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, 2001

            [ ] 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: None

          SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
                        Common Stock, 40 Cents Par Value
                        Preferred Shares Purchase Rights

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant  was required to file such  reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO

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

     Aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of September 30, 2001 was approximately $197,356,000.

     The number of shares  outstanding  of the  registrant's  common stock as of
September 30, 2001: 16,868,062.

     Certain  responses  in Part III are  incorporated  herein by  reference  to
information  contained in the Company's  definitive Proxy Statement for its 2001
annual  meeting  to  be  filed  on or  before  November  28,  2001  ("The  Proxy
Statement").

<PAGE>

                                     PART I
Item 1.  Business:

General

     Possis Medical, Inc. (the Company) was incorporated in 1956 and went public
in 1960 as Possis Machine  Corporation.  Initial operations consisted of design,
manufacturing,  and sales of  industrial  equipment and a division that provided
temporary technical personnel.  The Company's  involvement with medical products
began in 1976.  In 1990  the  Company  made  the  decision  to focus on  medical
products and subsequently divested all non-medical operations.


Products

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

     Currently,  the three primary methods of removing intravascular blood clots
are surgery,  dissolution  with drugs  (thrombolysis)  and  mechanical  devices.
Thrombolytic  drug treatment  involves the  administration of a drug designed to
soften or dissolve  the blood clot in an  intensive  or critical  care  setting.
Thrombolytic drugs may require prolonged  infusion to be effective,  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.  Also,
other classes of drugs, specifically glycoprotein llb/llla inhibitors, are being
used to prevent blood clots from forming. These drugs, however, are not approved
for this use and of limited  value  against  clots  already  formed.  Mechanical
devices such as the  Fogarty-type  catheter  operate by inflating a balloon past
the  point of the  blood  clot  and  then  dragging  the  blood  clot out of the
patient's  body  through the artery.  Fogarty-type  catheters  require  surgical
intervention,  which may result in overnight hospital stays, are more limited in
their applications and may cause significant vascular trauma.

     The Company believes that its AngioJet System represents a rapid, safe, and
medically effective approach to the removal of blood clots from arteries,  veins
and grafts and offers certain advantages over current methods of treatment.  The
AngioJet System is a non-surgical,  minimally  invasive catheter system designed
to rapidly remove blood clots with minimal vascular trauma.  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.  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.

<PAGE>

     To operate the AngioJet System, a physician first threads a catheter 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 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 at the tip. The jets then  macerate or pulverize the
clot material into microscopic  fragments,  which are immediately propelled down
the catheter,  out of the patient's  body and into a disposable  collection  bag
located on the drive unit.  No water is used  directly on the vessel  surface to
remove material.

     Currently  the  Company  is  marketing  the  XMI(TM)135   and   Xpeedior(R)
catheters. The XMI135 and Xpeedior catheters are the first catheters marketed by
the  Company  based  upon  its  proprietary   Cross-Stream(R)  Technology.  This
exclusive technology platform 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 with
"mural  thrombus,"  the older,  more  organized  material that adheres to vessel
walls and can complicate patient results.

     The AngioJet Rheolytic  Thrombectomy  System is a pioneering device for the
removal of 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,  and drugs, such as thrombolytics and platelet  inhibitors.
For these  reasons,  the market  potential is not readily  quantifiable  through
widely published  industry  statistics.  The approach of the Company has been to
estimate  the  total  number  of cases for a given  indication  in a  particular
vascular territory. These statistics are available through industry sources. The
Company  then  estimates  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, the Company has relied on its 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.  In cases where  little or no reliable  data exists,  relatively  simple
"rules of thumb" are used to estimate  figures  for  statistics  like  worldwide
patient incidence of certain  conditions.  We believe that the totality of these
sources  provides  estimates that are  directionally  and  relatively  accurate,
although the Company cannot guarantee their accuracy.

     The Company's  marketing analysis indicates that the AngioJet System may be
effective for the treatment of various blood clot-induced  conditions throughout
the  vasculature.  The  following  table  shows  the  vascular  territories  and
indications  for which the AngioJet  System may be used. In addition,  the table
indicates the annual incidences  worldwide and the Company's  estimated AngioJet
System annual market potential.

<PAGE>

<TABLE>
<CAPTION>

                                                                                                                  AngioJet
                                                                                        Estimated                  System
                                                                                          Annual                   Annual
                                                                                         Worldwide                 Market
                                                                                         Incidence               Potential
Vascular Territory                               Indication                             (Patients)              (Procedures)
<S>                                 <C>                                                <C>                        <C>
Coronary (1)                        Heart Attacks & Unstable Angina                      5,300,000                  550,000
Legs (2)                            Leg Arteries & Bypass Grafts                         1,300,000                  220,000
A-V Access (3)                      Hemodialysis Graft Thrombosis                          400,000                  190,000
Lungs                               Pulmonary Embolism                                   1,000,000                  200,000
Cerebral (4)                        Ischemic Stroke                                      1,900,000                  380,000
Venous Cerebral Sinus               Stroke                                                   4,500                    2,000
Cervical Carotid                    Stroke                                                   6,600                    1,000
Venous                              Deep Vein Thrombosis                                 2,500,000                  900,000

                  Total                                                                 12,411,100                2,443,000
(1) Marketed under March 1999 FDA approval.
(2) Marketed under April 2000 FDA approval.
(3) Marketed under December 1996 approval.
(4) In clinical trials.

</TABLE>

     In April 2000,  March 1999 and December 1996, the Company received Food and
Drug Administration  (FDA) clearances to commence U.S. marketing of the AngioJet
System, for removal of blood clots in leg arteries, native coronary arteries and
coronary  bypass grafts and access  grafts used by patients on kidney  dialysis,
respectively.

     During 1996 through 1998 the Company sponsored a randomized clinical trial,
VeGAS  2,  which  compared  the  AngioJet  System  with the  thrombolytic  drug,
urokinase,  in the  treatment of  intracoronary  thrombus.  The AngioJet  System
proved  to be  medically  safe and  effective  and  cost-effective  compared  to
urokinase.  Cost savings averaged nearly $5,000 per patient.  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
current  practices  not using the  AngioJet  System.  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 and not in randomized, clinical trials.

     In  October  1999,   the  Company   received  full  FDA  approval  for  its
Investigational  Device Exemption (IDE) application for the clinical trial (TIME
1) of the AngioJet System in the treatment of acute ischemic  stroke.  The first
patient was enrolled in May 2000. After the first five patients had been treated
in the  TIME 1  clinical  trial  for  ischemic  stroke,  a  planned  review  was
conducted.  This review  concluded that the AngioJet NV150  neurocatheter  could
access the middle  cerebral artery where most ischemic  strokes occur,  and that
the device can effectively remove clot from this territory. The review suggested
changes  to  the  protocol  covering  a  variety  of  areas,  including  patient
selection,  exclusion  criteria,  and specifications for physician  technique in
deploying and moving the device in the cerebral vasculature. Physician reviewers
also suggested changes to the device,  to improve the trackability,  flexibility
and  efficacy  profile.  In May 2001,  the FDA  approved the re-start of patient
enrollment in the TIME 1 clinical trial. TIME 1 will enroll up to 30 patients at
up to eight  centers  in the U.S.  to  determine  safety of the  device for this
indication.

<PAGE>

     PERMA-SEAL(R) GRAFT. The Perma-Seal Graft is a self-sealing synthetic graft
comprised of silicone elastomers,  with a winding of polyester yarn encapsulated
within its wall, and is manufactured  using proprietary  electrostatic  spinning
technology developed by the Company. The Perma-Seal Graft is implanted in kidney
dialysis  patients to provide  necessary  vascular access.  The Company believes
that its  Perma-Seal  Graft may offer  advantages  over currently used synthetic
grafts  because of its needle hole sealing  capability.  A  randomized  clinical
trial  comparing the Perma-Seal  Graft to conventional  Teflon(R)  grafts showed
that the Perma-Seal  Graft provides access sites with minimal  compression  time
and bleeding as compared to other  currently  available graft products and, as a
result,  reduced  administrative  time and the associated costs per patient.  In
addition,  because of its ability to seal a needle puncture without depending on
tissue  ingrowth,  the  Perma-Seal  Graft may provide an option for patients who
require dialysis  immediately after implant.  The Company,  however,  recognizes
that the market  potential  for this  product  is  limited  by its  FDA-approved
labeling, which limits it to use in dialysis patients requiring immediate access
for  hemodialysis.  Due to the limited  market  potential for this product,  the
Company made a business  decision to focus on the AngioJet System business.  The
assets   associated  with  this  business  have  been  written  off,  and  prior
distribution  agreements have been terminated.  No additional sales are expected
for fiscal 2002 and beyond.

     PERMA-FLOW(R)  CORONARY BYPASS GRAFT.  The Perma-Flow  Graft is a synthetic
graft 5mm in  diameter  for use as a  synthetic  coronary  artery  bypass  graft
(CABG).  The  Perma-Flow  Graft is  intended to provide a graft  alternative  to
patients who require bypass surgery but have  insufficient or inadequate  native
vessels available for such use because of repeat procedures,  trauma, disease or
other  factors.  The market  potential for this graft product was deemed smaller
than our  pre-development  estimates.  No sales are expected for fiscal 2002 and
beyond. The assets associated with this business have been written off.

     A goal of the Company is to maximize the value of vascular  graft  products
and  technologies  for its  shareholders.  Its  strategy is to seek  partners to
distribute the products and possibly fund the graft product development program.
In  addition,  the  Company  will  continue to pursue the  possible  sale of the
vascular  graft  products and  technologies.  Currently  the Company has put all
graft  development  activities  on hold as it  concentrates  its  efforts on the
development on new AngioJet System applications.


Research and Development

     The Company's research and development program for its existing products is
focused primarily on clinical testing, obtaining necessary FDA product approvals
and validating manufacturing processes for the AngioJet System.

     The  Company's  new product  development  efforts are focused  primarily on
developing  additional  designs and  applications  of the AngioJet  Thrombectomy
System,  including  neurovascular  and large  vessel  applications  and  related
products.  The Company is also exploring AngioJet System  applications for other
blood clot conditions.  Research and development expenses are generally incurred
for product design, development and qualification, development and validation of
manufacturing  process,  conduct of clinical  trials,  and seeking and obtaining
governmental  approvals.  The Company's  research and  development  expenses are
expected to stay at current levels or slightly increase as the Company continues
its clinical trial and current product development plans.

<PAGE>

     As of September 30, 2001, the Company  employed  approximately 19 full-time
employees  in research  and  development,  including  15 in new product  concept
screening,  prototype building,  product and process development and validation,
and four in regulatory and clinical affairs. The Company performs  substantially
all of its research  and  development  activities  at its  headquarters  in Coon
Rapids,  Minnesota, a suburb of Minneapolis,  Minnesota.  The Company spent $4.8
million,  $5.5  million  and  $5.7  million  in  fiscal  2001,  2000  and  1999,
respectively,  on medical  product  research and  development.  AngioJet  System
research  and  development  expense for fiscal  2001,  2000,  and 1999 were $4.8
million, $5.5 million, and $4.4 million,  respectively.  Vascular graft research
and development expense for fiscal 1999 was $1.3 million.


