UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                     FOR THE FISCAL YEAR ENDED JULY 31, 2006

            [ ] 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: 763-780-4555

          SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
         Title of Class               Name of each exchange on which registered
         --------------               -----------------------------------------
  Common Stock, $.40 per value                   NASDAQ Global Market
 Preferred Stock Purchase Rights                 NASDAQ Global Market


        SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
YES              NO     X
     ---------       --------

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
YES              NO     X
     ---------       --------

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-10K. X .

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (check
one)
Large accelerated filer      Accelerated filer  X     Non-Accelerated filer
                       -----                  -----                        -----

Indicate by check mart whether the registrant is a shell company (as defined by
Rule 12b-2 of the Act.
YES              NO     X
     ---------       --------

Aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of
January 31, 2006: $164,555,000.

The number of shares outstanding of the registrant's common stock as of October
5, 2006: 17,210,215.

Certain responses in Part III are incorporated herein by reference from
information contained in the Company's definitive Proxy Statement for its 2006
annual meeting to be filed on or before November 3, 2006 ("The Proxy
Statement").

<PAGE>

                                     PART I
Item 1.  Business:

General

Possis Medical, Inc. is a developer, manufacturer and marketer of medical
devices, operating in one business segment. The company was incorporated in 1956
and has operated several businesses over the last 50 years. In 1990, we decided
to focus on medical products and changed our name to Possis Medical, Inc. in
1993. Currently virtually all of our revenue is derived from sale of the
Angiojet(R) Rheolytic(TM) Thrombectomy System, a proprietary catheter based
system designed to remove blood clots with minimal vascular trauma.

Development of Business

We continued during fiscal 2006 to introduce new products designed to expand the
use and efficacy of our Angiojet System. In late fiscal 2005, we received FDA
clearance to begin marketing the new Spiroflex(TM) family of rapid exchange
catheters. The Spiroflex four French catheter provides a highly flexible and
kink-resistant catheter optimized for delivery to smaller vessels and complex
anatomy (i.e., tight lesions, tortuous vessels, etc.). The slightly larger
Spiroflex VG provides the same high performance design, but with increased
thrombectomy power for slightly larger vessels and tougher thrombus. Both of
these catheters are approved to break apart and remove thrombus from leg
arteries greater than or equal to 3 mm in diameter. These devices have also been
submitted to the FDA for approval to be marketed for coronary use and we expect
approval in fiscal 2007. Once approved, these products will replace our XMI-RX
and XMI-RX+ catheters. Finally, our new AgioJet Ultra System remains under
review with the FDA. In July 2005, the Company filed a PMA supplement with the
FDA for the new console and thrombectomy sets. We anticipate FDA approval to
market the Ultra system in fiscal 2007. The Ultra Console, when combined with
the new disposable thrombectomy sets that integrated the current separate
catheters and pumps, is designed to provide plug-and-go convenience for hospital
staff. To further expand the range of products we offer, we began selling the
SafeSeal(TM) Hemostasis Patch to control bleeding from the puncture made to
perform an endovascular procedure in May 2006.

In fiscal 2006, we have obtained several contract renewals within our group
purchasing organization affiliations. These group-buying contracts are
increasingly prevalent in the healthcare industry and we have made substantial
progress in forging relationship with the major medical product purchasing
groups.

Products

Over 99 percent of our sales are derived from sale of a single product line: the
Angiojet(R) Rheolytic(TM) Thrombectomy System. The AngioJet System is a
non-surgical, minimally invasive catheter system designed to rapidly remove
blood clots with minimal vascular trauma.

The development of blood clots in various sites within the vascular system is
common and is one of the leading causes of morbidity and death. Blood clots can
be caused by a number of factors, including cardiovascular disease, trauma,
impediment of normal flow during invasive procedures, or physical pressure that
impedes venous return such as occurs during prolonged bed rest. If a blood clot
becomes large enough, it can block a blood vessel, preventing oxygenated blood
from reaching the organ or tissue it supplies, a condition called ischemia. In
addition, if a blood clot breaks off, it can travel through the bloodstream
(embolize) and block blood flow to other organs and tissue. Conditions caused by
blood clots include acute myocardial infarction (heart attack), stroke, limb
threatening peripheral ischemia, hemodialysis access graft failure, deep vein
thrombosis and pulmonary embolism.

We believe that the AngioJet System represents a relatively rapid, safe,
medically effective and potentially cost-effective approach to the removal of
blood clots from arteries, veins and grafts. The AngioJet System has
demonstrated the ability to safely and effectively remove blood clots within
seconds to minutes without surgical intervention or the risk of uncontrolled
bleeding.

The AngioJet System consists of three major components: a reusable drive unit to
power a pump and monitor device performance, a disposable single-use pump set
that delivers pressurized saline to the catheter, and a family of disposable,
single-use catheters. To operate the AngioJet System, a physician first threads
a catheter over a guidewire down a patient's blood vessel to the site of the
blood clot. The AngioJet System's drive unit is then activated, causing a
disposable pump to pressurize sterile saline to approximately 10,000 pounds per
square inch (psi) at the source and send it through the catheter to the tip.
Saline jets enclosed within the catheter spray from the catheter tip back up the
catheter at several hundred miles per hour. The operation of high-speed jets,
contained inside the catheter, creates a localized low-pressure zone around the
catheter's tip. The difference between the low pressure at the tip and the
normal blood pressure in the vessel draws the blood clot into the catheter
through openings near the tip. The jets then macerate or pulverize the blood
clot into microscopic fragments, which are ultimately propelled down the
catheter, out of the patient's body and into a disposable collection bag located
on the drive unit. The saline jets are enclosed within the catheter and not used
directly on the vessel surface to remove material.

                                       2
<PAGE>

Currently, we market the XMI(R) (Over the Wire version - OTW), XMI-RX (Rapid
Exchange version), XMI RX +, Spiroflex, XVG(R), Spiroflex VG(R), Xpeedior(R),
DVX(TM) and AVX(R) lines of catheters. Each of these catheters feature our
patented Cross-Stream(R) Technology. This technology intensifies the action at
the tip of the catheter, which doubles the clot removal rate and triples the
treatable vessel size compared to other available mechanical thrombectomy
devices on the market today. In addition, Cross-Stream Technology has been able
to deal more effectively than previous catheters with "mural thrombus," the
older, more organized material that adheres to vessel walls and can complicate
patient outcomes.

In May 2006, The Company announced the introduction of the SafeSeal(TM)
Hemostasis Patch. The SafeSeal patch is a topical wound dressing that decreases
the time it takes to control bleeding from the puncture made into a blood vessel
to perform an endovascular procedure. Designed to assist manual pressure and
complement invasive vessel closure techniques, the SafeSeal Patch specifically
targets the more than 7 million diagnostic and therapeutic procedures performed
annually in the U.S. for coronary and peripheral applications. The SafeSeal
Patch enters a U.S. market that the Company estimates to be $45 million in 2006
and growing to $100 million by 2009. The SafeSeal Patch will be marketed in the
U.S. to interventional catheterization labs, physicians and staff by the Possis
Medical sales team pursuant to a multi-year distribution agreement with Medafor.

In July 2006, the Company and Angiometrix, Inc. mutually agreed to dissolve the
exclusive agreement to distribute the Metricath(TM) arterial measurement system.

Markets and Applications

The AngioJet System is designed to remove intravascular blood clots in a variety
of clinical applications. It is typically used in conjunction with other medical
devices, such as angioplasty balloons and stents (both bare metal and drug
eluting), and drugs, such as thrombolytics and platelet inhibitors.

Our marketing analysis and cumulative clinical experience indicate that the
AngioJet System may be effective for the treatment of various blood clot-induced
conditions beyond its current approved indications. Our goal is to extend the
reach of our technology over time to these additional indications through
additional regulatory clearances, predominately in the United States (U.S.).

The AngioJet System currently has FDA clearance for marketing in three clinical
applications: (1) for removal of blood clots in access grafts and native
fistulas used by patients in kidney dialysis (received in December 1996), (2)
for removal of clots in native coronary arteries and coronary bypass grafts
(received in March 1999) and (3) for removal of blood clots in leg arteries
(received in April 2000).

                                       3
<PAGE>

The following table shows the vascular territories and indications for which the
AngioJet System is currently marketed or the Company is seeking an indication or
researching. In addition, the table indicates the estimated annual incidence
rate in the U.S. and also the Company's estimated Realizable Market Opportunity
for the AngioJet System and adjunctive devices offered by the Company.

<TABLE>
<CAPTION>
<S>                    <C>                                          <C>                       <C>              <C>
--------------------------------------------------------------------------------------------------------------------------
 Vascular Territory             Clinical Indication              Estimated         Realizable U.S. Market Opportunity
                                                                Annual U.S.
                                                                 Incidence
                                                                (Patients)
---------------------- -------------------------------------- ---------------- --------------------- ---------------------
                                                                                                       (in millions of
                                                                                   (Procedures)           dollars)*
---------------------- -------------------------------------- ---------------- --------------------- ---------------------
Coronary(1)            Coronary Thrombosis (Native Arteries         2,700,000                 87,000           $140 - 155
                       and Bypass Grafts
---------------------- -------------------------------------- ---------------- ---------------------- --------------------
Legs(2)                Peripheral Arterial Thrombosis**             2,160,000                 76,000           $150 - 165
---------------------- -------------------------------------- ---------------- ---------------------- --------------------
A-V Access(3)          Hemodialysis Graft Thrombosis                  330,000                295,000           $185 - 200
---------------------- -------------------------------------- ---------------- ---------------------- --------------------
Venous (4)             Deep Vein Thrombosis(DVT)**                    650,000                 79,000                  ***
---------------------- -------------------------------------- ---------------- ---------------------- --------------------
Lungs (4)              Pulmonary Embolism (PE)                        220,000                 40,000                  ***
---------------------- -------------------------------------- ---------------- ---------------------- --------------------
Cerebral (4)           Ischemic Stroke                                640,000            Exploratory                  ***
---------------------- -------------------------------------- ---------------- ---------------------- --------------------
TOTAL                                                               6,700,000                577,000           $475 - 520
--------------------------------------------------------------------------------------------------------------------------

(1)  Marketed under March 1999 FDA approval.
(2)  Marketed under April 2000 FDA approval.
(3)  Marketed under December 1996 FDA approval.
(4)  In Research and Development Phase; realizable market estimates are as
     follows: DVT $140 - $200 million; PE $40 - $100 million; Ischemic stroke is
     exploratory and market size is to be determined

* Realizable Market Opportunity dollar estimates are for products and clinical
indications projected to be commercially available in fiscal year 2006.
** Estimates include opportunity for thrombectomy and $70 to $85 million for
adjunctive temporary occlusion/protection devices (70,000 to 80,000 procedures).
*** To be determined

--------------------------------------------------------------------------------------------------------------------------
</TABLE>

We estimated the total number of cases for a given indication in the foregoing
table based on statistics from industry sources and then estimated the number of
procedures that might be amenable to treatment with the AngioJet System, in
conjunction with other therapies, both devices and drugs. In making these
estimates for the number of cases amenable to treatment with the AngioJet
System, we have relied on our own estimates, as well as estimates based on data
provided by physician consultants, presentations at medical industry
conferences, peer-reviewed journal articles, security analyst publications, and
publications by industry trade and consulting groups. We believe that the
totality of these sources provides estimates that are directionally and
relatively accurate, although the Company cannot guarantee their accuracy.

Clinical tests

During 1996 through 1998, we sponsored a randomized clinical trial, VeGAS 2,
which compared the AngioJet System with the approved thrombolytic drug,
Urokinase(R), in the treatment of intracoronary thrombus. The AngioJet System
proved to be medically safe and effective and cost-effective compared to
Urokinase. The results were compelling enough that the FDA granted regulatory
clearance without convening a Panel reviewed by outside experts. Treatment in
the trial with AngioJet cost an average of $5,000 less per patient than did
treatment with Urokinase. These results have been presented by physician
investigators at major medical meetings and have been published in the October
2001 issue of the American Heart Journal, a peer reviewed publication.

With respect to other FDA-approved indications, such as peripheral arteries, the
Company believes that the AngioJet System offers a unique combination of
clinical benefit and cost-effectiveness, when compared with medical management
and thrombolytic therapy. While the Company and some physicians have assembled
considerable data demonstrating these cost-savings, it is noted that these
savings have been documented only in non-randomized patient sets.

In July 2003, we completed patient enrollment planned for the TIME 1 clinical
study of the AngioJet NV150 catheter system and Possis Microcatheter to treat
acute ischemic stroke. As has been reported, AngioJet treatment in the study was
safe, but clinically significant clot removal was seen in only about 30% of the
patients. This outcome was not sufficient to support a Phase 2 study. We intend

                                       4
<PAGE>

to continue our research efforts for treating ischemic stroke along several
paths, including using drugs and its device together, to develop a therapy with
the right balance of safety and effectiveness.

From 2001 through 2004, we sponsored an on-label marketing study of AngioJet
System in treating acute myocardial infarction (heart attack) patients: the AiMI
study. The purpose of the study was to determine whether heart attack patients
benefited by having smaller final infarcts by adding AngioJet to their
interventional treatment. 480 patients were enrolled at 32 centers. Patients,
who were not required to have visible thrombus (clotting) were randomly assigned
to AngioJet treatment followed by balloon and stenting, or to balloon and
stenting alone. Final infarct size was measured 2-4 weeks after treatment via
nuclear scan. The initial results were announced in August 2004, and a complete
presentation of results was made at the TCT conference in September 2004. The
clinical presentation made at TCT is available on www.possis.com. The AiMI study
failed to show that adding AngioJet to the treatment of heart attack patients
undergoing balloon and stenting decreased final infarct size.

We are currently sponsoring the JETSTENT study of AngioJet treatment in heart
attack patients with visible thrombus. This European based multi-centered
randomized trial is led by principal investigator Dr. David Antoniucci of the
Careggi Institute in Florence, Italy, with Dr. Antonio Colombo of San Raffaele
Hospital, Milan, serving as co-principal investigator. Enrollment began in
December 2005 and is targeted for 500 patients total. Our sponsorship of this
trial is, in part, designed to reconfirm the efficacy of the AngioJet System in
coronary applications where there is visible thrombus.

Research and Development

Our product development efforts are focused on product enhancements for existing
approved indications, new products for existing indications, new products for
new clinical indications and general upgrades to the AngioJet System. We are
also working on developing new endovascular products that are beyond the
AngioJet family, of which the GuardDOG distal occlusion guidewire is the
furthest along example. Research and development expenses are generally incurred
for product prototyping and design, development and qualification, development
and validation of manufacturing processes, conduct of investigational clinical
trials, and seeking and obtaining governmental approvals. In fiscal 2007, our
research and development expenses are expected to be slightly less than that
seen in fiscal 2006 levels. We will continue to expand the current realizable
market for the AngioJet System and expand into new areas, such as distal embolic
protection.


As of August 31, 2006, we employed approximately 27 full-time employees in
research and development, including 23 in new product concept screening,
prototype building, product and process development and validation, and three in
regulatory and clinical affairs. Technical staff from other engineering
departments, such as manufacturing, quality and process engineering also support
R&D efforts. We perform substantially all of our research and development
activities at our headquarters in Minnesota. We spent $10,907,000, $10,502,000,
and $9,033,000, in fiscal 2006, 2005 and 2004, respectively, on medical product
research and development.

Manufacturing

We assemble and test our entire AngioJet product line in-house and have
vertically integrated a number of processes in an effort to provide increased
quality and reliability. Many of the processes are proprietary. Most of our raw
materials and components and select subassemblies used in our products are
purchased from outside suppliers and are generally readily available from
multiple sources; however, some of the raw material items are available only
from single-source suppliers.

Starting in fiscal 2007, several of our products, including our new AngioJet
Ultra System, will be manufactured by outside contractors. Although we believe
we have selected reliable manufacturers, we will generally have less control
over the quality of the manufacturing process for these products and could be
subject to increased rates of return, to other quality problems, or to delivery
delays if our contract manufacturers do not perform.

Our manufacturing facilities are subject to periodic inspections by regulatory
authorities, including the FDA Quality System Regulations (QSR), compliance
inspections by the FDA and a Notified Body, a private sector audit and test
house designated by European Union competent authorities (Ministries of Health)
to determine whether a product may display the CE mark, which is necessary for
marketing in the European Union. We have undergone and have consistently passed
all inspections by the FDA and/or our Notified Body each year.

Marketing and Sales

We market our AngioJet System primarily to interventional cardiologists,
interventional radiologists and vascular surgeons and secondarily to physician
specialty groups, such as nephrologists and osteopaths. Revenue from AngioJet
System sales in the United States was approximately 96%, 97% and 98% of fiscal
2006, 2005 and 2004 revenue, respectively.

