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, 1999

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

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

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

           9055 Evergreen Blvd, NW, Minneapolis, Minnesota 55433-8003
               (Address of principal executive offices)    (Zip Code)

        Registrant's telephone number, including area code: 612-780-4555
        SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: None
          SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
                        Common Stock, 40 Cents Par Value
                        Preferred Shares Purchase Rights

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

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

     Aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of October 22, 1999 was approximately $135,030,636.

     The number of shares  outstanding  of the  registrant's  common stock as of
October 22, 1999: 15,003,404.

     Certain  responses  in Part III are  incorporated  herein by  reference  to
information  contained in the Company's  definitive Proxy Statement for its 1999
annual  meeting  to  be  filed  on  or  before  November  3,  1999  ("The  Proxy
Statement").

<PAGE>

                              POSSIS MEDICAL, INC.

Forward-Looking Statements

     This  report on Form  10-K,  including  the  description  of the  Company's
business, its Year 2000 readiness,  and Management's  Discussion and Analysis of
Financial Condition and Results of Operations, contains certain "forward-looking
statements" as defined in the Private Securities  Litigation Reform Act of 1995.
Such statements relating to future events and financial  performance,  including
the  submission of  applications  to the Food and Drug  Administration  ("FDA"),
revenue and expense levels, profitability,  and future capital requirements, are
forward-looking  statements that involve risks and uncertainties,  including the
Company's ability to meet its timetable for FDA submissions, the review time and
process  at the FDA,  results  of  clinical  trials,  changes  in the  Company's
marketing  strategies,  the Company's ability to establish product  distribution
channels, changes in manufacturing methods, market acceptance of the AngioJet(R)
System, changes in the level of capital expenditures by hospitals, the levels of
sales  of  the  Company's  products  that  can be  achieved,  ability  to  raise
additional  capital  and  other  risks set  forth in the  cautionary  statements
included  in Exhibit  99 to the  Company's  report on Form 10-Q dated  April 30,
1999, filed with the Securities and Exchange Commission.


                                     PART I
Item 1.  Business:

General

     Possis Medical, Inc. (the Company) was incorporated in 1956 and went public
in 1960 as Possis Machine  Corporation.  Initial operations consisted of design,
manufacturing,  and sales of  industrial  equipment and a division that provided
temporary technical personnel.  The Company's  involvement with medical products
began in 1976, when it sold its rights to a patented bileaflet  mechanical heart
valve,  which it had obtained from Zinon C. Possis,  the founder of the Company,
to St. Jude Medical,  Inc. for royalty payments based on St. Jude's valve sales.
In 1982 a subsidiary was  established to focus initially on the development of a
synthetic  blood vessel used to bypass blocked  coronary  arteries.  In the late
1980's the Company decided to leverage existing management expertise and entered
the pacemaker lead  business.  The strategic role of the pacemaker lead business
was to  provide  cash  flow to fund the  development  of  synthetic  grafts  and
thrombectomy  systems  and to give the  Company  access to and name  recognition
within the medical  device  industry.  In 1990 the Company  made the decision to
focus on medical products and subsequently divested all non-medical  operations,
beginning with its Technical Services division in September 1991 followed by its
industrial  equipment subsidiary and related land and buildings in January 1994.
See Note 2 of Notes to Consolidated  Financial  Statements contained in Part II,
Item 8 of this Form  10-K.  These  sales  enabled  Possis to focus its human and
financial  resources  exclusively on its other products,  which are currently in
clinical trials and in early stages of commercialization.

<PAGE>

Products

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

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

     The Company  believes that its AngioJet System  represents a novel approach
to the removal of blood clots from arteries, veins and grafts and offers certain
advantages  over  current  methods  of  treatment.  The  AngioJet  System  is  a
non-surgical,  minimally  invasive catheter system designed for rapidly removing
blood clots with minimal vascular trauma.  The AngioJet System consists of three
major  components:  a reusable drive unit to power the pump and monitor  patient
safety, a disposable single-use pump set that delivers pressurized saline to the
catheter, and a family of disposable,  single-use catheters.  In early stages of
commercialization   and  in  U.S.  clinical  trials,  the  AngioJet  System  has
demonstrated  the ability to safely and  effectively  remove  blood clots within
seconds  to  minutes  without  surgical  intervention  and  without  the risk of
uncontrolled bleeding.

     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 10,000  pounds  per square  inch (psi) and send it down the  catheter.
Saline jets spray  backwards  down the catheter at half the speed of sound.  The
result is a  jet-action  that 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  an  opening  at the tip.  The jets then  blast 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.

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

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

<PAGE>

<TABLE>
<CAPTION>

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

                  Total                                11,611,100   2,563,000

</TABLE>


     Clinical  results  from our VeGAS 2  coronary  trial,  which  compared  the
AngioJet  System with the drug Urokinase,  clearly  demonstrate the cost savings
associated with the AngioJet System - on average nearly $5,000 per patient.  The
AngioJet System's speed and lower  complication  rate, result in less time spent
in an intensive care unit, a shorter  hospital stay and lower overall  treatment
costs.

     In March 1999 and  December  1996 the Company  received FDA  clearances  to
commence U.S. marketing of the AngioJet System, with labeling claims for removal
of blood clots in native coronary arteries and coronary bypass grafts and access
grafts used by patients on kidney dialysis.  In July 1997, the Company submitted
a 510(k)  application to the FDA seeking clearance for the AngioJet System to be
used in leg arteries and bypass grafts.  The Company is currently  responding to
issues with the FDA and expects  approval for peripheral  AngioJet System use in
the  first  half of  calendar  2000.  In  addition,  the  Company  submitted  an
Investigational  Device  Exemption (IDE)  application  with the FDA in September
1999 for the treatment of cerebrovascular  stroke using the AngioJet System. The
first patient is expected to be enrolled in the cerebrovascular  stroke clinical
trial by calendar  year end.  The Company is currently  enrolling  patients in a
clinical trial of the AngioJet  System for use in the treatment of stroke caused
by the blockage of the carotid arteries, the main vessels supplying blood to the
brain.

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

     Autogenous  grafts  (using  the  patient's  own  saphenous  vein or mammary
artery) have been successfully used in CABG procedures for a number of years and
have shown a relatively  high patency rate (75% to 85% for  saphenous  veins and
over 90% for mammary  arteries one year after surgery) with  negligible  risk of
tissue  rejection.  However,  the surgical  harvesting of vessels for autogenous
grafts involves  significant  patient trauma and expense.  In addition,  not all
patients  requiring CABG surgery have  sufficient  native vessels as a result of
previous bypass  surgeries,  or their vessels may be of inferior  quality due to
trauma or disease.  Cryopreserved saphenous veins are available, but these veins
have shown low  patency  rates and often  deteriorate  due to the body's  immune
system attacking the graft.

<PAGE>

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

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

     Company research indicates that in the year 2000 approximately 760,000 CABG
procedures will be performed worldwide,  of which approximately  400,000 will be
performed in the United States.  Approximately 10% of these CABG procedures will
be performed on patients who had  previously  undergone  bypass  surgery.  It is
anticipated  that the number of repeat  CABGs will  continue  to  increase  as a
percentage  of  procedures  performed.  Currently,  approximately  70%  of  CABG
procedures are performed  utilizing the saphenous  vein.  Based upon  interviews
with cardiovascular  surgeons,  including those involved in the clinical trials,
the Company  believes that patients  whose native  vessels are not available for
use  in  bypass  surgery  comprise  approximately  1% of  those  receiving  CABG
procedures,  or approximately  7,000 annually.  If initial use of the Perma-Flow
Graft is shown to be clinically acceptable,  the Company believes that the graft
may be used for these patients.  The Company further  believes that if long-term
clinical  results are  acceptable  to  clinicians  (generally  greater  than 50%
patency  five  years  after  implant),  the  graft may  ultimately  be used as a
substitute for native saphenous veins.

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

     The Company  received  FDA  approval to  initiate  clinical  testing of its
Perma-Flow Graft in November 1991. In July 1995, the Company  received  approval
to commence  Phase 2 of the study.  In February 1999, the Company placed further
vascular graft research and  development on hold,  including the enrollment into
the Perma-Flow  clinical trial due to the Phase 2 clinical  results and to focus
its resources on the AngioJet System.

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

<PAGE>

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

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

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

     Approximately 250,000 patients in the United States are expected to undergo
kidney dialysis in the year 2000, of which approximately  95,000 are expected to
receive  vascular access  procedures  utilizing  either natural vessel grafts or
synthetic  access  grafts.   The  Company   estimates  that  of  these  patients
approximately  74,000 are implanted with a synthetic graft. The Company believes
that worldwide, approximately 108,000 synthetic grafts are implanted annually.

     The  U.S.   hospital   prices  of  ePTFE  and  biological   graft  products
manufactured  by certain other  manufacturers  currently range from $400 to $700
per unit, depending on length,  style, and configuration.  In December 1999, the
Company entered into an exclusive  worldwide supply and distribution  agreement.
The pricing of the  Perma-Seal  Graft to the  distributor is a percentage of the
price  charged to the  hospital by the  distributor  subject to a minimum  sales
price.

     ePTFE  SYNTHETIC  VASCULAR  GRAFT.  In February 1999, the Company  received
510(k)  approval from the FDA to market three  expanded  polytetrafluoroethylene
("ePTFE")  synthetic  vascular grafts.  ePTFE synthetic  vascular grafts are the
most commonly used synthetic grafts in peripheral vessel bypass  procedures.  In
2000, the Company  estimates  270,000  peripheral  grafting  procedures  will be
performed worldwide, with 200,000 of these in the United States.

<PAGE>

Research and Development

     The Company's  research and development  program for its existing  products
are focused  primarily  on clinical  testing,  obtaining  necessary  FDA product
registrations  and validating  manufacturing  processes for the AngioJet System.
The  Company's  new  product   development  efforts  are  focused  primarily  on
developing   additional   applications  of  the  AngioJet  Thrombectomy  System,
including carotid,  neurovascular and large vessel applications.  The Company is
exploring AngioJet System applications for other blood clot conditions,  such as
removal of  intracranial  blood clot in head  trauma  cases.  In  addition,  the
Company is examining non-vascular applications involving the removal of unwanted
soft tissue including liposuction, gastroenterology, keyhole surgery, orthopedic
applications,  and ear,  nose  and  throat  surgery.  Research  and  development
expenses  are   generally   incurred  for  product   design,   development   and
qualification,  development and validation of manufacturing process,  conduct of
clinical trials, and seeking and obtaining governmental approvals. The Company's
research  and  development  expenses  are  expected  to  increase as the Company
continues its clinical trials and current product development plans.

     As of September 30, 1999, the Company  employed  approximately 59 full-time
employees  in research  and  development,  including  50 in new product  concept
screening,  prototype building,  product and process development and validation,
and nine in regulatory and clinical affairs. The Company performs  substantially
all of its research  and  development  activities  at its  headquarters  in Coon
Rapids,  Minnesota, a suburb of Minneapolis,  Minnesota.  The Company spent $5.7
million,  $5.2  million  and $5.0  million  in  fiscal  1999,  1998,  and  1997,
respectively, on medical product research and development.


Marketing and Sales

     The  Company  is  marketing  its  AngioJet  System  and graft  products  to
interventional  radiologists and cardiologists  and also to physician  specialty
groups, including vascular, cardiovascular and thoracic surgeons.

     The  Company is  currently  marketing  the  AngioJet  System  for  coronary
applications  and  hemodialysis  graft thrombosis and plans to market the system
for other peripheral  vessel and graft  applications as FDA marketing  approvals
are obtained, targeting interventional radiologists,  vascular surgeons and some
cardiologists  who do peripheral  interventions.  The AngioJet System for stroke
treatment will be marketed to interventional neuroradiologists, neurologists and
cardiologists as FDA marketing approvals are obtained.

     The  primary   customer  for  the  Perma-Flow   Graft  is  expected  to  be
cardiovascular  and  thoracic  surgeons.  The  Perma-Seal  Graft is  marketed to
vascular surgeons, who typically are the primary decision makers with respect to
the  placement of vascular  access  grafts for patients  receiving  dialysis for
renal failure.  The Company is also targeting  other  clinicians  influential in
dialysis treatment selection, including nephrologists,  internists, and dialysis
unit technicians.

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

<PAGE>

     In December 1999, the Company  entered into an exclusive  worldwide  supply
and  distribution  agreement  with  Horizon  Medical  Products,   Inc.  for  its
Perma-Seal  Dialysis  Access Graft.  The first shipment under this Agreement was
made in January 1999.

     In March 1996, the Company entered into a three year distribution agreement
with Baxter Healthcare  Corporation  ("Baxter") granting Baxter worldwide rights
to market,  sell and distribute the Perma-Flow  Graft.  The initial  shipment of
Perma-Flow  Grafts was made in July 1996.  However,  in April 1998,  the Company
modified the Agreement  with Baxter,  under which Baxter  retains  non-exclusive
distribution rights outside of the United States, but has no distribution rights
in the United States for the remaining term of the  Distribution  Agreement.  In
March 1999, the distribution  agreement expired and the Company is seeking a new
distributor.

     The Company's three expanded  polytetrafluoroethylene  ("ePTFE")  synthetic
vascular  grafts are planned to be marketed  and sold by a marketing  partner or
independent distributor.

     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.

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


Patents, Patent Applications, Licenses and Proprietary Rights

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

<PAGE>

     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's  business,  financial  condition and results of
operations.


Competition

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

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

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

<PAGE>

Government Regulation

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

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

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

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

<PAGE>

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

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

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

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

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

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


Employees

     As of September 30, 1999, the Company had 211 full-time employees,  and two
contract  employees.  Of  these  full-time  employees,  59 are in  research  and
development,  66  are in  manufacturing  and  production,  four  are in  quality
systems, six are in facilities/maintenance, 52 are in sales and marketing and 24
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.

<PAGE>

Item 2. Properties:

     The  Company  leases   approximately  51,000  square  feet  of  office  and
manufacturing  space  (including   approximately  6,500  square  feet  of  clean
manufacturing  space) at 9055  Evergreen  Boulevard NW,  Minneapolis,  Minnesota
55433-8003. See Note 7 of Notes to Consolidated Financial Statements in Part II,
Item 8, 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      54    Director, Chief Executive Officer and President
Russel E. Carlson      53    Vice President, Finance and Chief Financial Officer
Eapen Chacko           51    Vice President, Investor and Public Relations
Irving R. Colacci      46    Vice President, Legal Affairs and Human Resources
                                             General Counsel and Secretary
James D. Gustafson     43    Vice President, Quality Systems and
                                             Regulatory/Clinical Affairs
T. V. Rao              56    Vice President and General Manager
Robert J. Scott        54    Vice President, Manufacturing Operations


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

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

     Eapen  Chacko  joined the Company in  September  1999 as Vice  President of
Investor and Public Relations. Prior to joining the Company, Mr. Chacko had been
Director of Investor  Relations  for  Fingerhut  Companies,  Inc.,  a $2 billion
catalog and Internet  marketer,  since March 1995.  Mr. Chacko earned a master's
degree in economics from The Johns Hopkins University.

<PAGE>

     Irving R. Colacci has served as Vice  President  and General  Counsel since
December 1993, and as Secretary and Corporate  Counsel of the Company since July
1988. Prior to 1993, Mr. Colacci served in various management positions with the
Company and its subsidiaries.  Prior to joining the Company,  Mr. Colacci was an
associate attorney at Dorsey & Whitney LLP, a major law firm in Minneapolis.

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

     T. V. Rao has  served  as Vice  President  and  General  Manager  of Possis
Medical since  February  1999.  Prior to this he was Vice  President and General
Manager of the AngioJet  System  business.  Before joining the Company,  Mr. Rao
served as Vice  President of Sales and  Marketing for Angeion  Corporation  from
July 1995 to June 1998,  as Vice  President of Sales and Marketing for Brunswick
Biomedical  Corporation  from  July  1994 to June  1995 and  served  in  several
positions (most recently as Director of Marketing,  Tachyarrhythmia Business) at
Medtronic Inc. since 1980. Mr. Rao holds a master's  degree in business from the
College  of St.  Thomas  and a  bachelor's  degree  with  honors  in  mechanical
engineering from Madras, India.

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

<PAGE>

                                     PART II

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

     The Company had 1,680 common  shareholders  of record at July 31, 1999. 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, 1999
and 1998 are presented below:

<TABLE>
                                             1999              1998
                                        High      Low      High      Low
<S>                                    <C>       <C>      <C>       <C>
  QUARTER:
    First...........................   $ 9.88    $ 4.31   $15.25    $11.00
    Second                              11.38      6.75    15.00     10.38
    Third...........................    14.88      7.50    17.00     12.50
    Fourth..........................    12.50     10.31    14.75      9.25

</TABLE>

     Additional  information  is  contained  in Note 5 of Notes to  Consolidated
Financial Statements included in Part II, Item 8, in this Form 10-K.

     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.

     On May 11 and June 2,1999,  the Company sold an aggregate of 827,852 shares
of Common  Stock and  warrants to  purchase a total of 127,178  shares of Common
Stock for aggregate  consideration of $7,000,000.  The securities were privately
sold to accredited investors.  Miller,  Johnson & Kuehn received a placement fee
of $210,000 in  connection  with the private  placement.  The exercise  price is
$11.43 per share for 106,509  warrants and $11.69 per share for 17,669  warrants
and are  exercisable  for a period  of four  years.  The  securities  were  sold
pursuant to Rule 506 of Regulation D promulgated  under the Securities  Exchange
Act of
1934.

<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
                                                       1999           1998          1997          1996           1995
<S>                                                  <C>             <C>           <C>           <C>            <C>
INCOME STATEMENT DATA:
Operating revenues-
     Continuing operations.....................      $13,123        $6,118        $ 4,834       $ 1,606         $3,207
Net income (loss):
     Continuing operations.....................      (12,021)       (11,969)       (8,608)       (8,578)        (5,153)
Discontinued operations........................          --             --            112           405            421
Net income (loss) per common share -
     basic and diluted:
     Continuing operations.....................         (.90)          (.98)         (.71)         (.74)          (.53)
     Discontinued operations...................          --             --            .01           .04            .04
Weighted average shares outstanding -
     basic and diluted.........................       13,356         12,191        12,099        11,611          9,726

BALANCE SHEET DATA:
    Working capital............................      $13,530        $16,598       $16,840       $24,780         $6,846
Total assets...................................       19,821         23,897        22,423        29,361         10,321
Long-term debt,
        excluding current maturities........             100         11,493            10            39             93
Shareholders' equity........................          16,315          8,744        19,800        27,597          8,648

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

<PAGE>

     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.

     Over the past  several  fiscal  years,  the  Company has  transitioned  its
revenue  stream from pacemaker  leads and royalty  revenues to revenues from the
sale  of  its  new  products.   The  resulting  cash  flow,  together  with  the
approximately  $34.0 million net proceeds  from the Company's  calendar 1994 and
1995 common stock offerings,  the $12.0 million gross proceeds from the issuance
of 5%  convertible  subordinated  debentures in 1998, and the $7.0 million gross
proceeds from the Company's  1999 private  placement of common stock,  have been
used to fund  the  Company's  operations,  including  research  and  development
related to its  products.  In excess of 95% of fiscal 1999  revenues were United
States  product sales.  The  importance of United States  revenue  generation is
expected to continue for the foreseeable future.


Results of Operations

Fiscal Years ended July 31, 1999, 1998 and 1997

     Total  revenue  for 1999  increased  $7,005,000,  or 115%,  to  $13,123,000
compared to $6,118,000 in 1998. Total revenue for 1998 increased $1,284,000,  or
27%, to  $6,118,000  compared to  $4,834,000  in 1997.  The main  factors in the
revenue  increase  were the  March  1999 and  December  1996 FDA  clearances  to
commence U.S. marketing of the AngioJet(R)  Rheolytic(TM)  Thrombectomy  System,
with labeling  claims for removal of blood clots in symptomatic  native coronary
arteries and coronary  bypass  grafts and for removal of blood clots from grafts
used by patients on kidney  dialysis.  U.S.  AngioJet System product revenue was
$12,040,000,   $5,662,000  and  $1,827,000  for  fiscal  1999,  1998  and  1997,
respectively.  This was an  increase  of 113% and 210% in fiscal  1999 and 1998,
respectively, compared to prior years.

Revenue - AngioJet

     During the fiscal years ended July 31, 1999, 1998 and 1997 the Company sold
162, 29 and 25 AngioJet  System  drive units,  respectively.  In fiscal 1999 and
1998,  92%  and  93%  of the  drive  units  sold  were  sold  within  the  U.S.,
respectively.  The  significant  increase in AngioJet System drive unit sales in
fiscal  1999 was due to the FDA  approval  received in March 1999 for use in the
native coronary arteries and coronary bypass grafts. The Company currently lists
its AngioJet  System drive unit,  considered  capital  equipment,  at $35,000 to
hospitals  in the U.S.  The  Company  employs a variety of  flexible  drive unit
acquisition   programs   including   outright   purchase,   rental,   lease  and
fee-per-procedure.  Management  believes the  purchasing  cycle for the AngioJet
System drive unit will vary from purchasing the drive unit with no evaluation to
an evaluation  period up to six months depending on the customer's budget cycle.
As of July 31,  1999 the  Company had 300  AngioJet  System  drive units in U.S.
hospitals as compared to 191 and 72 at the end of the previous two fiscal years.
Each drive unit generates  disposable income when it is used. During fiscal 1999
the Company  sold  approximately  9,100  disposable  sets versus 4,700 and 1,900
disposable sets in fiscal years 1998 and 1997, respectively.