Manufacturing

     We assemble and test our entire  product line in-house and have  vertically
integrated a number of processes in an effort to provide  increased  quality and
reliability  of the  components  used  in the  production  process.  Many of the
processes  are  proprietary  and were  developed  by the  Company.  The  Company
believes that as product and process improvements are identified, our ability to
control costs and quality will improve.  Raw  materials,  components  and select
subassemblies  used in our products are purchased from outside suppliers and are
generally readily available from multiple sources.

     Our  manufacturing  facilities  are  subject  to  periodic  inspections  by
regulatory  authorities,  including Good Manufacturing Practice (GMP) compliance
inspections  by the  FDA  and  TuV  Product  Services.  TuV is a  notified  body
designated by the European Union competent authorities (Ministries of Health) to
determine whether a product can display the CE mark,  necessary for marketing in
the European Union. We have undergone  inspections by the FDA for GMP compliance
and the TuV each year since 1998.  All Possis  products  currently  carry the CE
mark in the European Community.

     FDA inspections  focus on GMP as defined in federal  regulation 21 CFR 820.
These  regulations  define standards for the  manufacturing  and quality systems
used to produce  medical  devices.  The FDA has conducted  inspections of Possis
Medical,  Inc. at regular  intervals  since 1993,  and prior to approval of some
Possis Medical,  Inc.  marketing  applications.  Some of these  inspections have
identified  deficiencies  in  our  compliance  with  certain  GMP  requirements,
including  systems to  address  corrective  and  preventive  actions,  complaint
processing,  design and process validation,  material defect trending and use of
statistical  techniques.  Deficiencies  found during the most recent  inspection
have been  corrected  and currently the Company is waiting for the FDA to review
the corrective actions implemented. The risk of non-compliance includes seizure,
injunction  and/or civil penalties.  The Company does not anticipate any adverse
FDA action.


Marketing and Sales

     The  Company  markets  its  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  99%, 93%, and
91% of fiscal 2001, 2000, and 1999 revenue, respectively.

<PAGE>

     The  Company is  currently  marketing  the  AngioJet  System  for  coronary
applications,  peripheral vessel and graft  applications and hemodialysis  graft
thrombosis.  The  AngioJet  System  for stroke  treatment  will be  marketed  to
interventional neuroradiologists;  neurologists and interventional cardiologists
as FDA marketing approvals are obtained.

     The AngioJet  System is  currently  marketed by a direct sales force in the
United States, consisting entirely of employees of Possis Medical, Inc.

     The Company is currently  marketing its AngioJet  System outside the United
States using an independent distributor network.  Generally, the distributorship
agreements   provide  that  the  distributors,   at  their  own  expense,   will
investigate,  negotiate  and  obtain  regulatory  approvals  for  the  Company's
products in the specified territory. All sales made to the Company's independent
distributors are denominated in United States dollars.

     In December 1998, the Company  entered into an exclusive  worldwide  supply
and  distribution  agreement  for its  Perma-Seal  Dialysis  Access  Graft.  The
distributor   defaulted   under  the   agreement   by  failing  to  comply  with
contractually  obligated levels of product purchases and with payment schedules.
In  November  2000,  the  distributor  indicated  its  desire to  terminate  the
distribution  agreement and return unsold  product.  The Company has settled all
outstanding litigation with the Perma-Seal  distributor,  and has terminated the
distribution relationship.

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

<PAGE>

Patents, Patent Applications, Licenses and Proprietary Rights

     The  Company's  success  depends and will continue to depend in part on its
ability to maintain  patent  protection for products and processes,  to preserve
its trade secrets and to operate without  infringing the  proprietary  rights of
third parties.  The Company's policy is to attempt to protect its technology by,
among other things,  filing patent applications for technology that it considers
important to the  development of its business.  The patents held and applied for
by the Company  describe method and apparatus claims related to thrombectomy and
atherectomy  devices,  as well as method  and  apparatus  claims  related to the
design and use of synthetic vascular grafts. The Company no longer considers the
graft patents as material to its business going  forward.  The Company holds ten
United States patents and three foreign patents relating to the AngioJet System.
Of the ten U.S.  patents,  seven were filed  between 1990 and 1995 and are valid
for seventeen years following issuance.  Three of the  AngioJet-related  patents
are valid for twenty years following  their 1998 filing dates. In addition,  the
Company has thirteen United States and twenty-three  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.  No assurance can be given
that the Company's pending  applications will result in patents being issued or,
if issued, that such patents, or the Company's existing patents,  will provide a
competitive advantage, or that competitors of the Company will not design around
any  patents  issued  to  the  Company.   Since  many   competitors  are  better
capitalized,  no assurance can be given that such competitors will not choose to
test the existing patent  protection by introducing  competitive  products which
would then draw the Company  into  costly  litigation,  which  would  reduce its
market penetration and strategic advantage.

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

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


Competition

     The Company's products will compete with a number of different products and
treatment methods for the conditions they address. The Company believes that its
AngioJet System will face intense  competition  from a variety of treatments for
the ablation and removal of blood clots,  including thrombolytic drug therapies,
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.

<PAGE>

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

     The  AngioJet(R)  System  is a device  for the  rapid,  safe and  effective
removal of  intravascular  thrombus from native  coronary  vessels and saphenous
vein grafts,  kidney  dialysis  access  grafts,  and leg arteries.  The AngioJet
System   has  a  unique   profile  of  safety,   clinical   effectiveness,   and
cost-effectiveness.  In general, it competes against pharmacological dissolution
of  the  thrombus  using  thrombolytics  or  glycoprotein  IIb/IIIa  inhibitors,
mechanical removal using other devices, and against surgical revision of grafts.
Drugs take time, do not work in a significant  number of cases, have deleterious
side  effects  and are  expensive.  Drugs  are,  however,  easy  to  administer,
particularly in an emergency room setting or in a community  hospital that lacks
interventional facilities. In general, drugs have the biggest market share among
the set of procedures which constitute our potential markets.

     In the  peripheral  arteries,  there  is no other  FDA-approved  mechanical
device.  In the A-V access area, there are numerous  mechanical  devices,  under
many  different  trade names;  no individual  device has a dominant share of the
market. This 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 the Company's products and its 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 the Company's products in either Class II or III (the
highest  level),  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 for AV access
graft thrombectomy are subject to pre-market notification (510(k) submission) to
the  FDA,  whereas  AngioJet  for  treating  coronary  thrombus  is  subject  to
pre-market  approval  (PMA) by the FDA,  and  subsequent  annual  and  other PMA
supplement 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 the Company's 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 IDE  (Investigational  Device
Exemption)  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 they can cost several  million  dollars.  Many of the Company's
products were the subject of such clinical  trials in the past,  and the Company
expects  that some of its  future  products  will also  require  investigational
clinical trials.

<PAGE>

     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 Company product is able to be marketed 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  the  Company  and  its  products,  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 the Company and/or its employees to injunction, prosecution, civil
fines,  seizure or recall of products,  prohibition  of sales or  suspension  or
withdrawal of any previously granted approvals.

     The AngioJet  System received its first clearance for the U.S. market via a
510(k) premarket notification  application approved 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 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) premarket approval  application for treating
thrombus in leg arteries.

     The Perma-Seal Dialysis Access Graft was FDA-approved for marketing under a
PMA  in  September  1998.  The  Perma-Flow  Coronary  Artery  Bypass  Graft  was
FDA-approved for marketing under an Humanitarian Device Exemption "HDE" in April
1998.

     The  Company's  manufacturing  and quality  systems are also subject to FDA
regulations  requiring  compliance  with the FDA's  current  Good  Manufacturing
Procedures   ("GMP").   The  FDA  conducts   periodic  on-site   inspections  of
manufacturing  facilities.  The Company has successfully  undergone several such
inspections in the past. The Company is obliged to address any deficiency  noted
during  such   inspections.   If  the  FDA  notices   violations  of  applicable
regulations,  the continued marketing of the Company's products may be adversely
affected.  Such  regulations  are  subject  to  change  and  depend  heavily  on
regulatory interpretations.

     The Company  conducts  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. Approval to display the CE Mark is dependent, in
part, on annual inspections by representatives of European  regulatory bodies to
successfully demonstrate compliance with the ISO 9001 Quality Standards.

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

<PAGE>

Employees

     As of September  30, 2001,  the Company had 194  full-time  employees,  one
part-time employee and five contract employees. Of these full-time employees, 19
are in research and development,  77 are in manufacturing and production, 12 are
in  quality  systems,  five are in  facilities/maintenance,  64 are in sales and
marketing  and 17 are in  management or  administrative  positions.  None of the
Company's  employees  are  covered by a  collective  bargaining  agreement,  and
management considers its relations with its employees to be good.

Item 2.  Properties:

     The  Company  leases   approximately  51,000  square  feet  of  office  and
manufacturing  space  (including  approximately  6,500 square feet of controlled
environment  manufacturing  space) at 9055 Evergreen  Boulevard NW, Minneapolis,
Minnesota 55433-8003.  See Note 6 of Notes to Consolidated  Financial Statements
in Part II, Item 8, in this Form 10-K.


Item 3.  Legal Proceedings:

     None

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

     None

<PAGE>

                      EXECUTIVE OFFICERS OF THE REGISTRANT


       Name           Age                      Position

Robert G. Dutcher     56      Director, Chief Executive Officer and President

Eapen Chacko          53      Chief Financial Officer and Vice President,
                              Finance and Investor/Public Relations


Irving R. Colacci     48      Vice President, Legal Affairs and Human Resources
                              General Counsel and Secretary

James D. Gustafson    45      Vice President, Technology, Product Development
                              and Quality Systems

Shawn McCarrey        43      Vice President, U.S. Sales

T. V. Rao             58      Vice President, Marketing and Worldwide Sales

Robert J. Scott       56      Vice President, Manufacturing Operations


     Robert G. Dutcher  served as Executive  Vice  President of the Company from
June 1992  until  October  1993 and has  served as  President,  Chief  Executive
Officer and a director of the Company since October 1993.

     Eapen Chacko has served as Vice  President  of Finance and  Investor/Public
Relations and Chief  Financial  Officer since  September 2000. Mr. Chacko joined
the Company in September  1999 as Vice President of  Investor/Public  Relations.
Before  joining Possis  Medical,  Inc., Mr. Chacko had been Director of Investor
Relations  for  Fingerhut  Companies,  Inc.,  a $2 billion  catalog and Internet
marketer, since March 1995.

     Irving R.  Colacci has served as  Secretary  and  Corporate  Counsel of the
Company  since  July  1988  and as  Vice  President,  Legal  Affairs  and  Human
Resources, and General Counsel since December 1993.

     James D.  Gustafson  has  served as Vice  President  of the  Company  since
January  1,  1994  and  has  been   responsible   for  Quality   Assurance   and
Regulatory/Clinical  Affairs for the Company since June 1993. In August of 2001,
Mr. Gustafson assumed  responsibility  for the Company's  technology and product
development functions.

