340,342 in fiscal 1994. The future annual rentals
on this  operating  lease  are  $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.

     9.  RESEARCH  AND  DEVELOPMENT
     The Company has had  agreements  for joint funding of certain  research and
development costs related to the Company's products and projects.  In connection
therewith,  the  Company  recorded  medical  products  revenue of  approximately
$576,000  in  fiscal  1994 in  exchange  for the  rights  to the use of  certain
technology and products.

     10. 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  80% of medical product sales are to foreign  customers.  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. In 1995, sales to two customers amounted
to 62% and 15% of medical products  revenues and in 1994, sales to two customers
totaled 70% and 14% of medical product revenues.

     11. SALE OF PACEMAKER  LEADS  BUSINESS
     On March 18,  1994,  the  Company  sold the  assets of the  pacemaker  lead
product  line to  Innovex,  Inc.  The  Company  received  $1,100,000  in cash in
exchange  for  $451,786 in  inventories  and fixed  assets,  recording a gain of
$647,816.  In  addition,  the  Company  received a 75% royalty on gross sales of
certain  leads and related  services  for one year.  The  pacemaker  leads was a
product  line  and  component  of the  medical  products  segment.  Since  other
components of this segment  (research  and  development  activities  and initial
production of new products)  are  continuing,  the sale of the lead business has
not been reported as a discontinued operation.

     12. SALE OF REAL ESTATE
     In March 1994,  the Company  closed on the sale of its land,  buildings and
leasehold  improvements  associated  with the Jet Edge  business to  TC/American
Monorail,  Inc. The property sold for $1,200,000 and the Company recorded a gain
on the sale of $957,573.  All Company operations are now conducted at the leased
facility in Coon Rapids, Minnesota.

     13.  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  grants 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  has  received  $1,000,000  and will  receive  up to an  additional
$1,500,000  if  the  Company   achieves   certain   additional   regulatory  and
commercialization milestones.
<PAGE>

     On March 15, 1996 the Company  entered into a  Distribution  Agreement with
Baxter Healthcare Corporation ("Baxter"). This Agreement grants Baxter exclusive
worldwide distribution rights to the Possis Perma-Flow Coronary Bypass Graft for
a three-year  term.  Under this  Agreement,  through July 31, 1996,  the Company
received  $200,000 and will receive up to an  additional  $400,000,  $200,000 on
each of the first and second anniversary dates of agreement signing,  as long as
the agreement is in effect.


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

     During fiscal 1995 and 1996, 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"  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, 1996 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 Note 6 of
Notes to  Consolidated  Financial  Statements  in Part II,  Item 8 and  "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  Statements of  Operations  for each of the three years in the
          period ended July 31, 1996
     Consolidated Balance Sheets, July 31, 1996 and 1995
     Consolidated  Statements  of Cash Flows for each of the three  years in the
          period ended July 31, 1996.
     Consolidated  Statements of Changes in Shareholders' Equity for each of the
          three years in the period ended July 31, 1996.
     Notes to Consolidated Financial Statements

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

     Consent of independent certified public accountants.

     SCHEDULE VIII - Valuation Accounts

     Other  schedules  are  omitted  because  they are not  required  or are not
applicable  or 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 two pages.
<PAGE>

  Exhibit       Form           Date Filed               Description       

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

   3.2          S-2         Amendment No.1      Bylaws as amended and restated
                            August 9, 1994      to date
 
   4.3          10-K        Fiscal year ended   Norwest Equipment Finance, Inc.
                            July 31, 1994       loan agreement, dated January 
                                                12, 1994
 
   10.1         S-1         June 30, 1988       Agreement with St. Jude Medical,
                                                Inc., dated August 2, 1983

   10.2         8-K         February 14, 1994   Asset purchase agreement with
                                                TC/American Monorail, Inc.,
                                                dated January 28, 1994

   10.3         S-2         July 1, 1994        Real estate purchase agreement
                                                with TC/AmericanMonorail, Inc.,
                                                dated January 28, 1994