<PAGE>

     The Company  expects the U.S.  AngioJet  System sales will continue to grow
primarily  through the  addition of sales  people,  the  completion  of clinical
trials  designed  to yield  additional  FDA label  approved  product  uses,  the
publication  of  clinical  performance  and  cost  effectiveness  data,  and the
introduction  of additional  catheter  designs.  The current sales increases are
expected to be generated  primarily from the FDA coronary  approval  received in
March 1999.  Additional  sales  growth is planned upon FDA approval for AngioJet
System  use in leg  arteries  and  bypass  grafts.  In July  1997,  the  Company
submitted a 510(k)  application  to the FDA seeking  clearance  for the AngioJet
System to be used in leg  arteries and bypass  grafts.  The Company is currently
responding to issues with the FDA and expects  approval for peripheral  AngioJet
System in the first half of calendar 2000. In addition, the Company submitted an
Investigational  Device  Exemption (IDE)  application  with the FDA in September
1999 for the treatment of cerebrovascular  stroke using the AngioJet System. The
first  patient  to be  enrolled  in the stroke  clinical  trial is  expected  by
calendar  year end.  The Company is currently  enrolling  patients in a clinical
trial of the AngioJet  System for use in the  treatment of stroke  caused by the
blockage of the carotid arteries, the main vessels supplying blood to the brain.
The Company  believes  that the  treatment  of blood clots in coronary  vessels,
peripheral arteries,  bypass grafts and neuro vessels are significant  worldwide
marketing opportunities for the AngioJet System.

     Foreign sales of the AngioJet System during fiscal 1999, 1998 and 1997 were
$491,000,  $351,000 and $804,000,  respectively.  The reduction in foreign sales
from 1997 to 1998 was due to the  reduced  number of drive  units sold in fiscal
1998 versus fiscal 1997. In Japan,  the coronary  AngioJet System clinical study
enrollment  was  completed in April 1998 and a regulatory  filing is planned for
November  1999 with the  Japanese  Ministry  of  Health  and  Welfare.  Japanese
approval  for  coronary  use of the  AngioJet  System is  expected by the end of
calendar 2000.

Revenue - Vascular Grafts

     During fiscal 1999, 1998 and 1997, sales of  Perma-Seal(R)  Dialysis Access
Graft were $593,000, $0 and $124,000,  respectively. The reduction in Perma-Seal
sales in fiscal 1998 was due to the  termination of a distribution  agreement in
January 1997. 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 with Horizon Medical
Products,  Inc. for its  Perma-Seal  Dialysis  Access Graft.  The first shipment
under this Agreement was made in January 1999.

     During fiscal 1998 and 1997, sales of  Perma-Flow(R)  Coronary Bypass Graft
were $105,000 and $58,000, respectively. In March 1996, the Company entered into
a Distribution  Agreement with Baxter Healthcare  Corporation  ("Baxter").  This
Agreement  granted  Baxter  exclusive  worldwide   distribution  rights  to  the
Perma-Flow  Coronary  Bypass Graft for a three-year  term.  In April 1998,  this
Distribution   Agreement  was  modified  with  Baxter  retaining   non-exclusive
distribution  rights outside the United States but having no distribution rights
in the  United  States for the  remaining  term of the  Distribution  Agreement.
Marketing  efforts were reduced  subsequent to the modification of the Agreement
which  resulted in the  termination  of  Perma-Flow  sales.  In April 1998,  the
Company received  Humanitarian  Device Exemption  ("HDE") approval from the FDA,
clearing the way for U.S. marketing of the Perma-Flow  Coronary Bypass Graft for
patients  who require  coronary  bypass  surgery but who have  inadequate  blood
vessels of their own for use in the  surgery.  In March 1999,  the  Distribution
Agreement expired and the Company is seeking a new distributor.

<PAGE>

     In February  1999,  the Company  received  510(k)  approval from the FDA to
market  three  expanded  polytetrafluoroethylene  ("ePTFE")  synthetic  vascular
grafts.  ePTFE synthetic  grafts are the most commonly used synthetic  grafts in
peripheral vessel bypass  procedures.  These products are planned to be marketed
and sold by a marketing partner or independent distributor.

     Sales  agreement  and other  revenue of  $2,019,431  includes  $200,000 for
fiscal  1997 from Baxter  paid to the  Company  under a supply and  distribution
agreement for the Perma-Flow  Coronary  Bypass Graft.  In addition,  fiscal 1997
sales  agreement  and other  revenue  includes  $1,799,000  in cash and returned
unused product due to the termination of the Company's  Perma-Seal  Graft supply
and  distribution  agreement.  See  Note 9 of Notes  to  Consolidated  Financial
Statements.

     A goal of the  Company  is to  maximize  the  value of these  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.  While the  Company  works  toward
completing these  activities,  it has placed vascular graft product  development
activities on hold,  including  enrollment  into the Perma-Flow  Coronary Bypass
Graft clinical trial.

     The Company is planning  for  continued  growth in product  sales in fiscal
2000 and beyond and  believes  that most of this growth will come from  AngioJet
System sales in the U.S. marketplace.

Cost of Medical Products

     Cost of medical products, compared to prior years, increased 36% and 17% in
fiscal  1999 and  1998,  respectively.  The  increase  is  primarily  due to the
significant  growth in the AngioJet System product sales.  Medical product gross
margins  improved  by  $4,917,000  and  $2,443,000  in  fiscal  1999  and  1998,
respectively,  compared to prior years.  The gross margin  percentage  in fiscal
1999  was  40%  compared  to  5% in  fiscal  1998.  The  Company  believes  that
manufacturing  costs per unit will be reduced and gross margins will continue to
improve as product sales and related  production volumes continue to grow and as
identified product and process improvements are made.

Selling, General and Administrative Expense

     Selling,  general and  administrative  expenses  increased  $4,055,000  and
$3,010,000 in fiscal 1999 and 1998, respectively,  as compared to prior periods.
The primary  factors are increased sales and marketing  expenses  related to the
establishment  of a direct sales  organization  to sell the AngioJet  System and
expenses  of  marketing  the  product  in the  United  States.  Based upon early
physician  interest  and with the  AngioJet  System  receiving  FDA approval for
coronary use, the Company has grown the U.S. AngioJet System sales and marketing
organization  from eight employees in January 1997 to 53 employees in July 1999.
The Company plans on increasing its sales and marketing  expenditures  in fiscal
2000 in order to continue  to expand its direct  U.S.  sales force and to expand
its marketing efforts.

Research & Development

     Research and development  expenses  increased 11% and 5% in fiscal 1999 and
1998,  respectively,  as compared to prior  periods,  primarily due to increased
expenses  relating  to the  development  of  new  AngioJet  Thrombectomy  System
applications.  This  increase was offset by a reduction of expenses  relating to
the  Perma-Flow  Graft and  Perma-Seal  Graft  clinical  trials and  development
expenses. The Company has placed further vascular graft research and development
activities on hold,  including  enrollment  into the  Perma-Flow  Graft clinical
trial. The Company believes that research and development  expenses for AngioJet
Thrombectomy  System  applications will increase as it completes the development
of its  current  products  and invests in  development  of new  AngioJet  System
thrombectomy   applications  and  new  high-pressure  waterjet  technology-based
products.

<PAGE>

Interest Income and Expense

     Interest  income has  decreased  in fiscal 1999 and 1998 from the  previous
years  due  to  use of  the  Company's  cash  reserves  to  fund  the  Company's
operations. The gross proceeds of $7,000,000 received from the private placement
offering in May and June 1999 had a modest  impact on interest  income in fiscal
1999.  The  $12,000,000   gross  proceeds  received  from  the  issuance  of  5%
convertible subordinated debentures received in July 1998 had a modest impact on
interest income in fiscal 1998. The Company expects  interest income to decrease
as the Company's cash reserves are used to fund the Company's operations.

     Interest  expense  increased  $341,000 and $35,000 in fiscal 1999 and 1998,
compared to prior  years.  These  increases  were due to the  issuance of the 5%
convertible  subordinated  debentures in July 1998. The Company expects interest
expense to decrease in fiscal 2000, due to the final 5% convertible subordinated
debenture being converted into the Company's common stock in March 1999.

Discontinued Operations

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


Liquidity and Capital Resources

     The Company's cash and cash equivalents totaled  approximately $9.2 million
at July 31, 1999,  a decrease of $4.7  million from the prior year.  The primary
factors in the  reduction  of the  Company's  cash  position was the net loss of
approximately  $12.0  million  which was  partially  offset by the $6.7  million
private placement offering in May and June 1999.

     During fiscal 1999,  cash used in operating  activities  was $11.9 million,
which resulted  primarily from a $12.0 million net loss, a $1.9 million increase
in receivables and $366,000 decrease in trade accounts payable, partially offset
by  depreciation,  amortization,  stock  compensation and an increase in accrued
liabilities  totaling  $2.4  million.  Cash  used in  investing  activities  was
$700,000 which was used to purchase  plant and  equipment.  Net cash provided by
financing  activities was $7.9 million,  which resulted from the net proceeds of
the private placement  offering of $6.7 million,  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>

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

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

     The Company believes that product sales of the AngioJet  System,  primarily
in the U.S.,  will yield  meaningful  sales growth going forward.  Concurrently,
sales and marketing  expenditures are planned to increase with the sales growth.
Research and  development  expenditures  are expected to increase as the Company
completes the development of its current  products and invests in development of
new AngioJet System  thrombectomy  applications and new  high-pressure  waterjet
technology-based products. The Company expects to report a loss for fiscal 2000,
which is  expected  to be less than the  fiscal  1999 loss.  A modest  profit is
expected  for fiscal  2001.  In addition,  the Company  expects that  increasing
working capital  investments in trade receivables and inventory will be required
to support growing product sales.

     The Company is currently evaluating its capital needs and options available
for raising cash,  including the sale of additional equity capital,  asset based
financing and monies that may be forthcoming  from the Company's graft business.
There is no  guarantee  that the  Company  will  secure  financing,  or reach an
agreement to sell its common stock, at terms acceptable to the Company.


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. In addition,  executive  officers,  and other key
management  personnel may, under the Plan,  receive an additional payment upon a
change in control  notwithstanding their employment status following a change in
control.


Year 2000 ("Y2K")

     The Company established a team in May 1998 to assess the possible exposures
related  to the Y2K  issue.  The areas  investigated  include:  product  issues,
business computer systems and software,  production equipment,  vendor readiness
and contingency plans. Products currently sold by the Company are Y2K compliant.
The Company has responded to all inquiries regarding Y2K compliance by customers
and vendors.  The Company has noted an increase in requests from customers since
January 1999. The Company has taken steps to attach  stickers to all drive units
indicating Y2K compliance.

<PAGE>

     The  Company  uses  commercial  software  to manage  the  primary  business
functions of production,  finance and payroll. These systems have been certified
by the vendors as Y2K compliant on the software  releases  currently  installed.
The Company has service  contracts with these vendors so any additional  changes
needed are obtained in service packs. The Company's  network operating system is
certified as Y2K  compliant and has been tested by the company.  Production  and
quality control equipment do not use dates to control operations.

     Certain  personal  computers  were  not  Y2K  compliant.  The  Company  has
completed the purchase of replacement  computers which were purchased as planned
spending  necessary  to  maintain  current  technology.  Installation  of  these
computers will be completed in October 1999.

     The Company  uses  Microsoft  software to operate its  workstations  and to
provide  office  productivity  functions.  It knows that not all of the  current
versions  used  are  fully  Y2K  ready.  The  Company   installed   software  to
automatically  distribute software updates. It has installed commercial software
to check  hardware,  software,  and data files for potential  Y2K problems.  The
Company expects no significant problems with applications software.

     The  Company  evaluated  its  suppliers  of  utility,   telecommunications,
payroll,  banking,  and  employee  benefits  services.  It does not  expect  any
disruptions in these services.  The Company  replaced its voice mail system with
one that is Y2K compliant; the replacement was needed for other business reasons
so was not budgeted as a specific Y2K expense.

     Company vendors have responded to questionnaires  and follow-up phone calls
regarding  their Y2K readiness.  The Company  continues to monitor key suppliers
and has incorporated Y2K readiness into its supplier  certification process. The
Company's  contingency  planning  includes  monitoring  of suppliers  and market
conditions to ensure a constant  supply of  materials.  In the event any vendors
are not or will not be Y2K  compliant,  the Company will seek new vendors and/or
stockpile inventory to meet its production needs.

     The Company budgeted approximately $50,000 for expenses directly related to
Y2K identification and remediation.  Expenses to date are approximately $10,000;
total expenses are not expected to deviate  significantly  from the budget.  The
Company purchased  directors' and officers'  liability  insurance related to the
Y2K issue.

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

     While it is impossible to evaluate every aspect of year 2000 compliance, we
believe  that either of two events would be our most likely year 2000 worst case
scenario.  The  first  would be from one or more of our sole or  limited  source
suppliers to fail to be year 2000  compliant or to have its business  negatively
impacted by year 2000 issues of others.  The second would be delays in receiving
orders or payments from customers due to year 2000 problems they experience.  At
the present time, it is not possible to determine whether any of these events is
likely to occur,  or to quantify any potential  negative impact they may have on
our future results of operations and financial condition.

<PAGE>

New Accounting Pronouncements

     Effective  for fiscal 1999,  the Company  adopted SFAS No. 130,  "Reporting
Comprehensive  Income".  SFAS No. 130  requires  that  changes in the amounts of
certain items, including foreign currency translation adjustments,  be presented
in the Company's financial statements.

     Effective for fiscal 1999, the Company  adopted SFAS No. 131,  "Disclosures
about Segments of an Enterprise and Related Information". The statement requires
disclosure of certain  financial and  descriptive  information  about  operating
segments as  redefined  by SFAS No. 131.  The Company  operates in one  business
segment.

     In June 1998,  SFAS No. 133,  "Acounting  for Derivative  Instruments  and
Hedging  Activities" was  issued.  SFAS No.  133  establishes  a new  model for
accounting for  derivatives  and hedging  activities and supersedes and amends a
number  of  existing  accounting  standards.  SFAS  No.  133  requires  that all
derivatives  be recognized in the balance sheet at their fair market value,  and
the corresponding derivative gains or losses be either reported in the statement
of operations or as a deferred item depending on the type of hedge  relationship
that exists with respect to such derivative. Management has not yet completed an
assessment  of the impact of  adopting  the  provisions  of SFAS No. 133 and the
Company's  financial  statements.  The standard is effective  for the Company in
fiscal 2001.


Forward-Looking Statements

     Management's  Discussion and Analysis of Financial Condition and Results of
Operations  and  certain  other  sections  of  this  Form  10-K,  including  the
discussion  regarding Year 2000  compliance,  contain  certain  "forward-looking
statements" as defined in the Private Securities  Litigation Reform Act of 1995.
Such statements relating to future events and financial  performance,  including
the submission of applications to the FDA, anticipated FDA approvals, the timing
of FDA approvals,  revenue and expense levels,  profitability and future capital
requirements,   are   forward-looking   statements   that   involve   risks  and
uncertainties,  including  the  Company's  ability to meet its timetable for FDA
submissions, the review time and process at the FDA, results of clinical trials,
changes  in  the  Company's  marketing  strategies,  the  Company's  ability  to
establish  product  distribution  channels,  changes in  manufacturing  methods,
market  acceptance  of the  AngioJet  System,  changes  in the levels of capital
expenditures by hospitals, the levels of sales of the Company' products that can
be achieved,  ability to raise  additional  capital and other risks set forth in
the cautionary statements included in Exhibit 99 to the Company's report on Form
10-Q dated April 30, 1999, 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.  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  1999,  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, 1999, 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, 1999 and 1998 and
the related  consolidated  statements of operations,  comprehensive  loss,  cash
flows,  and changes in  shareholders'  equity for each of the three years in the
period ended July 31, 1999.  Our audits also  included the  financial  statement
schedule listed in the Index at Item 14. These consolidated financial statements
and  financial  statement  schedule  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

     In our opinion,  such consolidated  financial statements present fairly, in
all  material  respects,  the  financial  position of Possis  Medical,  Inc. and
subsidiaries  as of July 31, 1999 and 1998 and the  results of their  operations
and their  cash flows for each of the three  years in the period  ended July 31,
1999, in conformity with generally accepted accounting principles.  Also, in our
opinion,  such financial statement schedule,  when considered in relation to the
basic financial  statements taken as a whole,  presents fairly,  in all material
respects, the information set forth therein.



Deloitte & Touche LLP
Minneapolis, Minnesota
August 31, 1999
(September 15, 1999 as to Note 10)

<PAGE>


                      POSSIS MEDICAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>



                                                                     July 31, 1999            July 31, 1998
 <S>                                                                  <C>                       <C>
ASSETS:
CURRENT ASSETS:
 Cash and cash equivalents (Note 1)...........................        $ 9,151,004               $13,841,793
 Receivables:
   Trade (less allowance for doubtful accounts and returns:
          $489,000 and $150,000, respectively)................          3,063,311                 1,147,563
 Inventories (Note 1):
   Parts......................................................          1,218,910                 1,085,236
   Work-in-process............................................          1,596,313                 1,740,834
   Finished goods.............................................          1,556,482                 1,913,084
 Prepaid expenses and other assets............................            247,907                   313,158

    Total current assets......................................         16,833,927                20,041,668


PROPERTY (Notes 1 and 3):
 Leasehold improvements.......................................          1,274,814                 1,210,984
 Machinery and equipment......................................          4,143,032                 3,720,772
 Assets in construction.......................................            258,114                   113,094
                                                                        5,675,960                 5,044,850
 Less accumulated depreciation................................          2,887,025                 2,343,691
   Property - net.............................................          2,788,935                 2,701,159

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

 Goodwill (Note 1)............................................            197,922                   269,922

TOTAL ASSETS..................................................        $19,820,784               $23,896,854

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

<PAGE>

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


<TABLE>
<CAPTION>

                                                                     July 31, 1999             July 31, 1998
<S>                                                                   <C>                      <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
    Trade accounts payable..................................          $   879,173               $ 1,245,552
    Accrued salaries, wages, and commissions................            1,605,680                 1,060,687
    Current portion of long-term debt (Note 3)..............               92,490                    97,713
    Clinical trials accrual.................................              110,100                   335,067
    Litigation settlement...................................                --                      200,000

    Other liabilities.......................................              616,840                   504,624
Total current liabilities...................................            3,304,283                 3,443,643

LONG-TERM DEBT (Notes 1 and 3)..............................               99,728                11,492,661

OTHER LIABILITIES  (Note 5).................................              102,000                   216,200


COMMITMENTS AND CONTINGENCIES (Notes 7 and 10)

SHAREHOLDERS' EQUITY (Note 5):
    Common stock-authorized, 100,000,000 shares
         of $ .40 par value each; issued and outstanding,
        14,998,360 and 12,218,622 shares, respectively......            5,999,344                 4,887,449
    Additional paid-in capital..............................           60,608,623                42,476,257
    Unearned compensation...................................             (141,467)                 (489,060)
    Retained deficit........................................          (50,151,727)              (38,130,296)
    Total shareholders' equity..............................           16,314,773                 8,744,350
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................          $19,820,784               $23,896,854

<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>


                                                                              1999                1998              1997
<S>                                                                       <C>                   <C>                 <C>
REVENUES:
     Medical products sales (Note 8)..............................        $13,123,479        $  6,117,850        $2,814,646
     Sales agreement and other (Note 9)...........................            --                  --              2,019,431
         Total revenues...........................................         13,123,479           6,117,850         4,834,077

COST OF SALES AND OTHER EXPENSES:
     Cost of medical products ....................................          7,883,865           5,794,901         4,934,887
     Selling, general and administrative..........................         11,611,113           7,555,616         4,545,937
     Research and development ....................................          5,743,866           5,193,787         4,964,239
     Interest.....................................................            381,179              40,599             5,422
         Total cost of sales and other expenses...................         25,620,023          18,584,903        14,450,485

Operating loss....................................................        (12,496,544)        (12,467,053)       (9,616,408)

Interest income...................................................            475,113             489,610         1,001,578
Gain on sale of  investments  ....................................              --                  8,101             7,109
Loss from continuing operations...................................        (12,021,431)        (11,969,342)       (8,607,721)

Income from discontinued operations - net (Note 2)................              --                --                111,539
Net loss .........................................................       $(12,021,431)       $(11,969,342)      $(8,496,182)

Weighted average number
     of common shares outstanding - basic and diluted.............         13,355,822          12,191,477        12,099,217
Earnings (loss) per common share - basic and diluted:
     Continuing operations    ....................................              $(.90)              $(.98)            $(.71)
     Discontinued operations  ....................................              --                 --                   .01
Net loss .........................................................              $(.90)              $(.98)            $(.70)

</TABLE>

                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                               YEARS ENDED JULY 31
<TABLE>
<CAPTION>

                                                                              1999                1998               1997
<S>                                                                      <C>                 <C>                 <C>
Net loss ........................................................        $(12,021,431)       $(11,969,342)       $(8,496,182)
Unrealized gain on investments...................................               --                  5,836            139,440
Comprehensive loss...............................................        $(12,021,431)       $(11,963,506)       $(8,356,742)

<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>
                                                                              1999                1998               1997
<S>                                                                      <C>                 <C>                 <C>
OPERATING ACTIVITIES:
     Net loss .........................................................  $(12,021,431)       $(11,969,342)       $(8,496,182)
Adjustments to reconcile net loss to net
         cash used in operating activities:
     Gain on sale of marketable securities.............................          --                (8,101)            (7,109)
Loss on disposal of assets.............................................         4,312              15,237              4,932
Depreciation...........................................................     1,035,105             774,027            473,816
Amortization...........................................................       204,077              84,832             72,000
     Stock compensation................................................       327,462             430,046            155,083
     Stock options issued to non-employees.............................        14,000              11,648                --

     Increase in receivables...........................................    (1,915,748)           (148,112)          (391,314)
     Increase in inventories...........................................       (58,002)         (1,613,285)        (1,286,860)

     (Increase) decrease in other current assets.......................        65,251             (57,920)           (56,961)

     Increase (decrease) in trade accounts payable.....................      (366,379)            597,052            330,597

     Increase in accrued and other current liabilities.................       787,795             113,110            601,686
         Net cash used in operating activities.........................   (11,923,558)        (11,770,808)        (8,600,312)
INVESTING ACTIVITIES:
     Additions to plant and equipment..................................      (693,398)           (614,074)          (612,641)