     Shawn F. McCarrey  joined the Company as Director of U.S. Sales in December
1998, and became Vice  President of U.S.  Sales in April 2001.  Prior to joining
the Company,  Mr.  McCarrey  served in a variety of sales positions with USCI, a
subsidiary of C.R. Bard, Inc.

     T.V.  Rao joined the  Company in June 1998 as Vice  President  and  General
Manager of the AngioJet(R) System business,  and currently holds the position of
Vice  President of Sales and  Marketing.  Prior to joining the Company,  Mr. Rao
served as Vice  President of Sales and  Marketing for Angeion  Corporation  from
1995 until 1998,  Vice President of Brunswick  Biomedical from 1994 to 1995, and
Director of Product Management at Medtronic, Inc. from 1990 to 1994.

     Robert J. Scott has served as Vice President of Manufacturing Operations of
the Company since December 1993.

<PAGE>


                                     PART II

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

     The Company had 1,510 common  shareholders  of record at July 31, 2001. The
common stock is traded on The Nasdaq  Stock  Market under the symbol POSS.  High
and low closing sale prices for each quarter of fiscal years ended July 31, 2001
and 2000 are presented below:

<TABLE>
                                    2001               2000
                                High    Low        High    Low
         <S>                  <C>      <C>        <C>     <C>
         QUARTER:
           First              $ 8.88   $5.50      $12.50  $8.06
           Second               8.13    3.75       11.37   7.63
           Third                6.35    3.94       14.12   8.28
           Fourth              13.11    6.10        8.63   6.00

</TABLE>

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

<PAGE>

Item 6. Selected Financial Data:

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

<TABLE>
<CAPTION>

In Thousands Except per Share Data                              2001            2000          1999            1998            1997

<S>                                                           <C>            <C>           <C>             <C>             <C>
INCOME STATEMENT DATA:
    Operating revenues..............................          $30,001        $ 20,552      $ 13,210        $  6,158        $  4,866
  Net income (loss):
    Continuing operations...........................           (3,304)        (10,590)      (12,021)        (11,969)         (8,608)
    Discontinued operations.........................             --              --            --              --               112
  Net income (loss) per common share -
          basic and diluted:
    Continuing operations..........                              (.20)           (.67)         (.90)           (.98)           (.71)
    Discontinued operations.........................             --              --            --              --               .01
  Weighted average shares outstanding -
         basic and diluted..........................           16,739          15,697        13,356          12,191          12,099

BALANCE SHEET DATA:
  Working capital...................................          $14,405        $ 16,788       $13,530         $16,598         $16,840
  Total assets......................................           22,009          25,004        19,821          23,897          22,423
  Long-term debt, excluding current maturities......             --                 7           100          11,493              10
  Shareholders' equity..............................           18,071          20,495        16,315           8,744          19,800

</TABLE>

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



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

General

     The  Company  was  incorporated  in 1956 and went  public in 1960 as Possis
Machine Corporation.  Initial operations consisted of design,  manufacturing and
sales of industrial  equipment and a division that provided temporary  technical
personnel.  The Company's  involvement  with medical  products began in 1976. In
1990 the Company made the decision to focus on medical products and subsequently
divested all non-medical operations.

     The Company operates in one business segment -- the manufacture and sale of
medical devices. Possis Medical, Inc. 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.

     The Company generates revenue from the sale of its products.  The resulting
cash flow,  together with the net proceeds  from the  Company's  debt and equity
offerings,  has been used to fund the Company's  operations,  including research
and  development  related  to its  products.  Approximately  99% of fiscal  2001
revenues were from product sales in the United States.  The importance of United
States revenue generation is expected to continue for the foreseeable future.

<PAGE>

Results of Operations

Fiscal Years Ended July 31, 2001, 2000 and 1999

     Total product sales for 2001 increased  $9,449,000,  or 46%, to $30,001,000
compared  to  $20,552,000  in 2000.  Total  product  sales  for  2000  increased
$7,341,000,  or 56%, to $20,552,000 compared to $13,211,000 in 1999. The Company
recorded a net loss of $3,304,000, or $.20 per share, for 2001. This compared to
a net  loss of  $10,590,000,  or  $.67  per  share  in  2000  and a net  loss of
$12,021,000, or $.90 per share in 1999.

Revenue - AngioJet System

     U.S.  AngioJet  System revenue for 2001 increased  $10,400,000,  or 54%, to
$29,553,000  compared to $19,153,000 in 2000.  U.S.  AngioJet System revenue for
2000  increased  $7,027,000 or 58%, to  $19,153,000  compared to  $12,126,000 in
1999. The Company  markets the  AngioJet(R)  Rheolytic(TM)  Thrombectomy  System
(AngioJet  System)  worldwide.  The  AngioJet  System  consists  of a drive unit
(capital)  that powers a disposable  pump and a family of disposable  catheters,
each aimed at a specific  indication.  The main factors in the revenue  increase
were increased sales resulting from the Company commencing U.S. marketing of the
AngioJet System with additional labeling claims. During fiscal 2001 and 2000 the
Company  began U.S.  marketing of three new  catheters  for the removal of blood
clots  in  leg  (peripheral)   arteries;  the  XMI(TM)135  in  March  2001,  the
Xpeedior(R)100 in May 2000 and the LF140 in April 2000. In addition, the Company
received  clearance to market the Company's  Xpeedior 60 catheter for removal of
blood clots from dialysis access grafts in April 2000.

     As of July 31, 2001 the Company had a total of 669 domestic AngioJet System
drive units in the field, compared to 493 and 300 at the end of the previous two
years.  During fiscal 2001 the Company sold  approximately  25,200 catheters and
pump  sets  versus  approximately  16,100  and  9,100 in  fiscal  2000 and 1999,
respectively.  This  represents a 57% and 77% increase in unit  catheters  sales
from the previous  years.  During the fiscal years ended July 31, 2001, 2000 and
1999  the  Company  sold  160,   138  and  162  AngioJet   System  drive  units,
respectively.  The  increase in AngioJet  System drive unit sales in fiscal 2001
from fiscal 2000  resulted  from  increase  market  penetration  and the overall
acceptance of the AngioJet System by physicians. The decrease in AngioJet System
drive unit sales in fiscal 2000 from fiscal 1999 was due to cost  constraints at
U.S.  hospitals  related to the Balanced  Budget Reform Act ("BBA") of 1997. The
BBA mandated the removal of $17 billion from hospital  operating  budgets by the
end of 2002 and $61  billion by 2010.  Hospitals  responded  to this  mandate by
freezing or reducing  expenditures  in major cost centers such as the  pharmacy,
and by deferring  purchases  of capital  equipment  such as the AngioJet  System
drive unit.  The extent of these cost  constraints  across  hospitals and within
departments  of the same  hospitals  was not  proportional,  and depended on the
unique  revenue,  cost  and  capital  budget  situation  of the  institution  in
question.  The Company  believes  the BBA had an adverse  affect on its AngioJet
System drive unit sales and its competitors sales because of the pressure it put
on hospitals to reduce expenditures. However, the Company does not have any data
that allows it to calculate the amount of the adverse  affect the BBA had on its
competitors.

     The Company employs a variety of flexible drive unit  acquisition  programs
including  outright  purchase and various  evaluation  programs.  The purchasing
cycle for the  AngioJet  System drive unit varies  depending  on the  customer's
budget  cycle.  The Company has signed  contracts  with five  purchasing  groups
making  it an  approved  vendor  in  order to  accelerate  orders  and  increase
marketing   penetration.   These  purchasing  groups  negotiate   pre-determined
discounts on the drive units and  catheters for their member  hospitals.  Member
hospitals are required, with some exceptions, to purchase products from approved
vendors,  such as the Company.  The purchasing groups receive a marketing fee on
their  purchases from the Company.  These discounts and marketing fees have been
offset by the  increase  in sales with the member  hospitals  of the  purchasing
group.  There has been no material  negative effect on the Company's  margins or
results due to these discounts and marketing fees.

<PAGE>

     The  Company  expects  U.S.  AngioJet  System  sales  to  continue  to grow
primarily   through   obtaining   additional   Food  and   Drug   Administration
(FDA)-approved  product uses,  introduction  of new catheter models for existing
indications, more face time selling to existing accounts,  peer-to-peer selling,
and the publication of clinical performance and cost-effectiveness data.


     Foreign sales of the AngioJet System during fiscal 2001, 2000 and 1999 were
$372,000, $393,000 and $491,000, respectively. The limited foreign sales are due
to cost constraints in overseas markets. In foreign markets, where public sector
funds are more  crucial for  hospital  operation,  Euro  devaluations  generated
higher public sector  deficits,  which, in turn,  forced  reductions in hospital
procedure and equipment budgets. In Japan, the coronary AngioJet System clinical
study was  completed  in April 1998 and a  regulatory  filing was  completed  in
November  1999 with the  Japanese  Ministry  of Health and  Welfare  (MHW).  The
Company has  responded  to  questions  from the MHW.  The  Company is  expecting
Japanese approval for coronary use of the AngioJet System in fiscal 2002.

     The Company  believes  that the  treatment  of blood clots in the  coronary
vessels,  peripheral  arteries,  and  vessels  in  the  brain,  are  significant
worldwide marketing opportunities for the AngioJet System.

Revenue - Vascular Grafts

     During  fiscal 2001,  2000 and 1999,  revenue from  Perma-Seal(R)  Dialysis
Access Grafts was $75,000, $1,006,000 and $593,000,  respectively.  In September
1998 the Company  received FDA marketing  approval for its  Perma-Seal  Dialysis
Access Graft. In December 1998, the Company entered into an exclusive  worldwide
supply and distribution  agreement for its Perma-Seal Dialysis Access Graft. The
distributor   defaulted   under  the   agreement   by  failing  to  comply  with
contractually  obligated levels of product purchases and with payment schedules.
In  November  2000,  the  distributor  indicated  its  desire to  terminate  the
distribution  agreement and return unsold  product.  The Company has settled all
outstanding litigation with the Perma-Seal  distributor,  and has terminated the
distribution  relationship.  The  settlement  had no  impact  on  the  financial
statements as the related accounts  receivable  balances had been  appropriately
written down in prior periods. No additional sales of Perma-Seal Dialysis Access
Grafts are expected.

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

     A goal of the Company is to maximize the value of vascular  graft  products
and  technologies  for its  shareholders.  Its  strategy is to seek  partners to
distribute the products and possibly fund the graft product development program.
In  addition,  the  Company  will  continue to pursue the  possible  sale of the
vascular  graft  products and  technologies.  Currently  the Company has put all
graft  development  activities  on hold as it  concentrates  its  efforts on the
development on new AngioJet System applications.