                                       5
<PAGE>

We are currently marketing the AngioJet System for coronary applications,
peripheral vessel and graft applications and hemodialysis graft thrombosis. We
anticipate marketing the AngioJet System for deep vein thrombosis (DVT),
pulmonary embolism (PE) and potentially for stroke treatment if and when FDA
marketing approvals are obtained.

We currently market the AngioJet System through our own direct sales force in
the United States. A single sales force calls on all the distinct specialties
listed above; for example, the Company does not have separate coronary or
peripheral sales forces.

Outside the United States, and with the exception of Germany, we market the
AngioJet System using an independent distributor network. We hired an outside
consultant to assist it in selling the AngioJet System in Germany in August
2004. Generally, our distributorship agreements provide that the distributors,
at their own expense, will investigate, negotiate and obtain regulatory
approvals for our products in the specified territory. All sales made to our
independent distributors are denominated in United States dollars.

Our promotional activities are designed primarily to enlist the support of key
medical opinion leaders in the United States and abroad. We believe that
publications in medical journals and presentations at medical meetings are
important in encouraging acceptance of our products. Other marketing activities
include medical journal advertising, participating in medical meetings, and
supporting physician courses and studies designed to gather clinical and cost
effectiveness data of our products compared to conventional treatment.

Patents, Patent Applications, Licenses and Proprietary Rights

Our success depends, and will continue to depend, in part on our ability to
maintain patent protection for products and processes, to preserve trade secrets
and to operate without infringing the proprietary rights of third parties. Our
policy is to attempt to protect our technology by, among other things, filing
patent applications for technology that we consider important to the development
of its business. The patents we hold and apply for describe method and apparatus
claims related to thrombectomy and atherectomy devices, distal occlusion
devices, and method and apparatus claims related to the design and use of
synthetic vascular grafts. We no longer consider the graft patents as material
to our business going forward. We hold 27 United States patents and seven
foreign patents relating to the AngioJet System filed since 1990. In addition,
we have 34 United States and 25 foreign patent applications pending relating to
the AngioJet System. The validity and breadth of claims covered in medical
technology patents involve complex legal and factual questions and, therefore,
may be highly uncertain.

We require all employees to execute non-disclosure agreements upon commencement
of their employment. These agreements generally provide that all confidential
information developed or made known to the individual during the course of the
individual's employment with us is to be kept confidential and not disclosed to
third parties.

Competition

We believe that the AngioJet System will face increasing competition from a
variety of treatments for the reduction and removal of blood clots, including
thrombolytic drug therapies, particulate capture systems, such as occlusion
balloons, filters and combined systems, direct stenting, surgical intervention,
balloon embolectomy, mechanical and laser thrombectomy devices, ultrasound
ablators, and other thrombectomy devices based on waterjet systems that may
currently be under development by other companies. The medical products market
is characterized by rapidly evolving technology and increased competition. Our
future success will depend on our ability to keep pace with advancing technology
and competitive innovations. Many of our potential competitors have
significantly greater research and development capabilities, more experience in
obtaining regulatory approvals, established marketing and greater financial and
managerial resources. 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 the
products we develop.

Currently, the three primary methods of removing intravascular blood clots are
surgery, dissolution with drugs (thrombolysis) and various catheter-based
mechanical methods. We believe our AngioJet System competes effectively with
thrombolytic drug treatment on the basis of cost, speed, effectiveness and side
effects. Although certain drugs may be considered by some physicians to be
easier to administer than the AngioJet system, thrombolytic drug treatment
involves the administration of a drug designed to soften or dissolve the blood
clot in an intensive care setting. Thrombolytic drugs may require prolonged
infusion to be effective and may require significant time to take effect, which
is costly in an intensive or critical care setting, and then may only partially
remove the clot. In addition, thrombolytic drugs may cause uncontrolled,
life-threatening bleeding. Other classes of drugs, specifically platelet
glycoprotein llb/llla inhibitors, prevent blood clots from forming during
coronary interventional procedures but have no proven benefit against clots
already formed.

We believe the AngioJet System competes effectively against mechanical clot
removal systems on the basis of reduced surgical intervention, reduced trauma
and reduced hospitalization. Mechanical devices such as the Fogarty-type
catheter operate by inflating a balloon past the point of the blood clot and

                                       6
<PAGE>

then pulling the balloon along the artery, essentially dragging the blood clot
out of the patient's body. Fogarty-type catheters require surgical intervention,
which may result in overnight hospital stays, are more limited in their
applications and may cause significant vascular trauma.

For native coronary arteries, coronary bypass grafts, and peripheral arteries,
there are several catheter-based mechanical devices marketed in the U.S.,
including low-pressure manual aspiration/suction catheters, laser catheters, and
passive debris capture devices such as embolic protection guidewires. The manual
aspiration/suction catheters seek to show a price advantage relative to the
AngioJet System because they do not require a drive unit in order to evacuate
clot. The Company's research and clinical experience shows that these devices
are not as effective in removing clot, particularly in acute settings with large
thrombus burdens. Debris capture devices, such as embolic protection guidewires,
often have associated manual aspiration devices sold with the guidewires; to the
extent that these devices can show a reduction in MACE (major adverse cardiac
events) rates with their use, this can result in lost sales for the AngioJet
System, which is currently an active thrombectomy system. The coronary and
peripheral markets are very sensitive to clinical data and device safety and
effectiveness, and they are less price sensitive.

In the AV-access area, there are numerous mechanical devices, under many
different trade names; no individual device has a dominant share of the market.
This latter market is extremely price sensitive, so devices do not necessarily
gain share because of improved performance and effectiveness alone.

Government Regulation

Government regulation in the United States and other countries is a significant
factor in both our products and our activities, which are regulated by the U.S.
FDA under a number of statutes, including the Food, Drug and Cosmetic ("FDC")
Act.

FDA regulations place our products in either Class II or III (the highest level
of relative risk), based on the extent of both the pre-market approvals and
post-market controls deemed necessary to assure that they are safe and
effective. For example, Class II devices such as the AngioJet System for AV-
access graft thrombectomy are subject to pre-market notification (510(k)
submission) to the FDA, whereas use of the AngioJet System for treating coronary
thrombus is subject to pre-market approval ("PMA") by the FDA, and subsequent
annual and other PMA supplemental reporting requirements. While the FDA attempts
to complete review of these different types of pre-market submissions within
specific timeframes (90 days for a 510(k); 180 days for a PMA), final action by
the FDA may take considerably longer. Any adverse determination or request for
additional information could delay market introduction and have a materially
adverse effect on our continued operations.

In addition, either a 510(k) or PMA may require the inclusion of data and
analyses from the conduct of investigational clinical trials. Generally, such
clinical trials may be conducted only under an Investigational Device Exemption
("IDE") approved by the FDA. The FDA monitors and oversees the conduct of
clinical trials under an IDE. Such clinical trials typically take several years
to conduct, and can cost several million dollars. Many of our products were the
subject of such clinical trials in the past, and we expect that some of our
future products will also require investigational clinical trials.

The AngioJet Coronary catheter is a Class III device and is marketed in the U.S.
under an approved PMA. The AngioJet AV-access and peripheral arterial thrombus
catheters are Class II devices and are marketed in the U.S. under cleared 510(k)
submissions.

Once a product is cleared for marketing in the U.S., product labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. The FDA imposes other post-marketing
controls on, such as annual establishment registration, annual product listings,
and administration of complaint and medical device reporting files. Failure to
meet these pervasive FDA requirements could subject us and/or our employees to
injunction, prosecution, civil fines, seizure or recall of products, prohibition
of sales or suspension or withdrawal of any previously granted approvals.

The AngioJet System received its first clearance for the U.S. market through a
510(k) pre-market notification cleared by the FDA in December 1996, for use in
treating thrombosed AV access grafts. In March 1999, the AngioJet System
received FDA approval of a PMA application for treating thrombus in coronary
arteries and saphenous vein bypass grafts. In May 2000, the AngioJet System
received FDA market clearance via another 510(k) pre-market notification for
treating thrombus in leg arteries.

Our manufacturing and quality systems are also subject to FDA regulations
requiring compliance with the FDA's current Quality System Regulations ("QSR").
The FDA conducts periodic on-site inspections of manufacturing facilities. We
have successfully undergone several such inspections in the past. We are obliged
to address any deficiency noted during such inspections. If the FDA detects
violations of applicable regulations, the continued marketing of our products
may be adversely affected. Such regulations are subject to change and depend
heavily on regulatory interpretations.

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<PAGE>

We conduct sales and marketing activities in various foreign countries. The time
required to obtain approval to market a product in a foreign country may be
longer or shorter than that required for FDA approval, and the requirements may
differ. The AngioJet System displays the CE Mark, allowing import into the
European Union and certain other countries that accept the CE Mark. Approval to
display the CE Mark is dependent, in part, on annual inspections by
representatives of European Notified Bodies to successfully demonstrate
compliance with the ISO 9001 Quality Standards.

Employees

As of August 31, 2006, we had 269 full-time employees, six part-time employees
and 13 contract employees. Of these full-time employees, 27 are in research and
development, 90 are in manufacturing and production, 17 are in quality
assurance, seven are in facilities/maintenance, 99 are in sales and marketing
and 29 are in management or administrative positions. None of our employees are
covered by a collective bargaining agreement, and management considers its
relations with its employees to be good.

Available Information

We maintain a website at www.possis.com. We make available on our website under
"Investors"--"SEC Filings" and "Financial Results," free of charge, our Annual
Report to shareholders, annual reports on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K and any amendments thereto; and the SEC
filings of its directors and executive officers (Forms 3, 4, and 5) under
Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). These links are automatically updated, so the filings and any amendment
thereto also are available immediately after they are made publicly available by
the SEC. These filings also are available by the SEC through the SEC's EDGAR
system at www.sec.gov.

Item 1A:  Risk Factors

Our operations are subject to a number of risks and uncertainties that may
effect our financial results, our accounting, and the accuracy of the forward
making statements we make in this Form 10-K. We make statements regarding the
timing of product introductions and regulatory approval or permission to market
our products; the size of the potential markets for our products; our ability to
increase sales of disposable product and capital equipment in the face of new
product introductions from competitors; our ability to obtain regulatory
clearance in new foreign markets; the responses of customer to our marketing
strategies; our ability to retain and motivate skilled employees especially
sales positions; our ability to expand our sales force; the valuation of the
Company's deferred tax asset allowance; our future revenue, earnings, earnings
per share and expense levels; our future equity financing needs; and our ability
to develop new products and enhance existing ones. These forward-looking
statements are based on our current expectations and assumptions and entail
various risks and uncertainties that could cause actual results to differ
materially from those expressed in the forward-looking statements. Our actual
results may vary from these expectations because of a number of factors that
affect our business, the most important of which include the following:

o    Because we derive virtually all of our revenue from a single product line,
     factors affecting that product line will adversely affect our overall
     results. We have focused our resources on the continued development and
     refinement of our AngioJet (R) System. If we fail to obtain additional
     regulatory approvals, a new competitor emerges, or the medical community
     rejects the use of the AngioJet System for multiple purposes, our business,
     financial condition and results of operations would be materially and
     adversely affected.

o    Although we attempt to establish the clinical value of our products with
     clinical studies, adverse results from those studies have had, and could
     have in the future, a significantly adverse impact on our business. In
     order to support regulatory filings related to new applications for our
     products, and to encourage greater use of our products in existing
     applications, we periodically sponsor clinical studies. The studies are
     normally designed to be independent and not influenced by the sponsor. If
     the data from an independent study indicates or implies that our products
     are ineffective, or less effective than anticipated, our business would
     likely be negatively affected. For example, we sponsored a three year study
     on the use of our AngioJet System in treating cardiac infarct where visible
     thrombosis was not required that ended in the summer of 2004. When the
     study did not indicate that the AngioJet had a positive impact on final
     infarct size, the marketplace began questioning the value of our system
     generally, particularly in heart treatment. The negative publicity from
     these results significantly impacted our results for the 2005 and 2006
     fiscal years. If future studies generated similar results, our operations
     would be further negatively impacted.

o    Because our products are subject to extensive governmental regulation, we
     might not be able to pursue opportunities rapidly or effectively and
     failure to comply with regulatory requirements could subject us to fines
     penalties and prosecution. Our products and manufacturing activities are
     subject to extensive and rigorous federal and state regulation in the
     United States and various regulatory requirements in other countries.
     Current United States Food and Drug Administration (FDA) enforcement policy
     strictly prohibits the marketing of approved medical devices for unapproved

                                       8
<PAGE>

     uses. Therefore, even if our products receive regulatory approval,
     regulators may significantly limit the indications for which our products
     may be marketed. In addition, the process of obtaining and maintaining
     required regulatory approvals can be lengthy and expensive, and the outcome
     of the process can be uncertain. Moreover, regulatory approvals may be
     withdrawn if we fail to comply with regulatory standards or if unforeseen
     problems arise following the initial marketing of a product. Additionally,
     we are required to adhere to Quality System Regulations promulgated by the
     FDA relating to product design, development, manufacturing, servicing,
     testing and documentation. Failure to comply with applicable Quality System
     Regulations or other regulatory requirements may result in fines, delays or
     suspensions of approvals, injunctions against further distribution of our
     products, seizures or recalls of products, operating restrictions, criminal
     prosecutions or other sanctions, in addition to adverse publicity. The
     adoption of new regulations or changes in existing regulations could
     prevent us from obtaining, or affect the timing of, future regulatory
     approvals and could adversely affect the marketing of our existing
     products. We cannot assure you that we will be able to obtain necessary
     regulatory approvals on a timely basis, if at all. Delays in our receipt of
     or failure to receive regulatory approvals, the loss of previously received
     approvals or our failure to comply with regulatory requirements would have
     a material adverse effect on our business, financial condition and results
     of operations.

o    Our manufacturing would be interrupted if we were unable to use our
     manufacturing facility. We manufacture all of our AngioJet System products
     at our manufacturing facility in Minneapolis, Minnesota. If this facility
     was to be destroyed, shut down or unable to be used for its intended
     purpose, or if the specialized manufacturing equipment we maintain at the
     office is damaged, we would not be able to manufacture the AngioJet System
     products until a replacement facility and equipment was found, and the
     replacement facility and process revalidated. The replacement of the
     manufacturing facility and equipment and the revalidation of the facilities
     could take several months before manufacturing operations could restart.
     The delay engendered by, and the potential cost incurred in, these steps
     would have a material adverse effect on our business, financial condition
     and results of operations.

o    We may not be able to enhance our products rapidly enough to keep pace with
     advances in the medical products industry. The medical products market is
     characterized by rapidly evolving technology. Our future success depends on
     our ability to keep pace with advancing technology from competitors and
     other innovators. 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 accomplish desired
     therapeutic effects through entirely different methods than the products we
     are developing. We believe our AngioJet System will face intense
     competition from a variety of treatments for the removal of blood clots,
     including clot-dissolving (thrombolytic) drug therapies, surgical
     intervention, balloon embolectomy, embolic protection devices, mechanical
     and laser thrombectomy devices, ultrasound ablators, and other thrombectomy
     devices based on waterjet systems that are currently being developed by
     other companies.

o    Larger companies in the medical products industry may be in a better
     position to compete for our customers. Many of the companies developing
     competing devices have substantially greater capital and substantially
     greater resources for and experience in research and development,
     regulatory matters, manufacturing and marketing than we have. These
     companies will be serious competitors for us and may succeed in developing
     products that are more effective and/or less costly than the AngioJet
     System. Furthermore, these companies may be more successful than we are in
     manufacturing and marketing their products. Our competitors or others may
     develop technologies, products or procedures that are more effective than
     any we are developing or that may render our technology and products
     obsolete or noncompetitive. The advent of new devices, procedures or new
     pharmaceutical agents could hinder our ability to compete effectively and
     could have a material adverse effect on our business, financial condition
     and results of operations.

o    We may not be able to adequately secure our position through intellectual
     property protection. Our success depends and will continue to depend in
     part on our ability to maintain patent protection for our products and
     processes, to preserve our trade secrets and to operate without infringing
     the proprietary rights of third parties. We attempt to protect our
     technology by filing patent applications for technology that we consider
     important to the development of our business, among other measures
     described below. Claims relating to medical technology patents involve
     complex legal and factual questions. Therefore, their outcomes are highly
     uncertain. We cannot assure you that our pending applications will result
     in patents being issued to us or that either our new patents or our
     existing patents will give us a competitive advantage. Moreover, our
     competitors may design around any patents issued to us, third parties may
     receive patent protection on their own waterjet devices, and others may
     hold or receive patents containing claims that may cover products developed
     by us. We require all our employees to execute non-disclosure agreements
     when they are first employed. We cannot assure you, however, that these
     non-disclosure agreements and other safeguards will protect our proprietary
     information and know-how, or that they will provide us adequate remedies in
     the event of unauthorized use or disclosure of confidential information. We
     also cannot assure you that others will be unable to develop such
     information independently.