     Proceeds from sale of fixed assets................................        16,656               2,100             20,954

     Purchase of marketable securities.................................          --               (13,612)        (1,990,718)
     Proceeds from sale/maturity of marketable securities..............          --            10,991,719          7,011,640
         Net cash provided by (used in) investing activities...........      (676,742)         10,366,133          4,429,235
FINANCING ACTIVITIES:
     Proceeds from notes payable and long-term debt....................        21,074          12,175,000                --
     Repayment of long-term debt.......................................       (14,069)            (28,356)           (73,386)

     Proceeds from issuance of stock and exercise
         of options and warrants.......................................     7,926,761             142,406            405,150
     Deferred debt issue costs.........................................       (24,255)           (891,776)               --
         Net cash provided by financing activities.....................     7,909,511          11,397,274            331,764

INCREASE (DECREASE) IN CASH AND
    CASH EQUIVALENTS...................................................    (4,690,789)          9,992,599         (3,839,313)
CASH AND CASH EQUIVALENTS AT BEGINNING
   OF YEAR.............................................................    13,841,793           3,849,194          7,688,507
CASH AND CASH EQUIVALENTS AT END OF YEAR...............................  $  9,151,004         $13,841,793         $3,849,194

SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid..........................................................  $      1,643         $     1,262         $    5,422
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                 --                 --
Accrued payroll taxes related to restricted stock......................        83,230             325,397                --
Cancellation of restricted stock.......................................        40,381                 --                 --
Inventory transferred to fixed assets..................................        32,201              16,288             32,279
Issuance of restricted stock...........................................        20,250             919,106                --
Warrants issued related to convertible debt............................          --               600,000                --

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

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                Unearned   Unrealized
                                         Common Stock            Additional      Stock       Loss on
                                     Number of                    Paid-in        Compen-     Invest-         Retained
                                      Shares       Amount         Capital        sation      ments          Deficit         Total

<S>                                  <C>          <C>           <C>           <C>          <C>         <C>            <C>
BALANCE AT JULY 31, 1996........     12,052,644   $4,821,058    $40,688,535   $(102,690)   $(145,276)  $(17,664,772)    $27,596,855
    Employee stock purchase
         plan...................          8,537        3,415        123,616         --           --             --          127,031
    Stock options issued to
        directors (Note 5)......            --           --          52,393         --           --             --           52,393
    Stock options exercised.....         68,109       27,243        276,391         --           --             --          303,634
    Stock retired..............          (7,978)      (3,191)       (22,324)        --           --             --          (25,515)
    Unearned stock compensation
        amortization............            --           --             --      102,690          --             --          102,690
    Unrealized gain on investments          --           --             --          --       139,440            --          139,440
    Net loss....................            --           --             --          --           --      (8,496,182)     (8,496,182)

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

BALANCE AT JULY 31, 1998........     12,218,622    4,887,449     42,476,257    (489,060)         --     (38,130,296)      8,744,350
    Employee stock purchase
       plan.....................         19,881        7,952        106,181         --           --             --          114,133
    Stock options issued to
      directors and physicians
       (Note 5).................            --          --           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

<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 43 years.
In 1990 the Board of Directors decided to focus on medical  products,  which led
to the  sale  of the  Technical  Services  Division  in 1991  and  the Jet  Edge
industrial  waterjet  business  in 1994.  In March  1994  the  Company  sold its
pacemaker lead business  because it anticipated that revenues from this business
would decline due to a pacemaker lead technology  shift. The name of the Company
was  changed to Possis  Medical,  Inc.  in 1993.  In January  1995,  the Company
established  a  100%  owned  subsidiary,  Possis  Medical  Europe  B.V.,  in the
Netherlands  to  support  international  product  distribution.  Possis  Medical
received AngioJet Rheolytic  Thrombectomy System U.S. marketing approval for use
in AV access hemodialysis grafts in December 1996 and for use in native coronary
arteries and coronary bypass grafts in March 1999.

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

     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
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

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

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

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

     Deferred Debt Issue Costs Deferred debt issue costs were being amortized on
a  straight-line  basis over six years,  based on the term of the 5% convertible
subordinated   debentures   due  2004.  In  FY99,  all  of  the  5%  convertible
subordinated  debentures  were  converted into the Company's  common stock.  All
unamoritzed  deferred debt issue costs were offset against  equity.  Accumulated
amortization at July 31, 1998 was $7,671.

<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  FY99,  all  of  the  5%  convertible
subordinated  debentures  were  converted into the Company's  common stock.  All
unamortized  original  issue  discount was offset  against  equity.  Accumulated
amortization at July 31, 1998 was $5,161.

     Goodwill  Goodwill  is being  amortized  on a  straight-line  basis over 13
years,   based  on  the  remaining   life  of  patent  rights   related  to  the
Perma-Flow(R)Graft  acquired in 1988. Accumulated  amortization at July 31, 1999
and 1998 was $789,500 and $717,500, respectively.

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

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

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

     Earnings  (Loss)  Per  Share  Loss per  share  for  1999,  1998 and 1997 is
computed  by  dividing  the net loss by the  weighted  average  number of common
shares outstanding.  Warrants,  options, and convertible debentures representing
1,882,288, 2,511,762 and 1,359,344 shares of common stock at July 31, 1999, 1998
and 1997,  respectively,  have been excluded from the  computations  because the
effect is antidilutive.

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

     Marketable   Securities   During   1998  and   1997,   the   Company   sold
available-for-sale   securities   aggregating   approximately   $5,992,000   and
$1,012,000, realizing gains of $8,101 and $7,109 in 1998 and 1997, respectively.

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

<PAGE>

     Comprehensive  Income  Effective  fiscal 1999, the Company adopted SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 requires that changes in the
amounts of certain items, including foreign currency translation adjustments, be
presented in the Company's financial statements.

     Segment Reporting  Effective fiscal 1999, the Company adopted SFAS No. 131,
"Disclosures  about  Segments of an  Enterprise  and Related  Information."  The
statement requires  disclosure of certain financial and descriptive  information
about operating  segments as redefined by SFAS No. 131. The Company  operates in
one business segment.

     Derivative  Instruments and Hedging  Activities In June 1998, SFAS No. 133,
"Accounting for Derivative  Instruments and Hedging Activities" was issued. SFAS
No. 133  establishes  a new model for  accounting  for  derivatives  and hedging
activities and supersedes and amends a number of existing accounting  standards.
SFAS No. 133 requires that all derivatives be recognized in the balance sheet at
their fair market value,  and the  corresponding  derivative  gains or losses be
either  reported in the statement of operations or as a deferred item  depending
on the type of hedge  relationship  that exists with respect to such derivative.
Management  has not yet  completed an  assessment  of the impact of adopting the
provisions of SFAS No. 133 on the Company's financial  statements.  The standard
is effective for the Company in fiscal 2001.


2.    DISCONTINUED OPERATIONS

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

     During 1996, ATS prepaid the notes  receivable and the estimated  remaining
royalty  payments  in  connection  with the sale of ATS. At July 31,  1997,  all
amounts related to the Company's sale of ATS were paid in full.

     Income from  Discontinued  Operations  Operating  results of the  Technical
Services division were as follows for the year ended July 31, 1997:

<TABLE>
<CAPTION>
        <S>                                               <C>
        Sales.........................................    $  --
        Income from operations........................    $  --
        Amortization of not-to-compete agreement......      41,768
        Percentage of ATS's revenues..................      69,771
        Income from discontinued operations ..........    $111,539

</TABLE>

<PAGE>

<TABLE>

3.    LONG-TERM DEBT
<S>                                                                                       <C>          <C>
   Long-term debt at July 31, 1999 and 1998 is as follows:                                   1999        1998

   Note payable, interest at 4.5%, interest and principal due June
     1999 and June 2001, collateralized by the Company's equipment...................      $175,000   $  175,000
   Notes payable, interest at 9.75%-10.15%, .principal and interest
     payable monthly, final payment due October 2002, collateralized by the
     Company's equipment.............................................................        17,218        4,513
   Convertible subordinated registered debentures due July 2004,
     face value of $12,000,000, net of unamortized original issue discount
     of $-0- and $594,839 as of July 31, 1999 and 1998, interest at 5%,
     converted in 1999, unsecured ...................................................          --      11,405,161
   Non-interest bearing note payable, principal payable in 10 equal
     quarterly payments beginning January 1997, final payment paid
     April 1999, unsecured...........................................................          --           5,700

                                                                                            192,218    11,590,374
    Less current maturities..........................................................       (92,490)      (97,713)

                                                                                           $ 99,728   $11,492,661

</TABLE>

     In July 1998,  the Company  received  $12,000,000  gross  proceeds from the
issuance of 5% convertible subordinated debentures due 2004 and 110,640 warrants
valued  at  $600,000.  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. The warrants are exercisable
for common stock at $15.58 per share.


4.   INCOME TAXES

     At July 31,  1999,  the Company had net  operating  loss  carryforwards  of
approximately $45,793,000 for federal tax purposes, which expire in 2003 through
2019, and $13,455,000  for Minnesota tax purposes,  which expire in 2003 through
2014.

     In addition, at July 31, 1999 the Company has approximately  $2,126,000 and
$548,000 in federal and state tax credits,  respectively,  substantially  all of
which are research and development  tax credits,  which expire from 2000 through
2014, and a $65,182 AMT credit which does not expire.

     Deferred  tax  assets  and  liabilities  as of July  31,  1999 and 1998 are
described in the table below. The Company reduced its net deferred tax assets to
zero through a valuation  allowance  due to the  uncertainty  of realizing  such
assets:

<TABLE>

                                                           1999        1998
<S>                                                     <C>         <C>
  Current assets (liabilities):
  Allowance for doubtful accounts and returns.......... $ 171,000   $  51,000
  Inventory............................................   179,000     152,000
  Employee compensation and benefits...................   334,000     203,000
  Other  ..............................................    25,000      16,000
                                                          709,000     422,000
  Valuation allowance..................................  (709,000)   (422,000)
  Net    .............................................. $    --     $    --

</TABLE>

<PAGE>

<TABLE>

<S>                                               <C>             <C>
Long-term assets:
     Net operating losses........................ $16,518,000     $12,464,000
     Amortization of patents.....................     365,000         276,000
     Tax credits.................................   2,674,000       1,975,000
     Depreciation................................    (263,000)       (222,000)

                                                   19,294,000      14,493,000
     Valuation allowance......................... (19,294,000)    (14,493,000)
     Net    ..................................... $      --       $      --

</TABLE>

     The effective income tax rate differed from the U.S. federal statutory rate
for each of the three years ended July 31, 1999, 1998 and 1997 as follows:

<TABLE>

                                                         1999           1998           1997
<S>                                                  <C>            <C>           <C>
  Tax benefit on loss from
    continuing operations computed at
    statutory rate of 34%..........................  $(4,087,000)   $(4,069,000)   $(2,889,000)
  Decrease in tax benefit due to nonrecognizable
    benefits of net operating loss
    carryforwards and others.......................    4,087,000      4,069,000      2,889,000
  Total income tax expense
    continuing operations..........................  $     --       $     --       $     --

</TABLE>

5.    COMMON STOCK

     Private  Placement  Offering 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.

     Stock Options Certain officers, directors, key employees, and certain other
individuals  may purchase  common stock of the Company under stock option plans.
In 1992,  the Company  established  the 1992 Stock  Compensation  Plan (the 1992
Plan), which replaced the 1983 and 1985 plans.  Although the 1983 and 1985 plans
remain in effect for options  outstanding,  no new options may be granted  under
these plans.

     The 1992 Plan  authorizes  awards of the  following  types of  equity-based
compensation:   incentive  stock  options,  nonqualified  stock  options,  stock
appreciation  rights,  restricted stock,  deferred stock, annual grants of stock
options to  directors,  stock options to directors in lieu of  compensation  for
services rendered as directors,  and other stock-based awards valued in whole or
in part by reference to stock of the Company.  No incentive stock options may be
granted on or after August 1, 2002,  nor shall such options  remain valid beyond
ten years following the date of grant.

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

<PAGE>

     At July 31, 1999,  there were  1,621,070  shares  reserved for  outstanding
options and 407,332  shares  available  for  granting of options  under the 1992
Plan.

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

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

     In fiscal 1999, 1998 and 1997, the Company granted 11,477,  8,874 and 5,207
compensatory  options,  respectively,  to its outside  directors in lieu of cash
payments for directors fees.  These options were granted under the 1992 Plan and
vested immediately.

     A summary of changes in  outstanding  options  for each of the three  years
ended July 31, 1999 follows:

<TABLE>
                                                                 1999                      1998                      1997
<S>                                                         <C>                     <C>                       <C>
     Shares under option at
        beginning of year............................         1,443,571                 1,212,944                   899,787
     Options granted - 1992 plan.....................           460,877                   302,674                   460,557
     Options exercised...............................           (66,200)                  (23,940)                  (68,109)
     Options canceled................................          (217,178)                  (48,107)                  (79,291)
        Shares under option at end of year...........         1,621,070                 1,443,571                 1,212,944
     Shares exercisable at end of year...............           859,866                   691,209                   581,238
     Exercise price of options granted...............       $3.52-15.50               $5.50-16.69              $10.62-20.45
     Exercise price of options exercised.............        $3.75-8.75                $1.00-5.75              $1.00-14.625
     Market price of options exercised...............       $7.43-14.95              $13.13-19.25             $16.75-19.625
     Aggregate market value of options
        exercised....................................          $603,877                  $424,396                $1,241,296

</TABLE>

     Stock option  weighted  average  exercise prices during 1999, 1998 and 1997
are summarized below:

<TABLE>
                                                       1999      1998      1997
<S>                                                  <C>       <C>       <C>
         Outstanding at beginning of year..........  $12.10    $11.63    $ 9.15
         Granted  .................................    7.79     13.55     15.81
         Exercised.................................    5.72      4.20      4.46
         Canceled .................................   13.98     13.79     12.40
         Outstanding at end of year................   10.89     12.10     11.63

</TABLE>

<PAGE>

     The following table summarizes  information  concerning options outstanding
and exercisable options as of July 31, 1999:

<TABLE>
                                       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>             <C>
         $1 - $6       197,668        4.06           $  4.52           191,418         $ 4.48
         $6 - $12      695,627        7.40              8.30           293,992           8.48
         $12 - $17     562,225        7.47             14.18           286,244          14.17
         $17 - $21     165,550        7.18             18.20            88,213          18.21

</TABLE>

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

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

     In fiscal 1999,  the Company  granted 2,500 shares of  restricted  stock to
employees under the terms of the 1992 Plan,  which vested 1,250 shares each year
in fiscal  years  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  1999,  1998 and 1997,  total  compensation  expense of $327,462,
$430,046 and $102,690,  respectively,  was recognized on these  restricted stock
grants.

<PAGE>

     Effective August 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based  Compensation." As permitted by SFAS 123, the Company has elected to
continue following the guidance of APB No. 25 for measurement and recognition of
stock-based   transactions  with  employees.   No  compensation  cost  has  been
recognized  for stock  options  issued  under the 1992 Plan because the exercise
price for all options granted was at least equal to the fair value of the common
stock  at the  date of  grant  except  as  noted  previously  in this  note.  If
compensation cost for the Company's stock option and employee purchase plans had
been  determined  based on the fair value at the grant  dates for grants  during
1999,  1998 and 1997,  consistent  with the method provided in SFAS No. 123, the
Company's net loss and loss per share would have been as follows:

<TABLE>

                                           1999           1998          1997
<S>                                   <C>            <C>            <C>
  Net loss:
    As reported....................   $(12,021,431)  $(11,969,342)  $(8,496,182)
    Pro forma......................    (14,312,062)   (14,122,375)   (9,752,401)
  Loss per share - basic and diluted:
    As reported....................   $       (.90)  $       (.98)  $      (.70)
    Pro forma......................             (1.07)      (1.16)         (.81)

</TABLE>

     The fair value of options  granted  under the various  option  plans during
1999,  1998 and 1997 was  estimated on the date of grant using the  Black-Sholes
option-pricing  model  with  the  following  weighted  average  assumptions  and
results:


                                                   1999        1998       1997

   Dividend yield...........................       None        None        None
   Expected volatility......................        78%         47%         40%
   Risk-free interest rate..................       5.5%        6.5%        6.5%
   Expected life of option..................    120 mo.     120 mo.     120 mo.
   Fair value of options on grant date...... $2,964,817  $2,795,547  $4,353,803



     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, 1999.  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  (See  Note  3).  These  warrants  expire  on July  15,  2002 and are
exercisable into common stock at $15.58 per share. As of July 31, 1999, 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.

     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  19,881  shares in
1999, 7,811 shares in 1998 and 8,537 shares in 1997 under this Plan.

<PAGE>

6.    401 K PLAN

     The  Company has an  employees'  savings  and profit  sharing  plan for all
qualified   employees  who  have  completed  six  months  of  service.   Company
contributions  are made at the  discretion of the Board of Directors  subject to
the maximum amount allowed under the Internal  Revenue Code.  Contributions  for
the years  ended  July 31,  1999,  1998 and 1997  were  $208,563,  $154,863  and
$97,765, respectively.


7.    COMMITMENTS AND CONTINGENCIES

     The  Company's  medical  products  operation  is  conducted  from a  leased
facility under an operating  lease which expires in 2006.  Rental payments under
the lease are  guaranteed by a letter of credit in the amount of $20,000 at July
31, 1999.  Rental  expense  charged to  operations  was $241,674 in fiscal 1999,
$241,674 in 1998 and $237,742 in fiscal 1997.  Future minimum payments under the
non-cancelable operating leases at July 31, 1999 were:

            Year Ended
             July 31                          Amount

              2000                           $242,000
              2001                            242,000
              2002                            242,000
              2003                            242,000
              2004                            242,000
              2005 and thereafter             484,000

           Total minimum lease payments    $1,694,000

     The  lease  is  noncancelable  before  April  2001,  after  which it can be
canceled with notice and payment of a termination fee.

     The Company is leasing a sales office under an  operating  lease  effective
August 1999 which expires in 2002.  The future annual  rentals on this operating
lease are approximately $14,000 per year through 2002.

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


8.    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.
Possis  Medical,  Inc.  evaluates  revenue  performance  based on the  worldwide
revenues   of  each  major   product   line  and   profitability   based  on  an
enterprise-wise  basis  due to  shared  infrastructures  to make  operating  and
strategic decisions.

     Total revenues by United States and non-United States for each of the three
years ended July 31, 1999, 1998 and 1997 are as follows:

                                    1999           1998         1997

     United States............  $12,632,300    $5,766,817    $4,029,806
     Non-United States........      491,179       351,033       804,271
     Total revenues...........  $13,123,479    $6,117,850    $4,834,077


     In 1999,  1998 and 1997  there  were no  individual  customers  with  sales
exceeding 10% of total revenues.


9.    PRODUCT SUPPLY AND DISTRIBUTION AGREEMENTS

     In December 1998, the Company  entered into an exclusive  worldwide  supply
and  distribution  agreement  with  Horizon  Medical  Products,   Inc.  for  its
Perma-Seal  Dialysis  Access Graft.  The first shipment under this agreement was
made in January 1999.

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

     On March 15, 1996 the Company  entered into a  distribution  agreement with
Baxter  Healthcare  Corporation   ("Baxter").   This  agreement  granted  Baxter
exclusive worldwide distribution rights to the Possis Perma-Flow Coronary Bypass
Graft for a three-year  term.  Under this agreement,  through July 31, 1997, the
Company  received  $400,000  and was  scheduled  to receive up to an  additional
$200,000,  on the second anniversary date of agreement  signing,  as long as the
agreement was still in effect.  In April 1998, this  distribution  agreement was
modified with Baxter retaining non-exclusive  distribution rights outside of the
United  States  but has no  distribution  rights in the  United  States  for the
remaining  term  of  the  distribution   agreement.   In  conjunction  with  the
modification,  the  Company  waived the  $200,000  second  anniversary  payment.
Effective  March  15,  1999,  all of  Baxter's  distribution  rights  to  Possis
Perma-Flow Coronary Bypass Graft terminated.


10.   SUBSEQUENT EVENT

     On September  15, 1999,  the  Company's  Board of Directors  has 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. In addition,  executive  officers,  and
other key  management  personnel,  may,  under the Plan,  receive an  additional
payment  upon a  change  in  control  notwithstanding  their  employment  status
following a change in control.

<PAGE>

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

     During fiscal 1998 and 1999, there were no changes in or disagreements with
the Company's  independent certified public accountants on accounting procedures
or accounting and financial disclosures.

<PAGE>

                                    PART III


Item 10.  Directors and Executive Officers of the Registrant:

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


Item 11.  Executive Compensation:

     Information regarding compensation of directors and officers for the fiscal
year ended July 31, 1999 is in the Proxy Statement and is incorporated herein by
reference.


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

     The security  ownership of certain  beneficial  owners and management is in
the  Proxy   Statement   under  the  heading  "Common  Stock  Ownershi"  and  is
incorporated herein by reference.