   10.4         10-Q        Quarter ended       Asset purchase agreement with
                            January 31, 1994    Innovex, Inc., dated March 11, 
                                                1994

   10.5         S-2         July 1, 1994        Lease agreement for corporate 
                                                headquarters and manufacturing 
                                                facility, dated January 4, 1991

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

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

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

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

*  10.10        S-1         June 30, 1988       1985 Nonqualified Stock Option
                                                Plan as amended to date
<PAGE>   
                                                                    
Exhibit         Form           Date Filed               Description  
*  10.11        10-K       Fiscal year ended    Form of incentive stock option
                           July 31, 1989        agreement for officers

*  10.12        10-K       Fiscal year ended    Form of stock option agreement 
                           July 31, 1989        for directors

*  10.13        S-8        December 30, 1992    1992 Stock Compensation Plan

*  10.14        10-K       Fiscal year ended    Form of restricted stock 
                           July 31, 1993        agreement for officers (1992 
                                                Plan)

*  10.15        10-K       Fiscal year ended    Form of nonqualified stock 
                           July 31, 1993        option agreement for officers 
                                                (1992 Plan)

*  10.16        10-K       Fiscal year ended    Form of incentive stock option
                           July 31, 1993        agreement for officers (1992 
                                                Plan)

*  10.17        10-K       Fiscal year ended    Form of nonqualified stock 
                           July 31, 1993        option agreement for 1992 
                                                directors' fees (1992 Plan)

*  10.18        10-K       Fiscal year ended    Form of nonqualified stock 
                           July 31, 1993        option agreement for 1990 
                                                directors' fees

*  10.19        10-K       Fiscal year ended    Form of nonqualified stock 
                           July 31, 1993        option agreement for 1989 
                                                directors' fees

   10.20        S-2        Amendment No. 1      Underwriting agreement entered 
                           August 9, 1994       into between the Company and
                                                John G. Kinnard and Company,
                                                Incorporated including form of
                                                warrant to representative dated
                                                September 8, 1994

   10.21        10-Q       Quarter ended        Supply & distribution agreement
                           January 31, 1995     with Bard Vascular Systems
                                                Division, C.R.Bard, Inc.

   10.22        S-3        Amendment No. 2      Underwriting agreement entered 
                           September 29, 1995   into between the Company, Dain
                                                Bosworth Incorporated and John 
                                                G. Kinnard and Company, 
                                                Incorporated dated October 2, 
                                                1995.

<PAGE>

Exhibit         Form           Date Filed               Description   

   10.23        10-Q       Quarter ended        Lease agreement for corporate
                           January 31, 1996     headquarters and manufacturing
                                                facility dated December 15, 
                                                1995.

   10.24        8-K        March 28, 1996       Supply and distribution 
                                                agreement with Edwards CVS 
                                                Division, Baxter Healthcare
                                                Corporation

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

   23          Consent of independent certified public accountants

   27          Financial data schedule



*    Indicates management contract or compensatory plan or arrangement.

(b)   Reports on Form 8-K

     Possis Medical,  Inc. filed no reports on Form 8-K during the quarter ended
July 31, 1996.
<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 21, 1996

     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 21, 1996 
Donald C. Wegmiller

/s/ Robert G. Dutcher          Director, President and        October 21, 1996
Robert G. Dutcher              Chief Executive Officer

/s/ Dean Belbas                Director                       October 21, 1996
Dean Belbas

/s/ Seymour J. Mansfield       Director                       October 21, 1996
Seymour J. Mansfield

/s/ Demetre Nicoloff, MD       Director                       October 21, 1996
Demetre Nicoloff, MD

/s/ Ann M. Possis              Director                       October 21, 1996
Ann M. Possis

/s/ Joe A. Walters             Director                       October 21, 1996
Joe A. Walters
<PAGE>

                                                   
                                                                 SCHEDULE VIII

                              POSSIS MEDICAL, INC.