                                       9
<PAGE>

o    The intellectual property litigation to which we might be required to
     resort to protect our products could be costly and unfavorable results
     could damage our business. The medical device industry has seen much
     litigation with respect to patent and other intellectual property rights.
     Litigation may be necessary for us to enforce our patents, to protect our
     trade secrets and know-how, to defend against claimed infringement of
     others' rights or to determine the ownership, scope or validity of the
     proprietary rights of Possis Medical, Inc. and others. However, litigation
     also could be extremely costly to us and could divert our resources and
     efforts away from our products and day-to-day business matters. If the
     litigation had an adverse outcome, it could subject us to substantial
     liabilities to third parties, require us to seek licenses from third
     parties and prevent us from manufacturing, selling or using our products.
     Any of these results could have a material adverse effect on our business,
     financial condition and results of operations.

o    Many of our sales are subject to reimbursement by third party agencies or
     private insurers of agencies and changes in eligibility or rates of
     reimbursement could adversely affect our business. Health care providers
     (such as hospitals and physicians) that purchase medical devices like the
     AngioJet System for the treatment of patients generally rely on third-party
     payors like Medicare, Medicaid and private insurance plans to reimburse all
     or part of the costs associated with the health care services they provide.
     In certain foreign markets, the pricing of and profits generated by health
     care products are subject to government control. In some states, Medicare
     and Medicaid payors reimburse hospitals for inpatient medical procedures at
     a pre-determined rate based on diagnosis-related groups. Currently, we do
     not believe that U.S. reimbursement rates are a material impediment to
     adoption of our therapy. If these rates do not include, and third-party
     payors do not otherwise provide, adequate reimbursement to health care
     providers for the cost of our products, our products will not gain wide
     market acceptance and our financial results will suffer. The market for our
     products also could be adversely affected by future legislation to reform
     the nation's health care system or by changes in industry practices
     regarding reimbursement. We cannot assure you that the reimbursement rates
     of third-party payors will allow us to price our products at levels
     sufficient to realize an appropriate return on our investment in product
     development.

o    We may not be able to retain all of our key personnel. We depend greatly on
     a limited number of key management and technical personnel. Moreover,
     because of the highly technical nature of our business, our ability to
     continue our technological developments and to market our products--and
     thereby develop a competitive edge in the marketplace--depends in large
     part on our ability to attract and retain qualified technical and key
     management personnel. Competition for qualified personnel is intense, and
     we cannot assure you that we will be able to attract and retain the
     individuals we need. The loss of key personnel, or our inability to hire or
     retain qualified personnel, could have a material adverse effect on our
     business, financial condition and results of operations.

o    We may be subject to product liability claims, for which insurance coverage
     may be insufficient. The manufacture and sale of our products may subject
     us to product liability claims. The United States Supreme Court has held
     that, despite a company's compliance with FDA regulations, it may not be
     shielded from common-law negligent-design claims or manufacturing and
     labeling claims based on state laws. Product liability insurance is
     expensive and in the future may not be available on acceptable terms, if at
     all. We cannot assure you that the coverage limits of our product liability
     insurance policies will be adequate if a product liability claim is brought
     against us. A successful claim or series of claims against us that exceeds
     our insurance coverage could have a material adverse effect on our
     business, financial condition and results of operations. Moreover, whether
     or not successful, product liability litigation would likely divert the
     attention of our key personnel and could adversely affect our reputation
     and the marketability of our technology and products. Consequently, any
     product liability litigation could have a material adverse effect on our
     business, financial condition and results of operations.

o    The protections we have adopted may cause takeover offers to be decided by
     the Board rather than our shareholders. Of the 100 million shares of
     capital stock authorized by our amended and restated articles of
     incorporation, 81 million shares are undesignated. Our Board of Directors
     may issue the undesignated shares on terms and with the rights, preferences
     and designations determined by the Board without shareholder action. In
     addition, we have adopted a shareholder rights plan that provides for the
     exercise of preferred share purchase rights when a person becomes the
     beneficial owner of 15% or more of our outstanding common stock (subject to
     certain exceptions). We also are subject to provisions of the Minnesota
     Business Corporation Act that limit the voting rights of shares acquired in
     specified types of acquisitions and that restrict specified types of
     business combinations. The existence or issuance of "blank check" stock,
     the existence of our shareholder rights plan and the effect of
     anti-takeover provisions under Minnesota law, individually or in the
     aggregate, may discourage potential takeover attempts and delay, deter or
     prevent a change in control. They also may make the removal of management
     more difficult, which could deprive our shareholders of opportunities to
     sell their shares at prices higher than prevailing market prices.

o    We depend on single-source suppliers. We depend on single-source suppliers
     for some of the raw materials used in the manufacture of our products. If
     we cannot obtain key raw materials from our suppliers, we cannot assure you
     that the materials will be available from other suppliers, that other
     suppliers will agree to supply the materials to us, or that our use of the

                                       10
<PAGE>

     other suppliers would be approved by the FDA. Although we believe our
     supply of raw materials currently is adequate for the needs of our
     business, we cannot assure you that new sources of supply will be available
     when needed. Any interruption in our supply of raw materials could have a
     material adverse effect on our ability to manufacture our products until a
     new source of supply is located and, therefore, could have a material
     adverse effect on our business, financial condition and results of
     operations.

Item 2.  Properties:

We lease approximately 51,000 square feet of office and manufacturing space
(including approximately 6,500 square feet of controlled environment
manufacturing space) at 9055 Evergreen Boulevard NW, Minneapolis, Minnesota
55433-8003. We lease approximately 25,000 square feet of additional office and
warehouse space at 9130 and 9144 Springbrook Drive, Minneapolis, Minnesota
55433-8003. We lease approximately 800 square feet of office space at 1513
Johnson Ferry Road, Marietta, Georgia 30062. See Note 7 of Notes to Consolidated
Financial Statements in Part II, Item 8, in this Form 10-K.

We believe these properties to be in good condition and are adequate to meet our
current levels of production, research and development and necessary corporate
business activities. Included in the existing lease for the 9055 Evergreen
Boulevard NW property is the option to purchase the facility, extend the lease
term in two five-year increments and/or add on to the current location as the
need arises.

Item 3.  Legal Proceedings:

We were served with a shareholder lawsuit that was filed with the Minnesota
Federal District Court on June 3, 2005, alleging that Possis Medical, Inc. and
named individual officers violated federal securities laws. The Complaint seeks
class action status and unspecified damages. We believe that the allegations of
the lawsuit are without merit and are contesting the lawsuit vigorously. We do
not believe that the amount of any potential liability associated with these
matters can be estimated at this time, but an unfavorable resolution of these
matters could have a material adverse effect on our results of operations,
financial condition or cash flows.

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

None

Executive Officers of the Registrant:

     Name              Age           Position
--------------------------------------------------------------------------------

Robert G. Dutcher      61    Chairman, President and Chief Executive Officer

Jules L. Fisher        52    Vice President, Finance and Chief Financial Officer

Irving R. Colacci      53    Vice President, Legal Affairs and Human Resources
                             General Counsel and Secretary; Chief Governance
                             Officer

James D. Gustafson     50    Senior Vice President, Research, Development,
                             Engineering, Clinical Evaluation, and Chief Quality
                             Officer

Shawn F. McCarrey      48    Executive Vice President, Worldwide Sales and
                             Marketing

Robert J. Scott        61    Vice President, Manufacturing and Information
                             Technology; Chief Security Officer

Robert G. Dutcher joined our medical subsidiary in 1985 as its General Manager
     and became its President. He served as our Executive Vice President from
     June 1992 until October 1993. He has served as President and Chief
     Executive Officer since October 1993. Mr. Dutcher was elected Chairman of
     the Board in December 2001.

Jules L. Fisher joined us as Chief Financial Officer, Vice President of Finance
     in May 2005. Prior to that time, Mr. Fisher served as a consultant with
     Certes Financial Pros since November 2004 and was Corporate Controller of
     American Medical Systems from February to September 2004. Mr. Fisher was
     the Chief Financial Officer of Medical CV, Inc. from December 2001 to
     February 2004. From 1996 until December 2001, Mr. Fisher served as Vice
     President and Chief Financial Officer at Minntech Corporation.

                                       11
<PAGE>

Irving R. Colacci joined us in 1988 as Secretary and Corporate Counsel. Since
     1993, he has served as General Counsel and Vice President, Legal Affairs
     and Human Resources; in August 2005 he was designated as Chief Governance
     Officer.

James D. Gustafson has served as a Vice President since January 1, 1994, and has
     been responsible for our Quality Assurance and Regulatory/Clinical Affairs
     since June 1993. In August 2001, Mr. Gustafson assumed responsibility
     research, development, and engineering functions, and in August 2005
     assumed responsibility for all clinical evaluation activities, and was
     designated Chief Quality Officer.

Shawn F. McCarrey became our Director of U.S. Sales in December 1998 and became
     Vice President of U.S. Sales in April 2001, Vice President of Worldwide
     Sales in February 2003 and Executive Vice President of Worldwide Sales and
     Marketing in 2005. Prior to December 1988, Mr. McCarrey served in a variety
     of sales positions with USCI, a subsidiary of C.R. Bard, Inc., from January
     1982 until 1998.

Robert J. Scott joined our medical subsidiary in 1985 and has served as Vice
     President of Manufacturing since 1993 and Information Technology since July
     30, 2001; in August 2005 he was designated as Chief Security Officer.

                                     PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities:

We had 1,253 common shareholders of record on September 21, 2006. Our 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, 2006 and
2005 are presented below:

                         2006                               2005
            --------------------------------    -----------------------------
                High               Low             High              Low
QUARTER:
First          $13.39              $9.90          $30.76             $ 9.78
Second          12.97               9.40           13.98              10.50
Third           10.26               8.90           12.20               8.02
Fourth           9.85               7.77           11.70               8.28

We have not paid cash dividends on our common stock since 1983. We do not
currently anticipate paying cash dividends in the foreseeable future.

Share Repurchase Program

On February 16, 2005 our Board of Directors authorized the repurchase of an
additional $15,000,000 of common stock from time to time in open market
transactions. The February 2005 authorization will expire in December 2006. We
repurchased 312,491 shares during the year ended July 31, 2006. We believe that
the share repurchase program is an effective tool to reduce the dilution
associated with our stock based incentive compensation plans.

During the three months ended July 31, 2006, we repurchased an aggregate of
62,891 shares of our common stock pursuant to the repurchase program. The
following table details those purchases on a monthly basis:

<TABLE>
<CAPTION>
                    Company Repurchases of Equity Securities
<S>                  <C>                 <C>                <C>                     <C>
-------------------- ------------------- ------------------ ----------------------- -------------------------
                                                                                     (d) Maximum Number (or
                                                             (c) Total Number of       Approximate Dollar
                                                             Shares Purchased as     Value) of Shares that
                      (a) Total number      (b) Average        Part of Publicly       May Yet Be Purchased
                         of Shares        Price Paid per      Announced Plans or       Under the Plans or
                         Purchased             Share               Programs                 Programs
-------------------- ------------------- ------------------ ----------------------- -------------------------
May 1, 2006 to               --                 --                    --                       --
May 31, 2006
-------------------- ------------------- ------------------ ----------------------- -------------------------
June 1, 2006 to
June 30, 2006                --                 --                    --                       --
-------------------- ------------------- ------------------ ----------------------- -------------------------
July 1, 2006 to
July 31, 2006              62,891              $8.74                62,891                 $9,997,000
-------------------- ------------------- ------------------ ----------------------- -------------------------
</TABLE>

                                       12
<PAGE>

Item 6. Selected Financial Data:

<TABLE>
<CAPTION>
                             SELECTED FINANCIAL DATA
                      POSSIS MEDICAL, INC. AND SUBSIDIARIES
                              YEARS ENDED JULY 31,
<S>                                     <C>        <C>        <C>        <C>        <C>
In Thousands Except per Share Data         2006       2005       2004       2003       2002
                                      ------------------------------------------------------
INCOME STATEMENT DATA:
     Product sales                      $61,879    $65,053    $72,420    $57,428    $42,471
     Gross profit margin                     72%        74%        76%        75%        70%
Net income:
Before income taxes                       2,532     10,119     18,763     12,013      6,256
Income tax (provision) benefit           (1,723)    (3,964)    (7,034)     4,555     11,526
After income taxes                          809      6,155     11,729     16,568     17,782
Net income per common share - diluted:
Before income taxes                        0.14       0.55        .96       0.64       0.34
Income tax (provision) benefit            (0.09)     (0.21)     (0.36)      0.24       0.62
After income taxes                         0.05       0.34       0.60       0.88        .96
Weighted average shares outstanding:
     Basic                               17,224     17,616     17,936     17,502     17,079
     Diluted                             17,825     18,311     19,566     18,889     18,602
BALANCE SHEET DATA:
Cash and Marketable Securities          $48,116    $44,427    $48,171    $31,944    $18,557
Working capital                          57,158     53,544     57,399     38,881     25,038
Total assets                             81,952     78,151     86,021     67,765     44,689
Shareholders' equity                     72,904     70,588     77,617     61,034     39,754
CASH FLOW DATA:
Operating cash flow                      $8,470    $11,919    $17,375    $12,995     $6,966
</TABLE>

On August 1, 2005, we adopted Statement of Financial Accounting Standards No.
123(R), Share Based Payment (SFAS 123R), which resulted in $3,462,000 of pre-tax
expense, or ($2,962,000 after tax, or $0.17 per diluted share). See Note 4 to
the Consolidated Financial Statements.

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

General

We develop, manufacture, and market medical devices for mechanical thrombectomy
in native coronary arteries and coronary bypass grafts, leg arteries and in
kidney dialysis access grafts and native fistulas. Our primary product, the
AngioJet Rheolytic Thrombectomy System (AngioJet System) uses miniaturized
waterjet technology, which enables interventional cardiologists, interventional
radiologists, vascular surgeons, and other specialists to remove blood clots
throughout the body.

The proprietary AngioJet System consists of a drive unit (capital equipment), a
disposable pump set that delivers pressurized saline to a catheter, and a
variety of disposable catheters that are specifically designed for particular
clinical indications. The AngioJet coronary catheter is a Class III medical
device and is marketed in the U.S. under an approved PMA. The AngioJet AV-access
and peripheral arterial catheters are Class II devices and are marketed in the
U.S. under cleared 510(k) submissions.

We expect U.S. AngioJet System sales to grow primarily through obtaining
additional FDA approved product uses, introduction of new catheter models for
existing indications, introduction of AngioJet System-related products, more
face-time selling to existing accounts, peer-to-peer selling, and the
publication of clinical performance and cost-effectiveness data.

Critical Accounting Policies

Our consolidated financial statements include accounts of Possis Medical, Inc.
and all wholly-owned subsidiaries. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions in certain circumstances
that affect amounts reported in the accompanying consolidated financial
statements and related footnotes. In preparing these financial statements, we
have made our best estimates and applied our best judgment of certain amounts
included in the financial statements, giving due consideration to materiality.

                                       13
<PAGE>

Our most critical accounting policies are those described below. Application of
these accounting policies involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates.

Revenue Recognition

Revenues associated with AngioJet drive units that are maintained at customer
locations are recognized, and title and risk of loss on those drive units is
transferred to the customer when we receive a valid purchase order from the
customer. Revenue is not recognized for AngioJet drive units that are maintained
at customer locations as evaluation drive units. We do not lease AngioJet drive
units. Revenues associated with products that are shipped to customers from our
facilities are recognized, and title and risk of loss are transferred to the
customer, when a valid purchase order is received and the products are received
at the customer's location. Provisions for returns are recorded in the same
period the related revenues are recognized. Revenue recognition for drive unit
extended warranties is amortized on a straight-line basis over the life of the
warranty period that is generally twelve months.

Allowance for Returns

Trade receivables are reduced by an allowance for items that may be returned in
the future. The allowance requires us to make estimates at the time the account
receivable is recorded concerning the likelihood of returns. The estimate is
based upon our historical product return experience, customer complaint rates,
information received from our customers and other assumptions that we believe
are reasonable under the circumstances. We review, on a quarterly basis, the
actual returns for the previous quarter and evaluate the adequacy of the
allowance for future returns. Although we believe the amount of the allowance
for returns is appropriate, actual returns incurred could differ from our
original estimate, requiring adjustments to the allowance.