Item 13. Certain Relationships and Related Transactions:

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

<PAGE>


                                     PART IV


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

(a)   1. Financial Statements

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

         Consolidated Balance Sheets, July 31, 1999 and 1998
         Consolidated Statements of Operations for each of the three years in
               the period ended July 31, 1999
         Consolidated Statements of Comprehensive Loss for each of the three
               years in the period ended July 31, 1999.
         Consolidated Statements of Cash Flows for each of the three years
               in the period ended July 31, 1999.
         Consolidated Statements of Changes in Shareholders' Equity for each
               of the three years in the period ended July 31, 1999.
         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, 1996   Rights agreement, dated December 12,
                                          1996, between the Company and
                                          Norwest Bank Minnesota N.A., as
                                          rights agent

   4.2       8-K      July 24, 1998       Convertible Debenture Purchase
                                          Agreement dated July 14, 1998

   4.3       8-K      July 24, 1998       Form of Series A 5% Convertible
                                          Debenture due July 15, 2004,
                                          dated July 14, 1998

   4.4       8-K      July 24, 1998       Registration Rights Agreement
                                          between the Company and
                                          purchasers of the Convertible Debt
                                          dated July 14, 1998

   4.5       8-K      July 24, 1998       Form of Redeemable Warrant to
                                          purchasers of the Convertible
                                          Debt dated July 15, 1998

   4.6       10-K     November 23, 1966   Debenture Agreement with St. Paul
                                          Fire and Marine Company and
                                          Western Life Insurance Company
                                          and form of debenture rates and
                                          warrants

   4.7       8-K      May 12, 1999        Private placement Purchase Agreement
                                          dated May 11, 1999 between the
                                          Company and the investors listed
                                          therein

   4.8       8-K      May 12, 1999        Registration Rights Agreement between
                                          the Company and the investors in the
                                          purchase Agreement dated May 11, 1999

   4.9       8-K      May 12, 1999        Form of Warrant to investors of the
                                          Purchase  Agreement dated May 11, 1999

<PAGE>


Exhibit     Form        Date Filed                   Description



   10.1     8-K       December 6, 1996    Settlement agreement and mutual
                                          release relating to the termination
                                          of the Perma-Seal supply and
                                          distribution agreement with C.R.Bard,
                                          Inc.

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

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>

Exhibit     Form        Date Filed                   Description

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

   10.16    10-Q      Quarter ended       Supply & distribution agreement
                      January 31, 1995    with Bard Vascular Systems
                                          Division, C.R.Bard, Inc.

   10.17    10-Q      Quarter ended       Lease agreement for corporate
                      January 31, 1996    headquarters and manufacturing
                                          facility dated December 15, 1995.

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

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

*  10.20    10-K      Fiscal Year ended   Change in Control Termination
                      July 31, 1999       Pay Plan

   10.21    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, 1999       public accountants

   27                                     Financial data schedule

   99       10-Q      Quarter ended       Investment risk factors
                      April 30, 1999

*    Indicates management contract or compensatory plan or arrangement.

(b)   Reports on Form 8-K

     During the quarter ended July 31, 1999,  the Company filed a report on Form
8-K dated May 12, 1999 reporting  under Item 5 that the Company had entered into
a Private Placement Purchase Agreement.

<PAGE>

SIGNATURES

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

POSSIS MEDICAL, INC.

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

Dated:  October 29, 1999

     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 29, 1999
Donald C. Wegmiller


/s/ Robert G. Dutcher          Director, President and          October 29, 1999
Robert G. Dutcher              Chief Executive Officer


/s/ Dean Belbas                Director                         October 29, 1999
Dean Belbas


/s/ Seymour J. Mansfield       Director                         October 29, 1999
Seymour J. Mansfield


/s/ Whitney A. McFarlin        Director                         October 29, 1999
Whitney A. McFarlin


/s/ William C. Mattison, Jr.   Director                         October 29, 1999
William C. Mattison, Jr.


/s/ Rodney A. Young            Director                         October 29, 1999
Rodney A. Young

<PAGE>
                                                                    SCHEDULE II

                              POSSIS MEDICAL, INC.

VALUATION ACCOUNTS
YEARS ENDED JULY 31, 1999, 1998 AND 1997

<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, 1999            $   150,000        $  584,000        $ 245,000        $   489,000
Year ended July 31, 1998                 80,000           140,000           70,000            150,000
Year ended July 31, 1997                 60,000            96,530           76,530             80,000

Valuation allowance on
deferred tax asset:

Year ended July 31, 1999            $14,915,000        $5,008,000        $    --          $20,003,000
Year ended July 31, 1998             10,695,000         4,220,000             --           14,915,000
Year ended July 31, 1997              7,657,000         3,038,000             --           10,695,000

</TABLE>

<PAGE>

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

                                  EXHIBIT INDEX
Exhibit
Number                            Description

   23             Consent of independent certified public accountants

   27             Financial data schedule

<PAGE>

                                                                    EXHIBIT 23





CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Possis Medical, Inc.:

     We consent to the  incorporation by reference in  Post-Effective  Amendment
No.  1 to  Registration  Statement  No.  33-5467  on  Form  S-8,  Post-Effective
Amendment No. 1 to Registration Statement No. 33-33416 on Form S-8, Registration
Statement No. 33-39987 on Form S-8, Registration  Statement No. 33-56728 on Form
S-8, and Registration  Statement No. 333-57289 on Form S-8 of our report,  dated
August 31, 1999  (September  15, 1999 as to Note 10),  appearing  in this Annual
Report on Form 10-K of Possis Medical, Inc. for the year ended July 31, 1999.



Deloitte & Touche LLP
Minneapolis, Minnesota
October 25, 1999

<PAGE>

                                                                   EXHIBIT 3.2


                         BYLAWS OF P0SSIS MEDICAL, INC.
                                    ARTICLE I
                          DEFINITIONS AND ABBREVIATIONS

     As used herein,  the  following  terms shall have the  following  meanings:

     "Corporation" means Possis Medical, Inc.

     "Act" means the Minnesota Business Corporation Act, as amended from time to
time.  "Articles  of   Incorporation"   or  "Articles"  mean  the  Articles  of
Incorporation of the Corporation, as amended from time to time.

    "Bylaws" means the Bylaws of the Corporation, as amended from time to time.

     "Authorized  Shares"  means the shares of all  classes  of stock  which the
Corporation is authorized by the Articles of Incorporation to issue.

     "Registered  Holders" means the shareholders of record of the issued shares
of the Corporation as they appear upon the  Shareholders'  Ledger  maintained by
the Transfer Agent.


                                   ARTICLE II

                                 IDENTIFICATION

     Section 1. NAME. The name of the Corporation is Possis Medical, Inc.

     Section 2. REGISTERED OFFICE AND REGISTERED AGENT.

     Clause  (a).  OBLIGATION  TO  MAINTAIN.  The  Corporation  shall  have  and
continuously  maintain in the State of Minnesota a  registered  office which may
be, but need not be, the same as its place of business.

     Clause (b) REGISTERED  OFFICE.  The registered office of the Corporation in
Minnesota shall be that set forth in a statement of the Board of Directors filed
with the Secretary of State of the State of Minnesota.

     Section 3. PRINCIPAL  BUSINESS OFFICE. The principal business office of the
Corporation  is  9055  Evergreen  Blvd.  N.W.,   Minneapolis,   Minnesota.   The
Corporation  may have such other  business  offices either within or without the
State of Minnesota as the Board of Directors may from time to time establish.

     Section 4. SEAL. If so directed by the Board of Directors,  the Corporation
may use a corporate  seal.  The failure to use such a seal,  however,  shall not
affect the validity of any documents executed on behalf of the Corporation.  The
seal of the Corporation  shall be circular in form and mounted upon a metal die,
suitable for impressing the same upon paper. The seal need only include the word
"Seal", but it may also include, at the discretion of the Board, such additional
wording as is permitted by law.

     Section 5. FISCAL YEAR. The fiscal year of the  Corporation  shall begin on
the  first  day of  August  in each  year  and end on the  last  day of July the
following year.

<PAGE>

                                   ARTICLE III

                                  CAPITAL STOCK

     Section 1.  SUBSCRIPTIONS  FOR  SHARES.  Unless  otherwise  provided in the
subscription  agreement,  subscriptions for shares, whether made before or after
the organization of the  Corporation,  shall be paid in full at such time, or in
such  installments  and at such times,  as shall be  determined  by the Board of
Directors.  Any call made by the Board of Directors for payment on subscriptions
shall be  uniform  as to all shares of the same class or as to all shares of the
same  series,  as the case may be.  In case of  default  in the  payment  of any
installment  or call when such  payment is due, the  Corporation  may proceed to
collect the amount due in the same manner as any debt due the Corporation.

     Section 2.  CONSIDERATION  FOR SHARES.  Common Stock may be issued for such
consideration  as may be  fixed  from  time to time by the  Board  of  Directors
provided it not be less than the par value of the shares so issued.

     Section 3. PAYMENT FOR SHARES. The consideration for the issuance of shares
may be paid,  in whole or in part,  in money,  in other  property,  tangible  or
intangible, or in labor or services actually performed for the Corporation. When
payment of the  consideration  for which shares are to be issued shall have been
received by the  Corporation,  such shares  shall be deemed to be fully paid and
non-assessable.  Neither  promissory  notes nor future services shall constitute
payment or part payment for shares of the  Corporation.  In the absence of fraud
in the transaction,  the judgment of the Board of Directors or the shareholders,
as the case may be, as to the value of the  consideration  received  for  shares
shall be  conclusive.  No  certificate  shall be issued for any share until such
share is fully paid.

     Section 4. CERTIFICATES REPRESENTING SHARES.  Certificates of shares of the
Corporation  shall be in such form as shall be  prescribed by law and adopted by
the Board of Directors, certifying the number of shares of the Corporation owned
by each  shareholder.  The certificates  shall be numbered in the order in which
they are  issued  and shall be signed by the  Chief  Executive  Officer  and the
Secretary or by such other officers as the Board of Directors may designate. The
signatures of the Chief  Executive  Officer and the Secretary upon a certificate
may be  facsimiles.  In case any  officer  who has  signed  or  whose  facsimile
signature  has been  placed upon such  certificate  shall have ceased to be such
officer before such  certificate is issued,  it may be issued by the Corporation
with the same effect as if he or she was such  officer at the date of its issue.
Such  certificates  shall  also  have such  legends  as may be  required  by any
shareholder agreement or other agreement.

     Section 5.  CERTIFICATES  FOR SHARES OF COMMON  STOCK.  Each  holder of the
Common Stock of the  Corporation  shall be entitled to a  certificate  in a form
approved by the Board of Directors.

<PAGE>

     Section 6. TRANSFER OF SHARES. Transfer of certified shares on the books of
the  Corporation  may  be  authorized  only  by  the  shareholder  named  in the
certificate,  or the shareholder's  legal  representative,  or the shareholder's
duly authorized  attorney-in-fact,  and upon surrender of the certificate or the
certificates for such shares therefore  properly  endorsed.  The Corporation may
treat,  as the absolute  owner of the shares of the  Corporation,  the person or
persons in whose name or names the  shares  are  registered  on the books of the
Corporation.  The transfer of uncertified  shares,  if any, shall be made by the
means determined by the Board of Directors. Every certificate surrendered to the
Corporation  for exchange or transfer shall be canceled,  and no new certificate
or certificates  shall be issued in exchange for any existing  certificate until
such existing  certificate  shall have been  cancelled.  The rights  against the
Corporation  inherent in certified shares are transferable  only by registration
of such  shares  in the name of the  assignee  as the  registered  holder on the
Shareholders Ledger maintained by the Transfer Agent of the Corporation.

     Section 7. TRANSFER AGENT AND REGISTRAR. The Board of Directors may appoint
one or more  transfer  agents and one or more  registrars  and may  require  all
certificates  for shares to bear the signature or signatures of any of them. The
Transfer  Agent shall  maintain  among  other  records a  Shareholders'  Ledger,
setting forth, among other things, the names and addresses of the holders of all
issued  shares  of the  Corporation,  the  number of  shares  held by each,  the
certificate  numbers  representing  such  shares,  and the  date of issue of the
certificates  representing such shares. The Registrar shall maintain among other
records a Share Register, setting forth, among other things, the total number of
shares of each class of shares which the Corporation is authorized to issue, and
the total number of shares actually  issued.  The  Shareholders'  Ledger and the
Share  Register  are  hereby  identified  as the  Stock  Transfer  Books  of the
Corporation; but as between the Shareholders' Ledger and the Share Register, the
names and addresses of shareholders,  as they appear on the Shareholders' Ledger
maintained by the Transfer Agent, shall be the official list of "shareholders of
record" of the  Corporation,  in the Articles of  Incorporation,  Bylaws,  stock
certificates, minutes and other records of the Corporation occasionally referred
to as "registered  holders." The name and address of each shareholder of record,
as they appear upon the Shareholders' Ledger, shall be conclusive evidence as to
who  are  the  shareholders  entitled  to  receive  notice  of the  meetings  of
shareholders;  to vote at such  meetings,  to  examine  a  complete  list of the
shareholders  entitled to vote at meetings;  and to own, enjoy, and exercise any
other  property or rights  deriving  from such shares  against the  Corporation.
Shareholders,  but not the  Corporation,  its  Directors,  Officers,  Agents  or
Attorneys, shall be responsible for notifying the Transfer Agent, in writing, of
any changes in their names or addresses  from time to time, and failure so to do
will  relieve the  Corporation,  its other  Shareholders,  Directors,  Officers,
Agents,  and Attorneys,  and its Transfer Agent and Registrar,  of liability for
failure to direct notices or other documents,  or pay over or transfer dividends
or other  property  or  rights,  to a name or  address  other  than the name and
address appearing in the Shareholders' Ledger maintained by the Transfer Agent.

     Section 8. LOST,  STOLEN OR DESTROYED  CERTIFICATES.  The  Corporation  may
issue a new  certificate  for  shares of stock in the  place of any  certificate
theretofore  issued and alleged to have been lost, stolen or destroyed,  but the
Board of  Directors  may  require  the owner of such lost,  stolen or  destroyed
certificate, or his legal representative, to furnish affidavits as to such loss,
theft,  or destruction  and to give a bond in such form and substance,  and with
such  surety or  sureties,  with fixed or open  penalty,  as it may  direct,  to
indemnify the Corporation and the Transfer Agent and Registrar against any claim
that may be made on account of the alleged loss,  theft or  destruction  of such
certificate.

<PAGE>

                                   ARTICLE IV

                                THE SHAREHOLDERS

     Section  1.  PLACE  OF  MEETINGS.  Meetings  of  the  shareholders  of  the
Corporation  may be held at such  place,  either  within or without the State of
Minnesota,  as may be specified in the respective notices, or waivers of notice,
thereof, or proxies to represent shareholders thereat.

     Section 2. ANNUAL MEETING.  An annual meeting of the  shareholders  for the
election of  Directors  and for the  transaction  of such other  business as may
properly  come before the meeting shall be held on an annual basis as determined
by the Board of Directors.

     Section 3. SPECIAL  MEETINGS.  Special  meetings of the shareholders may be
called by the Chief Executive Officer, the Board of Directors, or the holders of
not less than one-tenth of all the shares entitled to vote at the meeting.

     Section 4. NOTICE OF MEETINGS--WAIVER.  Written or printed notice,  stating
the place,  day and hour of the meeting and, in case of a special  meeting,  the
purpose or purposes for which the meeting is called, shall be delivered not less
than ten nor more  than  sixty  days  before  the  date of the  meeting,  either
personally or by mail, by or at the  direction of the Chief  Executive  Officer,
the Secretary, or the Officer or person calling the meeting, to each shareholder
of record  entitled to vote at such  meeting.  If mailed,  such notice  shall be
deemed to be delivered when deposited in the United States mail addressed to the
shareholder  at this  address as it appears on the Stock  Transfer  Books of the
Corporation,  with postage thereon prepaid. Waiver by a shareholder of notice in
writing of a shareholders'  meeting,  signed by him, whether before or after the
time  stated  therein,  shall  be  equivalent  to the  giving  of  such  notice.
Attendance by a shareholder,  whether in person or by proxy,  at a shareholders'
meeting shall constitute a waiver of notice of such meeting.

     Section  5.  MEETINGS  HELD UPON  SHAREHOLDER  DEMAND.  Annual  or  special
meetings  of the  shareholders  may  be  demanded  by a  shareholder  under  the
following circumstances:

     Clause (a). If an annual meeting of  shareholders  has not been held during
the  immediately  preceding  fifteen (15) months,  a shareholder or shareholders
holding  three  percent  (3%) or more of all voting  shares may demand an annual
meeting of shareholders by written notice of demand given to the Chief Executive
Officer or Chief Financial Officer the Corporation.  If the Board fails to cause
an annual  meeting to be called and held as required by law, the  shareholder or
shareholders making the demand may call the meeting by giving notice as required
by law, all at the expense of the Corporation.

     Clause (b). A shareholder or shareholders holding ten percent (10%) or more
of the voting power of all shares  entitled to vote may demand a special meeting
of shareholders by written notice of demand given to the Chief Executive Officer
or Chief Financial  Officer of the Corporation and containing the purpose of the
meeting, except that a special meeting for the purpose of considering any action
to directly or indirectly effect a business combination, including any action to
change or otherwise  affect the  composition  of the Board of Directors for that
purpose, must be called by twenty-five percent (25%) or more of the voting power
of all shares  entitled to vote.  Within  thirty (30) days after  receipt of the
notice of demand by the Chief Executive Officer or Chief Financial  Officer,  it
shall be the duty of the Board of  Directors  to cause a special  meeting  to be
duly called and held on notice no later than  ninety (90) days after  receipt of
the demand. If the Board of Directors fails to cause such a meeting to be called
and held as required by this Section, the shareholder or shareholders making the
demand may call the meeting by giving notice as provided in Article IV,  Section
4.

<PAGE>

     Section  6.  CLOSING OF  TRANSFER  BOOKS AND FIXING  RECORD  DATE.  For the
purpose  of  determining  shareholders  entitled  to notice of or to vote at any
meeting of  shareholders  or any  adjournment  thereof,  or  entitled to receive
payment of any dividend, or in order to make a determination of shareholders for
any other proper purpose,  the Board of Directors of the Corporation may provide
that the Stock  Transfer  Books  shall be closed for a stated  period but not to
exceed, in any case, sixty days. If the Stock Transfer Books shall be closed for
the purpose of  determining  shareholders  entitled to notice of or to vote at a
meeting  of  shareholders,  such  books  shall be  closed  for at least ten days
immediately preceding such meeting. In lieu of closing the Stock Transfer Books,
the Board of Directors may fix in advance a date as the record date for any such
determination of  shareholders,  such date in any case to be not more than sixty
days and, in case of a meeting of shareholders,  not less than ten days prior to
the date on  which  the  particular  action,  requiring  such  determination  of
shareholders,  is to be taken. If the Stock Transfer Books are not closed and no
record date is fixed for the determination of shareholders entitled to notice of
or to vote at a meeting of  shareholders,  or  shareholders  entitled to receive
payment of a dividend,  the date on which notice of the meeting is mailed or the
date on which the  resolution of the Board of Directors  declaring such dividend
is adopted,  as the case may be, shall be the record date for such determination
of shareholders.  When a determination  of shareholders  entitled to vote at any
meeting  of  shareholders  has  been  made as  provided  in this  Section,  such
determination   shall  apply  to  any  adjournment   thereof  except  where  the
determination  has been made through the closing of the Stock Transfer Books and
the stated period of closing has expired.

     Section 7. QUORUM.  A majority of the shares entitled to vote,  represented
in person or by proxy,  shall  constitute a quorum at a meeting of shareholders.
The shareholders present at a duly organized meeting may continue to do business
until  adjournment,  notwithstanding  the withdrawal of enough  shareholders  to
leave less than a quorum.

     Section 8. VOTING.

     Clause (a) COMMON STOCK.  Except as otherwise provided by the Act or by the
Articles of  Incorporation,  every holder of the Common Stock of the Corporation
shall be  entitled  to one vote for each share of Common  Stock  standing in his
name on the books of the Corporation.

     Clause (b)  PROHIBITION  AGAINST  VOTING  STOCK.  Common Stock shall not be
voted at any meeting of shareholders in any of the following events:

     Item (i) If any installment of the purchase price owing the Corporation for
such shares is due and unpaid thereon.

     Item (ii) If the  certificate  representing  such  shares  shall  have been
transferred on the Shareholders'  Ledger maintained by the Transfer Agent of the
Corporation after the record date for determining  shareholders entitled to vote
at the meeting has been fixed by the Board of  Directors,  or, if no record date
is so fixed,  then  after the date on which  notice of the  meeting is mailed to
shareholders.

<PAGE>

     Clause (c)  PROXIES.  A  shareholder  may vote either in person or by proxy
executed   in  writing   by  the   shareholder,   or  by  his  duly   authorized
attorney-in-fact.  No proxy shall be valid after eleven  months from the date of
its execution, unless otherwise provided in the proxy.

     Clause (d) VOTING OF SHARES OWNED BY OTHER CORPORATIONS. Shares standing in
the name of another corporation may be voted by such officer,  agent or proxy as
the Bylaws of such other  corporation may prescribe,  or, in the absence of such
provision,  as the Board of Directors of such other  corporation  may determine;
or, in the absence of such provision or determination,  as the President or Vice
President and Secretary or Assistant  Secretary of such other corporation may by
proxy, duly executed and sealed (but not necessarily  acknowledged or verified),
designate.

     Clause  (e)  VOTING  OF  SHARES  OWNED BY  FIDUCIARIES.  Shares  held by an
administrator,  executor,  guardian or conservator may be voted either in person
or by proxy, without a transfer of such shares into his name. Shares standing in
the name of a trustee may be voted by him, either in person or by proxy,  but no
trustee  shall be entitled to vote shares held by him without a transfer of such
shares into his name. It shall not be necessary  for such  fiduciary to obtain a
court  order  authorizing  him to vote  such  shares.  The  general  proxy  of a
fiduciary  shall be given the same  weight and  effect as a general  proxy of an
individual or corporation.

     Clause (f) VOTING OF SHARES OWNED BY RECEIVERS. Shares standing in the name
of a receiver  may be voted by such  receiver,  and shares  held by or under the
control of a receiver may be voted by such receiver without the transfer thereof
into his name if authority so to do be contained in an appropriate  order of the
court by which such receiver was appointed.

     Clause (g) VOTING OF PLEDGED SHARES. A shareholder whose shares are pledged
shall be  entitled to vote such  shares  until the shares have been  transferred
into the name of the pledge, and thereafter the pledge shall be entitled to vote
the shares so transferred.