<PAGE>

Cost of Medical Products

     Cost of medical products, compared to prior years, increased 16% and 27% in
fiscal 2001 and 2000,  respectively.  The  increases  are  primarily  due to the
significant  growth in the U.S.  AngioJet System product sales.  Medical product
gross  margins  improved by $7,852,000  and  $5,172,000 in fiscal 2001 and 2000,
respectively,  over the prior year.  The gross margin  percentage in fiscal 2001
was 61%  compared  to 51% and 40% in  fiscal  2000 and 1999,  respectively.  The
improvement  in gross  margins was driven by higher  volumes of XMI and Xpeedior
catheters  that carry higher  margins than the  catheters  they  replaced and an
improvement in the XMI 135 and LF140 product catheter mix in the year ended July
31, 2001.  The Company  believes  that gross margins will continue to improve as
product  sales and related  volumes  continue to grow and as product and process
improvements are made.

Selling, General and Administrative Expenses

     Selling,  general and  administrative  expenses  increased  $1,166,000  and
$4,442,000 in fiscal 2001 and 2000, respectively,  as compared to prior periods.
The  primary  factors for the expense  increase  for fiscal 2001 were  increased
sales and marketing  expenses  related to the  expansion of the  Company's  U.S.
direct sales organization for the AngioJet System,  increased commission expense
due to increased AngioJet System product sales, increased marketing fees for the
national purchasing contracts, and increased computer and software depreciation.
These expense  increases were offset by the reduction in costs related to a work
force  reduction in January 2001, a 2001 Special  Equity  Compensation  Program,
discussed in the next paragraph, and a reduction in sales product demonstrations
and samples.  The primary factors for the expense  increase for fiscal 2000 were
increased sales and marketing  expenses  related to the  establishment of a U.S.
direct sales  organization  to sell the AngioJet  System,  increased  commission
expense due to increased  AngioJet System product sales and increased  marketing
fees for the national purchasing contracts. The Company expects that the current
U.S.  sales force will be able to grow sales and service the  customer  base for
the Company's AngioJet System through fiscal 2002.

     The Company issued stock option awards totaling  1,800,865 shares in fiscal
2001. In August 2000, stock option awards of 443,800 were issued that related to
the Company's fiscal 2000 performance, since the fiscal 2000 year ended in July.
In fiscal  2001,  the  Company  was  faced  with two  issues:  1)  potential  of
additional  dilutive  financing due to the prospect of continuing losses, and 2)
the hiring away of key employees by competitors. Consequently, 403,885 net stock
option  awards  were issued to conserve  cash and reduce  expenses.  These stock
option awards reduced  management and key employee cash  compensation  and sales
commission by approximately  $810,000. An additional 733,800 stock option awards
were issued to retain management and key employees.  Of the 733,800 stock option
awards,  539,800 relate to fiscal 2001 performance  stock option awards that are
normally issued in August 2001, subsequent to fiscal 2001 year-end. Accelerating
these  awards was,  in the opinion of  management,  a  necessary  and  effective
retention tool to ensure the continuity of business  growth and the  achievement
of profitability goals.

<PAGE>

Research and Development Expenses

     Research and  development  expense  decreased 13% and 4% in fiscal 2001 and
2000,  as compared to prior  periods.  The decrease in fiscal 2001 is due to the
timing of outlays in different  stages of  development  of new  AngioJet  System
applications  and related  products.  The decrease in 2000 was due mainly to the
shutdown  of  graft  product   development.   The  reduction  in  graft  product
development  was offset by an increase in  development  of new  AngioJet  System
applications.  The Company  believes that research and  development  expense for
AngioJet  System  applications  will  increase  in  fiscal  2002 as the  Company
completes the development of its current products and invests in the development
of new AngioJet System thrombectomy applications and related products.

Interest Income and Expense

     Interest income  decreased  $107,000 in fiscal 2001 from fiscal 2000 due to
the use of cash to fund operations. Interest income increased $110,000 in fiscal
2000 from fiscal 1999 due to  investment  of the proceeds from the Company's $15
million  private  placement  offering in March 2000 offset by the use of cash to
fund operations.  The Company expects interest income to decrease in fiscal 2002
due to expected declining market interest rates.

     Interest expense was $8,000,  $9,000 and $381,000 for fiscal 2001, 2000 and
1999 respectively.  The fiscal 2000 decrease over 1999 was due to the conversion
of the Company's 5%  convertible  subordinated  debentures  into common stock in
March 1999. The Company expects interest expense to stay at low levels in fiscal
2002  unless a line of credit  through a bank is  obtained.  If a line of credit
were obtained, the amount of increase in interest expense will be dependent upon
how much was borrowed,  the interest  rate, and the length of time the borrowing
was outstanding.

SELECTED QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>

                                                                 Fiscal Year Ended July 31, 2001
                                              -----------------------------------------------------------------------
                                                    First            Second            Third            Fourth
                                                   Quarter           Quarter          Quarter           Quarter
<S>                                             <C>               <C>              <C>               <C>
Product sales                                   $6,578,110        $6,947,017       $7,411,418        $9,064,002
Gross profit                                     3,463,064         3,993,346        4,864,771         5,943,113
Net income (loss)                               (2,371,960)       (1,598,409)          28,726           637,232
                                              =======================================================================

Basis and diluted
  income (loss) per share                       $    (0.14)       $    (0.10)      $     -           $     0.04
                                              =======================================================================

                                                                 Fiscal Year Ended July 31, 2000
                                              -----------------------------------------------------------------------
                                                    First            Second            Third            Fourth
                                                   Quarter           Quarter          Quarter           Quarter

Product sales                                   $4,513,189        $5,188,291       $4,500,184        $6,350,040
Gross profit                                     2,384,794         2,577,469        2,304,933         3,144,709
Net loss                                        (2,591,980)       (2,349,832)      (2,906,232)       (2,742,337)
                                              =======================================================================

Basis and diluted
  loss per share                                $    (0.17)       $    (0.16)      $    (0.18)       $    (0.16)
                                              =======================================================================

</TABLE>


Liquidity and Capital Resources

     The Company's cash,  cash  equivalents  and marketable  securities  totaled
approximately  $9,516,000 at July 31, 2001 versus  $12,971,000 at July 31, 2000.
The primary  factors in the decrease was the cash used in funding  operations of
$2,755,000 and capital  expenditures of $1,334,000 which was partially offset by
cash  received in  connection  with the  issuance of stock and exercise of stock
options of $638,000.

<PAGE>

     During fiscal 2001, cash used in operating activities was $2,755,000, which
resulted primarily from the $3,304,000 net loss, an expense reimbursement from a
city  government of $102,000,  an increase in receivables  of $1,328,000,  and a
decrease in trade  accounts  payable of $595,000,  partially  offset by non-cash
charges,  a  decrease  in  inventories,  and a increase  in accrued  liabilities
totaling  $2,638,000.  The  expense  reimbursement  from  a city  government  of
$102,000  relates  to debt  forgiven  by the  city  government  due the  Company
achieving minimum headcount  employment  objectives.  The $1,328,000 increase in
receivables  was due to increase in revenue in fiscal 2001 as compared to fiscal
2000.  The  $595,000  decrease  in trade  accounts  payable was due to timing of
year-end payables,  especially for software and computer upgrades.  The decrease
in inventories of $218,000 was due to the record sales,  implementation  of lean
manufacturing initiatives and the write down of certain raw material inventories
related to the LF140  catheter  during the fourth  quarter of fiscal 2001.  Cash
provided by investing  activities was  $22,545,000 of proceeds from the maturity
of  marketable  securities,  offset by  purchase  of  marketable  securities  of
$13,628,000  and the purchase of property and equipment of $1,334,000.  Net cash
provided by financing  activities  was  $633,000,  which  resulted from the cash
received in connection  with the issuance of stock and exercise of stock options
of $638,000.

     During  fiscal 2000,  cash used in operating  activities  was $8.8 million,
which  resulted  primarily  from the $10.6  million net loss and a $1.2  million
increase  in  inventory,  partially  offset by non-cash  charges,  a decrease in
receivables, and an increase in accounts payable totaling $3.0 million. The $1.2
million  increase  in  inventories  was due to the  increase  in the  number  of
evaluation  drive units in the field as of July 31, 2000 as compared to July 31,
1999 and due to the expected  increase in future AngioJet  System  revenue.  The
$100,000  decrease in receivables was due to reduction in days sales outstanding
for U.S. AngioJet System receivables as of July 31, 2000 as compared to July 31,
1999. The $1.0 million increase in accounts payable was due to the purchasing of
software and computers  toward the end of fiscal 2000. The capital  expenditures
were paid in August 2000.  Cash used in investing  activities was $10.8 million,
which  resulted from the purchase of marketable  securities of $24.1 million and
the purchase of property and equipment of $1.9 million,  partially offset by the
proceeds from the maturity of marketable  securities of $15.2 million.  Net cash
provided by financing activities was $14.5 million,  which resulted from the net
proceeds of the $14 million private placement offering and the exercise of stock
options of approximately $500,000.

     During fiscal 1999,  cash used in operating  activities  was $11.9 million,
which  resulted  primarily  from the  $12.0  million  net loss,  a $1.9  million
increase in receivables  and $366,000  decrease in accounts  payable,  partially
offset by  depreciation,  amortization,  stock  compensation  and an increase in
accrued  liabilities  totaling  $2.4  million.  The  $1.9  million  increase  in
receivables  was due to the  significant  increase  in revenue in fiscal 1999 as
compared to fiscal 1998. The $366,000  reduction in accounts  payable was due to
the  timing  of when  payables  are  paid.  The  $788,000  increase  in  accrued
liabilities  was  primarily due to the increase in accrued  salaries,  wages and
commissions.  The increase in accrued salaries, wages and commissions was due to
the  increase in  personnel  and in revenue in fiscal 1999 as compared to fiscal
1998. Cash used in investing  activities was $700,000 which was used to purchase
property  and  equipment.  Net cash  provided by financing  activities  was $7.9
million,  which  resulted  from  the  net  proceeds  of a $6.7  million  private
placement offering,  the exercise of stock warrants of $828,000 and the exercise
of stock  options  of  $417,000.  As of March  1999,  all of the 5%  convertible
subordinated debentures and related accrued interest totaling $12.3 million were
converted into approximately 1.7 million shares of the Company's common stock at
an average conversion price of $7.12 per share.

<PAGE>

     The Company expects that revenue from the AngioJet System, primarily in the
United  States,  will be in the range of $39  million  to $44  million in fiscal
2002.  Gross  margin for fiscal  2002 is  expected  to be between 65% and 75% of
total sales. The Company expects selling, general and administrative expenses to
increase  in fiscal 2002 due to  anticipated  growth in  revenue.  Research  and
development  expenditures are expected to increase from the fiscal 2001 level as
the Company completes  development of projects and invests in development of new
AngioJet System  thrombectomy  applications  and related  products.  The Company
expects  diluted  earnings per share for fiscal 2002 in the range of $0.18-0.23,
which is consistent  with its previous  guidance of basic  earnings per share in
the range of $0.20-0.25. The quarterly revenue progression should build steadily
through the year,  from a seasonal  low in the first  quarter,  with the profile
being affected by the timing of new product  introductions as well as the timing
of expenses related to marketing and clinical trials.  In addition,  the Company
expects that  increasing  working capital  investments in trade  receivables and
inventory will be required to support growing product sales. The Company expects
to achieve these growth objectives  without the need for external equity funding
in fiscal 2002,  although there can be no assurance that additional capital will
not be obtained during that time.