Allowance for Doubtful Accounts

Substantially all of our trade receivables are due from health care facilities
located in the United States. The estimated allowance for doubtful accounts is
based upon the age of the outstanding receivables and the payment history and
creditworthiness of each customer. We evaluate the adequacy of the allowance for
doubtful accounts on a quarterly basis. Although we believe the amount of the
allowance for doubtful accounts is appropriate, nonpayment of accounts could
differ from our original estimate, requiring adjustments to the allowance.

Inventories

We value inventories at the lower of cost or market. In order to determine the
market value of inventory, on a quarterly basis, we assess the inventory
quantities on hand to estimate future usage and sales and, if necessary, set up
an obsolescence reserve for inventory deemed excess or obsolete to estimate
market value. Although we believe the amount of the reserve for inventory
obsolescence is appropriate, the amount of our inventory that becomes obsolete
may differ from our original estimate, requiring adjustments to the reserve.

Warranty Reserve

We provide a one-year limited warranty on our AngioJet System drive unit and a
limited warranty on AngioJet System disposable products. We establish a warranty
reserve at the time products are sold that is based upon historical frequency of
claims relating to our products and the cost to replace disposable products and
to repair drive units under warranty. We evaluate the adequacy of the warranty
reserve on a quarterly basis. Although we believe the amount of the warranty
reserve is appropriate, given our historical experience, if actual claims
incurred differ from the original estimate, we would be required to adjust the
reserve.

Deferred Tax Asset Valuation Allowance

We record deferred tax assets primarily from federal and state net operating
loss carryovers and from research and development tax credit carryovers and to
the extent the utilization of those loss carryovers and credits is doubtful, we
record an allowance against the deferred tax assets. Generally, during periods
of sustained profitability no allowance is recorded unless there is a specific
credit that cannot be applied before it expires, or a loss in a jurisdiction
that cannot be applied in other jurisdictions. We became profitable starting in
fiscal 2001 and have remained profitable since. In fiscal 2006, we increased the
valuation allowance against our deferred tax asset to $1,413,000 because of
research and development tax credits that may exceed the limits imposed by
Federal and State tax jurisdictions on use of credits and that may therefore not
be realizable in future years.


                                       14
<PAGE>

Stock-Based Compensation

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment (123(R)), effective for a company's first fiscal year
beginning after June 15, 2005, SFAS No. 123(R) supersedes Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R)
requires all share-based compensation, including grants of stock options, to be
recognized in the consolidated statements of earnings. On August 1, 2006 we
adopted SFAS No. 123(R), and elected the modified prospective transition method.
This method permits us to apply the new requirements on a prospective basis. Our
net income for fiscal 2006, reflected stock-based compensation expense of
$3,462,000 ($2,962,000 after tax, or $0.17 per diluted share). Below is a table
showing the effects on SFAS 123(R) on our fiscal 2006 Statement of Income and
comparing it to fiscal 2005 and 2004 Statements of Income.

The following table compares our Statement of Income and Comprehensive Income as
reported in accordance with GAAP with a pro-forma, non-GAAP Statement of Income
and Comprehensive Income for fiscal 2006 that eliminates the effect of SFAS
123(R) on the Statement of Income and Comprehensive Income. "As Reported"
amounts include stock compensation as reported under SFAS 123 prior to revision.
In addition, fiscal 2005 and fiscal 2004 is included for comparison purposes.

<TABLE>
<CAPTION>
<S>                                     <C>          <C>          <C>          <C>          <C>
                                                        2006                       2005         2004
                                        -------------------------------------- ------------ ------------
                                                                   Pro-forma
                                                                    Non-GAAP
                                                         SFAS      Excluding
                                                        123(R)        SFAS
                                        As Reported  Adjustments     123(R)    As Reported  As Reported
                                        ------------ ------------ ------------ ------------ ------------
Product sales                           $61,879,378  $         -  $61,879,378  $65,053,329  $72,420,168
Cost of sales and other expenses:
 Cost of medical products                17,114,312     (418,000)  16,696,312   16,966,874   17,320,094
 Selling, general and administrative     32,990,441   (2,279,000)  30,711,441   28,625,132   27,983,585
 Research and development                10,907,289     (765,000)  10,142,289   10,501,719    9,033,207
                                        ------------ ------------ ------------ ------------ ------------
 Cost of sales and other expenses        61,012,042   (3,462,000)  57,550,042   56,093,725   54,336,886
Operating income                            867,336    3,462,000    4,329,336    8,959,604   18,083,282
 Interest income                          1,812,900            -    1,812,900    1,274,149      731,809
 Loss on sale of securities                (148,476)           -     (148,476)    (114,401)     (52,580)
                                        ------------ ------------ ------------ ------------ ------------
Income before income taxes                2,531,760    3,462,000    5,993,760   10,119,352   18,762,511
Provision for income taxes                1,723,159      500,000    2,223,159    3,963,934    7,033,790
                                        ------------ ------------ ------------ ------------ ------------
Net income                                  808,601    2,962,000    3,770,601    6,155,418   11,728,721
Other comprehensive income net of tax:
 Unrealized loss on securities              (89,000)           -      (89,000)    (104,000)     (36,000)
                                        ------------ ------------ ------------ ------------ ------------
Comprehensive income                        719,601    2,962,000    3,681,601    6,051,418   11,692,721
                                        ============ ============ ============ ============ ============
Net income per common share
 Basic                                  $      0.05  $      0.17  $      0.22  $      0.35  $      0.65
 Diluted                                $      0.05  $      0.17  $      0.21  $      0.34  $      0.60
                                        ============ ============ ============ ============ ============
Net income per diluted common share columns for fiscal 2006 may not total due to
rounding.
</TABLE>

Non-GAAP (General Accepted Accounting Principles) Disclosures

In our Selected Financial Data, Management's Discussion and Analysis, and Notes
to Consolidated Financial Statements, we make reference to non-GAAP (general
accepted accounting principles) financial measures:

- Income per common share before income taxes - We believe that this non-GAAP
financial measure is useful to investors because of the complexity of the
application of accounting for tax assets and credits and the effect on our net
income of the allowance against the deferred tax allowance and the recovery of
that allowance. Income per share before taxes, presented in conjunction with the
GAAP income per share, allows investors to consider operating performance
independent of these complexities. It is especially useful for fiscal 2003 and
2002, when we had an unusual tax benefit due to the reduction of the tax
valuation allowance.

-SFAS 123(R) - Various line items in our income statement, including net income
before taxes, net income after tax, net income per share, cost of medical
products, operating expenses (including selling, general and administrative, and
research and development), and provision for income taxes, without adjustment
for compensation charges resulting from SFAS 123(R) . These measures are not in

                                       15
<PAGE>

accordance with, or an alternative for, generally accepted accounting principles
and may be different from non-GAAP measures used by other companies. Possis
believes that the presentation of non-GAAP net income, non-GAAP net income per
share data, and other non-GAAP line items from the Consolidated Statements of
Income and Comprehensive Income, when shown in conjunction with the
corresponding GAAP measures, provides useful information to management and
investors regarding financial and business trends relating to its financial
condition and results of operations. Possis further believes that where the
adjustments used in calculating non-GAAP net income and non-GAAP net income per
share are based on specific identified charges that impact different line items
in the statements of income (including cost of medical products, selling,
general and administrative and research and development expense), that it is
useful to investors to know how these specific line items in the statements of
income are affected by these adjustments. In particular, as Possis begins to
apply SFAS 123(R), it believes that it is useful to investors to understand how
the expenses associated with the application of SFAS 123(R) are reflected in its
Consolidated Statements of Income and Comprehensive Income.

Results of Operations

     Fiscal Years Ended July 31, 2006, 2005 and 2004

Summary

Total product sales for fiscal 2006 decreased $3,174,000 or 5% to $61,879,000,
compared to $65,053,000 in fiscal 2005. Total product sales for 2005 decreased
$7,367,000, or 10%, to $65,053,000, compared to $72,420,000 in fiscal 2004.

We recorded net income of $809,000, or $0.05 per diluted share, in fiscal 2006,
compared to net income of $6,155,000, or $0.34 per diluted share, in fiscal 2005
and net income of $11,729,000, or $0.60 per diluted share, in fiscal 2004. Our
net income for fiscal 2006 reflects the impact of adopting SFAS No.123(R), which
resulted in stock-based compensation expense of $3,462,000, ($2,962,000 after
tax, or $0.17 per diluted share).

                                       16
<PAGE>

Operating Expenses

The following table compares dollars (in thousands) and percentage changes in
the Statements of Income between 2006 and 2005 and between 2005 and 2004.

<TABLE>
<CAPTION>
<S>                                <C>       <C>       <C>         <C>    <C>       <C>       <C>         <C>
                                                      Increase (Decrease)                    Increase (Decrease)
                                     2006      2005    Dollars  Percent     2005      2004    Dollars   Percent

  Product Sales                    $ 61,879  $ 65,053  $(3,174)    (4.9%) $ 65,053  $ 72,420  $ (7,367)   (10.2%)

  Operating Expenses
     Cost of medical products        17,114    16,967      147       0.9%   16,967    17,320      (353)    (2.0%)
     Selling, general and
      administrative                 32,990    28,625    4,365      15.2%   28,625    27,984       641       2.3%
     Research and development        10,907    10,502      405       3.9%   10,502     9,033     1,469      16.3%
     Total                           61,011    56,094    4,917       8.8%   56,094    54,337     1,757       3.2%

  Operating Income                      868     8,959   (8,091)   (90.3%)    8,959    18,083    (9,124)   (50.5%)

     Other Income                     1,664     1,160      504      43.4%    1,160       680       480      70.6%

  Income before income taxes          2,532    10,119   (7,587)     (75%)   10,119    18,763    (8,644)   (46.1%)
  Income taxes (provision) benefit   (1,723)   (3,964)   2,241    (56.5%)   (3,964)   (7,034)    3,070    (43.6%)
  Net income                       $    809  $  6,155  $(5,346)   (86.9%) $  6,155  $ 11,729  $ (5,574)   (47.5%)

The following table shows the Statements of Income as a percentage of product
sales for 2006, 2005 and 2004.

                                       2006      2005     2004

  Product Sales                       100.0%    100.0%   100.0%

  Operating Expenses
     Cost of medical products          27.7%     26.1%    23.9%
     Selling, general and
      administrative                   53.3%     44.0%    38.6%
     Research and development          17.6%     16.1%    12.5%
     Total                             98.6%     86.2%    75.0%

  Operating Income                      1.4%     13.8%    25.0%

     Other Income                       2.7%      1.8%     0.9%

  Income before income taxes            4.1%     15.6%    25.9%
  Income taxes provision              (2.8%)    (6.1%)   (9.7%)
  Net income                            1.3%      9.5%    16.2%
</TABLE>

On August 1, 2005, we adopted Statement of Financial Accounting Standards No.
123(R), Share Based Payment (SFAS 123R), which resulted in $3,462,000 of pre-tax
expense, ($2,962,000 after tax. or $0.17 per diluted share). See Note 4 to the
Consolidated Financial Statements.

Revenue

U.S. product sales for fiscal 2006 decreased $3,258,000, or 5%, to $59,858,000
compared to $63,116,000 in fiscal 2005. U.S. product sales for fiscal 2005
decreased $7,751,000, or 11%, to $63,116,000 compared to $70,867,000 in fiscal
2004. The main factor in the revenue decrease during fiscal 2006 and 2005 is the
negative impact from the results of the AiMI post-marketing study impacting our
coronary, or long catheter sales. Fiscal 2006 was also effected by higher than
normal sales force turnover.

                                       17
<PAGE>

As of July 31, 2006, we had a total of 1,672 domestic AngioJet System drive
units in the field, compared to 1,509 and 1,317 at the end of the previous two
fiscal years. During fiscal 2006, we sold approximately 45,300 catheters and
pump sets versus approximately 47,700 in fiscal 2005 and 52,100 in fiscal 2004.
This represents a 5 percent decrease in fiscal 2006 and an 8 percent decrease in
fiscal 2005 in unit catheter sales from the previous years. We sold 156 AngioJet
System drive units in fiscal 2006, 215 drive units in fiscal 2005 and 258 drive
units in fiscal 2004. Although the AngioJet System drive unit sales resulted
from continuing customer acceptance of our coronary and peripheral catheter
product lines, they also reflect the negative effects of the AiMI study on
coronary cath lab purchases.

We employ a variety of flexible drive unit sale programs, including outright
sale and various evaluation programs. The purchasing cycle for the AngioJet
System drive unit varies depending on the customer's budget cycle and is
normally approximately six months from the beginning of the marketing cycle. We
have signed contracts with eight purchasing groups to increase market
penetration. These purchasing groups evaluate and screen new medical
technologies, and negotiate pre-determined discounts on behalf of their members,
and. By working with these purchasing groups, we are placed on their recommended
vendor list, and in some instances receive marketing support from the purchasing
group supported by a marketing fee that we pay. These discounts and marketing
fees have been offset by the increase in our sales to the member hospitals of
the purchasing group. There has been no material negative effect on our margins
due to these discounts and marketing fees. The discounts reduce gross revenue on
the income statement, while marketing fees are included in selling, general and
administrative expense on the income statement.

Foreign sales of the AngioJet System were $2,021,000 in fiscal 2006, $1,938,000
in fiscal 2005 and $1,553,000 in fiscal 2004. The increase in sales is primarily
due to the introduction of the SpiroFlex, XMI RX, XMI and XVG catheters and the
increase in drive unit sales in the European market. Limited foreign sales are
primarily due to cost constraints in overseas markets.

Cost of Medical Products

Cost of medical products increased $147,000 to $17,114,000 in fiscal 2006
compared to fiscal 2005. The increase was primarily due to higher production
overhead on lower units produced combined with an increase in compensation
charges under SFAS 123(R) of $418,000, offset by the reduction in AngioJet unit
sales. Cost of medical products decreased $353,000 to $16,967,000 in fiscal 2005
compared to fiscal 2004. The decrease was due to reduction in revenue offset by
higher production overhead costs.

Gross profit decreased by $3,321,000 to $44,765,000, or 72 percent of product
sales, in fiscal 2006 from $48,086,000, or 74 percent of product sales in fiscal
2005. Gross profit decreased $7,014,000 in fiscal 2005 from $55,100,000 or 76
percent of product sales in fiscal 2004. The decrease in the gross profit margin
in fiscal 2006 and 2005 was primarily due to lower revenue.

Selling, General and Administrative Expenses

Selling, general and administrative expense increased $4,365,000 to $32,990,000,
or 53 percent of product sales, in fiscal 2006 from $28,625,000 or 44 percent of
product sales in fiscal 2005. The primary factors for the expense increase for
fiscal 2006 was SFAS 123(R) stock-based compensation charges which contributed
$2,279,000 or over half of the overall increase. We also had increased
expenditures in fiscal 2006, however, in marketing, clinical study, and in the
proportionate amount of salary, incentives and benefits for field sales
personnel resulting from turnover.

Selling, general and administrative expense increased $641,000 to $28,625,000 or
44 percent of product sales, in fiscal 2005 compared to $27,984,000 or 39
percent of product sales in fiscal 2004. The primary factors for the expense
increase in fiscal 2005 were the additional expenses associated with the growth
in the sales force, increased employee medical benefit costs, increase in
Sarbanes-Oxley related professional fees, increase in executive benefit plan
expenses, increase in depreciation, increase in software expenses, and an
increase in building rent and operating costs. These increases were partially
offset by a reduction in expenses associated with marketing clinical trials, a
reduction of incentives, a decrease in sales materials and sales demos, a
decrease in outside services and a decrease in contract labor.

We currently have a U.S. sales force of approximately eighty employees and
expect that will be sufficient to grow sales and service our current customer
base for the AngioJet System through fiscal 2007.

Research and Development Expenses

Research and development expenses increased $405,000 to $10,907,000, or 18
percent of product sales, in fiscal 2006 compared to $10,502,000 or 16 percent
of product sales in fiscal 2005. The increase was primarily due to SFAS 123(R)
impact of $765,000. Overall research and development expenses would have
decreased by $360,000 excluding the impact of SFAS 123(R). The level of research
and development is dependent on the timing of expenses incurred for various
research and development projects including the new drive unit, an associated

                                       18
<PAGE>

project to combine the pump and catheter, SpiroFlex and SpiroFlex VG catheters
and the GuardDOG distal occlusion guidewires.

Research and development expenses increased $1,469,000 to $10,502,000, or 16
percent of product sales, in fiscal 2005 compared to $9,033,000, or 12 percent
of product sales in fiscal 2004. The increase was largely due to the timing of
expenses incurred for various research and development projects including the
new drive unit, an associated project to combine the pump and catheter, DVX
peripheral catheter, and projects relating to the improvement of the rapid
exchange catheter and the distal occlusion guidewires.