     Section 9.  PROPOSALS.  To be properly  brought before a regular meeting of
shareholders,  business must be (i) specified in the notice of the meeting, (ii)
directed  to be brought  before the meeting by the Board of  Directors  or (iii)
proposed at the meeting by a shareholder  who (A) was a shareholder of record at
the time of giving of notice  provided for in these  Bylaws,  (B) is entitled to
vote at the  meeting  and (C) gives  prior  notice  of the  matter,  which  must
otherwise  be a proper  matter for  shareholder  action,  in the  manner  herein
provided.  For  business to be properly  brought  before a regular  meeting by a
shareholder,  the  shareholder  must give written notice to the Secretary of the
Corporation  so as to be  received  at the  principal  executive  offices of the
Corporation at least 120 days before the date that is one year after the date of
the  corporation's  proxy statement for the prior year's regular  meeting.  Such
notice shall set forth (i) the name and record address of the shareholder and of
the beneficial  owner,  if any, on whose behalf the proposal will be made,  (ii)
the class and number of shares of the  Corporation  owned by the shareholder and
beneficially owned by the beneficial owner, if any, on whose behalf the proposal
will be made,  (iii) a brief  description of the business  desired to be brought
before the regular meeting and the reasons for conducting such business and (iv)
any material  interest in such business of the  shareholder  and the  beneficial
owner, if any, on whose behalf the proposal is made. The chairman of the meeting
may refuse to acknowledge any proposed  business not made in compliance with the
foregoing procedure.

<PAGE>

     Section 10. CONDUCT OF SHAREHOLDER  MEETINGS.  The presiding officer of the
meeting shall have the right and authority to prescribe such rules,  regulations
and  procedures  and to do all such acts as, in the  judgment of such  presiding
officer,  are  appropriate  for  conduct  of  the  meeting.  To the  extent  not
prohibited by law, such rules,  regulations or procedures  may include,  without
limitation,  establishment of (i) an agenda or order of business for the meeting
and the method by which business may be proposed,  (ii) rules and procedures for
maintaining  order  at the  meeting  and the  safety  of  those  present,  (iii)
limitations on attendance at or  participation in the meeting to shareholders of
record of the Corporation, their duly authorized proxies or such other person as
the presiding officer of the meeting shall determine, (iv) restrictions on entry
to the  meeting  after  the time  fixed  for the  commencement  thereof  and (v)
limitations on the time allotted to questions or comments by  participants.  Any
proposed  business  contained in the notice of a regular meeting is deemed to be
on the agenda and no further motions or other actions shall be required to bring
such proposed business up for consideration.  Unless and to the extent otherwise
determined by the presiding officer of the meeting, it shall not be necessary to
follow Robert's Rules of Order or any other rules of parliamentary  procedure in
the meeting of the  shareholders.  Following  completion  of the business of the
meeting as  determined by the  presiding  officer of the meeting,  the presiding
officer  of the  meeting  shall have the  exclusive  authority  to  adjourn  the
meeting.


                                    ARTICLE V

                             THE BOARD OF DIRECTORS


     Section 1.  NUMBER AND  QUALIFICATIONS.  The  business  and  affairs of the
Corporation  shall be  managed by a Board of not more than nine  Directors,  who
need  not be  residents  of the  State  of  Minnesota,  or  shareholders  of the
Corporation.  The number of Directors may be any lesser  number,  but may not be
less than three.  The number of Directors  may be increased to any number,  from
time to time,  by  amendment  of this  Section;  but no decrease  shall have the
effect of shortening the term of any incumbent Director.

     Section 2. ELECTION.

     Clause (a) Members of the Board of  Directors  shall hold office  until the
next annual meeting of the shareholders or until death, resignation,  removal or
disqualification. At each annual meeting, the shareholders shall elect Directors
to hold office until the next  succeeding  annual  meeting.  Each Director shall
hold office for the term for which he is elected,  and until his successor shall
be elected and qualified.

     Clause (b)  Nominations  of persons for  election as Directors at a regular
meeting of  shareholders  may be made (i) by or at the direction of the Board of
Directors or (ii) by any  shareholder who (A) was a shareholder of record at the
time of giving of notice  provided for in these Bylaws,  (B) is entitled to vote
at the meeting and (C) gives prior notice of the nomination in the manner herein
provided. For a nomination to be properly made by a shareholder, the shareholder
must  give  written  notice  to the  Secretary  of the  Corporation  so as to be
received at the principal executive offices of the Corporation at least 120 days
before  the date  that is one year  after  the date of the  corporation's  proxy
statement for the prior year's regular meeting.  Such notice shall set forth (i)
as to the shareholder  giving the notice: (A) the name and record address of the
shareholder  and the  beneficial  owner,  if any, on whose behalf the nomination
will be made, and (B) the class and number of shares of the Corporation owned by
the shareholder and beneficially owned by the beneficial owner, if any, on whose
behalf the  nomination  will be made and (ii) as to each person the  shareholder
proposes to nominate:  (A) the name, age, business address and residence address
of the person, (B) the principal  occupation or employment of the person and (C)
the class and number of shares of the Corporation's  capital stock  beneficially
owned by the person.  The chairman of the meeting may refuse to acknowledge  the
nomination of any person not made in compliance with the foregoing procedure.

<PAGE>

     Section 3. VACANCIES.  Any vacancy  occurring in the Board of Directors may
be filled by the  affirmative  vote of a majority  of the  remaining  Directors,
though less than a quorum of the Board of Directors.  A Director elected to fill
a vacancy shall be elected for the unexpired term of his  predecessor in office.
Any  directorship  to be filled by reason of increase in the number of Directors
may  be  filled  by  the  affirmative  vote  of the  majority  of the  remaining
Directors,  though  less  than a quorum of the Board of  Directors.  A  Director
elected to fill such a vacancy  shall hold office until the next annual  meeting
of shareholders and until his successor shall have been elected and qualified.

     Section 4. PLACE OF  MEETINGS.  Meetings of the Board of  Directors  of the
Corporation,  annual,  regular or special,  may be held either within or without
the State of Minnesota.  A conference  among Directors of the Corporation by any
means of communication  through which the Directors may simultaneously hear each
other during the conference constitutes a meeting of the Board of Directors.

     Section 5. ANNUAL  MEETINGS.  The Board of  Directors  shall meet each year
immediately  after the annual  meeting of the  shareholders,  at the place where
such meeting of the  shareholders  has been held  (either  within or without the
State of Minnesota), or at such other location as the Board shall determine, for
the purpose of  organization,  election of officers,  and  consideration  of any
other business that may properly be brought before the meeting. No notice of any
kind to either old or new  members  of the Board of  Directors  for such  annual
meeting shall be necessary.

     Section 6.  REGULAR  MEETINGS.  Regular  meetings of the Board of Directors
shall be held at least four (4) times a year as the Board of Directors may, from
time to time, determine.

     Section 7. SPECIAL MEETINGS.  Special meetings of the Board of Directors of
the  Corporation  shall  be held  upon  notice  thereof  by  letter,  facsimile,
telephone,  electronic  mail,  word-of-mouth or other means given not later than
twenty-four (24) hours prior to the time for such meeting. Notice of any special
meeting of the Board of Directors may be waived in writing  signed by the person
or persons  entitled  to such  notice,  whether  before or after the time stated
therein,  and shall be equivalent to the giving of such notice.  Attendance of a
Director  at a  special  meeting  shall  constitute  a waiver  of notice of such
special  meeting,  except  where a Director  attends a meeting  for the  express
purpose of objecting to the  transaction  of any business,  because such special
meeting is not lawfully convened.  Neither the business to be transacted at, nor
the purpose of any special meeting of the Board of Directors,  need be specified
in the notice, or waiver of notice of such meeting.

     Section 8. QUORUM.  A majority of the Directors  currently  holding  office
shall  constitute  a quorum  for the  transaction  of  business.  The act of the
majority  of the  Directors  present  at a meeting  at which a quorum is present
shall be the act of the Board of Directors.

<PAGE>

     Section 9. COMMITTEES.

     Clause (a) A resolution  approved by the affirmative  vote of a majority of
the Board of Directors  may  establish  committees  having the  authority of the
Board  in the  management  of the  business  of the  Corporation  to the  extent
provided  in the  resolution.  Committees  shall be  subject at all times to the
direction and control of the Board, except as provided in Article V, Section 10.

     Clause (b) A committee  shall consist of one or more natural  persons,  who
need not be Directors,  appointed by the  affirmative  vote of a majority of the
Directors present at a duly held meeting of the Board.

     Clause (c) Minutes,  if any, of committee  meetings shall be made available
upon request to members of the committee and to any Director.

     Section 10. COMMITTEE OF DISINTERESTED  PERSONS.  Pursuant to the procedure
set forth in Section 9 above,  the Board may  establish a committee  composed of
two or more disinterested  Directors or other disinterested persons to determine
whether it is in the best  interest of the  Corporation  to pursue a  particular
legal right or remedy of the  Corporation  and whether to cause the dismissal or
discontinuance of a particular proceeding that seeks to assert a right or remedy
on behalf of the  Corporation.  For the purposes of this Section,  a Director or
other person is "disinterested" if the director or other person is not the owner
of more than 1% of the stock of the Corporation or a related corporation, is not
a present  or former  officer,  employee,  or agent of the  Corporation  or of a
related  corporation,  and has not been made or threatened to be made a party to
the proceeding in question. The committee,  once established,  is not subject to
the  direction  or control of, or  termination  by, the Board.  A vacancy on the
committee may be filled by a majority vote of the remaining  committee  members.
The good faith  determinations of the committee are binding upon the Corporation
and its directors,  officers,  and  shareholders.  The committee shall terminate
when it issues a written report of its determinations to the Board.

     Section 11. DIVIDENDS.

     Clause (a) SHARE DIVIDENDS. The Board of Directors or the shareholders may,
from  time to  time,  declare  and the  Corporation  may  pay  dividends  on its
outstanding  shares  in  cash,  property,  or its own  shares,  except  when the
Corporation  is  insolvent  or  when  the  payment   thereof  would  render  the
Corporation  insolvent  or when the  declaration  or  payment  thereof  would be
contrary to any  restrictions  contained in the Articles of Incorporation or the
Act.

     Section 12. LOANS.  The Board of Directors shall have power with respect to
the lending of funds:

     Clause (a) TO LEND FUNDS GENERALLY.  To lend money for any general business
purposes;  invest the funds of the  Corporation  from time to time; and take and
hold real and  personal  property as security for the payment of funds so loaned
or invested; but to make no loans secured by the shares of the Corporation.

     Clause (b) TO LEND  FUNDS TO  EMPLOYEES.  To lend  money to, and  otherwise
assist,  its  employees,  other than its Directors and Officers;  but to make no
loans secured by the shares of the Corporation.

<PAGE>

     Section 13. IMPROPER ACTION AT MEETINGS.

     Clause (a) IMPROPER  DIVIDEND OR  DISTRIBUTION.  Directors  who vote for or
assent to the declaration of any dividend or other distribution of the assets of
the Corporation to its shareholders contrary to the provisions of the Act or the
Articles  of  Incorporation,  shall  be  jointly  and  severally  liable  to the
Corporation  for the amount of such dividend  which is paid or the value of such
assets  which  are  distributed  in excess of the  amount  of such  dividend  or
distribution  which could have been paid or  distributed  without a violation of
hate provisions of the Act or the Articles of Incorporation.

     Clause (b) IMPROPER  PURCHASE OF SHARES OF THE  CORPORATION.  Directors who
vote for or assent to the purchase of the shares of the Corporation  contrary to
the provisions of the Act or the Articles of Incorporation  shall be jointly and
severally  liable to the  Corporation for the amount of  consideration  paid for
such shares which is in excess of the maximum  amount which could have been paid
therefore  without a violation of the  provisions  of the Act or the Articles of
Incorporation.

     Clause (c) IMPROPER LIQUIDATION OF ASSETS. Directors who vote for or assent
to any distribution of assets of the Corporation to its Shareholders  during the
liquidation  of the  Corporation  without  payment and  discharge  of, or making
adequate  provision for, all known debts,  obligations,  and  liabilities of the
Corporation  shall be jointly and severally  liable to the  Corporation  for the
value of such  assets  which are  distributed  to the  extent  that such  debts,
obligations  and  liabilities of the  Corporation  are not  thereafter  paid and
discharged.

     Clause (d) IMPROPER  LOANS.  Directors who vote for or assent to the making
of a loan to an Officer or  Director  of the  Corporation,  or the making of any
loan secured by shares of the Corporation, shall be jointly and severally liable
to the Corporation for the amount of such loan until the repayment thereof.

     Clause  (e) EFFECT OF GOOD  FAITH.  A  Director  shall not be liable  under
Clauses  (a),  (b), or (c) of this  Section if he relied and acted in good faith
upon financial statements of the Corporation represented to him to be correct by
the  President or the Officer of the  Corporation  having charge of its books of
account, or certified by an independent public or certified public accountant or
firm of such  accountants  fairly to  reflect  the  financial  condition  of the
Corporation,  nor  shall he be so  liable if in good  faith in  determining  the
amount  available for any such dividend or distribution he considered the assets
to be of their book value.

     Clause (f)  CONTRIBUTION  FROM  SHAREHOLDERS.  Any Director  against whom a
claim shall be asserted  under or pursuant to this  Section for the payment of a
dividend or other  distribution  of assets of the  Corporation  and who shall be
held liable thereon, shall be entitled to contribution from the shareholders who
accepted  or received  any such  dividend or assets,  knowing  such  dividend or
distribution  to have been made in violation of this  Section,  in proportion to
the amounts received by them respectively.

     Clause (g) CONTRIBUTION  FROM OTHER DIRECTORS.  Any Director against whom a
claim shall be asserted  under or pursuant to this Section  shall be entitled to
contribution  from the other  Directors  who voted for or assented to the action
upon which the claim is asserted.

     Section 14. EFFECT OF PRESENCE AT MEETINGS.  A Director who is present at a
meeting of the Board of  Directors at which  action on any  corporate  matter is
taken shall be presumed to have  assented to the action taken unless his dissent
shall be  entered  in the  minutes  of the  meeting  or unless he shall file his
written  dissent to such action with the person  acting as the  secretary of the
meeting  before  the  adjournment  thereof  or shall  forward  such  dissent  by
registered  mail to the  Secretary  of the  Corporation  immediately  after  the
adjournment of the meeting.  Such right to dissent shall not apply to a Director
who voted in favor of such action.

<PAGE>

     Section 15. PLACES OF KEEPING RECORDS.  Subject to the limitations existing
under the Act and the laws of the  State of  Minnesota,  the  books of  account,
records,  documents,  and papers of the  Corporation may be kept at any place or
places within the State of Minnesota.  Limitations  on the place or places where
the books of account,  records,  documents, and papers of the Corporation may be
kept may be made from time to time by the Bylaws of the Corporation.

     Section 16.  PROVISIONS FOR WORKING CAPITAL.  The Board of Directors of the
Corporation  shall have power,  from time to time,  to fix and  determine and to
vary the amount to be reserved as working capital of the Corporation and, before
the payment of any dividends or the making of any  distribution  of profits,  it
may set aside out of the net profits or earned surplus of the  Corporation  such
sum or sums as it may from time to time in its absolute discretion  determine to
be proper whether as a reserve fund to meet  contingencies or for the equalizing
of dividends,  or for repairing or maintaining any property of the  Corporation,
or for an addition to the stated capital, capital surplus, or earned surplus, or
for any corporate  purposes that he Board of Directors  shall think conducive to
the best interest of the  Corporation,  subject only to such  limitations as the
Restated Code of Bylaws of the Corporation may from time to time impose.

     Section 17. TO WHOM SHARES MAY BE SOLD.  Subject to the  provisions  of the
Articles of  Incorporation,  any of the shares of the Corporation may be issued,
sold  or  otherwise  disposed  of by it  from  time  to  time  to  such  person,
corporations,  or  other  legal  entities  as  the  Board  of  Directors  of the
Corporation may determine.

     Section 18.  INTEREST OF  DIRECTORS  IN  CONTRACTS.  Any  contract or other
transaction between the Corporation and one or more of its Directors, or between
the  Corporation  and any firm of which one or more of its Directors are members
or employees,  or in which they are  interested,  or between the Corporation and
any  corporation  or  association  of  which  one or more of its  Directors  are
shareholders,  members, directors,  officers, or employees, or in which they are
interested,  shall be valid for all  purposes,  notwithstanding  the presence of
such  Director  or  Directors  at the meeting of the Board of  Directors  of the
Corporation,  which acts upon, or in reference to such contract or  transaction,
and  notwithstanding  his or their  participation in such action, if the fact of
such  interest  shall be disclosed  or known to the Board of Directors  present,
such  interested  Director or Directors to be counted in  determining  whether a
quorum is present,  but not to be counted in  calculating  the  majority of such
quorum  necessary  to carry such vote.  This  Section  shall not be construed to
invalidate  any  contract or other  transaction  which would  otherwise be valid
under the common and statutory law applicable thereto.

     Section 19. COMPENSATION OF DIRECTORS. By act of a majority of the Board of
Directors, the members of the Board of Directors may be paid a retainer and/or a
fee for attendance at all annual, regular, special and adjourned meetings of the
Board  and its  duly  constituted  committees.  No such  fee  shall  be paid any
Director  if  absent.  Any  Director  of the  Corporation  may  also  serve  the
Corporation in any other  capacity,  and receive  compensation  therefore in any
form.

<PAGE>
                                   ARTICLE VI

                               EXECUTIVE COMMITTEE

     Section 1. DESIGNATION OF EXECUTIVE  COMMITTEE.  By resolution of the Board
of Directors,  the Board may  designate  two or more  Directors to constitute an
Executive  Committee.  The  designation  of such  Executive  Committee,  and the
delegation of the  authority  herein  granted,  shall not operate to relieve the
Board of Directors, or any member thereof, of any responsibility imposed upon it
or him by law.  No member of the  Executive  Committee  shall  continue  to be a
member thereof after he ceases to be a Director of the Corporation. The Board of
Directors shall have the power at any time to increase or decrease the number of
members of the Executive  Committee,  to fill vacancies  thereon,  to change any
member thereof, and to change the functions or terminate the existence thereof.

     Section 2. POWERS OF THE EXECUTIVE COMMITTEE.  During the intervals between
meetings of the Board of Directors,  and subject to such  limitations  as may be
required  by law or by  resolution  of the  Board of  Directors,  the  Executive
Committee  shall  have and may  exercise  all of the  authority  of the Board of
Directors in the  management of the  Corporation.  The  Executive  Committee may
also,  from time to time,  formulate and recommend to the Board of Directors for
approval general  policies  regarding the management of the business and affairs
of the Corporation.  All minutes of meetings of the Executive Committee shall be
submitted to the next succeeding meeting of the Board of Directors for approval;
but  failure to submit the same or to receive  the  approval  thereof  shall not
invalidate any completed or  incompleted  action taken by the  Corporation  upon
authorization  by the  Executive  Committee  prior to the time at which the same
should have been, or was, submitted as above provided.

     Section 3.  PROCEDURE;  MEETINGS;  QUORUM.  The  Chairman of the  Executive
Committee of the Corporation shall, if present,  act as Chairman at all meetings
of the Executive  Committee,  and the  Secretary of the  Corporation  shall,  if
present, act as secretary of the meeting. In case of the absence of the Chairman
from any meeting of the  Executive  Committee,  the  Executive  Committee  shall
appoint an Acting Chairman of the meeting.  The Executive Committee shall keep a
record of its acts and proceedings. Regular meetings of the Executive Committee,
of which no notice  shall be  necessary,  shall be held on such days and at such
places as shall be fixed by  resolution  adopted by a majority of the  Executive
Committee.  Special  meetings of the Executive  Committee shall be called at the
request of any member of the Executive Committee,  and shall be held upon notice
by letter,  facsimile,  or other electronic memo, delivered for transmission not
later than during the second day immediately preceding the day for such meeting.
Notice  of any  special  meeting  of the  Executive  Committee  may be waived in
writing, signed by the member or members entitled to such notice, whether before
or after the time stated therein,  and shall be equivalent to the giving of such
notice. Attendance of any member of the Executive Committee at a special meeting
shall  constitute  a waiver of notice of such  special  meeting.  The  Executive
Committee may hold its meetings within or without the State of Minnesota,  as it
may from time to time by  resolution  determine.  A  majority  of the  Executive
Committee  shall be necessary to constitute a quorum for the  transaction of any
business, and the act of a majority of the members present at a meeting at which
a quorum is present shall be the act of the Executive Committee.  The members of
the  Executive  Committee  shall  act only as a  committee,  and the  individual
members shall have no power as such.

<PAGE>
                                   ARTICLE VII

                                    OFFICERS

     Section 1. NUMBER AND DESIGNATION. The Officers of the Corporation shall be
elected or appointed by the Board of Directors.  The Corporation  shall have one
or more  natural  persons  exercising  the  functions  of the  offices  of Chief
Executive Officer and Chief Financial Officer.  The Board of Directors may elect
or appoint such other officers or agents as it deems necessary for the operation
and  management  of the  Corporation,  with such  powers,  rights,  duties,  and
responsibilities  as  may  be  determined  by  the  Board,  including,   without
limitation,  a Chairman of the Board (who shall be a director), a President, one
or more Vice Presidents, a Secretary,  and a Treasurer,  each of whom shall have
the powers,  rights,  duties,  and  responsibilities  set forth in these Bylaws,
unless  otherwise  determined  by the Board.  Any of the offices or functions of
those offices may be held or performed by the same person.

     Section  2.  CHIEF  EXECUTIVE  OFFICER.  Unless  provided  otherwise  by  a
resolution adopted by the Board of Directors,  the Chief Executive Officer:  (a)
shall be responsible  for the general  active  management of the business of the
Corporation;   (b)  shall,  when  present,   preside  at  all  meetings  of  the
shareholders;   (c)  shall  be  responsible  for  implementing  all  orders  and
resolutions  of the  Board;  (d)  shall  sign  and  deliver  in the  name of the
Corporation  any  deeds,  mortgages,  bonds,  contracts,  or  other  instruments
pertaining to the business of the  Corporation,  except where  authority to sign
and deliver is required or permitted  by law to be  exercised by another  person
and except where such authority is expressly delegated by these Bylaws or by the
Board  to some  other  officer  or agent of the  Corporation;  (e) may  maintain
records of and certity proceedings of the Board and shareholders;  and (f) shall
perform  such other  duties as may from time to time be  assigned  to him by the
Board.