Change of Control Plan

     On September 15, 1999, the Company's  Board of Directors  approved a Change
in Control  Termination Pay Plan that provides,  at the discretion of the Board,
salary and benefit continuation  payments to executive officers and selected key
management and technical  personnel in the event they are  terminated  within 24
months  of a change  in  control.  At this  time,  the  Board of  Directors  has
committed to a three-year salary and benefit  continuation for the Company's CEO
and  two-year  salary and  benefit  continuations  for certain  other  executive
officers.  In  addition,  the  Company's  other  officers,  key  management  and
technical  personnel  are entitled to salary and benefit  continuation  benefits
ranging in  duration  from six to 24  months.  The Board of  Directors  has also
recognized  the  potential  for  additional  payments  upon a change in  control
notwithstanding  employment status following a change in control. These payments
are described as Cash Bonus  payments that are strictly at the discretion of the
Board,  are only to be awarded if the Company achieves  "substantial  growth" as
determined  by the  Board in its  discretion,  and are based on the value of the
Company at the time of the  Change in  Control  and the  Board's  assessment  of
Company  performance  and growth.  Cash  awards are limited to senior  executive
officers and other key  management  personnel.  The amount of the pool available
for such payments is limited,  in aggregate,  to between one and four percent of
the value of the Company at the time of the Change in Control, as measured based
on revenue.


Forward-Looking Statements

     Management's  Discussion and Analysis of Financial Condition and Results of
Operations  and  certain  other  sections  of this Form  10-K,  contain  certain
"forward-looking  statements"  as defined in the Private  Securities  Litigation
Reform  Act of 1995.  Such  statements  relate to future  events  and  financial
performance,   including  future  revenue,  expense  and  earnings  levels,  and
statements  relating to the Company's  ability to increase  utilization rates of
the AngioJet(R)  System at existing customer  accounts by increasing  disposable
sales,  the  ability to  maintain  manufacturing  yields at  acceptable  levels,
customer  responses  to the  Company's  marketing  strategies,  the  ability  to
maintain and grow sales by effectively  managing a U.S. sales force, the ability
to achieve  growing  acceptance  of the  AngioJet  System by selling  more drive
units,  the ability to develop new products and bring them to market in a timely
manner, the ability to protect its intellectual  property,  the ability to raise
additional  capital on  acceptable  terms,  the ability to manage  clinical  and
marketing trials which result in greater customer acceptance of the products and
the ability to balance limited  resources  against an aggressive growth program.
These  statements  involve risks and  uncertainties,  and  consequently,  actual
results  may  vary  materially  from  those  projected  in  the  forward-looking
statements.  It is not possible to foresee or identify all factors affecting the
Company's future results and investors therefore should not consider any list of
such factors to be an  exhaustive  statement of all risks and  uncertainties.  A
partial  list of  factors  that may cause  actual  results  to  differ  from the
Company's forward-looking  statements would include trends toward managed health
care,  health care cost  containment,  the trend of consolidation in the medical
device industry,  difficulties and uncertainties associated with the lengthy and
costly new product development and regulatory  clearance  processes,  changes in
government laws and regulations and the enforcement  thereof that may be adverse
to the Company,  the  development  of new products and compounds by  competitors
that may make our  products  obsolete,  sudden  restrictions  in  supply  of key
materials, and economic factors over which the Company has no control, including
changes in  inflation  and interest  rates.  The Company  competes  against many
larger,  better  capitalized  competitors,   both  in  the  medical  device  and
pharmaceutical  industries.  These and other risk  factors set forth in the risk
factors  included  in Exhibit 99 to the  Company's  Form 10-K for the year ended
July 31, 2001 are filed with the Securities and Exchange Commission.


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

     The Company  invests its excess cash in money market mutual funds and short
term commercial paper. The market risk on such investments is minimal.


     The product sales for the Company's foreign  subsidiary are in U.S. Dollars
("USD").  At the end of July  2001,  the  amount  of  currency  held in  foreign
exchange was approximately  $1,000 USD. The market risk on the Company's foreign
subsidiary operations is minimal.

     At July 31, 2001, all of the Company's  outstanding  long-term debt carries
interest at a fixed  rate.  There is no  material  market  risk  relating to the
Company's long-term debt.


Item 8. Financial Statements and Supplementary Data:

<PAGE>


INDEPENDENT AUDITORS' REPORT


To the Shareholders of Possis Medical, Inc.:

     We have  audited the  accompanying  consolidated  balance  sheets of Possis
Medical,  Inc. and  subsidiaries  (the Company) as of July 31, 2001 and 2000 and
the related  consolidated  statements of operations,  cash flows, and changes in
shareholders'  equity for each of the three  years in the period  ended July 31,
2001. Our audits also included the financial  statement  schedule  listed in the
Index  at  Item  14.  These  consolidated  financial  statements  and  financial
statement  schedule are the  responsibility  of the  Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

     In our opinion,  such consolidated  financial statements present fairly, in
all  material  respects,  the  financial  position of Possis  Medical,  Inc. and
subsidiaries  as of July 31, 2001 and 2000 and the  results of their  operations
and their  cash flows for each of the three  years in the period  ended July 31,
2001, 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  financial  statements  taken as a whole,
presents fairly, in all material respects, the information set forth therein.



Deloitte & Touche LLP
Minneapolis, Minnesota
August 31, 2001

<PAGE>


                      POSSIS MEDICAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>




                                                                                     July 31, 2001             July 31, 2000
<S>                                                                                  <C>                       <C>
ASSETS

CURRENT ASSETS:..............................................
     Cash and cash equivalents (Note 1)......................                         $  9,515,751             $  4,053,429
     Marketable securities...................................                               --                    8,917,251
     Trade receivables (less allowance for doubtful
          accounts and returns of $659,000 and
          $672,000, respectively)............................                            4,268,114                2,940,497
     Inventories (Note 1):...................................                            4,216,629                5,100,338
     Prepaid expenses and other assets.......................                              342,995                  278,491
               Total current assets..........................                           18,343,489               21,290,006

PROPERTY AND EQUIPMENT, net (Notes 1 and 2)..................                            3,665,751                3,713,940

TOTAL ASSETS.................................................                          $22,009,240              $25,003,946



LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:.........................................
     Trade accounts payable..................................                          $ 1,321,485             $  1,916,063
     Accrued salaries, wages, and commissions................                            1,532,912                1,603,061
     Current portion of long-term debt (Note 2)..............                               94,310                  179,949
     Other liabilities.......................................                              989,556                  802,989
              Total current liabilities......................                            3,938,263                4,502,062

LONG-TERM DEBT (Notes 1 and 2)...............................                                --                       7,279

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,
          16,822,023 and 16,700,942 shares, respectively.....                            6,728,809                6,680,377
     Additional paid-in capital..............................                           75,411,387               74,581,145
     Unearned compensation...................................                              (22,700)                 (24,809)
     Retained deficit........................................                          (64,046,519)             (60,742,108)
              Total shareholders' equity.....................                           18,070,977               20,494,605

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................                          $22,009,240              $25,003,946



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

<PAGE>

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


<TABLE>
<CAPTION>

                                                                               2001                2000                1999
<S>                                                                       <C>                 <C>                  <C>


Products sales (Note 8)...........................................        $30,000,547          $20,551,704         $13,210,479

Cost of sales and other expenses:
   Cost of medical products ......................................         11,736,253           10,139,799           7,970,865
   Selling, general and administrative............................         17,218,924           16,052,830          11,611,113
   Research and development.......................................          4,820,037            5,525,431           5,743,866
   Interest  .....................................................              8,240                9,377             381,179
         Total cost of sales and other expenses...................         33,783,454           31,727,437          25,707,023

Operating loss....................................................         (3,782,907)         (11,175,733)        (12,496,544)
Interest income...................................................            478,496              585,352             475,113

Net loss .........................................................        $(3,304,411)        $(10,590,381)       $(12,021,431)

Weighted assumed number of common shares
     outstanding - basic and diluted..............................         16,739,277           15,697,135          13,355,822


Net loss per common share - basic and diluted ....................              $(.20)               $(.67)              $(.90)


<FN>

See notes to consolidated financial statements.

</FN>
</TABLE>

<PAGE>


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

<TABLE>
<CAPTION>

                                                                               2001                 2000                1999

OPERATING ACTIVITIES:
<S>                                                                        <C>                  <C>                 <C>
  Net loss ..............................................................  $(3,304,411)         $(10,590,381)       $(12,021,431)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
  Depreciation...........................................................    1,950,533             1,195,848           1,035,105
  Stock compensation expense.............................................      196,199               271,534             341,462
  Expense reimbursement from city government.............................     (101,938)                 --                  --
  Writedown due to impairment of assets..................................       87,582               338,922                --
  Loss on disposal of assets.............................................        8,564                 6,345               4,312
  Amortization...........................................................         --                  72,000             204,077
  (Increase) decrease in trade receivables...............................   (1,327,617)              122,814          (1,915,748)
  Decrease (increase) in inventories.....................................      217,959            (1,230,513)            (58,002)
  (Increase) decrease in other current assets............................      (64,504)              (30,584)             65,251
  (Decrease) increase in trade accounts payable..........................     (594,578)            1,036,890            (366,379)
  Increase (decrease) in accrued and other current liabilities...........      177,499               (10,489)            787,795
     Net cash used in operating activities...............................   (2,754,712)           (8,817,614)        (11,923,558)
INVESTING ACTIVITIES:
  Proceeds from sale/maturity of marketable securities...................   22,545,000            15,205,000                --
  Purchase of marketable securities......................................  (13,627,749)          (24,122,251)               --
  Additions to property and equipment....................................   (1,334,142)           (1,851,510)           (693,398)
  Proceeds from sale of fixed assets.....................................        1,402                13,192              16,656
  Net cash provided by (used in) investing activities....................    7,584,511           (10,755,569)           (676,742)
FINANCING ACTIVITIES:
  Proceeds from issuance of stock and exercise
    of options and warrants..............................................      637,941            14,480,598           7,926,761
  Proceeds from notes payable and long-term debt.........................         --                    --                21,074
  Repayment of long-term debt............................................       (5,418)               (4,990)            (14,069)
  Deferred debt issue costs..............................................         --                    --               (24,255)
    Net cash provided by financing activities............................      632,523            14,475,608           7,909,511
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.........................    5,462,322            (5,097,575)         (4,690,789)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...........................    4,053,429             9,151,004          13,841,793
CASH AND CASH EQUIVALENTS AT END OF YEAR.................................   $9,515,751          $  4,053,429        $  9,151,004
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid............................................................   $    1,677          $      1,235        $      1,643
Accrued payroll taxes related to restricted stock........................       46,643                18,080              83,230
Issuance of restricted stock.............................................       23,900                59,000              20,250
Inventory transferred to fixed assets....................................         --                  23,280              32,201
Cancellation of restricted stock.........................................         --                   1,977              40,381
Conversion of subordinated debentures and accrued--
  interest into common stock.............................................         --                    --            12,346,174
Deferred debt issue costs and original issue discount
  netted against conversion of subordinated debentures...................         --                    --             1,371,122
Issuance of stock to settle litigation...................................         --                    --               225,000