We believe that research and development expenses for AngioJet System
applications and related products will decrease in fiscal 2007 over fiscal 2006
levels. Research and development expense levels are dependent upon the
continuing development of its current products and investment in the development
of new AngioJet System thrombectomy applications and related products including
clinical trials to support regulatory filings.


Interest Income

Interest income increased $539,000 to $1,813,000 in fiscal 2006 compared to
$1,274,000 in fiscal 2005, and increased $542,000 in fiscal 2005 from $732,000
in fiscal 2004. The increases are due to the investing of excess cash and cash
equivalents in an enhanced cash management portfolio of marketable securities
and to the recent interest rate increases. We expect interest income to increase
in fiscal 2007 as compared to fiscal 2006 primarily due to positive operating
cash flows.

Loss On Sale of Securities

Loss on sales of securities was $148,000 in fiscal 2006, $114,000 in fiscal 2005
and $53,000 in 2004. The losses were due to interest rate increases that reduced
the fair market value of the investments in marketable securities. Future gains
and losses on the sale of securities is primarily dependent on interest rate
fluctuations.

Provision for Income Taxes

We recorded a provision for income taxes of $1,723,000, or approximately 68
percent of income before income taxes, for fiscal 2006. We recorded a provision
for income taxes of $3,964,000 and $7,034,000, or approximately 39 percent and
37 percent of income before income taxes, for fiscal 2005 and 2004,
respectively.

For fiscal 2006 our effective tax rate was 68 percent on a GAAP basis and 37
percent as adjusted to exclude the impact of SFAS 123 (R). The increase in the
GAAP effective tax rate in the current year is attributable to the treatment of
incentive stock options (or ISO's) under SFAS 123 (R). Unless there is a
disqualifying disposition, we are not entitled to a deduction upon exercise of
an ISO and although SFAS 123(R) now requires us to recognize expense over the
vesting period, there is no offsetting tax benefit. In contrast, we are entitled
to a deduction, and tax benefit, upon exercise of non-qualified stock options.
Approximately 63 percent of our outstanding options at this time are ISO's so
the impact is significant.

During fiscal 2005, we determined that the scope of our operations caused us to
have nexus in states in which we had not previously filed corporate state income
tax returns. We filed the appropriate corporate state income tax returns in
these states, including returns for prior years, to obtain the appropriate net
operating loss carry-forwards. We expensed an additional $165,000 of corporate
state income tax expense relating to the filing of these state corporate income
tax returns during fiscal 2005.

We increased our deferred tax asset by an additional $56,000 in fiscal 2006,
$466,000 in fiscal 2005 and $2,578,000 in fiscal 2004, as a result of the tax
benefit from exercise of disqualified stock options that are recorded directly
in the Consolidated Statement of Changes in Shareholders' Equity. In fiscal
2006, we performed a study of our research and development tax credit for the
fiscal years 1995 through 2005. This analysis resulted in a net increase in the
Company's net research and development tax credits that can be carried forward
of $594,000. The valuation allowance against the deferred tax asset was
increased by $723,000 in fiscal 2006 to $1,413,000. Of this allowance,
$1,220,000 relates to research and development tax credits that may not be
realizable. An additional $120,000 valuation allowance was established in fiscal
2006 that relates to the capital loss carryover.

Effects of Inflation

Inflation and changes in prices had very little effect on our net revenue and
net income from operations for fiscal 2006.


                                       19
<PAGE>

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities totaled approximately
$48,116,000 at July 31, 2006 compared to $44,427,000 at July 31, 2005. The
primary factor in the increase was cash provided by operations of $8,470,000
which was partially offset by the repurchase of Company's stock for $3,163,000
and capital expenditures of $2,164,000.

During fiscal 2006, we generated $8,470,000 of cash from operating activities,
which resulted primarily from $809,000 net income, depreciation of $2,564,000, a
decrease in deferred tax assets of $1,220,000, stock-based compensation expense
of $3,554,000, and an increase in accounts payable and accrued liabilities of
$1,674,000. These cash sources were partially offset by increases in inventories
of $662,000 and in prepaid expenses and other assets of $802,000. Depreciation
includes company-owned drive units at customer locations, as well as property
and equipment. The decrease in the deferred tax asset was due to the utilization
of the net operating loss carry-forwards to offset current taxes payable. The
stock-based compensation includes the expensing of stock options under SFAS 123
(R). The increase in trade accounts payable and accrued liabilities was due to
the timing of the payments, including an increase in accrued compensation which
was paid subsequent to year-end. Inventory increased due to the introduction of
new products in fiscal 2006. The increase in prepaid expenses is primarily due
to increase in deposits with inventory vendors.

We used $7,938,000 in investing activities in fiscal 2006. This includes the net
purchase of marketable securities of $5,776,000 and the purchase of $2,164,000
of property and equipment.

We used $2,283,000 of cash in financing activities in fiscal 2006, which
resulted from the repurchase of 312,500 shares of our common stock for
$3,163,000, offset partially by the cash received in connection with the
exercise of stock options for $919,000.

During fiscal 2005, we generated $11,919,000 of cash from operating activities,
which resulted primarily from $6,155,000 net income, depreciation of $2,341,000,
a decrease in deferred tax assets of $3,374,000, and a decrease in accounts
receivable of $1,957,000. These sources of cash from operations were partially
offset by cash used to fund an increase in inventories of $1,021,000, an
increase in prepaid expenses and other assets of $424,000, and a decrease in
accounts payable and accrued liabilities of $840,000. Depreciation includes
company-owned drive units at customer locations, as well as property and
equipment. The decrease in the deferred tax asset was due to the utilization of
the net operating loss carry-forwards to offset current taxes payable. The
$1,957,000 decrease in receivables was due to decrease in revenue in fiscal 2005
as compared to fiscal 2004. Inventory increased as we built additional units to
meet the anticipated increase in demand of the AngioJet System that was not
realized because of the negative impact of the AiMI post-marketing study
results. The decrease in trade accounts payable and accrued liabilities was due
to the timing of the payments.

We used $1,368,000 of cash in investing activities during fiscal 2005. This
includes proceeds from the sale of marketable securities of $279,000 and the
purchase of $1,661,000 of property and equipment.

We used $13,706,000 of cash in financing activities in fiscal 2005, which
resulted from the repurchase of 1,133,100 shares of our common stock for
$14,961,000, offset partially by the cash received in connection with the
exercise of stock options for $1,256,000.

During fiscal 2004, we generated $17,375,000 of cash from operating activities,
which resulted primarily from $11,729,000 net income, depreciation of
$1,813,000, a decrease in deferred tax assets of $6,554,000, non-cash stock
compensation expense of $142,000, an increase in accounts payable and accrued
liabilities of $1,673,000. These cash sources were partially offset by cash used
in operations to fund an increase in receivables of $2,266,000, an increase in
inventories of $1,800,000, and an increase in prepaid expenses and other assets
of $475,000. The increase in trade accounts payable and accrued liabilities was
due to the timing of the payments, including an increase in accrued compensation
which was paid subsequent to year-end. The $2,266,000 increase in receivables
was due to increase in revenue in fiscal 2004 as compared to fiscal 2003.
Inventory increased due to the increase in demand for the AngioJet System.

We used $15,916,000 of cash in investing activities in fiscal 2004. This
includes a net purchase of $12,708,000 of marketable securities and property and
equipment purchases of $3,259,000.

We generated $2,170,000 of cash from financing activities in fiscal 2004,
resulting from cash received in connection with the exercise of stock options
and warrants of $7,190,000, offset by the repurchase of 243,400 shares of our
common stock for $5,020,000.

Except with respect to lease obligations and purchase obligations, we do not
have any substantial commitments for capital expenditures. The following table
sets forth contractual obligations at July 31, 2006:


                                       20
<PAGE>

<TABLE>
<CAPTION>
<S>                     <C>                <C>               <C>             <C>
                                           Payments Due By Period
---------------------------------------------------------------------------------------
                           Total          Less than 1       1 - 3 Years     4 - 5 Years
                                             year
                      -----------------------------------------------------------------
Operating Lease
Obligations             $  1,716,000       $  433,000        $  825,000      $  458,000

Purchase Obligations       3,808,000        3,808,000                --              --

Other Long-Term
Liabilities                  863,000          254,000           406,000         203,000

                      -----------------------------------------------------------------
Total                   $  6,387,000     $  4,495,000       $ 1,431,000      $  661,000
                       ==============    ============       ===========      ==========
</TABLE>

o    Operating Lease Obligations - See Note 7 to the Consolidated Financial
     Statements.
o    Purchase Obligations - These are open committed purchase orders for
     inventory and operational expenses.
o    Other Long-Term Liabilities - See Note 2 to the Consolidated Financial
     Statements.

With over $48 million of cash and marketable securities, we believe our cash on
hand and funds from operations will be sufficient to cover both our short-term
and long-term operating requirements.

Off-Balance Sheet Arrangements

We do not have any material off-balance-sheet financial arrangements.

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

We primarily invest our excess cash in a professionally managed, institutional
fixed income portfolio of short duration. The market risk on a diversified
portfolio of relatively short duration is minimal, while enhancing returns above
money market levels. Loss on sales of securities was $148,000 in fiscal 2006,
$114,000 in fiscal 2005 and $53,000 in 2004. The losses were due to interest
rate increases that reduced the fair market value of the investments in
marketable securities. Future gain (loss) on sale of securities is dependent on
interest rate fluctuations.

Our foreign product sales are in U.S. Dollars ("USD") except for product sales
in Germany, which are in euro's. The German product sales were minimal during
fiscal 2006. We have a foreign bank account in which the German product sales
receipts are deposited and immediately transferred to the operating bank account
in the United States. The balance in the German bank account was zero as of July
31, 2006.

                                       21
<PAGE>

Item 8. Financial Statements and Supplementary Data:

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Possis Medical, Inc.:


We have audited the accompanying consolidated balance sheets of Possis Medical,
Inc. and subsidiaries (the "Company") as of July 31, 2006 and 2005, and the
related consolidated statements of income and comprehensive income, cash flows
and changes in shareholders' equity for each of the three years in the period
ended July 31, 2006. Our audits also included the financial statement schedule
listed in the Index at Item 15. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at July 31, 2006 and
2005, and the results of their operations and their cash flows for each of the
three years in the period ended July 31, 2006, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of July 31, 2006, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated October 11, 2006, expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.

Minneapolis, Minnesota
October 11, 2006


                                       22
<PAGE>

                     POSSIS MEDICAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
<S>                                                      <C>            <C>
                                                         July 31, 2006  July 31, 2005
                                                         -------------  -------------
ASSETS

CURRENT ASSETS:
Cash and cash equivalents (Note 1)                       $  3,505,796   $  5,257,244
Marketable securities (Note 1)                             44,610,130     39,169,811
Trade receivables (less allowance for doubtful accounts
 and returns of $580,000 and $669,000, respectively)        8,356,776      8,274,839
Inventories (Note 1)                                        5,915,950      5,830,204

Prepaid expenses and other assets                           1,663,322      1,158,214

Deferred tax assets (Note 3)                                1,331,000      1,042,000
                                                         -------------  -------------
    Total current assets                                   65,382,974     60,732,312

PROPERTY AND EQUIPMENT, net (Note 1)                        5,090,198      4,879,221

DEFERRED TAX ASSET, net (Note 3)                           10,756,000     12,113,949

OTHER ASSET (Note 2)                                          723,262        425,914
                                                         -------------  -------------

TOTAL ASSETS                                             $ 81,952,434   $ 78,151,396
                                                         =============  =============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Trade accounts payable                                   $  2,040,367   $  1,355,402
Accrued salaries, wages, and commissions                    3,468,961      3,212,525
Other liabilities                                           2,715,421      2,468,669
                                                         -------------  -------------
    Total current liabilities                               8,224,749      7,036,596

OTHER LIABILITIES (Note 2)                                    823,975        526,914

COMMITMENTS AND CONTINGENCIES (Note 7)

SHAREHOLDERS' EQUITY (Note 4):
Common stock-authorized, 100,000,000 shares of
 $0.40 par value each; issued and outstanding, 17,146,825
 and 17,326,487 shares, respectively                        6,858,730      6,930,595
Additional paid-in capital                                 77,378,276     75,710,188
Accumulated other comprehensive loss                         (329,000)      (240,000)
Retained deficit                                          (11,004,296)   (11,812,897)
                                                         -------------  -------------
    Total shareholders' equity                             72,903,710     70,587,886
                                                         -------------  -------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY               $ 81,952,434   $ 78,151,396
                                                         =============  =============
</TABLE>

See notes to consolidated financial statements.

                                       23
<PAGE>


                      POSSIS MEDICAL, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                            AND COMPREHENSIVE INCOME
                               YEARS ENDED JULY 31

<TABLE>
<CAPTION>
<S>                                                 <C>            <C>           <C>
                                                       2006           2005          2004
                                                   -------------- -------------- -------------

Product sales (Note 8)                               $61,879,378    $65,053,329   $72,420,168
Cost of sales and other expenses:
    Cost of medical products                          17,114,312     16,966,874    17,320,094
    Selling, general and administrative               32,990,441     28,625,132    27,983,585
    Research and development                          10,907,289     10,501,719     9,033,207
                                                   -------------- -------------- -------------
        Total cost of sales and other expenses        61,012,042     56,093,725    54,336,886
                                                   -------------- -------------- -------------
Operating income                                         867,336      8,959,604    18,083,282
Interest income                                        1,812,900      1,274,149       731,809
Loss on sale of securities                              (148,476)      (114,401)      (52,580)
                                                   -------------- -------------- -------------
Income before income taxes                             2,531,760     10,119,352    18,762,511
Income tax provision (Note 3)                         (1,723,159)    (3,963,934)   (7,033,790)
                                                   -------------- -------------- -------------
Net income                                               808,601      6,155,418    11,728,721
Other comprehensive loss, net of tax -
    Unrealized loss on securities                        (89,000)      (104,000)      (36,000)
                                                   -------------- -------------- -------------
Comprehensive income                                    $719,601     $6,051,418   $11,692,721
                                                   ============== ============== =============
Net income per common share:
    Basic                                                  $0.05          $0.35         $0.65
    Diluted                                                $0.05          $0.34         $0.60
Weighted average number of common shares
 outstanding:
    Basic                                             17,223,562     17,616,072    17,935,974
    Diluted                                           17,824,739     18,310,906    19,565,530
</TABLE>

See notes to consolidated financial statements.


                                       24
<PAGE>


                      POSSIS MEDICAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                               YEARS ENDED JULY 31
<TABLE>
<CAPTION>
<S>                                             <C>           <C>           <C>
                                                    2006          2005          2004
                                                ------------- ------------- -------------
OPERATING ACTIVITIES:
    Net income                                  $    808,601  $  6,155,418  $ 11,728,721
    Adjustments to reconcile net income to net
     cash provided by operating activities:
    Depreciation                                   2,563,704     2,341,170     1,813,476
    Deferred income taxes                          1,219,949     3,374,000     6,554,030
    Stock-based compensation expense               3,553,804       159,000       141,646
    Loss on sale of securities                       190,442       136,405        52,580
    Loss (gain) on disposal of assets                  5,980        80,651       (47,236)
    (Increase) decrease in trade receivables         (81,937)    1,957,341    (2,265,786)
    Increase in inventories                         (662,482)   (1,020,509)   (1,800,360)
    Increase in prepaid expenses and other
     assets                                         (802,456)     (424,171)     (475,000)
    Increase (decrease) in trade accounts
     payable                                         643,283      (436,292)      205,918
    Increase (decrease) in accrued and other
     liabilities                                   1,030,849      (403,697)    1,466,971
                                                ------------- ------------- -------------
       Net cash provided by operating
        activities                                 8,469,737    11,919,316    17,374,960
                                                ------------- ------------- -------------
INVESTING ACTIVITIES:
     Additions to property and equipment          (2,163,523)   (1,660,969)   (3,258,644)
     Proceeds from sale of fixed assets                1,280        13,660        49,924
     Proceeds from sale/maturity of marketable
      securities                                  42,234,346    58,664,204    31,631,026
     Purchase of marketable securities           (48,010,107)  (58,385,017)  (44,338,786)
                                                ------------- ------------- -------------
     Net cash used in investing activities        (7,938,004)   (1,368,122)  (15,916,480)
                                                ------------- ------------- -------------
FINANCING ACTIVITIES:
     Proceeds from issuance of stock and
      exercise of options and warrants               918,585     1,255,710     7,190,378
   Excess tax benefits from stock-based
    compensation                                     (39,000)           --            --
     Repurchase of common stock                   (3,162,766)  (14,961,444)   (5,020,016)
                                                ------------- ------------- -------------
       Net cash (used in) provided by
        financing activities                      (2,283,181)  (13,705,734)    2,170,362
                                                ------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  (1,751,448)   (3,154,540)    3,628,842
CASH AND CASH EQUIVALENTS AT BEGINNING
  OF YEAR                                          5,257,244     8,411,784     4,782,942
                                                ------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR        $  3,505,796  $  5,257,244  $  8,411,784
                                                ============= ============= =============

SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for income taxes                      $    467,710  $    666,958  $    353,876
Issuance of restricted stock                         266,600        36,000        36,000
Disqualified stock options                            56,000       466,000     2,578,000
</TABLE>


See notes to consolidated financial statements.