     Section  3.  CHIEF  FINANCIAL  OFFICER.  Unless  provided  otherwise  by  a
resolution adopted by the Board of Directors,  the Chief Financial Officer:  (a)
shall keep accurate financial records for the Corporation; (b) shall deposit all
moneys,  drafts,  and checks in the name of and to the credit of the Corporation
in such banks and  depositories  as the Board of Directors  shall designate from
time to time;  (c) shall  endorse  for  deposit  all notes,  checks,  and drafts
received by the  Corporation  as ordered by the Board,  making  proper  vouchers
therefore;  (d) shall disburse the funds of the Corporation as may be ordered by
the Board of Directors or the Chief  Executive  Officer,  making proper vouchers
therefore;  (e) shall  render to the Chief  Executive  Officer  and the Board of
Directors,  whenever  requested,  an account of all of his transactions as Chief
Financial  Officer and of the financial  condition of the  Corporation;  and (f)
shall  perform  such  other  duties  as may be  assigned  to him by the Board of
Directors or the Chief Executive Officer from time to time.

     Section  4.  CHAIRMAN  OF THE  BOARD.  The  Chairman  of the  Board  of the
Corporation  shall  preside at all meetings of the Board of Directors  and shall
perform  such  other  functions  as may be  determined  from time to time by the
Board.

     Section  5.  PRESIDENT.   Unless  otherwise  determined  by  the  Board  of
Directors,   the  President  shall  be  the  Chief  Executive   Officer  of  the
Corporation.  If an  officer  other  than  the  President  is  designated  Chief
Executive  Officer,  the President shall perform such duties as may from time to
time be assigned to him by the Board, or if authorized by the Board, such duties
as are assigned to him by the Chief Executive Officer.

     Section 6. VICE PRESIDENTS. Any one or more Vice Presidents, if any, may be
designated by the Board of Directors as Executive Vice Presidents or Senior Vice
Presidents.  During the absence or disability of the President,  it shall be the
duty of the highest ranking Executive Vice President, and, in the absence of any
such Vice  President,  it shall be the duty of the highest  ranking  Senior Vice
President or other Vice President,  who shall be present at the time and able to
act, to perform the duties of the  President.  The  determination  of who is the
highest  ranking of two or more persons  holding the same office  shall,  in the
absence of specific  designation of order or rank by the Board of Directors,  be
made on the basis of the earliest date of  appointment  or election,  or, in the
event of  simultaneous  appointment  or  election,  on the basis of the  longest
continuous employment by the Corporation.

<PAGE>

     Section 7. SECRETARY.  The Secretary,  unless  otherwise  determined by the
Board,  shall  attend all meetings of the  shareholders  and all meetings of the
Board of Directors, shall record or cause to be recorded all proceedings thereof
in a book to be kept for that purpose, and may certity such proceedings.  Except
as  otherwise  required or permitted by law or by these  Bylaws,  the  Secretary
shall give or cause to be given notice of all meetings of the  shareholders  and
all meetings of the Board of Directors.

     Section  8.  TREASURER.  Unless  otherwise  determined  by the  Board,  the
Treasurer shall be the Chief Financial Officer of the Corporation. If an officer
other than the Treasurer is designated  Chief Financial  Officer,  the Treasurer
shall  perform  such  duties as may from time to time be  assigned to him by the
Board.

     Section 9.  TREASURER'S  BOND. If required by the Board of  Directors,  the
Treasurer  shall give the Corporation a bond in such sum and with such surety or
sureties as shall be  satisfactory  to the Board of  Directors  for the faithful
performance  of  the  duties  of his  office  and  for  the  restoration  to the
Corporation,  in case of his death,  resignation,  retirement,  or removal  from
office, of all books,  papers,  vouchers,  money, and other property of whatever
kind in his possession or under his control belonging to the Corporation.

     Section 10.  VACANCIES.  If any office  becomes  vacant by reason of death,
resignation,  retirement,   disqualification,   removal,  or  other  cause,  the
directors then in office,  although less than a quorum,  may by a majority vote,
choose a successor or successors who shall hold office for the unexpired term in
respect of which such vacancy occurred.

     Section 11.  AUTHORITY AND DUTIES.  In addition to the foregoing  authority
and  duties,  all  officers  of the  Corporation  shall  respectively  have such
authority  and perform  such  duties in the  management  of the  business of the
Corporation  as may be  designated  from time to tine by the Board of Directors.
Unless prohibited by a resolution approved by the affirmative vote of a majority
of the  Directors  present,  an officer  elected or  appointed by the Board may,
without the approval of the Board ,delegate some or all of the duties and powers
of an office to other persons.

     Section 12. TERM; RESIGNATION; REMOVAL; VACANCIES.

     Clause (a) All  officers of the  Corporation  shall hold office until their
respective  successors  are chosen and have  qualified  or until  their  earlier
death, resignation, or removal.

     Clause (b) An officer  may resign at any time by giving  written  notice to
the Corporation. The resignation is effective without acceptance when the notice
is given to the  Corporation,  unless a later effective date is specified in the
notice.

     Clause (c) An officer may be removed at any time, with or without cause, by
a resolution  approved by an  affirmative  vote of the majority of the directors
present at a duly held Board meeting.

     Clause (d) A vacancy in an office because of death,  resignation,  removal,
disqualification,  or other cause may, or in the case of a vacancy in the office
of Chief Executive  Officer or Chief  Financial  Officer shall, be filled by the
Board.

<PAGE>

     Section 13. OFFICERS SHALL NOT LEND CORPORATE CREDIT.  Except when properly
authorized to act on behalf of the  Corporation,  no officer of this Corporation
may sign or endorse,  in the name of or on behalf of this  Corporation or in his
official capacity,  any obligations for the accommodation of any other party. No
check,  note,  bond,  stock  certificate,  or other  security  or thing of value
belonging  to this  Corporation  shall  be used by an  officer  or  director  as
collateral for any obligation other than a valid obligation of the Corporation.

     Section 14. SALARIES. The salaries of all officers of the Corporation shall
be fixed  by the  Board of  Directors  or by the  Chief  Executive  Officer,  if
authorized by the Board.


                                  ARTICLE VIII

     Section 1.  INDEMNIFICATION.  The Corporation  shall indemnify such persons
for such expenses and liabilities, in such manner, under such circumstances, and
to such extent, as required or permitted by Minnesota Statutes Section 302A.521,
as amended from time to time, or as required or permitted by other provisions of
law.

     Section 2.  INSURANCE.  The  Corporation  may  purchase  insurance,  at its
expense, to protect itself and any Director,  Officer,  employee or agent of the
Corporation or another corporation,  partnership,  joint venture, trust or other
enterprise  against  any such  expense,  liability  or loss,  whether or not the
Corporation  would have the power to indemnify such person against such expense,
liability or loss under the Minnesota Business Corporation Act.


                                   ARTICLE IX

                             SPECIAL CORPORATE ACTS.
                    NEGOTIABLE INSTRUMENTS, DEEDS, CONTRACTS
                           AND SHAREHOLDERS' MEETINGS.

     Section 1. EXECUTION OF NEGOTIABLE INSTRUMENTS.  All checks, drafts, notes,
bonds,  bills of exchange and orders for the payment of money of the Corporation
shall, unless otherwise directed by the Board of Directors,  or unless otherwise
required bylaw, be signed by any two of the following Officers:  Chairman of the
Board,  Chief Executive  Officer,  Chief Financial  Officer,  President,  a Vice
President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary. The
Board of Directors  may,  however,  authorize  any one of such  Officers to sign
checks,  drafts and orders for the  payment of money,  which are for  respective
amounts not in excess of $10,000.00 in any case, singly and without necessity of
countersignature;  and may designate  Officers and employees of the Corporation,
other than those names above,  or different  combinations  of such  Officers and
employees of the Corporation,  who may, in the name of the Corporation,  execute
in its behalf checks,  drafts and orders for the payment of money, which are for
amounts not in excess of $5,000.00.

     Section  2.  EXECUTION  OF DEEDS,  CONTRACTS,  ETC.  Subject  always to the
specific  directions of the Board of Directors  all deeds and mortgages  made by
the  Corporation  and all other written  contracts  and  agreements to which the
Corporation  shall be a party shall be executed in its name by the  President or
one of the  Vice  Presidents  and  attested  by the  Secretary  or an  Assistant
Secretary;  and the  Secretary  or an  Assistant  Secretary,  when  necessary or
required, shall affix the Corporate Seal thereto.

<PAGE>

     Section  3.  ENDORSEMENT  OF  STOCK  CERTIFICATES.  Subject  always  to the
specific  directions  of the  Board of  Directors,  any share or shares of stock
issued by any  corporation and owned by the  Corporation  (including  reacquired
shares of stock of the  Corporation)  may, for sale or transfer,  be endorsed in
the name of the Corporation by the President or one of the Vice Presidents,  and
attested  by the  Secretary  or an  Assistant  Secretary  either with or without
affixing thereto the Corporate Seal.


     Section 4. VOTING OF SHARES  OWNED BY  CORPORATION.  Subject  always to the
specific  directions  of the  Board of  Directors,  any share or shares of stock
issued by any other  corporation  and owned or controlled by the Corporation may
be voted at any shareholders  meeting of such other corporation by the President
of the Corporation if he be present,  or in his absence by any Vice President of
the Corporation who, may be present. Whenever, in the judgment of the President,
or, in his absence, of any Vice Presidents,  it is desirable for the Corporation
to  execute a proxy or give a  shareholders  consent  in respect to any share of
shares of stock issued by any other  corporation  and owned by the  Corporation,
such proxy or consent  shall be executed in the name of the  Corporation  by the
President or one of the Vice Presidents of the Corporation and shall be attested
by the  Secretary  or an  Assistant  Secretary  of  the  Corporation  under  the
Corporate Seal without necessity of any authorization by the Board of Directors.
Any person or persons  designated  in the  manner  above  stated as the proxy or
proxies of the  Corporation  shall have full right,  power and authority to vote
the share or shares of stock issued by such other  corporation  and owned by the
Corporation the same as such share or shares might be voted by the Corporation.


                                    ARTICLE X

                                   AMENDMENTS

     The power to alter,  amend or repeal these Bylaws,  or adopt new Bylaws, is
vested in the Board of  Directors,  but the  affirmative  vote of the  number of
Directors which is equal to a majority of the number who would constitute a full
Board of  Directors  at the time of such action shall be necessary to effect any
such action.

     The undersigned, Possis Medical, Inc., a Minnesota corporation, does hereby
certify  that the  foregoing  Bylaws  were  duly  adopted  as the  Bylaws of the
Corporation by its Board of Directors, and are effective as of June 10, 1999.




                                 POSSIS MEDICAL, INC.


                                 By:
                                    Irving R. Colacci, Secretary

<PAGE>

                                                                 EXHIBIT 10.20



                                CHANGE IN CONTROL
                              TERMINATION PAY PLAN

                                    SECTION 1

INTRODUCTION

     Effective September 15, 1999, Possis Medical, Inc., a Minnesota corporation
(hereinafter  sometimes  referred to as  "Employer"  or the  "Company"),  hereby
creates a change in  control  termination  pay plan for the  benefit  of certain
employees of the Employer in the event of a Change in Control. Capitalized terms
used herein shall have the meaning provided in Section 9.

     The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its  shareholders to assure that the
Company  will  have the  continued  dedication  of its  officers  and  other key
management and technical personnel,  notwithstanding the possibility,  threat or
occurrence of a Change in Control (as defined  below) of the Company.  The Board
believes  it is  essential  to  diminish  the  inevitable  distraction  of these
employees by virtue of the personal uncertainties and risks created by a pending
or threatened  Change in Control and to encourage  full attention and dedication
to the Company currently and in the event of any threatened or pending Change in
Control,  and to provide  specified  individuals  with  compensation and benefit
arrangements  upon a Change in Control  which ensure that the  compensation  and
benefits  expectations  of these  individuals  will be  satisfied  and which are
competitive with those of other corporations.  Therefore, in order to accomplish
these objectives,  the Board has adopted this Change in Control  Termination Pay
Plan.

                                    SECTION 2

PARTICIPATION

     All  Participants  in the Plan shall be identified at the discretion of the
Board. Participants shall be classified as Class I, Class II, Class III or Class
IV Participants. An employee who has become a Participant shall be considered to
continue as a Participant in the Plan until the date of the Participant's  death
or, if  earlier,  the date when the  Participant  is no longer  employed  by the
Employer  or is  removed  as a  Participant  at the  discretion  of  the  Board;
provided, however, that a Participant who has a Termination of Employment within
24  months  following  the date of a Change  in  Control  will not cease to be a
Participant.

<PAGE>

                                    SECTION 3

TERMINATION OF EMPLOYMENT

     3.1.  Notice of Termination.  Any purported  termination of a Participant's
employment  by the  Employer  or the  Participant,  including a  Termination  of
Employment as defined herein,  (other than by reason of the Participant's death)
within  twenty-four (24) months following the month in which a Change in Control
occurs,  shall be  communicated  by a Notice of  Termination  to the  other.  No
purported  termination by the Employer of a  Participant's  employment  shall be
effective  if it is not  pursuant  to a  Notice  of  Termination.  Failure  by a
Participant to provide  Notice of Termination  shall not limit any rights of the
Participant  under the Plan except to the extent the  Employer  can  demonstrate
that it suffered actual damages by reason of such failure.

     3.2.  Participant's  Termination Rights. A Participant's right to terminate
his or her employment pursuant to the terms of the Plan shall not be affected by
the Participant's  incapacity due to physical or mental illness. A Participant's
continued employment shall not constitute consent to, or a waiver of rights with
respect to, any circumstance  constituting  Good Reason pursuant to the terms of
the Plan. Termination by a Participant of the Participant's  employment for Good
Reason  shall  constitute  termination  for Good Reason for all  purposes of the
Plan,  notwithstanding  that the  Participant may also thereby be deemed to have
"retired" under any applicable retirement programs of the Employer.

<PAGE>

                                    SECTION 4

TERMINATION PAYMENT

     4.1. Qualification.  To qualify for a termination payment under the Plan, a
Participant  must (a) be a Participant  as of the date of the Change in Control,
and (b) have a Termination of Employment  within 24 months following a Change in
Control.

     4.2.  Amount.  Subject to the eligibility  requirement set forth in Section
4.1,  and the  limitations  set forth in Section 4.4 and Section 5,  termination
payments  for Class I, Class II,  Class III and Class IV  Participants  shall be
determined as
follows:

     4.2.1. Class I Participants.  Termination payments shall be made to a Class
I  Participant  in an amount equal to the sum of (a)  thirty-six  (36) times the
Class I  Participant's  highest  monthly  base  compensation  during the six (6)
months immediately before the Date of Termination;  and (b) all annual incentive
payments that the Class I Participant  would have received for the year in which
the Date of Termination occurs, had required performance targets been met, which
shall be deemed to have occurred on the Date of Termination, whether or not they
have occurred or could possibly  occur.  Said payments shall be paid in a single
lump sum,  discounted to present value, or by periodic payments  consistent with
payroll  practices of the Employer  during a term to be determined by the Board.
The manner of payment shall be at the discretion of the Board.

     Additionally,  the Class I  Participant  shall receive the  following:  (a)
until the end of the  thirty-sixth  (36th)  month  following  the month in which
occurs the Class I Participant's Date of Termination,  the Employer will arrange
to provide the Class I Participant  with welfare  benefits  (including  life and
health insurance benefits) and other employee benefits of substantially  similar
design and cost (to the Class I Participant)  as the welfare  benefits and other
employee benefits available to the Class I Participant  immediately prior to the
Notice of Termination or immediately prior to the date of the Change in Control,
whichever  is  greater;  but  benefits  otherwise  receivable  by  the  Class  I
Participant  pursuant  to this clause (a) shall be  discontinued  if the Class I
Participant obtains full-time  employment providing welfare benefits during such
period  following  such  termination;  and  (b)  group  outplacement  counseling
services up to $20,000 in value.  Notwithstanding  the  foregoing,  the Employer
shall not be required to continue  to provide  disability  benefits  following a
Class I Participant's Date of Termination other than with respect to benefits to
which the Class I Participant  became  entitled prior to the Date of Termination
and  which  are  required  to be paid  following  such  Date of  Termination  in
accordance with the terms of applicable  disability  plans or policies in effect
prior to such Date of Termination. The Class I Participant shall not be required
to  mitigate  the amount of any payment  provided  for under the Plan by seeking
other employment or otherwise,  nor shall the amount of any payment provided for
under the Plan be reduced by any compensation  earned by the Class I Participant
as the result of employment by another  employer after the Date of  Termination,
or otherwise, except as set forth in clause (a) of this paragraph.

<PAGE>

     4.2.2. Class II Participants. Termination payments shall be made to a Class
II Participant in an amount equal to the sum of (a)  twenty-four  (24) times the
Class II  Participant's  highest  monthly base  compensation  during the six (6)
months immediately before the Date of Termination;  and (b) all annual incentive
payments that the Class II Participant would have received for the year in which
the Date of Termination occurs, had required performance targets been met, which
shall be deemed to have occurred on the Date of Termination, whether or not they
have occurred or could possibly  occur.  Said payments shall be paid in a single
lump sum,  discounted to present value, or by periodic payments  consistent with
payroll  practices of the Employer  during a term to be determined by the Board.
The manner of payment shall be at the discretion of the Board.

     Additionally,  the Class II Participant  shall receive the  following:  (a)
until the end of the  twenty-fourth  (24th) month  following  the month in which
occurs the Class II Participant's Date of Termination, the Employer will arrange
to provide the Class II Participant  with welfare  benefits  (including life and
health insurance benefits) and other employee benefits of substantially  similar
design and cost (to the Class II Participant) as the welfare  benefits and other
employee benefits available to the Class II Participant immediately prior to the
Notice of Termination or immediately prior to the date of the Change in Control,
whichever  is  greater;  but  benefits  otherwise  receivable  by the  Class  II
Participant  pursuant to this clause (a) shall be  discontinued  if the Class II
Participant obtains full-time  employment providing welfare benefits during such
period  following  such  termination;  and  (b)  group  outplacement  counseling
services up to $15,000 in value.  Notwithstanding  the  foregoing,  the Employer
shall not be required to continue  to provide  disability  benefits  following a
Class II Participant's  Date of Termination  other than with respect to benefits
to  which  the  Class  II  Participant  became  entitled  prior  to the  Date of
Termination and which are required to be paid following such Date of Termination
in  accordance  with the terms of  applicable  disability  plans or  policies in
effect prior to such Date of Termination.  The Class II Participant shall not be
required to mitigate  the amount of any payment  provided  for under the Plan by
seeking  other  employment  or  otherwise,  nor shall the amount of any  payment
provided for under the Plan be reduced by any  compensation  earned by the Class
II Participant as the result of employment by another employer after the Date of
Termination, or otherwise, except as set forth in clause (a) of this paragraph.

     4.2.3.  Class III  Participants.  Termination  payments  shall be made to a
Class III Participant in an amount equal to the sum of (a) twelve (12) times the
Class III  Participant's  highest monthly base  compensation  during the six (6)
months  immediately  before the Date of  Termination;  (b) all annual  incentive
payments  that the Class III  Participant  would have  received  for the year in
which the Date of Termination occurs, had required performance targets been met,
which shall be deemed to have  occurred on the Date of  Termination,  whether or
not they have occurred or could possibly occur. Said payments shall be paid in a
single lump sum, discounted to present value, or by periodic payments consistent
with payroll  practices of the Employer  during a term to be  determined  by the
Board. The manner of payment shall be at the discretion of the Board.

<PAGE>

     Additionally,  the Class III Participant  shall receive the following:  (a)
until the end of the twelfth  (12th) month  following  the month in which occurs
the Class III  Participant's  Date of Termination,  the Employer will arrange to
provide the Class III  Participant  with welfare  benefits  (including  life and
health insurance benefits) and other employee benefits of substantially  similar
design and cost (to the Class III Participant) as the welfare benefits and other
employee  benefits  available to the Class III Participant  immediately prior to
the  Notice of  Termination  or  immediately  prior to the date of the Change in
Control,  whichever is greater;  but benefits otherwise  receivable by the Class
III  Participant  pursuant to this clause (a) shall be discontinued if the Class
II Participant  obtains full-time  employment  providing welfare benefits during
such period following such termination;  and (b) group  outplacement  counseling
services up to $10,000 in value.  Notwithstanding  the  foregoing,  the Employer
shall not be required to continue  to provide  disability  benefits  following a
Class III Participant's  Date of Termination other than with respect to benefits
to  which  the  Class  III  Participant  became  entitled  prior  to the Date of
Termination and which are required to be paid following such Date of Termination
in  accordance  with the terms of  applicable  disability  plans or  policies in
effect prior to such Date of Termination. The Class III Participant shall not be
required to mitigate  the amount of any payment  provided  for under the Plan by
seeking  other  employment  or  otherwise,  nor shall the amount of any  payment
provided for under the Plan be reduced by any  compensation  earned by the Class
III  Participant as the result of employment by another  employer after the Date
of  Termination,  or  otherwise,  except  as set  forth  in  clause  (a) of this
paragraph.

     4.2.4. Class IV Participants. Termination payments shall be made to a Class
IV  Participant  in an amount equal to the sum of (a) six (6) times the Class IV
Participant's  highest  monthly  base  compensation  during  the six (6)  months
immediately  before the Date of Termination;  (b) all annual incentive  payments
that the Class IV Participant would have received for the year in which the Date
of Termination occurs, had required performance targets been met, which shall be
deemed to have  occurred  on the Date of  Termination,  whether or not they have
occurred or could possibly  occur.  Said payments shall be paid in a single lump
sum,  discounted  to present  value,  or by periodic  payments  consistent  with
payroll  practices of the Employer  during a term to be determined by the Board.
The manner of payment shall be at the discretion of the Board.