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

<PAGE>


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

<TABLE>
<CAPTION>

                                                                                     Unearned
                                            Common Stock           Additional         Stock
                                        Number of                   Paid-in           Compen-       Retained
                                         Shares        Amount       Capital           sation         Deficit            Total

<S>                                    <C>           <C>           <C>               <C>           <C>               <C>
BALANCE AT JULY 31, 1998...........    12,218,622    $4,887,449    $42,476,257       $(489,060)    $(38,130,296)     $ 8,744,350
    Employee stock purchase plan...        19,881         7,952        106,181            --               --            114,133
    Stock options issued to
      directors and physicians
      (Note 4).....................          --            --           54,349            --               --             54,349
    Stock options exercised........        66,200        26,480        276,687            --               --            303,167
    Stock grants...................         2,500         1,000         11,250         (20,250)            --             (8,000)
    Unearned stock compensation
      amortization.................          --            --             --           327,462             --            327,462
    Litigation settlement..........        22,785         9,114        215,886            --               --            225,000
    Stock retired..................       (12,814)       (5,126)        55,976          40,381             --             91,231
    Warrants exercised.............       120,000        48,000        780,000            --               --            828,000
    Debentures converted...........     1,733,334       693,334     10,281,718            --               --         10,975,052
    Private placement
       stock offering..............       827,852       331,141      6,350,319            --               --          6,681,460
    Net loss.......................          --            --             --              --        (12,021,431)     (12,021,431)
BALANCE AT JULY 31, 1999...........    14,998,360     5,999,344     60,608,623        (141,467)     (50,151,727)      16,314,773
    Employee stock purchase plan...        51,999        20,800        270,180            --               --            290,980
    Stock options issued to
      directors and physicians
      (Note 4)                               --            --           97,853            --               --             97,853
    Stock options exercised                58,682        23,473        147,634            --               --            171,107
    Stock grants...................         5,000         2,000         37,000         (59,000)            --            (20,000)
    Unearned stock compensation
      amortization.................          --            --             --           173,681             --            173,681
    Stock retired..................        (7,148)       (2,860)        38,963           1,977             --             38,080
    Private placement
       stock offering..............     1,594,049       637,620     13,380,892            --               --         14,018,512
    Net loss.......................          --            --             --              --        (10,590,381)     (10,590,381)
BALANCE AT JULY 31, 2000...........    16,700,942     6,680,377     74,581,145         (24,809)     (60,742,108)      20,494,605
    Employee stock purchase plan...        52,493        20,997        160,128            --               --            181,125
    Stock options issued to
      directors and physicians
      (Note 4).....................          --            --          170,190            --               --            170,190
    Stock options exercised........        72,127        28,851        427,965            --               --            456,816
    Stock grants...................         5,000         2,000         13,500         (23,900)            --             (8,400)
    Unearned stock compensation
      amortization.................          --            --             --            26,009             --             26,009
    Stock retired..................        (8,539)       (3,416)        58,459            --               --             55,043
    Net loss.......................          --            --             --              --         (3,304,411)      (3,304,411)
BALANCE AT JULY 31, 2001...........    16,822,023    $6,728,809    $75,411,387        $(22,700)    $(64,046,519)     $18,070,977

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

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Nature of Business 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 45 years.
In 1990 the Company decided to focus on medical products and changed its name to
Possis  Medical,  Inc. in 1993. In January 1995, the Company  established a 100%
owned  subsidiary,  Possis  Medical  Europe B.V., in the  Netherlands to support
international product  distribution.  Possis Medical received AngioJet Rheolytic
Thrombectomy  System U.S.  marketing  approval  for use in  arterio-venous  (AV)
access hemodialysis grafts 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 production  equipment  used to manufacture  them are
unique and have been designed and constructed by Company employees. In addition,
the medical  device  industry is subject to the laws and oversight of the United
States Food and Drug  Administration  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.  (the   Company)  and  its   wholly-owned
subsidiaries, Possis Holdings, Inc., JEI Liquidation, Inc. (Jet Edge) and Possis
Medical   Europe  B.V.,   after   elimination  of   intercompany   accounts  and
transactions.

     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  2001  and  2000  the  Company  invested  in
commercial  paper  with  original  maturities  of less  than six  months.  These
instruments  are  classified as held to maturity and carried at amortized  cost,
which approximates fair value.

     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:

                                            2001                2000

                 Finished goods          $1,935,590          $2,107,677
                 Work-in-process          1,432,536           1,551,524
                 Raw materials              848,503           1,441,137
                                         $4,216,629          $5,100,338

<PAGE>


     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>
                                         2001           2000         Life
   <S>                                <C>            <C>           <C>
   Leasehold improvements             $1,454,833     $1,363,902    10 years
   Equipment                           6,814,596      5,688,540    3-10 years
   Assets in construction                255,502        305,474      N/A
                                       8,524,931      7,357,916
   Less accumulated depreciation       4,859,180      3,643,976
   Property and equipment - net       $3,665,751     $3,713,940

</TABLE>


     Deferred Debt Issue Costs Deferred debt issue costs were being amortized on
a  straight-line  basis over six years,  based on the term of the 5% convertible
subordinated  debentures  due 2004.  In fiscal 1999,  all of the 5%  convertible
subordinated  debentures  were  converted into the Company's  common stock.  All
unamortized deferred debt issue costs were offset against equity.

     Goodwill Goodwill was being amortized on a straight-line  basis over 13-1/2
years,  based on the remaining  life of patent rights  related to the Perma-Flow
Graft  acquired  in 1988.  As of July  31,  2000,  the  value  of  goodwill  was
determined to be impaired, and the remaining balance of $125,922 was written off
as of July 31, 2000.

     Impairment of Long-Lived Assets Statement of Financial Accounting Standards
("SFAS") No. 121,  "Accounting  for the Impairment of Long-Lived  Assets and for
Long-Lived  Assets  to be  Disposed  Of,"  requires  that  long-lived  assets be
reviewed for impairment  whenever  events or changes in  circumstances  indicate
that the carrying value of an asset may not be  recoverable.  An impairment loss
is  recognized,  based on the  difference  between  the  carrying  value and the
discounted cash flows of an asset,  when the estimated future  undiscounted cash
flows from the asset are less than the  carrying  value of the asset.  In fiscal
2001,  the Company  wrote down  $87,582 of a fixed asset  (included  in selling,
general  and  administrative  expense).  The  value  of  this  fixed  asset  was
determined to be impaired due to the unlikely continued use of this fixed asset.
The Company wrote the asset down to net  realizable  value.  In fiscal 2000, the
Company wrote down $213,000 of fixed assets (included in cost of goods sold) and
$125,922 of goodwill (included in selling,  general and administrative  expense)
related to the Company's  vascular graft  business.  The value of these vascular
assets  was  determined  to be  impaired  due to the  reduction  of sales by the
Company's vascular graft distributor.

     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.

<PAGE>


     Original  Issue Discount  Original issue discount was being  amortized on a
straight-line  basis  over six  years,  based on the term of the 5%  convertible
subordinated  debentures due 2004. The original amount of $600,000 was the value
associated  with the detachable  stock warrants  issued in conjunction  with the
convertible subordinated  debentures.  In fiscal 1999, all of the 5% convertible
subordinated  debentures  were  converted into the Company's  common stock.  All
unamortized original issue discount was offset against equity.

     Revenue  Recognition  Revenues  associated  with  products that are already
maintained at customer  locations  are  recognized  when the Company  receives a
valid purchase order from the customer.  At this time ownership and risk of loss
is transferred to the customer.  Revenues  associated with products that are not
maintained at the customer  locations are recognized when a valid purchase order
is received and the products are received at the  customer's  location.  At this
time  title and risk of loss is  transferred  to the  customer.  Provisions  for
returns are provided for in the same period the related revenues are recorded.

     Shipping and Handling For fiscal 2001, the Company adopted  Emerging Issues
Task Force ("EITF") 00-10,  "Accounting  for Shipping and Handling  Costs." EITF
00-10 requires all amounts billed to customers in a sales transaction related to
shipping and handling to be classified  as product  sales.  The Company  records
costs related to shipping and handling in cost of medical products. Prior period
product  sales and cost of medical  products have been adjusted for this change,
which had no effect on previously reported net losses.

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

     Loss Per  Share  Loss per  share for  2001,  2000 and 1999 is  computed  by
dividing  the  net  loss  by  the  weighted  average  number  of  common  shares
outstanding.   Warrants  and  options  representing  3,826,089,   2,549,264  and
1,882,288 shares of common stock at July 31, 2001, 2000 and 1999,  respectively,
have been excluded from the computations because their effect is antidilutive.

     Reclassifications  Certain  reclassifications  have been made to the fiscal
2000 and 1999 financial  statements to conform to the  presentation  used in the
fiscal  2001  financial  statements.  The  reclassifications  had no  effect  on
shareholders' equity or net losses as previously reported.

     Derivative  Instruments and Hedging  Activities In fiscal 2000, the Company
adopted  SFAS No.  133,  "Accounting  for  Derivative  Instruments  and  Hedging
Activities,"  as amended by SFAS No. 138,  "Accounting  for  Certain  Derivative
Instruments and Certain Hedging Activities." SFAS No. 133 establishes accounting
and reporting  standards for derivative  instruments and for hedging activities.
It requires that all  derivatives,  including those embedded in other contracts,
be  recognized  as  either  assets  or  liabilities  and  that  those  financial
instruments  be measured at fair value.  The  accounting for changes in the fair
value of derivatives  depends on their intended use and designation.  Management
has reviewed the  requirements of SFAS No. 133 and has determined that they have
no free-standing or embedded derivatives.  All contracts that contain provisions
meeting the definition of a derivative also meet the  requirements  of, and have
been designated as, normal  purchases and sales.  The Company's policy is to not
use  free-standing  derivatives  and to not enter into contracts with terms that
cannot be designated as normal purchases or sales.

<PAGE>

2.  LONG-TERM DEBT

<TABLE>
<CAPTION>
     Long-term debt at July 31, 2001 and 2000 is as follows:

                                                                                                 2001            2000
     <S>                                                                                     <C>               <C>

     Note payable, interest at 4.5%, interest and principal due June
         1999 and August 2001, collateralized by the Company's equipment................     $ 87,500           $ 175,000
     Notes payable - other .............................................................        6,810              12,228
                                                                                               94,310             187,228
     Less current maturities............................................................       94,310             179,949
                                                                                             $   --             $   7,279

</TABLE>


     In fiscal 2001, the Company's  note payable and accrued  interest to a city
government in the amount of $101,938 was forgiven.  The note payable and accrued
interest were forgiven due to achieving minimum headcount employment  objectives
with the city government.