                                       25
<PAGE>

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

<TABLE>
<CAPTION>
<S>                              <C>        <C>         <C>          <C>        <C>           <C>
                                      Common Stock
                                 ---------------------- Additional  Unrealized
                                 Number of               Paid-in      loss on     Retained
                                    Shares    Amount      Capital    securities    Deficit       Total
                                    ------    --------    ---------  ----------    ---------     --------
BALANCE AT JULY 31, 2003         17,757,531 $7,103,013  $83,728,496  $(100,000) $(29,697,036) $61,034,473
Employee stock purchase plan         24,814      9,926      367,713         --            --      377,639
Stock options issued to directors
 (Note 4)                                --         --      105,646         --            --      105,646
Stock options and warrants
 exercised                          714,113    285,644    6,527,095         --            --    6,812,739
Disqualified stock options               --         --    2,578,000         --            --    2,578,000
Stock grants                          1,884        754         (754)        --            --           --
Restricted stock compensation            --         --       36,000         --            --       36,000
Unrealized loss on investments           --         --           --    (36,000)           --      (36,000)
Common stock repurchased           (243,400)   (97,360)  (4,922,656)        --            --   (5,020,016)
Net income                               --         --           --         --    11,728,721   11,728,721
                                 -------------------------------------------------------------------------
BALANCE AT JULY 31, 2004         18,254,942  7,301,977   88,419,540   (136,000)  (17,968,315)  77,617,202
  Employee stock purchase plan       37,580     15,032      416,007         --            --      431,039
  Stock options issued to
   directors (Note 4)                    --         --      123,000         --            --      123,000
  Stock options and warrants
   exercised                        164,311     65,724      758,946         --            --      824,670
  Disqualified stock options             --         --      466,000         --            --      466,000
  Stock grants                        2,754      1,102       (1,102)        --            --           --
  Restricted stock compensation          --         --       36,000         --            --       36,000
  Unrealized loss on investments         --         --           --   (104,000)           --     (104,000)
  Common stock repurchased       (1,133,100)  (453,240) (14,508,203)        --            --  (14,961,443)
  Net income                             --         --           --         --     6,155,418    6,155,418
                                 -------------------------------------------------------------------------
BALANCE AT JULY 31, 2005         17,326,487  6,930,595   75,710,188   (240,000)  (11,812,897)  70,587,886
  Employee stock purchase plan       61,665     24,666      489,533         --            --      514,199
  Stock options issued to
   directors (Note 4)                    --         --      137,750         --            --      137,750
  Stock options exercised            55,506     22,202      382,184                               404,386
  Disqualified stock options             --         --       56,000         --            --       56,000
  Stock grants                       21,947      8,779       (8,779)        --            --           --
  Restricted stock cancelled         (6,289)    (2,516)     (79,430)        --            --      (81,946)
  Restricted stock compensation          --         --      266,600                               266,600
  Unrealized loss on investments         --         --           --    (89,000)           --      (89,000)
  Common stock repurchased         (312,491)  (124,996)  (3,037,770)        --            --   (3,162,766)
  Stock compensation                     --         --    3,462,000         --            --    3,462,000
  Net income                             --         --           --         --       808,601      808,601
                                 -------------------------------------------------------------------------
BALANCE AT JULY 31, 2006         17,146,825 $6,858,730  $77,378,276  $(329,000) $(11,004,296) $72,903,710
                                 =========================================================================
</TABLE>

See notes to consolidated financial statements.


                                       26
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business Possis Medical, Inc. (the "Company") is a developer,
manufacturer and marketer of medical devices, operating in one business segment.
The Company was incorporated in 1956 and has operated several businesses over
the last 50 years. In 1990, the Company decided to focus on medical products and
in 1993 changed its name to Possis Medical, Inc. In January 1995, the Company
established a 100 percent owned subsidiary, Possis Medical Europe B.V., in the
Netherlands to support international product distribution. The Company's primary
product , the AngioJet Rheolytic Thrombectomy System, received U.S. marketing
approval for use in arterio-venous (AV) access hemodialysis grafts and native
fistulas in December 1996, for use in native coronary arteries and coronary
bypass grafts in March 1999, and for use in leg arteries in April 2000.

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

Basis of Consolidation The consolidated financial statements include the
accounts of Possis Medical, Inc. and its wholly-owned subsidiary: Possis Medical
Europe B.V., after elimination of intercompany accounts and transactions. Possis
Medical Europe B.V was dissolved in September 2006.

Use of Estimates The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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.

Cash Equivalents The Company considers highly liquid investments with original
maturities of three months or less to be cash equivalents.

Marketable Securities During fiscal 2006 and 2005, the Company primarily
invested its excess cash and cash equivalents in a professionally managed
portfolio of marketable securities. All Company securities in this portfolio as
of July 31, 2006 and 2005 are classified as available-for-sale and consist
primarily of U.S. government securities and corporate/municipal bonds. These
investments are reported at fair value with a net unrealized loss for the years
ended July 31, 2006, 2005 and 2004, of approximately $89,000, $104,000, and
$36,000, respectively, net of tax effect, which is included in other
comprehensive loss for the years ended July 31, 2006, 2005 and 2004. The cost of
securities sold is based on the specific identification method. No impairment
losses were recorded during fiscal years 2006, 2005, and 2004.

Information regarding the Company's available-for-sale marketable securities as
of July 31, 2006 and 2005 is approximately as follows:

<TABLE>
<CAPTION>
<S>                             <C>              <C>              <C>                <C>             <C>
                                  U.S.Govt.      Corporate         Municipal         Mutual
                                  Securities         Bonds            Bonds           Funds            Total
                                --------------   ------------     -------------    -------------   --------------

                                                                  July 31, 2006
                                ---------------------------------------------------------------------------------

Cost.........................   $22,028,000      $9,544,000       $    16,000        $13,557,000     $45,145,000
Gross unrealized losses......      (267,000)       (104,000)               --           (164,000)       (535,000)
                                --------------   ------------     -------------    -------------   --------------
Fair value...................   $21,761,000      $9,440,000       $    16,000        $13,393,000     $44,610,000
                                ===========      ==========       =============    =============   ==============


                                                                  July 31, 2005
                                ----------------------------------------------------------------------------------

Cost.........................   $24,175,000      $ 6,806,000      $ 7,948,000      $     632,000       $39,561,000
Gross unrealized losses......      (222,000)         (40,000)        (129,000)                --          (391,000)
                                --------------   ------------     -------------    -------------   ---------------
Fair value...................   $23,953,000      $ 6,766,000      $ 7,819,000      $     632,000       $39,170,000
                                =============    ============     =============    =============   ===============
</TABLE>


                                       27
<PAGE>

The following information recaps marketable securities for the years ended July
31, 2006 and 2005:

<TABLE>
<CAPTION>
<S>                    <C>            <C>          <C>           <C>           <C>
                                                    July 31, 2006
                       ---------------------------------------------------------------------

                        U.S. Govt.    Corporate     Municipal
                         Securities      Bonds         Bonds     Mutual Funds      Total
                       -------------  -----------  ------------  ------------  -------------
Proceeds from sales    $ 15,980,000   $4,139,000   $ 2,144,000   $19,971,000   $ 42,234,000
                       =============  ===========  ============  ============  =============
Net gain realized      $         --   $    1,000   $        --   $        --   $      1,000
                       =============  ===========  ============  ============  =============
Net loss realized      $   (184,000)  $   (5,000)  $    (2,000)  $        --   $   (191,000)
                       =============  ===========  ============  ============  =============

                                                                   July 31, 2005
                       ----------------------------------------------------------------------

                         U.S. Govt.   Corporate     Municipal
                         Securities      Bonds        Bonds      Mutual Funds      Total
                       -------------  -----------  ------------  ------------  -------------
Proceeds from sales    $ 27,416,000   $  697,000   $ 1,270,000   $29,281,000   $ 58,664,000
                       =============  ===========  ============  ============   ============
Net gain realized      $     40,000   $       --   $        --   $        --   $     40,000
                       =============  ===========  ============  ============  =============
Net loss realized      $    171,000   $   (5,000)  $        --   $        --   $   (166,000)
                       =============  ===========  ============  ============  =============
</TABLE>

Inventories

Inventories are stated at the lower of cost (on the first-in, first-out basis)
or market. Inventory balances at July 31 were as follows:

                                          2006                  2005
                                     ----------------      ----------------
   Finished goods...............     $2,021,448            $  2,149,599
   Work-in-process..............      1,381,157               1,206,364
   Raw materials................      2,513,345               2,474,241
                                     ----------------      ----------------
                                     $5,915,950            $  5,830,204
                                     ================      ================

Property and Equipment

Property is carried at cost and depreciated using the straight-line method over
the estimated useful lives of the various assets. Property and equipment
balances and corresponding lives at July 31 were as follows:

<TABLE>
<CAPTION>
<S>                            <C>                  <C>                 <C>
                                    2006                2005                  Life
                               -----------------    ----------------    ----------------
Leasehold improvements         $    2,805,467       $    2,295,999      5-10 years
Equipment                          11,532,405           10,329,650      3 to 10 years
Assets in construction                482,071              222,467      N/A
                               -----------------    ----------------
                                   14,819,943           12,848,116
Less accumulated depreciation      (9,729,745)          (7,968,895)
                               -----------------    ----------------
Property and equipment - net   $    5,090,198       $    4,879,221
                               =================    ================
</TABLE>

Impairment of Long-Lived Assets

Management of the Company periodically reviews the carrying value of property
and equipment owned by the Company by comparing the carrying value of these
assets with their related expected future net cash flows. Should the sum of the
related expected future net cash flows be less than the carrying value,
management will determine whether an impairment loss should be recognized. An
impairment loss would be measured by the amount by which the carrying value of
the asset exceeds the fair value of the asset. No impairment losses were

                                       28
<PAGE>

recorded during fiscal 2006, 2005 and 2004. The unrealized losses on securities
at year end are deemed temporary and the company expects the full value to be
realized.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes." Deferred taxes are provided on an asset and liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss or tax credit carryforwards, and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
variances between the amounts of assets and liabilities recorded for income tax
and financial reporting purposes. Deferred tax assets are reduced by a valuation
allowance to reflect the possibility that some portion or all of the deferred
tax assets may not be realized.

Derivative Instruments and Hedging Activities

All contracts that contain provisions meeting the definition of a derivative
also meet the requirements of, and have been designated as, normal purchases or
sales. The Company's policy is to not enter into contracts with terms that
cannot be designated as normal purchases or sales.

Revenue Recognition

Revenues associated with AngioJet drive units that are maintained at customer
locations are recognized, and title and risk of loss on those drive units is
transferred to the customer when we receive a valid purchase order from the
customer. Revenue is not recognized for AngioJet drive units that are maintained
at customer locations as evaluation drive units. We do not lease AngioJet drive
units. Revenues associated with products that are shipped to customers from our
facilities are recognized, and title and risk of loss are transferred to the
customer, when a valid purchase order is received and the products are received
at the customer's location. Provisions for returns are recorded in the same
period the related revenues are recognized.

Revenue recognition for drive unit extended warranties is amortized on a
straight-line basis over the life of the warranty period that is generally
twelve months.

Shipping and Handling

The Company recognizes all amounts billed to customers in a sales transaction
related to shipping and handling as product sales. The Company records costs
related to shipping and handling in cost of medical products.

Fair Value of Financial Instruments

The carrying value of all financial instruments approximates fair value due to
the short-term nature of the instruments.

Net Income Per Common Share

Net income per common share for fiscal 2006, 2005 and 2004 is computed by
dividing net income by the weighted average number of common shares outstanding.
Options representing 1,787,072, 1,328,814, and 41,600, shares of common stock at
July 31, 2006, 2005 and 2004, respectively, have been excluded from the
computations because their effect is antidilutive.

Accounting for Asset Retirement Obligations

In April 2005, the FASB issued FIN No. 47 to clarify the scope and timing of
liability recognition for conditional asset retirement obligations pursuant to
SFAS No. 143 - "Accounting for Asset Retirement Obligations". The interpretation
requires that a liability be recorded for the fair value of an asset retirement
obligation, if the fair value is estimable, even when the obligation is
dependent on a future event. FIN No. 47 further clarified that uncertainty
surrounding the timing and method of settlement of the obligation should be
factored into the measurement of the conditional asset retirement obligation
rather than affect whether a liability should be recognized. Implementation is
required to be effective no later than the end of fiscal years ending after Dec.
15, 2005. Additionally, FIN No. 47 will permit but not require restatement of
interim financial information during any period of adoption. Both recognition of
a cumulative change in accounting and disclosure of the liability on a pro forma
basis are required for transition purposes. The adoption of FIN 47 by the
Company did not have an effect on the Company's consolidated balance sheet,
statements of income, or cash flows.

Accounting for Certain Hybrid Financial Instruments

In February 2006, the FASB issued FASB No. 155, "Accounting for Certain Hybrid

                                       29
<PAGE>

Financial Instruments". This Statement amends FASB Statements No. 133,
Accounting for Derivative Instruments and Hedging Activities, and No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. This Statement resolves issues addressed in Statement 133
Implementation Issue No. D1, "Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets." This Statement is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006. The fair value election
provided for in paragraph 4(c) of this Statement may also be applied upon
adoption of this Statement for hybrid financial instruments that had been
bifurcated under paragraph 12 of Statement 133 prior to the adoption of this
Statement. Earlier adoption is permitted as of the beginning of an entity's
fiscal year, provided the entity has not yet issued financial statements,
including financial statements for any interim period for that fiscal year.
Provisions of this Statement may be applied to instruments that an entity holds
at the date of adoption on an instrument-by-instrument basis. Adoption is not
expected to have a material impact on the Company's consolidated earnings,
financial position or cash flows.

Fair Value Measurements

In March 2006, the FASB issued FASB No. 157, "Fair Value Measurements". This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Earlier application is
encouraged, provided that the reporting entity has not yet issued financial
statements for that fiscal year, including financial statements for an interim
period within that fiscal year. Adoption is not expected to have a material
impact on the Company's consolidated earnings, financial position or cash flows.

Accounting for Uncertainty in Income Taxes

In June 2006, The FASB issued FASB Interpretation No. 48. "Accounting for
Uncertainty in Income Taxes", an Interpretation of FASB Statement No. 109. This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The evaluation of a tax position in accordance with
this Interpretation is a two-step process. The first step is recognition: The
enterprise determines whether it is more likely than not that a tax position
will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. In
evaluating whether a tax position has met the more-likely-than-not recognition
threshold, the enterprise should presume that the position will be examined by
the appropriate taxing authority that has full knowledge of all relevant
information. The second step is measurement: A tax position that meets the
more-likely-than-not recognition threshold is measured to determine the amount
of benefit to recognize in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than 50 percent likely
of being realized upon ultimate settlement. This Interpretation is effective for
fiscal years beginning after December 15, 2006. Earlier application of the
provisions of this Interpretation is encouraged if the enterprise has not yet
issued financial statements, including interim financial statements, in the
period this Interpretation is adopted. The Company is in the process of
evaluating the impact of adopting this interpretation and adoption is not
expected to have a material impact on the Company's consolidated earnings,
financial position or cash flows.

2. EXECUTIVE BENEFIT PLAN
Effective February 1, 2004, the Company entered into a Supplemental Executive
Retirement Deferred Compensation Agreement (SERP) with the Company's Chief
Executive Officer (CEO). The Agreement requires the Company to establish an
account on behalf of the CEO and to fund it yearly until the CEO reaches 65
years of age or early retirement, whichever comes first. The estimated yearly
funding amount is approximately $203,000 for seven years. The target benefit is
an annual benefit, for a ten-year period, equal to one-half of the CEO's base
compensation at the time benefits become payable under the SERP.

In fiscal 2005, the Company established a Nonqualified Profit Sharing Plan (the
"Plan") for executive officers. The Plan requires annual awards based upon
target goals and contribution levels established by the Board of Directors. The
Plan requires the Company to establish an account on behalf of each participant
and to credit the participant account yearly. The estimated yearly funding
amount for the 2006 and 2005 Plan Year is $51,000 and $50,000, respectively. The
target benefit is an annual benefit, for a ten-year period, equal to one-tenth
of the participant's account at the time benefits become payable under the Plan.
The fiscal 2006 benefit was funded subsequent to year end.