     Additionally,  the Class IV Participant  shall receive the  following:  (a)
until the end of the sixth (6th) month  following  the month in which occurs the
Class IV Participant's Date of Termination, the Employer will arrange to provide
the Class IV  Participant  with  welfare  benefits  (including  life and  health
insurance benefits) and other employee benefits of substantially  similar design
and cost  (to the  Class IV  Participant)  as the  welfare  benefits  and  other
employee benefits available to the Class IV Participant immediately prior to the
Notice of Termination or immediately prior to the date of the Change in Control,
whichever  is  greater;  but  benefits  otherwise  receivable  by the  Class  IV
Participant  pursuant to this clause (a) shall be  discontinued  if the Class IV
Participant obtains full-time  employment providing welfare benefits during such
period  following  such  termination;  and  (b)  group  outplacement  counseling
services up to $5,000 in value.  Notwithstanding  the  foregoing,  the  Employer
shall not be required to continue  to provide  disability  benefits  following a
Class IV Participant's  Date of Termination  other than with respect to benefits
to  which  the  Class  IV  Participant  became  entitled  prior  to the  Date of
Termination and which are required to be paid following such Date of Termination
in  accordance  with the terms of  applicable  disability  plans or  policies in
effect prior to such Date of Termination.  The Class IV Participant shall not be
required to mitigate  the amount of any payment  provided  for under the Plan by
seeking  other  employment  or  otherwise,  nor shall the amount of any  payment
provided for under the Plan be reduced by any  compensation  earned by the Class
IV Participant as the result of employment by another employer after the Date of
Termination, or otherwise, except as set forth in clause (a) of this paragraph.

<PAGE>

     4.3 Cash  Transaction  Bonus.  In the  event of a Change  in  Control,  and
notwithstanding   their  employment   status  following  a  Change  in  Control,
Participants  identified  by the  Board  may  receive  a Cash  Bonus  calculated
consistent  based on the  value  of the  Employer  at the  time of a  Change  in
Control.  To qualify  for this Cash Bonus  payment,  the  Participant  must be a
Participant  as of the date of the  Change  in  Control  and must  hold the same
position,  or have  essentially the same or higher level of  responsibility,  as
held when being named as a Participant.

     The Cash Bonus payments  provided  herein are intended to be paid to senior
executive  officers and other key  management  personnel of the  Employer.  Cash
Bonus payments shall be paid only if the Employer achieves substantial growth in
value.  Said Cash Bonus Awards are intended and designed to be in an amount,  in
aggregate,  between one percent  (1%) and a maximum of four  percent (4%) of the
value of the Employer at the time of a Change in Control,  as measured  based on
revenue levels.

     4.4 Certain Additional Payments by the Company.

     4.4.1 Anything in this Agreement to the contrary notwithstanding and except
as set forth  below,  in the event it shall be  determined  that any  payment or
distribution by the Company to or for the benefit of a Participant identified by
the Board as eligible for the benefit provided in this Section 4.4 (whether paid
or  payable  or  distributed  or  distributable  pursuant  to the  terms of this
Agreement or otherwise, but determined without regard to any additional payments
required under this Section 4.4 (a "Payment") would be subject to the excise tax
imposed by Code Section  4999 or any interest or penalties  are incurred by said
Participant with respect to such excise tax (such excise tax,  together with any
such interest and penalties,  are  hereinafter  collectively  referred to as the
"Excise Tax"),  then said Participant shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment of all taxes
(including  any  interest or  penalties  imposed  with  respect to such  taxes),
including,  without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up  Payment,
said  Participant  retains an amount of the Gross-Up Payment equal to the Excise
Tax imposed upon the Payments.

     4.4.2  Subject  to the  provisions  of  Section  9(c),  all  determinations
required  to be made  under  this  Section  4.4,  including  whether  and when a
Gross-Up  Payment is required  and the amount of such  Gross-Up  Payment and the
assumptions to be utilized in arriving at such  determination,  shall be made by
the Company,  with the input of the Company's  certified public accounting firm,
which shall provide detailed  supporting  calculations to the Participant within
15 business  days of the  receipt of notice  that there has been a Payment.  Any
Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the
Company  to said  Participant  within a  reasonable  time.  As a  result  of the
uncertainty  in the  application  of Code  Section  4999,  it is  possible  that
Gross-Up  Payments which will not have been made by the Company should have been
made  ("Underpayment"),  consistent  with the  calculations  required to be made
hereunder.  In the event that the  Company  exhausts  its  remedies  pursuant to
Section 4.4.3 and said  Participant  thereafter is required to make a payment of
any Excise Tax, the Company shall determine the amount of the Underpayment  that
has occurred and any such Underpayment shall be promptly paid by the Company.

<PAGE>

     4.4.3 Said Participant  shall notify the Company in writing of any claim by
the Internal  Revenue Service that, if successful,  would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable  but no later  than ten  business  days after  said  Participant  is
informed in writing of such claim and shall  appraise  the Company of the nature
of such  claim and the date on which such claim is  requested  to be paid.  Said
Participant  shall not pay such  claim  prior to the  expiration  of the  30-day
period  following  the date on which he or she gives such  notice to the Company
(or such  shorter  period  ending on the date  that any  payment  of taxes  with
respect to such claim is due).  If the  Company  notifies  said  Participant  in
writing  prior to the  expiration of such period that it desires to contest such
claim, said participant shall:

     (i) give the Company any  information  reasonably  requested by the Company
relating to such claim;

     (ii) take such  action in  connection  with  contesting  such  claim as the
Company  shall  reasonably  request  in  writing  from time to time,  including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company;

     (iii)  cooperate  with the  Company in good  faith in order to  effectively
contest such claim; and

     (iv) permit the Company to participate in any proceedings  relating to such
claim.

     Provided,  however,  that the Company shall bear and pay directly all costs
and  expenses   (including   additional  interest  and  penalties)  incurred  in
connection  with such  contest  and shall  indemnify  and hold said  Participant
harmless,  on an after-tax  basis,  for any Excise Tax or income tax  (including
interest  and  penalties  with  respect  thereto)  imposed  as a result  of such
representation  and payment of costs and  expenses.  Without  limitation  on the
foregoing  provisions  of this  Section  4.4.3,  the Company  shall  control all
proceedings  taken in connection with such contest and, at its sole option,  may
pursue or forgo any and all administrative  appeals,  proceedings,  hearings and
conferences  with the taxing  authority in respect of such claim and may, at its
sole option,  either direct the Participant to pay the tax claimed and sue for a
refund or contest the claim in any permissible  manner, and the said Participant
agrees to prosecute such contest to a  determination  before any  administrative
tribunal,  in a court  of  initial  jurisdiction  and in one or  more  appellate
courts, as the Company shall determine;  provided,  however, that if the Company
directs  said  Participant  to pay such claim and sue for a refund,  the Company
shall  advance  the  amount  of  such  payment  to  said   Participant,   on  an
interest-free basis and shall indemnify and hold said Participant  harmless,  on
an after-tax  basis,  from any Excise Tax or income tax  (including  interest or
penalties  with  respect  thereto)  imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further provided
that any  extension of the statute of  limitations  relating to payment of taxes
for the taxable year of said  Participant  with respect to which such  contested
amount  is  claimed  to be due is  limited  solely  to  such  contested  amount.
Furthermore,  the  Company's  control of the contest  shall be limited to issues
with respect to which a Gross-Up  Payment  would be payable  hereunder  and said
Participant  shall be  entitled  to settle or  contest,  as the case may be, any
other  issue  raised  by  the  Internal  Revenue  Service  or any  other  taxing
authority.

<PAGE>

     4.4.4 If, after the receipt by said  Participant  of an amount  advanced by
the Company pursuant to Section 4.4.3, the said Participant  becomes entitled to
receive any refund with respect to such claim said participant shall (subject to
the Company's  complying with the requirements of Section 4.4.3) promptly pay to
the  Company  the amount of such  refund  (together  with any  interest  paid or
credited thereon after taxes applicable thereto).  If, after the receipt by said
Participant  of an amount  advanced by the Company  pursuant to Section 4.4.3, a
determination is made the said  Participant  shall not be entitled to any refund
with respect to such claim and the Company does not notify said  Participant  in
writing of its intent to contest such denial of refund  prior to the  expiration
of 30 days after such  determination,  then such  advance  shall be forgiven and
shall not be required to be repaid and the amount of such advance  shall offset,
to the extent thereof, the amount of Gross-Up Payment required to be paid.

     4.5 Legal  Fees and  Expenses.  The  Employer  will pay any legal  fees and
expenses  incurred by a  Participant  in  connection  with any dispute  with any
Federal,  state or local  governmental  agency with respect to benefits  claimed
under the Plan.  If the  Participant  utilizes  arbitration  to resolve any such
dispute,  the  Employer  will pay any legal fees and  expenses  incurred  by the
Participant in connection therewith.


                                    SECTION 5

280G LIMITATION

     The amount of any cash payment to be received by a Participant  pursuant to
the Plan shall be reduced (but not below zero) by the amount, if any,  necessary
to prevent any part of any payment or benefit  received or to be received by the
Participant in connection with a Change in Control  (whether payable pursuant to
the terms of the Plan or any other plan, contract, agreement or arrangement with
the Employer, with any person whose actions result in a Change in Control of the
Employer or with any person  constituting a member of an "affiliated  group" (as
defined in section 280G(d)(5) of the Code)) (such foregoing payments or benefits
referred to  collectively  as the "Total  Payments"),  from being  treated as an
"excess  parachute  payment"  within the  meaning of section  280G(b) (l) of the
Code,  but only if and to the extent such  reduction  will also result in, after
taking into  account all  applicable  state or federal  taxes  (computed  at the
highest marginal rate),  including any taxes payable pursuant to section 4999 of
the Code, a greater  after-tax  benefit to the  Participant  than the  after-tax
benefit to the Participant of the Total Payments  computed without regard to any
such  reduction.  For  purposes  of the  foregoing,  (a) no portion of the Total
Payments  shall be  taken  into  account  which in the  opinion  of tax  counsel
selected by the Employer and acceptable to the Participant does not constitute a
"parachute  payment" within the meaning of section 280G (b) (2) of the Code; (b)
any reduction in payments  pursuant to the Plan shall be computed by taking into
account that portion of Total Payments which constitute reasonable  compensation
within the meaning of section  28OG(b)(4) of the Code in the opinion of such tax
counsel;  (c) the value of any non-cash  benefit or of any deferred cash payment
included in the Total Payments shall be determined by the Employer in accordance
with the  principles of section  28OG(d)(4) of the Code; and (d) in the event of
any  uncertainty as to whether a reduction in Total Payments to the  Participant
is required  pursuant to the Plan, the Employer shall initially make the payment
to the  Participant  and the  Participant  shall be  required  to  refund to the
Employer any amounts  ultimately  determined  not to have been payable under the
terms of the Plan.

<PAGE>

                                    SECTION 6

AMENDMENT OR TERMINATION OF THE PLAN

     The Plan may be terminated or amended at any time, at the discretion of the
Board.  Except to the extent  benefits have become payable but have not actually
been paid, the Plan terminates  automatically  on the second  anniversary of the
date of a Change in
Control.


                                    SECTION 7

MISCELLANEOUS PROVISIONS

     7.1.  Non-exclusivity of Rights. Nothing in the Plan shall prevent or limit
any  Participant's  continuing or future  participation  in any benefit,  bonus,
incentive,  retirement or other plan or program provided by the Employer and for
which the  Participant  may  qualify,  nor shall  anything  in the Plan limit or
reduce such rights as any  Participant  may have under any other agreement with,
or plan, program, policy or practice of, the Employer.  Amounts which are vested
benefits or which a  Participant  is  otherwise  entitled  to receive  under any
agreement with, or plan,  program,  policy or practice of, the Employer shall be
payable in accordance with such agreement,  plan,  program,  policy or practice,
except as explicitly modified by the Plan.

     7.2. Successors. The Employer will require any successor (whether direct or
indirect,  by  purchase,  merger,   consolidation,   or  otherwise)  to  all  or
substantially  all of the  business  and/or  assets  of the  Employer  or of any
division or subsidiary thereof employing any Participant to expressly assume and
agree to perform  under the terms of the Plan in the same manner and to the same
extent that the Employer would be required to perform if no such  succession had
taken place.  Failure of the Employer to obtain such  assumption  and  agreement
prior to the  effectiveness  of any such succession  shall entitle each affected
Participant to compensation from the Employer in the same amount and on the same
terms as the  Participant  would be entitled  under the Plan if the  Participant
terminated employment for Good Reason following a Change in Control, except that
for  purposes  of  implementing  the  foregoing,  the  date on  which  any  such
succession  becomes effective shall be deemed the Date of Termination and Notice
of Termination shall be deemed to have been given on such date.

     7.3 Payments as  Compensation.  Payments under the Plan shall not be deemed
compensation  for purposes for any  retirement or 401(k) Plan  maintained by the
Company.

     7.4. Notice.  Notices and all other  communications  provided for under the
Plan  shall be in  writing  and shall be deemed  to have  been duly  given  when
delivered or mailed by United States registered mail, postage prepaid, addressed
to the other party as follows:

                    If to the Employer, to:
                        Possis Medical, Inc.
                        Attention: General Counsel
                        9055 Evergreen Blvd. N.W.
                        Minneapolis, MN 55433

     If to the Participant, to the address shown on the records of the Employer,
which the Employer shall keep up to date.

<PAGE>

     Either  party may change its  address for  purposes of this  Section 7.4 by
giving appropriate notice to the other party.

     7.5.  Governing Law. The validity,  interpretation  and construction of the
Plan  shall be  governed  by the laws of the State of  Minnesota,  except to the
extent that federal law controls.

     7.6. Validity.  The invalidity or  unenforceability of any provision of the
Plan shall not affect the validity or  enforceability  of any other provision of
the Plan, which shall remain in full force and effect.

     7.7.  Employment.  The Plan does not constitute a contract of employment or
impose on the Employer any obligation to retain any  Participant as an employee,
to  continue  any  Participant's  current  employment  status or to  change  any
employment policies of the
Employer.

     7.8.  Termination  Prior to a Change in  Control.  Any  termination  of the
Participant's  employment  by the  Employer  without  Cause prior to a Change in
Control, and which occurs at the request or insistence of any person (other than
the  Employer) in  connection  with a Change in Control  shall be deemed to have
occurred after the Change in Control for purposes of the Plan.


                                    SECTION 8

CLAIMS PROCEDURE

     8.1. General.  If a Participant  believes that he or she may be entitled to
benefits,  or the Participant is in disagreement with any determination that has
been made, the Participant may present a claim to the Employer.

     8.2.  Making a Claim.  A  Participant's  claim must be written  and must be
delivered  to the  Employer.  Within 30 days after  delivery of such claim,  the
Participant  shall receive either:  (a) a decision;  or (b) a notice  describing
special  circumstances  requiring a specified  amount of additional time (but no
more than 60 days from the date of delivery of such claim) to reach a decision.

     If such claim is wholly or partially denied,  the Participant shall receive
a written notice specifying: (a) the reasons for denial; (b) the Plan provisions
on which the denial is based; and (c) any additional information needed from the
Participant  in  connection  with the claim and the reason such  information  is
needed.  The  Participant  also  shall  receive  a copy  of  Section  8.3  below
concerning the Participant's right to request a review.

     8.3 Requesting  Review of a Denied Claim. A Participant  may request that a
denied  claim be  reviewed.  Such request for review must be written and must be
delivered  to the  Employer  within 30 days after the  Participant  receives the
written notice that the participant's  claim was denied. Such request for review
may (but is not required to) include issues and comments the  Participant  wants
considered in the review.  The Participant may examine  pertinent Plan documents
by asking the Employer.  Within 30 days after delivery by the Participant of the
Participant's  request for review,  the Participant shall receive either:  (a) a
decision; or (b) a notice describing special circumstances requiring a specified
amount of additional time (but no more than 60 days from the date of delivery of
such request for review) to reach a decision.  The decision  shall be in writing
and shall specify the Plan provisions on which it is based.

<PAGE>

     8.4. Exhaustion of Administrative  Remedies. No Participant (nor the estate
of any  deceased  Participant)  may  commence  any legal  action to recover Plan
benefits  or to enforce or clarify  rights  under the Plan under  Section 502 or
Section  510 of ERISA,  or under  any other  provision  of law,  whether  or not
statutory,  until the claims and review  procedures  set forth  herein have been
exhausted in their entirety.

     Decisions.  All decisions on claims and on reviews of denied claims will be
made by the  Employer.  The Employer  may, in its  discretion,  hold one or more
hearings.  If a  Participant  does not receive a decision  within the  specified
time,  the  Participant  should assume that the claim was denied or re-denied on
the date the specified time expired. The Employer reserves the right to delegate
its authority to make decisions.

                                    SECTION 9

DEFINITIONS

     When the following  terms are used in this  document  with initial  capital
letters, they shall have the following meanings.

     9.1.  Cause - shall mean (i) the material  breach by a  Participant  of any
obligation  to the  Company  under  the terms of this  Plan;  (ii) any acts of a
Participant  constituting  gross negligence or conduct which is demonstrably and
materially injurious to the Employer,  monetarily or otherwise;  (iii) Employees
breach of any fiduciary duty to the Employer; or (iv) a Participant's conviction
or the entry of a pleading of guilty or nolo  contendere to any crime  involving
moral turpitude. For purposes of this definition,  no act, or failure to act, on
a  Participant's  part shall be deemed  "willful"  unless done, or omitted to be
done, by the Participant with reasonable belief that the Participant's action or
omission was not in the best interest of the Employer.  Failure by a Participant
to perform  the  Participant's  duties  with the  Employer  during any period of
disability shall not constitute Cause.

     9.2. Change in Control - shall mean:

     (a) a change in control of a nature  that would be  required to be reported
in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not
the Employer is then subject to such reporting requirement; or

<PAGE>

     (b) the public announcement (which, for purposes of this definition,  shall
include,  without  limitation,  a report filed  pursuant to Section 13(d) of the
Exchange  Act) by the Employer or any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) that such person has become the "beneficial
owner" (as defined in Rule 13d-3 promulgated  under the Exchange Act),  directly
or indirectly,  of securities of the Employer (i)  representing 25% or more, but
not  more  than  50%,  of the  combined  voting  power  of the  Employer's  then
outstanding  securities  unless the transaction  resulting in such ownership has
been approved in advance by the Continuing Directors (as hereinafter defined) or
(ii)  representing  more than 50% of the combined voting power of the Employer's
then  outstanding  securities  (regardless  of any  approval  by the  Continuing
Directors);  provided, however, that notwithstanding the foregoing, no Change in
Control  shall be deemed to have  occurred for purposes of the Plan by reason of
the  ownership of 25% or more of the total voting  capital stock of the Employer
then issued and  outstanding by the Employer,  any subsidiary of the Employer or
any employee  benefit plan of the Employer or of any  subsidiary of the Employer
or any  entity  holding  shares of the  common  stock  organized,  appointed  or
established  for, or pursuant to the terms of, any such plan (any such person or
entity  described in this clause is referred to herein as a "Employer  Entity");
or

     (c) the  announcement of a tender offer by any person or entity (other than
an Employer Entity) for 20% or more of the Employer's  voting capital stock then
issued and outstanding, which tender offer has not been approved by the Board, a
majority of the members of which are Continuing  Directors,  and  recommended to
the shareholders of the Employer; or

     (d)  the  Continuing  Directors  cease  to  constitute  a  majority  of the
Employer's Board of Directors; or

     (e) the  shareholders  of the  Employer  approve (i) any  consolidation  or
merger of the Employer in which the Employer is not the  continuing or surviving
corporation  or pursuant to which  shares of Employer  stock would be  converted
into cash, securities or other property,  other than a merger of the Employer in
which  shareholders  immediately prior to the merger have the same proportionate
ownership of stock of the surviving  corporation  immediately  after the merger;
(ii) any sale, lease, exchange or other transfer (in one transaction or a series
of  related  transactions)  of all or  substantially  all of the  assets  of the
Employer; or (iii) any plan of liquidation or dissolution of the Employer.

     9.3. Code - shall mean the Internal Revenue Code of 1986, as amended.

     9.4.  Continuing  Director  - shall  mean any person who is a member of the
Board of Directors of the  Employer,  while such person is a member of the Board
of  Directors,  who is not an Acquiring  Person (as  hereinafter  defined) or an
Affiliate or Associate (as  hereinafter  defined) of an Acquiring  Person,  or a
representative of an Acquiring Person or of any such Affiliate or Associate, and
who (i) was a member of the Board of Directors as of the Effective  Date or (ii)
subsequently  becomes  a member  of the  Board of  Directors,  if such  person's
initial nomination for election or initial election to the Board of Directors is
recommended or approved by a majority of the  Continuing  Directors for purposes
of this definition.  "Acquiring Person" shall mean any "person" (as such term is
used in Sections  13(d) and 14(d) of the  Exchange  Act) who or which,  together
with all Affiliates and Associates of such person, is the "beneficial owner" (as
defined  in Rule  13(d)-3  promulgated  under the  Exchange  Act),  directly  or
indirectly,  of  securities  of the  Employer  representing  20% or  more of the
combined voting power of the Employer's then outstanding  securities,  but shall
not  include  the  Investors  or  any  Employer  Entity;   and  "Affiliate"  and
"Associate" shall have their respective  meanings ascribed to such terms in Rule
12(b)-2 promulgated under the Exchange Act.

<PAGE>

     9.5. Date of  Termination - shall mean the date  specified in the Notice of
Termination (except in the case of a Participant's  death, in which case Date of
Termination  shall  be the  date  of  death);  provided,  however,  that  if the
Participant's  employment is terminated by the Employer,  the date  specified in
the Notice of Termination  shall be at least 30 days from the date the Notice of
Termination is given to the Participant and if the  Participant's  employment is
terminated by the Participant for Good Reason,  the date specified in the Notice
of  Termination  shall  not be more  than 60 days  from the date the  Notice  of
Termination is given to the Employer.