     In August 2002, the Company's  note payable and accrued  interest to a city
government in the amount of $83,538 was  forgiven.  The note payable and accrued
interest  were  forgiven  due  to  maintaining   minimum  headcount   employment
objectives with the city government.

3.  INCOME TAXES

     At July 31,  2001,  the Company had net  operating  loss  carryforwards  of
approximately $58,510,000 for federal tax purposes, which expire in 2003 through
2021, and $16,785,000  for Minnesota tax purposes,  which expire in 2003 through
2016.

     In addition, at July 31, 2001, the Company has approximately $2,450,000 and
$663,000 in federal and state tax credits,  respectively,  substantially  all of
which are research and development  tax credits,  which expire from 2002 through
2016, and a $65,182 AMT credit which does not expire.


     Deferred  tax  assets  and  liabilities  as of July  31,  2001 and 2000 are
described  in the table  below.  The Company has  reduced its net  deferred  tax
assets to zero through a valuation allowance due to the uncertainty of realizing
such assets:

<TABLE>
<CAPTION>

                                                                                       2001                  2000
     <S>                                                                         <C>                   <C>
     Current assets (liabilities):
     Allowance for doubtful accounts and returns.........................        $    337,000          $    262,000
     Inventory...........................................................             220,000               365,000
     Employee compensation and benefits..................................             119,000               286,000
     Other  .............................................................              82,000                35,000
                                                                                      758,000               948,000
     Valuation allowance.................................................            (758,000)             (948,000)
     Net    .............................................................        $       --            $       --


     Long-term assets:
     Net operating losses................................................        $ 21,133,000          $ 19,917,000
     Amortization of patents.............................................             502,000               407,000
     Tax credits.........................................................           3,048,000             2,674,000
     Depreciation........................................................            (132,000)            ( 208,000)
                                                                                   24,551,000            22,790,000
     Valuation allowance.................................................         (24,551,000)          (22,790,000)
     Net    .............................................................        $       --            $       --

</TABLE>

<PAGE>


     The effective income tax rate differed from the U.S. federal statutory rate
for each of the three years ended July 31, 2001, 2000 and 1999 as follows:

<TABLE>
<CAPTION>

                                                                              2001                 2000                1999
     <S>                                                                 <C>                   <C>                 <C>
     Tax benefit on loss from
        continuing operations computed at
        statutory rate of 34%................................             $(1,123,000)         $(3,601,000)        $(4,087,000)
     Decrease in tax benefit due to non-recognizable
        benefits of net operating loss
        carry-forwards and others............................               1,123,000            3,601,000           4,087,000
     Total income tax expense................................             $      --            $      --           $      --

</TABLE>

4.   COMMON STOCK

     Private  Placement  Offerings In March 2000, in conjunction  with a private
placement  offering,  the Company issued 1,594,049 shares of its common stock to
various  investors  and  received  $15,000,000  in gross  proceeds.  The Company
incurred  issuance  costs of $981,488.  In addition,  the Company issued 318,810
warrants to purchase  shares of its common stock.  The exercise  price is $12.67
per share. These warrants expire in March 2004.

     In May and June 1999, in conjunction with a private placement offering, the
Company  issued  827,852  shares of its common  stock to various  investors  and
received  $7,000,000 in gross proceeds.  The Company incurred  issuance costs of
$300,000. In addition, the Company issued 124,178 warrants to purchase shares of
its common stock.  The exercise  price is $11.43 per share for 106,509  warrants
and $11.69 per share for 17,669 warrants.  These warrants expire in May and June
2003.

     During the year ended July 31, 1999, all of the 5% convertible subordinated
debentures and related accrued interest totaling $12,346,174 were converted into
1,733,334 shares of the Company's common stock at an average conversion price of
$7.12 per share.

     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).  The 1992 Plan replaced the 1985 and 1983 plans.  Although
the 1992, 1985 and 1983 plans remain in effect for options  outstanding,  no new
options may be granted under these plans.

     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,  a maximum of 2,000,000 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 are being
increased  annually beginning on August 1, 2000 by 2% of the number of shares of
the Company's common stock outstanding on July 31 of the prior fiscal year.

<PAGE>

     At July 31, 2001,  there were  3,246,061  shares  reserved for  outstanding
options  under all plans and 491,819  shares  available  for granting of options
under the 1999 Plan.

     In fiscal  2001,  2000 and 1999,  the Company  granted  40,289,  13,609 and
11,477 compensatory options,  respectively,  to its outside directors in lieu of
cash  payments  for  directors  fees.  Fiscal 2001 and 2000 options were granted
under the 1999 Plan. Fiscal 1999 options were granted under the 1992 Plan. 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 were approximately  $89,000,  $55,000, and $40,000 for the years ended
July 31, 2001, 2000, and 1999, respectively.

     In fiscal 2001, 2000 and 1999, the Company granted 13,000,  5,000 and 6,000
compensatory  options,  respectively,  to  various  physicians  in  lieu of cash
payments for  services.  The  Company's  policy is to treat these  options under
variable plan accounting in accordance  with SFAS No. 123 and related  Emergency
Issues Task Force  Issues.  These  options were granted  under the 1999 and 1992
Plans and vest  ratably  over a six month to a four year  period  and expire not
more than ten years from date of grant. The expense associated with non-employee
options was approximately $81,000,  $43,000 and $14,000 for the years ended July
31, 2001, 2000 and 1999, respectively.

     A summary of changes in  outstanding  options  for each of the three  years
ended July 31, 2001 follows:

<TABLE>
                                                                       2001                    2000                   1999
     <S>                                                              <C>                     <C>                    <C>
     Shares under option at
        beginning of year..............................               1,969,236               1,621,070              1,443,571
     Options granted...................................               1,800,865                 586,109                460,877
     Options exercised.................................                 (72,127)                (58,682)               (66,200)
     Options canceled..................................                (451,913)               (179,261)              (217,178)
     Shares under option at end of year................               3,246,061               1,969,236              1,621,070
     Shares exercisable at end of year.................               1,009,283               1,011,298                859,866

</TABLE>


     Stock option weighted  average exercise prices during fiscal 2001, 2000 and
1999 are summarized below:

<TABLE>
                                                             2001        2000        1999
     <S>                                                   <C>         <C>         <C>
     Outstanding at beginning of year..................... $10.43      $10.89      $12.10
     Granted..............................................   5.19        8.97        7.79
     Exercised............................................   6.33        3.53        5.72
     Canceled.............................................  10.27       12.56       13.98
     Outstanding at end of year...........................   7.54       10.43       10.89

</TABLE>

     The following table summarizes  information  concerning options outstanding
and exercisable options as of July 31, 2001:

<TABLE>
<CAPTION>

                                                Weighted
                                                 Average
         Range of                               Remaining            Weighted                             Weighted
         Exercise            Shares          Contractual Life         Average            Shares            Average
          Price           Outstanding            in Years         Exercise Price       Exercisable       Exercise Price
          <S>              <C>                     <C>               <C>                  <C>              <C>
          $ 1 - 6          1,293,816               9.04              $  4.27              259,013          $  4.84
            6 - 12         1,433,983               7.69                 7.73              289,644             9.35
           12 - 17           383,962               5.68                14.13              326,341            14.15
           17 - 21           134,300               5.15                18.18              134,285            18.18

</TABLE>

<PAGE>

     In fiscal 1999,  the Company  granted 2,500 shares of  restricted  stock to
employees under the terms of the 1992 Plan, which vest 1,250 shares each year in
fiscal  2000 and 2001.  Approximately  $8,000 was  accrued to pay the  estimated
withholding taxes on those shares as management believes that the employees will
elect to receive fewer shares in lieu of paying the  withholding  taxes. In case
of  termination  of the  employees,  unvested  shares  are  forfeited.  Unearned
compensation  of  $20,250  was  recorded  at the  date  of  grant  and is  being
recognized over the vesting period.

     In fiscal 2000, the Company granted 3,000 shares of restricted  stock to an
employee under the terms of the 1992 Plan,  which vest 1,500 shares each year in
fiscal 2000 and 2001 and 2,000 shares of restricted  stock to an employee  under
the terms of the 1999 Plan which vest in fiscal 2001.  Approximately $20,000 was
accrued to pay the  estimated  withholding  taxes on those shares as  management
believes that the employees will elect to receive fewer shares in lieu of paying
the withholding taxes. In case of termination of the employees,  unvested shares
are  forfeited.  Unearned  compensation  of $59,000 was  recorded at the date of
grant and is being recognized over the vesting period.

     In fiscal 2001, the Company granted 5,000 shares of restricted  stock to an
employee under the terms of the 1999 Plan,  which vest 2,500 shares each year in
fiscal years 2002 and 2003. The fair market value of the  restricted  shares was
approximately  $61,000 as of July 31, 2001.  Approximately $8,000 was accrued to
pay the estimated  withholding taxes on those shares as management believes that
the  employee  will  elect  to  receive  fewer  shares  in  lieu of  paying  the
withholding  taxes. In case of termination of the employee,  unvested shares are
forfeited.  Unearned  compensation of approximately  $24,000 was recorded at the
date of grant and is being recognized over the vesting period.

     In fiscal  2001,  2000 and 1999,  total  compensation  expense of  $26,009,
$173,681 and $327,462,  respectively,  were recognized on these restricted stock
grants.

     Effective August 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." As permitted by SFAS No. 123, the Company has elected
to continue following the guidance of APB No. 25 for measurement and recognition
of  stock-based  transactions  with  employees.  No  compensation  cost has been
recognized  for stock  options  issued under the 1999 and 1992 Plans because the
exercise  price for all options  granted was at least equal to the fair value of
the common stock at the date of grant except as noted  previously  in this note.
If compensation  cost for the Company's stock option and employee purchase plans
had been determined based on the fair value at the grant dates for grants during
fiscal 2001, 2000 and 1999, consistent with the method provided in SFAS No. 123,
the Company's net loss and loss per share would have been as follows:

<TABLE>
<CAPTION>
                                                              2001                      2000                         1999
         <S>                                               <C>                      <C>                      <C>
         Net loss:
           As reported..................................   $(3,304,411)             $(10,590,381)             $(12,021,431)
           Pro forma....................................    (7,184,411)              (13,283,866)              (14,312,062)

         Loss per share - basic and diluted:
           As reported..................................   $      (.20)             $       (.67)             $       (.90)
           Pro forma....................................          (.43)                      (.85)                   (1.07)

</TABLE>

<PAGE>


     The fair value of options  granted  under the various  option  plans during
fiscal  2001,  2000,  and 1999 was  estimated  on the  date of grant  using  the
Black-Sholes   option-pricing   model  with  the  following   weighted   average
assumptions and results:

<TABLE>
<CAPTION>

                                                                          2001                   2000                 1999
         <S>                                                         <C>                    <C>                  <C>
         Dividend yield.......................................              None                   None                 None
         Expected volatility..................................               82%                    85%                  78%
         Risk-free interest rate..............................                3%                   6.0%                 5.5%
         Expected life of option..............................           120 mo.                120 mo.              120 mo.
         Fair value of options on grant date..................        $8,647,857             $4,362,357           $2,964,817

</TABLE>

     Stock  Warrants  Stock   purchase   warrants  held  by  unrelated   parties
representing  the right to purchase 26,400 shares of the Company's  common stock
at $8.52 a share were  outstanding  as of July 31, 2001.  These  warrants do not
have an  expiration  date  and  must be  exercised  if the  market  value of the
Company's  common  stock  exceeds  $22.73  per share  for any sixty  consecutive
calendar days.