                                       30
<PAGE>

Total compensation expense resulting from the SERP and Plan for fiscal 2006,
2005 and 2004 is approximately $296,000, $344,000 and $162,000, respectively,
which is included in selling, general and administrative expenses. As of July
31, 2006 and 2005, the assets of $723,000 and $426,000 and liabilities of
$824,000 and $527,000 relating to the SERP and Plan are included in the balance
sheet under the caption Other Assets and Other Liabilities.

3.  INCOME TAXES

At July 31, 2006, the Company had net operating loss carry-forwards of
approximately $15,721,000 for federal tax purposes, which expire in 2019 through
2025, and $7,803,000 for Minnesota tax purposes, which expire in 2013 through
2016.

In addition, at July 31, 2006, the Company has approximately $3,834,000 in
federal and state tax credits, all of which are research and development tax
credits, which expire from 2008 through 2026, and approximately $809,000
alternative minimum tax credit, which does not expire. The Company established a
valuation allowance for $1,220,000 against these research and development tax
credits as a portion of them may not be realizable in future years. In fiscal
2006, we performed a study of our research and development tax credits for the
fiscal years 1995 through 2005. This analysis resulted in an increase in the
Company's net research and development tax credits that can be carried forward
of $594,000. In fiscal 2006, an additional $120,000 valuation allowance was
established that relates to the capital loss carryover and an additional $73,000
valuation allowance was established that relates to state net operating loss
carry-forwards.

The components of the income tax expense as of July 31, 2006, 2005 and 2004 are
as follows:

                                     2006             2005               2004
                                     ----             ----               ----
Current:
     Federal................  $     158,000   $        219,000    $     260,000
     State..................        241,159            269,934          338,790
                              -------------   ----------------    -------------
                                    399,159            488,934          598,790
Deferred:
     Federal................        810,000          3,189,000        6,540,000
     State..................        514,000            286,000         (105,000)
                              -------------   ----------------    -------------
                                  1,324,000          3,475,000        6,435,000
                              -------------   ----------------    -------------
Total income tax expense      $   1,723,159   $      3,963,934    $   7,033,790
                              =============   ================    =============

Deferred tax assets and liabilities as of July 31, 2006 and 2005 are described
in the table below.

                                                      2006           2005
                                                  -------------  ------------
Current Assets (Liabilities)
   Allowance for doubtful accounts and returns....$    228,000   $   269,000
   Inventory......................................     479,000       366,000
   Deferred Revenue...............................     429,000       374,000
   Employee compensation and benefits.............     183,000       184,000
   Other..........................................      12,000      (151,000)
                                                  -------------  ------------
   Net............................................$  1,331,000   $ 1,042,000
                                                  =============  ============
   Long-term assets (liabilities):................
   Net operating loss carry-forwards..............$  5,855,000   $ 8,795,000
   Amortization of patents........................     975,000       857,000
   Tax credits....................................   4,643,000     3,374,000
   Compensation...................................     779,000       205,000
   Depreciation...................................    (411,000)     (427,000)
   Unrealized loss on investments.................     208,000            --
   Capital loss carry-forward.....................     120,000            --
                                                  -------------  ------------
                                                    12,169,000    12,803,949
   Valuation allowance............................  (1,413,000)     (690,000)
                                                  -------------  ------------

   Net............................................$ 10,756,000   $12,114,000
                                                  =============  ============

                                       31
<PAGE>

The effective income tax rate differed from the U.S. federal statutory rate for
each of the three years ended July 31, 2006, 2005 and 2004 as follows:

<TABLE>
<CAPTION>
<S>                                                   <C>         <C>         <C>
                                                      2006        2005        2004
                                                  ------------ ----------- -----------
Tax expense (benefit) on income from continuing
 operations computed at statutory rate of 34% for
 fiscal 2006 and 35% for fiscal 2005 and 2004.... $   861,000  $3,542,000  $6,567,000
Research and development tax credits.............  (1,168,000)         --          --
Change in valuation allowance....................     723,000          --     (50,000)
FASB 123(R) compensation expense.................     740,000          --          --
Other............................................     567,159     421,934     516,790
                                                  ------------ ----------- -----------
Total income tax expense......................... $ 1,723,159  $3,963,934  $7,033,790
                                                  ============ =========== ===========
</TABLE>

Deferred tax benefit of $56,000, $466,000 and $2,578,000 in fiscal 2006, 2005
and 2004, respectively, relate to disqualifying dispositions of incentive stock
options, which were recorded directly in equity.

4. COMMON STOCK

Stock Based Compensation

We have stock-based compensation plans under which we issue stock options,
non-vested share awards and discounted purchase rights under an employee stock
purchase (Section 423) plan (ESPP). Employee and director stock options issued
prior to July 31, 2005 have a ten-year term. Employee stock options issued
subsequent to July 31, 2005 have a five-year term. Outstanding stock options
issued to employees generally vest over a four-year period, however, on occasion
the Company has issued options that vest based upon achieving corporate
objectives or stock price performance. Outstanding stock options issued to
directors vest over the following periods, based on the basis for issuance: a)
six months - stock options in lieu of compensation for services rendered as
directors, b) four years - annual grants of stock options and c) stock price
performance with a seven-year cliff period - service award options. Directors
receive an annual non-vested share award that vests upon continued employment
(time based) of one year. Our ESPP permits employees to purchase stock at 85% of
the market price of our common stock at the end of the quarterly purchase
period.

Prior to August 1, 2005, we applied Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations in
accounting for these plans. No stock-based compensation expense was recognized
in our statements of income prior to fiscal 2006 for stock option awards, as the
exercise price was equal to the market price of our stock on the date of grant.
In addition, we did not recognize any stock-based compensation expense for our
ESPP as it is intended to be a plan that qualifies under Section 423 of the
Internal Revenue Code of 1986, as amended.


On August 1, 2005, we adopted the fair value recognition provisions of Statement
of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based
Payment (123(R)), requiring us to recognize expense related to the fair value of
our stock-based compensation awards. We elected the modified prospective
transition method as permitted by SFAS No. 123(R). Under this transition method,
stock-based compensation expense for fiscal 2006, includes: (a) compensation
expense for all stock-based compensation awards granted prior to, but not yet
vested as of July 31, 2005, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123, Accounting for
Stock-Based Compensation; and (b) compensation expense for all stock-based
awards granted subsequent to July 31, 2005, based on the grant-date fair value
estimated in accordance with the provisions of SFAS No. 123(R). We recognized
compensation expense for stock options and non-vested share awards, that are
either market-based or time-based, on a straight-line basis over the requisite
service period of the award. Total stock-based compensation expense included in
our statement of income for fiscal 2006, was $3,462,000 ($2,962,000, net of
tax). In accordance with the modified prospective transition method of SFAS No.
123(R), financial results for prior periods have not been restated.

The following table illustrates the effect on net income and earnings per share
as if we had applied the fair value recognition provisions of SFAS 123 to
stock-based compensation for fiscal 2005 and 2004 under FAS 123 prior to
revision.

                                       32
<PAGE>

                                                2005                2004
                                          ------------------  ------------------
                                             As Reported         As Reported
                                          ------------------  ------------------
Net income, as reported                    $    6,155,418      $    11,728,721

Deduct: Stock-based compensation expense
 determined under fair value method for
 all awards, net of tax                        (3,169,000)          (3,198,000)
                                          ------------------  ------------------
Net income, pro forma                      $    2,986,418      $     8,530,721
                                          ==================  ==================

Net income per common share
     Basic-as reported                     $         0.35      $          0.65
     Basic-pro forma                       $         0.17      $          0.48

     Diluted-as reported                   $         0.34      $          0.60
     Diluted-pro forma                     $         0.16      $          0.44


Prior to the adoption of SFAS No. 123(R), we reported all tax benefits resulting
from the exercise of stock options as operating cash flows in our consolidated
statements of cash flows. In accordance with SFAS No. 123(R), for fiscal 2006,
we revised our statement of cash flows presentation to report the excess tax
benefits from the exercise of stock options as financing cash flows. For fiscal
2006, $39,000 of excess tax benefits were reported as financing cash flows
rather than operating cash flows.

We estimated the fair values using the Black-Scholes option-pricing model prior
to August 1, 2005 and using the Actuarial Binomial option-pricing model
subsequent to July 31, 2005, modified for dividends and using the following
assumptions:
<TABLE>
<CAPTION>
<S>                                         <C>              <C>            <C>
                                             2006             2005            2004
                                             ----             ----            ----
  Dividend yield.........................         None             None            None
  Expected volatility....................       38-60%           54-68%          54-64%
  Risk-free interest rate................     3.7-5.1%         4.1-4.5%        3.9-4.7%
  Expected life of option................   46-102 mo.        63-84 mo.         120 mo.
  Fair value of options on grant date....   $2,579,000       $7,635,000      $6,645,000
                                            ==========       ==========      ==========
</TABLE>

Forfeitures are estimated based on historical experience.

o    Risk-free interest rate is based on the U.S. Treasury interest rates whose
     term is consistent with the expected life of our stock options.
o    In 2006 we used an independent valuation advisor to assist us in more
     accurately projecting expected stock price volatility. In fiscal 2005 and
     2004, we used historical market price data.
o    We estimate the expected life of stock options based upon historical
     experience

Common Stock Repurchased

The Company's Board of Directors authorized share repurchase programs of
$4,000,000 in March 2004, $10,000,000 in August 2004 and $15,000,000 in February
2005. As of July 31, 2006, the share repurchase authorization remaining is
$9,997.000.

During fiscal 2004, in open market transactions, the Company repurchased 243,400
shares of its common stock, at an average price of approximately $20.62 per
share. During fiscal 2005, in open market transactions, the Company repurchased
1,133,100 shares of its common stock, at an average price of approximately
$13.20 per share. During fiscal 2006, in open market transactions, the Company
repurchased 312,500 shares of its common stock at an average price of
approximately $10.12 per share.

Since the inception of its repurchase programs, the Company has repurchased
1,936,000 shares of its common stock at an average price of approximately $14.02
per share.

                                       33
<PAGE>

Stock Options

In December 1999, the Company established the 1999 Stock Compensation Plan (the
1999 Plan), which replaced the 1992 Stock Compensation Plan (the 1992 Plan).
Although the 1992 Plan remains in effect for options outstanding, no new options
may be granted under this plan.

The 1999 Plan authorizes awards of the following type 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 December 16, 2009, nor shall such options remain valid
beyond ten years following the date of grant.

The total number of shares of stock reserved and available for distribution
under the 1999 Plan originally was 2,000,000 shares, all of which may be issued
as incentive stock options. The total number of shares of stock reserved and
available for distribution under the 1999 Plan has been increased annually since
August 1, 2000 by 2 percent of the number of shares of the Company's common
stock outstanding on July 31 of the prior fiscal year.
At July 31, 2006, there were 3,208,179 shares reserved for outstanding options
under all plans and 349,046 shares were available for granting of options under
the 1999 Plan.

In fiscal 2006, 2005 and 2004, the Company granted 27,494, 18,807, and 11,074
compensatory options, respectively, to its outside directors in lieu of cash
payments for directors fees. These options vest six months after date of grant
and expire not more than ten years from date of grant. The expense associated
with compensatory options to outside directors was approximately $138,000,
$123,000, and $106,000 for the years ended July 31, 2006, 2005 and 2004,
respectively.

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


                                                2006        2005       2004
                                            ------------------------------------
  Shares under option at beginning of year   3,062,409   2,652,263   2,761,253

  Options granted                              555,994     735,231     469,274

  Options exercised                            (55,506)   (167,078)   (519,534)

  Options canceled                            (354,718)   (158,007)    (58,730)
                                              ---------   --------   ----------
  Shares under option at end of year         3,208,179   3,062,409   2,652,263
                                             =========    ========   ===========
  Shares exercisable at end of year          2,078,399   1,992,450   1,906,119
                                             =========   =========   ===========

Stock option weighted-average exercise prices during fiscal 2006, 2005 and 2004
are summarized below:

                                      2006         2005          2004
                                   -------------------------- -------------
  Outstanding at beginning of year       $11.78      $ 11.08        $ 9.36
  Granted                                 11.63        13.66         18.91
  Exercised                                7.29         5.15          8.65
  Canceled                                14.27        15.74         14.58
  Outstanding at end of year             $11.55      $ 11.78       $ 11.08
                                         ======      =======       =======


                                       34
<PAGE>

The following table summarizes information concerning options outstanding and
exercisable options as of July 31, 2006:

<TABLE>
<CAPTION>
<S>                     <C>                   <C>                 <C>                      <C>                  <C>
                                        Weighted-Average
                                           Remaining
 Range of Exercise      Shares          Contractual Life      Weighted-Average                              Weighted-Average
       Price          Outstanding           in Years           Exercise Price        Shares Exercisable      Exercise Price
------------------ ------------------- ------------------- ---------------------    -------------------- --------------------
    $  1 - 6            577,536               4.25             $  4.76                     577,536           $  4.76
------------------ ------------------- ------------------- ---------------------    -------------------- --------------------
       6 - 12           897,082               5.12                8.08                     627,402              7.69
------------------ ------------------- ------------------- ---------------------    -------------------- --------------------
      12 - 17           883,961               4.84               13.04                     380,911             13.43
------------------ ------------------- ------------------- ---------------------    -------------------- --------------------
      17 - 21           817,800               6.47               17.95                     476,850             18.09
------------------ ------------------- ------------------- ---------------------    -------------------- --------------------
      21 - 34            31,800               7.74               27.24                      15,700             27.24
------------------ ------------------- ------------------- ---------------------    -------------------- --------------------
</TABLE>


Non-Vested Share Awards

The fair value of non-vested market-based and time-based share awards is
determined based on generally accepted valuation techniques and the closing
market price of our stock on the date of grant. A summary of the status of our
market-based and time-based share awards for each of the three years ended July
31 follows:

                                               2006         2005         2004
                                        -------------------------  -----------
Outstanding at beginning of year              2,754        1,884        2,010
Granted                                      21,974        2,754        1,884
Vested                                      (14,818)      (1,884)      (2,010)
Forfeited/canceled                           (6,289)          --           --
                                        ------------  -----------  -----------
Outstanding at end of year                    3,594        2,754        1,884
                                        ============  ===========  ===========

Share awards fair value during fiscal 2006, 2005 and 2004 are summarized below:

                                             2006          2005          2004
                                      --------------------------  ------------
Outstanding at beginning of year           $11.70        $28.60        $17.02
Granted                                     12.15         13.08         19.09
Vested                                      12.47         13.08         19.09
Forfeited/canceled                          13.03            --            --
Outstanding at end of year                  $8.36        $11.70        $28.60
                                      ============  ============  ============

The aggregate intrinsic value of options outstanding and exercisable as of July
31, 2006, (the amount by which the market price of the stock on July 31, 2006,
exceeded the exercise price of the stock on the date of grant) was $2,723,000
and $2,689,000, respectively.


In August, 2005, the Company issued 18,353 shares of restricted stock to
executives of the Company as part of the fiscal 2005 management incentive
program. The restricted stock vested when our stock price closed at $13.00 or
greater, which occurred on August 31, 2005. The $230,600 fair market value of
the restricted stock was expensed in fiscal 2005 as compensation expense. We
cancelled 6,289 shares of restricted stock due to executives electing to receive
fewer shares in lieu of paying withholding taxes.


In fiscal 2006, the Company granted 3,594 shares of restricted stock to the
Board of Directors under the terms of the 1999 Plan, which vest in twelve
months. The fair market value of the restricted shares was approximately $30,000
as of July 31, 2006. In case of termination of a member of the Board of
Directors, unvested shares are forfeited.


                                       35
<PAGE>

In fiscal 2005, the Company granted 2,754 shares of restricted stock to the
Board of Directors under the terms of the 1999 Plan, which vest in twelve
months. The fair market value of the restricted shares was approximately $32,000
as of July 31, 2005. In case of termination of a member of the Board of
Directors, unvested shares are forfeited.

In fiscal 2004, the Company granted 1,884 shares of restricted stock to the
Board of Directors under the terms of the 1999 Plan, which vest in twelve
months. The fair market value of the restricted shares was approximately $54,000
as of July 31, 2004. In case of termination of a member of the Board of
Directors, unvested shares are forfeited.
Total compensation expense of approximately $36,000 annually was recognized for
these restricted stock grants in fiscal years 2006, 2005, and 2004,
respectively.