VALUATION ACCOUNTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
______________________________________________________________________________

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

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

Year ended July 31, 1996       $ 27,019     $ 50,000     $ 17,019     $ 60,000
Year ended July 31, 1995        120,000      (76,375)      16,606       27,019
Year ended July 31, 1994        309,000      (93,220)      95,780      120,000


Reserve for loss on disposal
of discontinued waterjet
equipment segment:

Year ended July 31, 1996       $   --       $   --       $    --      $   --  
Year ended July 31, 1995           --           --            --          -- 
Year ended July 31, 1994        850,000      (68,123)     781,877         --  


Valuation allowance on
deferred tax asset:

Year ended July 31, 1996     $4,898,000   $2,003,000     $    --    $6,901,000
Year ended July 31, 1995      2,556,000    2,342,000          --     4,898,000
Year ended July 31, 1994      2,298,000      515,000      257,000    2,556,000
 
Reserve for inventory
obsolescence:

Year ended July 31, 1996       $125,000   $   38,795     $ 13,795      $150,000
Year ended July 31, 1995        150,000      136,086      161,086       125,000
Year ended July 31, 1994         27,775      135,051       12,826       150,000
<PAGE>

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

                                  EXHIBIT INDEX
Exhibit
 
Number                             Description      

 3.1        Articles of incorporation as amended and restated to date

 3.2        Bylaws as amended and restated to date

 4.1        Loan agreement with Norwest Equipment Finance, Inc.,
            dated January 12, 1994

10.1        Agreement with St. Jude Medical, Inc., dated August 2, 1983

10.2        Asset purchase agreement with TC/American Monorail, Inc.,
            dated January 28, 1994

10.3        Real estate purchase agreement with TC/American Monorail, Inc.,
            dated January 28, 1994

10.4        Asset purchase agreement with Innovex, Inc., dated
            March 11, 1994

10.5        Lease agreement for corporate headquarters and manufacturing
            facility, dated January 4, 1991

10.6        License agreement with Imperial Chemical Industries Plc.,
            dated April 15, 1991

10.7        License agreement with the University of Liverpool,
            dated May 10, 1990

10.8        Form of indemnification agreement with officers and directors
            of Registrant

10.9        1983 Incentive Stock Option Plan as amended to date

10.10       1985 Nonqualified Stock Option Plan as amended to date

10.11       Form of incentive stock option agreement for officers
 
<PAGE>

Exhibit
 
Number                             Description    

10.12       Form of stock option agreement for directors

10.13       Restated 1992 Stock Compensation Plan

10.14       Form of restricted stock agreement for officers (1992 Plan)

10.15       Form of nonqualified stock option agreement for officers (1992 Plan)

10.16       Form of incentive stock option agreement for officers (1992 Plan)

10.17       Form of nonqualified stock option agreement for 1992 directors'
            fees (1992 Plan)

10.18       Form of nonqualified stock option agreement for 1990 directors' fees

10.19       Form of nonqualified stock option agreement for 1989 directors' fees

10.20       Underwriting agreement entered into between the Company and
            John G. Kinnard and Company, Incorporated including form of warrant 
            to representative dated September 9, 1994

10.21       Supply and distribution agreement with Bard Vascular Systems
            Division, C. R. Bard, Inc.

10.22       Underwriting agreement entered into between the Company, Dain 
            Bosworth Incorporated and John G. Kinnard and Company, Incorporated 
            dated October 2, 1995

10.23       Lease agreement for corporate headquarters and manufacturing 
            facility dated December 15, 1995

10.24       Supply and distribution agreement with Edwards CVS Division, Baxter 
            Healthcare Corporation

  21        Subsidiaries of registrant

  23        Consent of independent certified public accountants
 
  27        Financial data schedule


                    Document has heretofore been filed with the Securities and
                    Exchange Commission as indicated in Item 14(a) 3 and is
                    incorporated herein by reference.
<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, and  Registration  Statement No. 33-56728 on
Form S-8 of our report, dated September 6, 1996, appearing in this Annual Report
on Form 10-K of Possis Medical, Inc. for the year ended July 31, 1996.

Minneapolis, Minnesota
October 25, 1996