     On September 15, 1994,  warrants to purchase 120,000 shares of common stock
at $6.90 per share were issued to John G. Kinnard & Company in conjunction  with
the Company's  September 1994 public stock  offering.  In November  1998,  these
warrants were exercised.

     In July  1998,  the  Company  issued to  various  investors  110,640  stock
purchase  warrants  in  conjunction  with a  private  placement  of  convertible
debentures.  These  warrants  expire on July 15, 2002 and are  exercisable  into
common stock at $15.58 per share.  As of July 31, 2001,  all such  warrants were
outstanding and unexercised.

     In May and June 1999,  the  Company  issued  106,509  and 17,669  warrants,
respectively,  to various  investors in conjunction  with the Company's  private
placement  offering.  These  warrants  expire  in May  and  June  2003  and  are
exercisable into common stock at $11.43 and $11.69, respectively. As of July 31,
2001, all such warrants were outstanding and unexercised.

     In March 2000, the Company issued 318,810 warrants to various  investors in
conjunction with the Company's private placement offering. These warrants expire
in March 2004 and are  exercisable  into common stock at $12.67.  As of July 31,
2001, all such warrants were outstanding and unexercised.


     Employee Stock  Purchase Plan The Employee  Stock Purchase Plan,  effective
January 1, 1991,  enables  eligible  employees,  through payroll  deduction,  to
purchase  the  Company's  common  stock at the end of each  calendar  year.  The
purchase  price is the lower of 85% of the fair market value of the stock on the
first or last day of the calendar  year.  The Company  issued  52,493  shares in
fiscal 2001, 51,999 shares in fiscal 2000 and 19,881 shares in fiscal 1999 under
this Plan.


5.       401 K PLAN

     The  Company has an  employees'  savings  and profit  sharing  plan for all
qualified   employees  who  have  completed  six  months  of  service.   Company
contributions  are made at the  discretion of the Board of Directors  subject to
the maximum amount allowed under the Internal  Revenue Code.  Contributions  for
the years  ended  July 31,  2001,  2000 and 1999  were  $250,179,  $260,482  and
$208,563, respectively.

<PAGE>


6.       RELATED PARTY TRANSACTIONS

     A Director of the Company at times performs  outside legal services for the
Company.  During  fiscal 2001,  2000 and 1999 the amount of these  services were
approximately  $74,000,  $1,000 and  $9,000,  respectively.  A  Director  of the
Company is a Principal of an investment banking firm that performed services for
the  Company and which  received  fees of  $925,000  during  fiscal year 2000 in
connection with a private placement financing by the Company.


7.  COMMITMENTS AND CONTINGENCIES

     The  Company's  medical  products  operation  is  conducted  from a  leased
facility  under an  operating  lease  which  expires  in 2006.  The lease can be
canceled by either party with notice and payment of a termination fee.

     The Company is also leasing a sales  office  under an operating  lease that
expires  in  2002.  The  future  annual  rentals  on this  operating  lease  are
approximately $14,000 per year through 2002.

     Total rental  expense  charged to  operations  was  $257,574,  $259,969 and
$242,824 for the years ended July 31, 2001, 2000, and 1999, respectively.

     Future minimum payments under the  non-cancelable  operating leases at July
31, 2001 were:


           Year Ended
            July 31                                       Amount
             2002                                      $  256,000
             2003                                         242,000
             2004                                         242,000
             2005                                         242,000
             2006                                         242,000
             Total minimum lease payments              $1,224,000



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,  2001,  2000 and 1999 are as
follows:


                                           2001           2000           1999

       United States................   $29,628,777    $20,158,934    $12,719,300
       Outside the United States....       371,770        392,770        491,179
       Total revenues...............   $30,000,547    $20,551,704    $13,210,479



     In fiscal 2001, 2000 and 1999 there were no individual customers with sales
exceeding 10% of total revenues.

<PAGE>

9.  PRODUCT SUPPLY AND DISTRIBUTION AGREEMENTS

     In December 1998, the Company  entered into an exclusive  worldwide  supply
and  distribution  agreement  for its  Perma-Seal  Dialysis  Access  Graft.  The
distributor   defaulted   under  the   agreement   by  failing  to  comply  with
contractually  obligated levels of product purchases and with payment schedules.
In  November  2000,  the  distributor  indicated  its  desire to  terminate  the
distribution  agreement and return unsold  product.  The Company has settled all
outstanding litigation with the Perma-Seal  distributor,  and has terminated the
distribution  relationship.  The  settlement  had no  impact  on  the  financial
statements.


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

     During fiscal 2000 and 2001, there were no changes in or disagreements with
the Company's  independent certified public accountants on accounting procedures
or accounting and financial disclosures.

<PAGE>


                                    PART III


Item 10.  Directors and Executive Officers of the Registrant:

     Information  under the heading  "Election of Directors"  and "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, 2001 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:

     The  security  ownership of certain  beneficial  owners and  management  is
contained in the Proxy Statement under the heading "Common Stock  Ownership" 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.

<PAGE>



                                     PART IV


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

(a)   1. Financial Statements

     The  following  financial  statements  of the  Company,  accompanied  by an
Independent Auditors' Report, are contained in Part II, Item 8:

     Consolidated Balance Sheets, July 31, 2001 and 2000
     Consolidated Statements of Operations for each of the three years in the
         period ended July 31, 2001
     Consolidated Statements of Cash Flows for each of the three years in the
         period ended July 31, 2001.
     Consolidated Statements of Changes in Shareholders' Equity for each of the
         three years in the period ended July 31, 2001.
     Notes to Consolidated Financial Statements

      2. Schedules

     The following financial statement schedules are submitted herewith:


         SCHEDULE II - Valuation Accounts

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

      3. Exhibits

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

<PAGE>



 Exhibit  Form        Date Filed                      Description

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

   3.2    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

   4.2    8-K      July 24, 1998      Form of Redeemable Warrant to
                                      purchasers of the Convertible
                                      Debt dated July 15, 1998

   4.3    10-K     November 23,       Debenture Agreement with St. Paul
                   1966               Fire and Marine Company and
                                      Western Life Insurance Company
                                      and form of debenture rates and warrants

   4.4    8-K      May 12, 1999       Form of Warrant to investors of the
                                      Purchase  Agreement dated May 11, 1999

   4.5    8-K      March 14, 2000     Private placement Purchase Agreement
                                      dated March 6, 2000 between the Company
                                      and the investors listed therein.

   4.6    8-K      March 14, 2000     Registration Rights Agreement between the
                                      Company and the investors in the Purchase
                                      Agreement dated March 6, 2000.

   4.7    8-K      March 14, 2000     Form of Warrant to investors of the
                                      Purchase Agreement dated March 6, 2000

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

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

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

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

<PAGE>

 Exhibit  Form        Date Filed                      Description

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

*  10.6   10-K     Fiscal year ended  Form of incentive stock option
                   July 31, 1989      agreement for officers

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

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

*  10.9   10-K     Fiscal year ended  Form of restricted stock agreement
                   July 31, 1993      for officers (1992 Plan)

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

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

*  10.12  10-K     Fiscal year ended  Form of nonqualified stock option
                   July 31, 1993      agreement for 1992 directors' fees
                                      (1992 Plan)

   10.13  10-Q     Quarter ended      Lease agreement for corporate
                   January 31, 1996   headquarters and manufacturing
                                      facility dated December 15, 1995

*  10.14  10-K     Fiscal Year ended  Change in Control Termination
                   July 31, 2001      Pay Plan - Amended  effective April
                                      3, 2001

*  10.15  10-K     Fiscal year ended  1999 Stock Compensation Plan
                   July 31, 1999

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

   23     10-K     Fiscal year ended  Consent of independent certified
                   July 31, 2001      public accountants

   99     10-K     Fiscal year ended  Investment risk factors
                   July 31, 2001

* Indicates management contract or compensatory plan or arrangement.

(b)   Reports on Form 8-K

     Possis Medical,  Inc. filed no reports on Form 8-K during the quarter ended
July 31, 2001.

<PAGE>



SIGNATURES

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

POSSIS MEDICAL, INC.

by: /s/ Eapen Chacko
        Eapen Chacko
        Vice President of Finance and
        Chief Financial Officer

Dated:  October 26, 2001

<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/ Donald C. Wegmiller        Chairman of the Board           October 26, 2001
Donald C. Wegmiller


/s/ Robert G. Dutcher          Director, President and         October 26, 2001
Robert G. Dutcher              Chief Executive Officer


/s/ Eapen Chacko               Vice President of Finance       October 26, 2001
Eapen Chacko                   Chief Financial Officer


/s/ Dean Belbas                Director                        October 26, 2001
Dean Belbas


/s/ Seymour J. Mansfield       Director                        October 26, 2001
Seymour J. Mansfield


/s/ Whitney A. McFarlin        Director                        October 26, 2001
Whitney A. McFarlin


/s/ William C. Mattison, Jr.   Director                        October 26, 2001
William C. Mattison, Jr.


/s/ Rodney A. Young            Director                        October 26, 2001
Rodney A. Young


/s/ Mary K. Brainerd           Director                        October 26, 2001
Mary K. Brainerd

<PAGE>


                                                                 SCHEDULE II

                              POSSIS MEDICAL, INC.



VALUATION ACCOUNTS
YEARS ENDED JULY 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>


       Column A                                  Column B              Column C            Column D                Column E


                                                                      Additions
                                                 Balance at           Charged to
                                                 Beginning            Costs and           Deductions               Balance at
        Description                               of Year             Expenses            Write-offs               End of Year
<S>                                          <C>                    <C>                  <C>                  <C>
Allowance for doubtful accounts
and returns - deducted from trade
receivables in the balance sheet:

Year ended July 31, 2001                      $    672,000           $1,297,000           $1,310,000           $     659,000
Year ended July 31, 2000                           489,000              502,000              319,000                 672,000
Year ended July 31, 1999                           150,000              584,000              245,000                 489,000



Valuation allowance on
deferred tax asset:

Year ended July 31, 2001                       $23,738,000           $1,571,000          $       --              $25,309,000
Year ended July 31, 2000                        20,003,000            3,735,000                  --               23,738,000
Year ended July 31, 1999                        14,915,000            5,088,000                  --               20,003,000

</TABLE>

<PAGE>



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

                                  EXHIBIT INDEX
Exhibit
Number                              Description


10.14  Change in Control Termination Pay Plan - Amended effective April 3, 2001

23     Consent of independent certified public accountants

99     Investment risk factors

<PAGE>