Stock Warrants

Stock purchase warrants held by unrelated parties representing the right to
purchase 26,400 shares of the Company's common stock at $8.52 a share were
outstanding as of July 31, 2003. These warrants were cancelled in fiscal 2004
following the expiration of the mandatory notice period.

In March 2000, the Company issued 318,810 warrants to various investors in
conjunction with the Company's private placement offering. These warrants were
exercisable into common stock at $12.67. During fiscal 2004, 206,381 of these
warrants were exercised. The remaining 15,399 warrants expired in March 2004.

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

                                                  2006        2005        2004
                                             ----------  ----------  ----------
Warrants outstanding at beginning of year           --          --     248,180
Warrants issued                                     --          --          --
Warrants exercised                                  --          --    (206,381)
Warrants expired                                    --          --     (41,799)
                                             ----------  ----------  ----------
Warrants outstanding at end of year                 --          --          --
                                             ==========  ==========  ==========


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 quarter. For fiscal 2006, the purchase price is 85
percent of the fair market value of the stock on the last day of the calendar
quarter. The Company issued 61,665 shares in fiscal 2006, 37,580 shares in
fiscal 2005, and 24,814 shares in fiscal 2004 under this Plan. Prior to
amendment in fiscal 2006, the plan enabled eligible employees to purchase shares
of the lower of 85 percent of the fair market value of the stock on the first or
last day of the calendar year.


5.   ACCRUED WARRANTY COSTS

The Company estimates the amount of warranty claims on sold product that may be
incurred based on current and historical data. The actual warranty expense could
differ from the estimates made by the Company based on product performance. A
summary of changes in the Company's product warranty liability of each of the
three years ended July 31 follows:

                                                  2006        2005        2004
                                             ----------  ----------  ----------
Accrued warranty costs at beginning of year..$ 146,500   $ 293,500   $ 146,500
Payments made for warranty costs............. (401,400)   (494,700)   (334,900)
Accrual for product costs....................  346,400     347,700     481,900
                                             ----------  ----------  ----------
Accrued warranty costs at the end of year....$  91,500   $ 146,500   $ 293,500
                                             ==========  ==========  ==========


6.  401 K PLAN

The Company has an employee savings and profit sharing plan for all qualified
employees who have completed six months of service. Company contributions are
made at the discretion of the Board of Directors subject to the maximum amount
allowed under the Internal Revenue Code. Contributions for the years ended July
31, 2006, 2005 and 2004 were $372,000, $358,000, and $409,000, respectively.

                                       36
<PAGE>

7.   COMMITMENTS AND CONTINGENCIES

The Company's operations are conducted from a leased facility under an operating
lease that expires in fiscal 2011. The lease can be canceled by either party
with notice and payment of a termination fee.

The Company is also leasing administrative, shipping and warehouse facilities
under an operating lease that expires in fiscal 2009. The Company is also
leasing a sales office under an operating lease that expires in 2007.

Total rental expense charged to operations was approximately $426,000, $406,000,
and $269,000, for the years ended July 31, 2006, 2005, and 2004, respectively.

Future minimum payments under the non-cancelable operating leases at July 31,
2006 are:


                           Year Ending July          Amount
                           ----------------          ------
                                 2007               $433,000
                                 2008                431,000
                                 2009                394,000
                                 2010                273,000
                                 2011                185,000
                                                     -------
                    Total minimum lease payments  $1,716,000
                                                   =========

We were served with a shareholder lawsuit that was filed with the Minnesota
Federal District Court on June 3, 2005, alleging that Possis Medical, Inc. and
named individual officers violated federal securities laws. The Complaint seeks
class action status and unspecified damages. We believe that the allegations of
the lawsuit are without merit and are contesting the lawsuit vigorously. We do
not believe that the amount of any potential liability associated with these
matters can be estimated at this time, but an unfavorable resolution could have
a material adverse effect on results of operations, financial condition or cash
flows.

8.  SEGMENT AND GEOGRAPHIC INFORMATION AND CONCENTRATION OF CREDIT RISK

The Company's operations are in one business segment; the design, manufacture
and distribution of cardiovascular and vascular medical devices. The Company
evaluates revenue performance based on the worldwide revenues of each major
product line and profitability based on an enterprise-wide basis due to shared
infrastructures to make operating and strategic decisions.

Total revenues from sales in the United States and outside the United States for
each of the three years ended July 31, 2006, 2005 and 2004 are as follows:

                                      2006          2005          2004
                                 -------------  ------------  ------------
United States....................$ 59,858,452   $63,115,776   $70,867,103
Outside the United States........   2,020,926     1,937,553     1,553,065
                                 -------------  ------------  ------------
Total revenues...................$ 61,879,378   $65,053,329   $72,420,168
                                 =============  ============  ============

In fiscal 2006, 2005, and 2004 there were no individual customers with sales
exceeding 10 percent of total revenues.


                                       37
<PAGE>

9.       SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
<S>                               <C>          <C>          <C>          <C>
                                            Fiscal Year Ended July 31, 2006
                                  ---------------------------------------------------
                                     First        Second       Third        Fourth
                                    Quarter      Quarter      Quarter      Quarter
Product sales                     $15,475,674  $15,129,108  $15,224,827  $16,049,769
Gross profit                       11,245,519   11,226,132   10,825,036   11,468,379
Net income (loss)                     265,602      341,563     (277,608)     479,044

Net income (loss) per common share
         Basic                           $.02         $.02        $(.02)        $.03
         Diluted                         $.01         $.02        $(.02)        $.03
Fiscal 2006 includes the adoption of Statement of Financial Accounting Standards No.
 123(R), Share Based Payment (SFAS 123R), which resulted in $3,462,000 of pre-tax
 expense, ($2,962,000 after tax, or $0.17 per diluted share). The following were
 effects on net income (loss) and EPS on a quarterly basis:

                                           First      Second     Third      Fourth
                                          Quarter    Quarter    Quarter     Quarter
Net income (loss)                        ($702,000) ($730,000) ($820,000)  ($710,000)
Net income (loss) per common share -
 diluted                                    ($0.04)    ($0.04)    ($0.05)     ($0.04)
</TABLE>

                                       Fiscal Year Ended July 31, 2005
                             ---------------------------------------------------
                                First        Second       Third        Fourth
                               Quarter      Quarter      Quarter      Quarter
Product sales                $17,501,988  $16,168,884  $15,101,977  $16,280,480
Gross profit                  13,197,649   11,885,466   10,946,716   12,056,624
Net income                     2,192,875    1,669,161    1,015,827    1,277,554

Net income per common share
         Basic                     $0.12        $0.09        $0.06        $0.07
         Diluted                    0.11         0.09         0.06         0.07

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

During fiscal 2006 and 2005, there were no changes in or disagreements with the
Company's independent registered public accounting firm on accounting procedures
or accounting and financial disclosures.

Item 9A.  Controls and Procedures

Evaluation of disclosure controls and procedures
------------------------------------------------

Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rule 13a-15(e) under the Exchange Act. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective in ensuring that information required to
be disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in applicable rules and forms and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, in a manner that allows timely decisions regarding required
disclosure.

                                       38
<PAGE>

Internal control over financial reporting
-----------------------------------------

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Possis Medical, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Possis
Medical, Inc.'s internal control system is designed to provide reasonable
assurance to our management and board of directors regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Possis
Medical, Inc.'s internal control over financial reporting includes those
policies and procedures that:

- Pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company;

- Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and

- Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets that could
have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

Management assessed the effectiveness of Possis Medical Inc.'s internal control
over financial reporting as of July 31, 2006. In making this assessment, we used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control -- Integrated Framework. Based on
management's assessment and those criteria, it believes that, as of July 31,
2006, Possis Medical, Inc. maintained effective internal control over financial
reporting.

Possis Medical, Inc.'s independent registered public accounting firm has audited
management's assessment of the effectiveness of Possis Medical, Inc.'s internal
control over financial reporting as of

July 31, 2006, as stated in the Report of Independent Registered Public
Accounting Firm, [appearing under Item 9A], which expresses unqualified opinions
on management's assessment and on the effectiveness of Possis Medical, Inc.'s
internal controls over financial reporting as of July 31, 2006.

October 13, 2006                     /s/ Robert G. Dutcher
                                     ------------------------------
                                     Robert G. Dutcher
                                     Chief Executive Officer

October 13, 2006                     /s/ Jules L. Fisher
                                     ------------------------------
                                     Jules L. Fisher
                                     Chief Financial Officer


                                       39
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Possis Medical, Inc.:


We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting under Item 9A,
that Possis Medical, Inc. and subsidiaries (the "Company") maintained effective
internal control over financial reporting as of July 31, 2006, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of July 31, 2006, is fairly stated,
in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of July 31, 2006, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule as of and for the year ended July
31, 2006, of the Company, and our report dated October 11, 2006, expressed an
unqualified opinion on those financial statements and financial statement
schedule.

Minneapolis, Minnesota
October 11, 2006


                                       40
<PAGE>

Item 9B.  Other Information

None.

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant:

Information under the heading "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" 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, 2006 is in the Proxy Statement under the heading "Election of
Directors" and "Executive Compensation" and is incorporated herein by reference.

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

The security ownership of certain beneficial owners and management is contained
in the Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management" and is incorporated herein by reference.

Information regarding securities authorized for issuance under equity
compensation plans is contained in the Proxy Statement under the heading
"Securities Authorized for Issuance Under Equity Compensation Plans" and is
incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions:

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

Item 14.  Principal Accountant Fees and Services:

Information under the heading "Audit Committee Report and Payment of Fees to
Accountants" in the Proxy Statement is incorporated herein by reference.

                                     PART IV

Item 15.  Exhibits and Financial Statement Schedules:

(a) 1. Financial Statements

The following financial statements of the Company, accompanied by a Report of
Independent Registered Public Accounting Firm, are contained in Part II, Item 8:

     Consolidated Balance Sheets, July 31, 2006 and 2005
     Consolidated Statements of Income and Comprehensive Income for each of the
         three years in the period ended July 31, 2006
     Consolidated Statements of Cash Flows for each of the three years in the
         period ended July 31, 2006
     Consolidated Statements of Changes in Shareholders' Equity for each of the
         three years in the period ended July 31, 2006
     Notes to Consolidated Financial Statements

     2. Financial Statement Schedules

The following financial statement schedules are submitted herewith:

     SCHEDULE II - Valuation Accounts for each of the three years in the period
ended July 31, 2006

                                       41
<PAGE>

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 pages.
<TABLE>
<CAPTION>
<S>              <C>           <C>                       <C>
 Exhibit         Form          Date Filed                        Description
-----------------------------------------------------------------------------------------------------

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

     3.2         10-K          Fiscal year ended         Bylaws, as amended and restated
                               July 31, 1999             to date

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

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

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

*   10.3         10-K          Fiscal year ended         Form of nonqualified stock option
                               July 31, 1993             agreement for officers (1992 Plan)

*   10.4         10-K          Fiscal year ended         Form of incentive stock option
                               July 31, 1993             agreement for officers (1992 Plan)

*   10.5         10-K          Fiscal year ended         Form of nonqualified stock option
                               July 31, 1993             agreement for 1992 directors' fees
                                                         (1992 Plan)

   10.6          10-Q          Quarter ended             Lease agreement for corporate
                               January 31, 1996          headquarters and manufacturing
                                                         facility dated December 15, 1995

   10.7          10-Q          Quarter ended             Lease agreement for additional corporate
                               January 31, 2004          and manufacturing facilities dated
                                                         March 1, 2004

*   10.8         10-K          Fiscal year ended         Change in Control Termination
                               July 31, 2001             Pay Plan - Amended  effective April 3, 2001


*   10.9         10-K          Fiscal year ended         1999 Stock Compensation Plan
                                                         July 31, 1999

*   10.10        10-K          Fiscal year ended         Form of nonqualified stock option agreement
                               July 31, 2002             (1999 Plan)

*   10.11        10-K          Fiscal year ended         Form of incentive stock option agreement
                               July 31, 2002             (1999 Plan)

*   10.12        10-K          Quarter ended             Supplemental Executive Retirement
                               January 31, 2004          Deferred Compensation Agreement dated
                                                         February 1, 2004
</TABLE>

                                   42
<PAGE>

<TABLE>
<CAPTION>
<S>              <C>           <C>                       <C>
   10.13        10-K          Fiscal year ended         Angiometrx Metricath Distribution Agreement
                              July 31, 2004             dated April 16, 2004

   10.14        10-Q          Fiscal year ended         Lease agreement for additional corporate
                              July 31, 2005             and manufacturing facilities dated
                                                        May 26, 2004

   10.15        Filed with                              Minnetronix Development and Production
                this 10-K                               Agreement

   21           Filed with                              Subsidiaries of registrant
                this 10-K

   23           Filed with                              Consent of independent registered
                this 10-K                               public accounting firm

   31.1         Filed with                              Certification of Chief Executive Officer
                this 10-K                               pursuant to Section 302 of the
                                                        Sarbanes-Oxley Act

   31.2         Filed with                              Certification of Chief Financial Officer
                this 10-K                               pursuant to Section 302 of the
                                                        Sarbanes-Oxley Act

   32.1         Filed with                              Certification of Chief Executive Officer
                this 10-K                               pursuant to Section 906 of the
                                                        Sarbanes-Oxley Act

   32.2         Filed with                              Certification of Chief Financial Officer
                this 10-K                               pursuant to Section 906 of the
                                                        Sarbanes-Oxley Act
</TABLE>

* Indicates management contract or compensatory plan or arrangement.

                                   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.

Dated:  October 13, 2006        by:    /s/ Jules L. Fisher
                                   -----------------------------------------
                                Jules L. Fisher
                                Chief Financial Officer and
                                Vice President of Finance


                                       43
<PAGE>

SIGNATURES

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/ Robert G. Dutcher         Chairman, President and          October 13, 2006
Robert G. Dutcher             Chief Executive Officer
                              (Principal Executive Officer)


/s/ Jules L. Fisher           Chief Financial Officer and      October 13, 2006
Jules L. Fisher               Vice President of Finance
                              (Principal Financial and
                               Principal Accounting Officer)

/s/ Mary K. Brainerd          Director                         October 13, 2006
Mary K. Brainerd


/s/ Seymour J. Mansfield      Lead Director                    October 13, 2006
Seymour J. Mansfield


/s/ William C. Mattison, Jr.  Director                         October 13, 2006
William C. Mattison, Jr.


/s/ Whitney A. McFarlin       Director                         October 13, 2006
Whitney A. McFarlin


/s/ Donald C. Wegmiller       Director                         October 13, 2006
Donald C. Wegmiller


/s/ Rodney A. Young           Director                         October 13, 2006
Rodney A. Young



                                       44
<PAGE>

                                                                     SCHEDULE II

                              POSSIS MEDICAL, INC.

VALUATION ACCOUNTS
YEARS ENDED JULY 31, 2006, 2005 AND 2004
<TABLE>
<CAPTION>
<S>                                  <C>             <C>                <C>              <C>
-------------------------------------------------------------------------------------------------------
      Column A                        Column B          Column C          Column D         Column E
-------------------------------------------------------------------------------------------------------


                                                       Additions
                                      Balance at       Charged to
                                      Beginning       (Reversal of)      Deductions       Balance at
   Description                        of Year          Expenses          Write-offs       End of Year
-----------------------------------------------------------------------------------------------------

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

Year ended July 31, 2006             $    670,000     $    690,000       $     778,000    $     580,000
                                     ============     ============       =============    =============
Year ended July 31, 2005                   536,000          682,000             548,000         670,000
                                     =============    =============      ==============   =============
Year ended July 31, 2004                   507,000          603,000             574,000         536,000
                                     =============    =============      ==============   =============


Valuation allowance on
deferred tax asset:

Year ended July 31, 2006             $    690,000      $   973,000       $           --     $ 1,663,000
                                     ============      ===========       ==============   =============
Year ended July 31, 2005                  690,000               --                   --         690,000
                                     ============      ===========       ==============   =============
Year ended July 31, 2004                  740,000               --               50,000         690,000
                                     ============      ===========       ==============   =============
</TABLE>


                                       45
<PAGE>

                              POSSIS MEDICAL, INC.
                             FORM 10-K - ITEM 15(a)3

                                  EXHIBIT INDEX
Exhibit
Number   Description
------   -----------

 10.15   Minnetronix Development and Production Agreement

 21      Subsidiaries of Possis Medical, Inc.

 23      Consent of Independent Registered Public Accounting Firm

 31.1    Certification of Chief Executive Officer pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002

 31.2    Certification of Chief Financial Officer pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002

 32.1    Certification of Chief Executive Officer pursuant to Section 906 of the
         Sarbanes-Oxley Act of 2002

 32.2    Certification of Chief Financial Officer pursuant to Section 906 of the
         Sarbanes-Oxley Act of 2002


                                       46