     9.6. Effective Date - shall mean September 15, 1999.

     9.7. Employer - shall mean Possis Medical,  Inc., a Minnesota  corporation,
or any successor thereto pursuant to Section 7.2 hereof or by operation of law.

     9.8.  Good  Reason - shall  mean the  occurrence,  without a  Participant's
express written  consent,  within 24 months following a Change in Control of any
one or more of the following:

     (a) a  significant  reduction  by the  Employer in the  Participant's  base
salary as in effect  immediately  prior to the  Change in Control or as the same
shall be increased from time to time;

     (b) the Employer's  requiring the  Participant to be based at a location in
excess of thirty  (30)  miles  from the  location  of the  Participant's  office
immediately prior to the Change in Control:

     (c) the  failure by the  Employer to (i)  continue  in effect any  material
compensation  or  benefit  plan,  program,  policy  or  practice  in  which  the
Participant  was  participating  at the time of the  Change in  Control  or (ii)
provide the Participant with  compensation and benefits at least equal (in terms
of benefit levels and/or reward  opportunities) to those provided for under each
employee  benefit plan,  program,  policy and practice as in effect  immediately
prior to the Change in Control (or as in effect following the Change in Control,
if greater);

     (d) the failure of the Employer to obtain a satisfactory agreement from any
Successor  to the  Employer  to assume and agree to perform  under the Plan,  as
contemplated in Section 7.2 hereof;

     (e)  any  purported  termination  by  the  Employer  of  the  Participant's
employment  that  is not  effected  pursuant  to a  Notice  of  Termination  (as
hereinafter defined); and

     (f)  the  assignment  by the  Employer  to the  Participant  of any  duties
inconsistent  in any respect  with  Participant's  position  (including  status,
offices,  titles,  and reporting  requirements),  authorities,  duties, or other
responsibilities  as in effect immediately prior to the Change in Control or any
other action of the Employer which results in a  diminishment  in such position,
authority,  duties,  or  responsibilities,   other  than  an  insubstantial  and
inadvertent  action which is remedied by the Employer  promptly after receipt of
notice thereof given by the Participant.

     9.9.  Notice of  Termination - shall mean a written  notice which shall set
forth the Date of Termination and shall set forth in reasonable detail the facts
and   circumstances   claimed  to  provide  a  basis  for   termination  of  the
Participant's employment.

     9.10.  Participant - shall mean the employees of the Employer identified as
such by the Board,  as the same may be  modified  by the  Employer  from time to
time.  Each  Participant  shall be assigned  to Class I, Class II,  Class III or
Class IV provided in Section 4 herein.

<PAGE>

     9.11.  Plan  -  shall  mean  the  termination  pay  plan  of  the  Employer
established  for the  benefit  of the  Participants  in the event of a Change in
Control.  The Plan shall be referred to as the "Possis  Medical,  Inc. Change in
Control Termination Pay Plan."

     9.12.  Plan  Year - the  twelve  consecutive  month  period  ending  on any
December 31.

     9.13. Termination of Employment - shall mean termination of a Participant's
employment  (a) by the  Employer  for any  reason  other  than Cause or (b) by a
Participant  for Good Reason;  but shall not include  termination by reason of a
Participant's death.

<PAGE>
                                                                 EXHIBIT 10.21


                          1999 STOCK COMPENSATION PLAN

     Section 1. Purpose.

     The purpose of the Possis Medical,  Inc. 1999 Stock  Compensation Plan (the
"Plan") is to promote the interests of Possis Medical,  Inc. (the "Company") and
its  shareholders  by aiding the Company in attracting,  retaining and providing
incentives to employees,  officers,  consultants,  independent  contractors  and
non-employee directors.

     Section 2. Definitions.

     As used in the Plan, the following  terms shall have the meanings set forth
below:

     (a)  "Affiliate"  shall mean (i) any entity  that,  directly or  indirectly
through one or more  intermediaries,  is controlled by the Company; and (ii) any
entity in which the Company has a significant  equity interest,  in each case as
determined by the Committee.

     (b) "Award" shall mean any Option,  Stock  Appreciation  Right,  Restricted
Stock,  Restricted Stock Unit,  Performance Award,  Dividend  Equivalent,  Other
Stock Grant or Other Stock-Based Award granted under the Plan.

     (c) "Award Agreement" shall mean any written  agreement,  contract or other
instrument or document evidencing any Award granted under the Plan.

     (d) "Code"  shall mean the Internal  Revenue Code of 1986,  as amended from
time to time, and any regulations promulgated thereunder.

     (e) "Committee"  shall mean either the Board of Directors of the Company or
a committee  of the Board of  Directors  appointed  by the Board of Directors to
administer  the Plan,  comprised  of not less than such number of  Directors  as
shall be required to permit Awards  granted under the Plan to qualify under Rule
16b-3. The Company expects to have the Plan  administered in accordance with the
requirements for the award of "qualified performance-based  compensation" within
the meaning of Section 162(m) of the Code.

     (f) "Company" shall mean Possis Medical, Inc., a Minnesota corporation, and
any successor corporation.

     (g)  "Director"  shall  mean a  member  of the  Board of  Directors  of the
Company.

     (h) "Dividend  Equivalent"  shall mean any right granted under Section 6(e)
of the Plan.

     (i)  "Eligible  Person"  shall  mean  any  employee,  officer,  consultant,
independent  contractor  or  director  providing  services to the Company or any
Affiliate whom the Committee determines to be an Eligible Person.

<PAGE>

     (j)  "Fair  Market  Value"  shall  mean,   with  respect  to  any  property
(including, without limitation, any Shares or other securities), the fair market
value of such  property  determined  by such methods or  procedures  as shall be
established from time to time by the Committee.  Notwithstanding  the foregoing,
unless otherwise determined by the Committee, the Fair Market Value of Shares on
a given date for  purposes  of the Plan shall not be less than:  (i) the closing
price as reported for composite transactions, if the Shares are then listed on a
national securities  exchange;  (ii) the last sale price, if the Shares are then
quoted on the  NASDAQ  National  Market;  or (iii) the  average  of the  closing
representative  bid and asked  prices of the Shares in all other  cases;  on the
date as of which fair market value is being  determined.  If on a given date the
Shares are not traded in an established  securities  market, the Committee shall
make a good faith  attempt to satisfy  the  requirements  of this  clause and in
connection therewith shall take such action as it deems necessary or advisable.

     (k)  "Incentive  Stock Option"  shall mean an option  granted under Section
6(a) of the Plan that is intended to meet the requirements of Section 422 of the
Code or any successor provision.

     (l) "Non-Qualified Stock Option" shall mean an option granted under Section
6(a) of the Plan that is not intended to be an Incentive Stock Option.

     (m) "Option" shall mean an Incentive Stock Option or a Non-Qualified  Stock
Option, and shall include Reload Options.

     (n) "Other Stock Grant" shall mean any right  granted under Section 6(f) of
the Plan.

     (o) "Other  Stock-Based  Award" shall mean any right  granted under Section
6(g) of the Plan.

     (p) "Participant" shall mean an Eligible Person designated to be granted an
Award under the Plan.

     (q) "Performance  Award" shall mean any right granted under Section 6(d) of
the Plan.

     (r)  "Person"  shall  mean  any   individual,   corporation,   partnership,
association or trust.

     (s) "Plan"  shall mean the Possis  Medical,  Inc.  1999 Stock  Compensation
Plan, as amended from time to time.

     (t) "Reload Option" shall mean any Option granted under Section 6(a)(iv) of
the Plan.

     (u) "Restricted  Stock" shall mean any Shares granted under Section 6(c) of
the Plan.

     (v) "Restricted  Stock Unit" shall mean any unit granted under Section 6(c)
of the Plan  evidencing the right to receive a Share (or a cash payment equal to
the Fair Market Value of a Share) at some future date.

     (w) "Shares"  shall mean shares of Common  Stock,  $0.40 par value,  of the
Company or such other  securities  or property  as may become  subject to Awards
pursuant to an adjustment made under Section 4(c) of the Plan.

     (x) "Stock  Appreciation  Right" shall mean any right granted under Section
6(b) of the Plan.

<PAGE>

     Section 3. Administration.

     (a) Power and Authority of the Committee. The Plan shall be administered by
the Committee.  Subject to the express  provisions of the Plan and to applicable
law,  the  Committee  shall have full  power and  authority  to:  (i)  designate
Participants;  (ii)  determine the type or types of Awards to be granted to each
Participant  under the Plan;  (iii) determine the number of Shares to be covered
by (or the method by which  payments  or other  rights are to be  calculated  in
connection  with) each Award;  (iv)  determine  the terms and  conditions of any
Award or Award  Agreement;  (v) amend the terms and  conditions  of any Award or
Award Agreement and accelerate the  exercisability  of any Award or the lapse of
restrictions  relating to any Award; (vi) determine whether,  to what extent and
under  what  circumstances  Awards  may be  exercised  in  cash,  Shares,  other
securities, other Awards or other property, or canceled, forfeited or suspended;
(vii)  determine  whether,  to what  extent and under what  circumstances  cash,
Shares, other securities, other Awards, other property and other amounts payable
with respect to an Award under the Plan shall be deferred  either  automatically
or at the election of the holder thereof or the Committee;  (viii) interpret and
administer  the  Plan  and any  instrument  or  agreement,  including  an  Award
Agreement,  relating to the Plan; (ix) establish,  amend,  suspend or waive such
rules and regulations  and appoint such agents as it shall deem  appropriate for
the proper  administration of the Plan; and (x) make any other determination and
take any other action that the  Committee  deems  necessary or desirable for the
administration of the Plan. Unless otherwise expressly provided in the Plan, all
designations, determinations,  interpretations and other decisions under or with
respect  to the Plan or any Award  shall be within  the sole  discretion  of the
Committee,  may be made at any time and shall be final,  conclusive  and binding
upon any  Participant,  any holder or beneficiary of any Award, and any employee
of the Company.

     (b) Delegation.  The Committee may delegate its powers and duties under the
Plan to one or more  Directors  or a  committee  of  Directors,  subject to such
terms,  conditions  and  limitations  as the Committee may establish in its sole
discretion.

     Section 4. Shares Available for Awards.

     (a) Shares  Available.  Subject to  adjustment as provided in Section 4(c),
the  aggregate  number of Shares that may be issued  under all Awards  under the
Plan shall be  2,000,000,  which number shall be  increased  annually  effective
August 1 by a number  of  shares  equal to 2% of the  number  of  shares  of the
Company issued and  outstanding at the end of the immediately  preceding  fiscal
year.  Shares to be issued under the Plan may be either  authorized but unissued
Shares or Shares  acquired in the open market or otherwise.  Any Shares that are
used by a Participant as full or partial  payment to the Company of the purchase
price  relating  to an Award,  or in  connection  with the  satisfaction  of tax
obligations  relating to an Award,  shall again be available for granting Awards
(other than Incentive Stock Options) under the Plan. If any Shares covered by an
Award or to which an Award relates are not purchased or are forfeited,  or if an
Award otherwise  terminates  without delivery of any Shares,  then the number of
Shares counted against the aggregate  number of Shares  available under the Plan
with respect to such Award, to the extent of any such forfeiture or termination,
shall again be available for granting Awards under the Plan. Notwithstanding the
foregoing,  the number of Shares available for granting  Incentive Stock Options
under the Plan shall not exceed 2,000,000,  subject to adjustment as provided in
the Plan and Section 422 or 424 of the Code or any successor provision.

<PAGE>

     (b)  Accounting  for Awards.  For  purposes of this  Section 4, if an Award
entitles the holder thereof to receive or purchase Shares,  the number of Shares
covered by such Award or to which  such  Award  relates  shall be counted on the
date of grant of such Award against the aggregate number of Shares available for
granting Awards under the Plan.

     (c)  Adjustments.  In the event that the Committee shall determine that any
dividend  or other  distribution  (whether  in the form of cash,  Shares,  other
securities  or other  property),  recapitalization,  stock split,  reverse stock
split, reorganization,  merger, consolidation,  split-up, spin-off, combination,
repurchase or exchange of Shares or other securities of the Company, issuance of
warrants or other rights to purchase  Shares or other  securities of the Company
or other similar corporate  transaction or event affects the Shares such that an
adjustment is determined by the Committee to be  appropriate in order to prevent
dilution or  enlargement  of the benefits or potential  benefits  intended to be
made available  under the Plan,  then the Committee  shall, in such manner as it
may deem  equitable,  adjust any or all of (i) the number and type of Shares (or
other  securities or other  property) that thereafter may be made the subject of
Awards,  (ii) the  number  and type of  Shares  (or  other  securities  or other
property) subject to outstanding Awards and (iii) the purchase or exercise price
with respect to any Award; provided,  however, that the number of Shares covered
by any Award or to which such Award relates shall always be a whole number.

     (d) Award Limitations Under the Plan. No Eligible Person may be granted any
Award or Awards under the Plan,  the value of which Awards is based solely on an
increase in the value of the Shares after the date of grant of such Awards,  for
more than  500,000  Shares  (subject to  adjustment  as provided  for in Section
4(c)),  in the aggregate in any calendar year. The foregoing  annual  limitation
specifically   includes  the  grant  of  any  Awards   representing   "qualified
performance-based  compensation"  within the  meaning  of Section  162(m) of the
Code.

     Section 5. Eligibility.

     Any Eligible Person of the Company or any Affiliate shall be eligible to be
designated a Participant. In determining which Eligible Persons shall receive an
Award and the terms of any Award, the Committee may take into account the nature
of the services rendered by the respective  Eligible Persons,  their present and
potential  contributions  to the success of the Company or such other factors as
the  Committee,  in its  discretion,  shall deem relevant.  Notwithstanding  the
foregoing,  an  Incentive  Stock  Option  may only be granted  to  full-time  or
part-time  employees  (which term as used herein includes,  without  limitation,
officers and Directors who are also  employees),  and an Incentive  Stock Option
shall not be granted to an employee of an  Affiliate  unless such  Affiliate  is
also a  "subsidiary  corporation"  of the Company  within the meaning of Section
424(f) of the Code or any successor
provision.

<PAGE>

     Section 6. Awards.

     (a)  Options.  The  Committee  is hereby  authorized  to grant  Options  to
Eligible  Persons  with  the  following  terms  and  conditions  and  with  such
additional terms and conditions not inconsistent with the provisions of the Plan
as the Committee shall determine:

     (i) Exercise  Price.  The  purchase  price per Share  purchasable  under an
Option shall be determined by the Committee; provided however, that the purchase
price of an  Incentive  Stock  Option  shall  not be less  than 100% of the Fair
Market Value of a Share on the date of grant of such Option.

     (ii) Option Term. The term of each Option shall be fixed by the Committee.

     (iii) Time and Method of Exercise.  The Committee  shall determine the time
or times at which an Option may be  exercised in whole or in part and the method
or methods by which, and the form or forms (including, without limitation, cash,
Shares,  other  securities,  other Awards or other property,  or any combination
thereof,  having a Fair Market Value on the exercise  date equal to the relevant
exercise  price) in which payment of the exercise price with respect thereto may
be made or deemed to have been made.

     (iv) Reload Options. The Committee may grant Reload Options,  separately or
together  with  another  Option,  pursuant  to which,  subject  to the terms and
conditions established by the Committee,  the Participant would be granted a new
Option when the payment of the exercise price of a previously  granted option is
made by the  delivery  of Shares  owned by the  Participant  pursuant to Section
6(a)(iii)  hereof or the  relevant  provisions  of another  plan of the Company,
and/or  when  Shares are  tendered  or  withheld  as payment of the amount to be
withheld under applicable  income tax laws in connection with the exercise of an
Option, which new Option would be an Option to purchase the number of Shares not
exceeding the sum of (A) the number of Shares so provided as consideration  upon
the  exercise  of the  previously  granted  option to which such  Reload  Option
relates and (B) the number of Shares, if any, tendered or withheld as payment of
the amount to be  withheld  under  applicable  tax laws in  connection  with the
exercise  of the option to which such  Reload  Option  relates  pursuant  to the
relevant  provisions  of the plan or agreement  relating to such option.  Reload
Options may be granted with respect to Options previously granted under the Plan
or any other stock option plan of the Company,  or may be granted in  connection
with any Option  granted  under the Plan or any other  stock  option plan of the
Company at the time of such grant.  Such Reload  Options  shall have a per share
exercise price equal to the Fair Market Value as of the date of grant of the new
Option.  Any Reload Option shall be subject to availability of sufficient Shares
for grant  under the Plan.  Shares  surrendered  as part or all of the  exercise
price of the Option to which it relates that have been owned by the  Participant
less than six months will not be counted for purposes of determining  the number
of Shares that may be purchased pursuant to a Reload Option.

<PAGE>

     (b) Stock Appreciation  Rights. The Committee is hereby authorized to grant
Stock  Appreciation  Rights to Eligible Persons subject to the terms of the Plan
and any applicable Award Agreement. A Stock Appreciation Right granted under the
Plan shall confer on the holder thereof a right to receive upon exercise thereof
the  excess of (i) the Fair  Market  Value of one Share on the date of  exercise
(or, if the Committee shall so determine,  at any time during a specified period
before or after  the date of  exercise)  over (ii) the grant  price of the Stock
Appreciation Right as specified by the Committee,  which price shall not be less
than  100% of the Fair  Market  Value  of one  Share on the date of grant of the
Stock  Appreciation  Right.  Subject to the terms of the Plan and any applicable
Award Agreement,  the grant price, term, methods of exercise, dates of exercise,
methods  of  settlement  and  any  other  terms  and  conditions  of  any  Stock
Appreciation  Right shall be as determined by the  Committee.  The Committee may
impose such conditions or restrictions on the exercise of any Stock Appreciation
Right as it may deem appropriate.

     (c) Restricted  Stock and Restricted  Stock Units.  The Committee is hereby
authorized  to grant  Restricted  Stock and  Restricted  Stock Units to Eligible
Persons with the following terms and conditions and with such  additional  terms
and conditions not inconsistent with the provisions of the Plan as the Committee
shall determine:

     (i)  Restrictions.  Shares of Restricted  Stock and Restricted  Stock Units
shall be subject to such  restrictions  as the Committee may impose  (including,
without  limitation,  a waiver  by the  Participant  of the  right to vote or to
receive any  dividend or other right or property  with respect  thereto),  which
restrictions  may lapse  separately or in combination at such time or times,  in
such installments or otherwise as the Committee may deem appropriate.

     (ii) Stock Certificates:  Delivery of Shares. Any Restricted Stock shall be
registered in the name of the Participant  and shall bear an appropriate  legend
referring  to  the  terms,   conditions  and  restrictions  applicable  to  such
Restricted  Stock.  In the case of  Restricted  Stock Units,  no Shares shall be
issued  at the time  such  Awards  are  granted.  Upon the  lapse or  waiver  of
restrictions  and the  restricted  period  relating  to  Restricted  Stock Units
evidencing  the  right to  receive  Shares,  such  Shares  shall be  issued  and
delivered to the holder of the Restricted Stock Units.

     (iii) Forfeiture.  Except as otherwise determined by the Committee,  upon a
Participant's   Termination  of  employment   (as   determined   under  criteria
established by the  Committee)  during the applicable  restriction  period,  all
Shares  of  Restricted  Stock  and  all  Restricted  Stock  Units  held  by  the
Participant  at such time shall be  forfeited  and  reacquired  by the  Company;
provided,  however, that the Committee may, when it finds that a waiver would be
in the  best  interest  of the  Company,  waive  in  whole or in part any or all
remaining  restrictions with respect to Shares of Restricted Stock or Restricted
Stock Units.

     (d)  Performance  Awards.  The  Committee  is  hereby  authorized  to grant
Performance  Awards to Eligible Persons subject to the terms of the Plan and any
applicable Award Agreement.  A Performance  Award granted under the Plan (i) may
be  denominated  or  payable in cash,  Shares  (including,  without  limitation,
Restricted Stock and Restricted Stock Units), other securities,  other Awards or
other  property and (ii) shall confer on the holder thereof the right to receive
payments,  in whole or in part, upon the achievement of such  performance  goals
during such performance periods as the Committee shall establish. Subject to the
terms of the Plan and any applicable Award Agreement,  the performance  goals to
be achieved during any performance period, the length of any performance period,
the  amount of any  Performance  Award  granted,  the  amount of any  payment or
transfer to be made  pursuant to any  Performance  Award and any other terms and
conditions of any Performance Award shall be determined by the Committee.

<PAGE>

     (e)  Dividend  Equivalents.  The  Committee is hereby  authorized  to grant
Dividend  Equivalents to Eligible Persons,  subject to the terms of the Plan and
any applicable Award Agreement,  under which the Participants  shall be entitled
to receive payments (in cash,  Shares,  other securities,  other Awards or other
property as determined in the  discretion  of the  Committee)  equivalent to the
amount of cash  dividends  paid by the Company to holders of Shares with respect
to a number of Shares determined by the Committee.

     (f) Other Stock Grants. The Committee is hereby authorized,  subject to the
terms of the Plan  and any  applicable  Award  Agreement,  to grant to  Eligible
Persons Shares without restrictions thereon as are deemed by the Committee to be
consistent with the purpose of the Plan.

     (g) Other Stock-Based  Awards.  The Committee is hereby authorized to grant
to Eligible  Persons,  subject to the terms of the Plan and any applicable Award
Agreement, such other Awards that are denominated or payable in, valued in whole
or in part by  reference  to,  or  otherwise  based  on or  related  to,  Shares
(including,  without  limitation,  securities  convertible into Shares),  as are
deemed by the Committee to be consistent with the purpose of the Plan. Shares or
other  securities  delivered  pursuant to a purchase  right  granted  under this
Section 6(g) shall be  purchased  for such  consideration,  which may be paid by
such method or methods and in such form or forms (including, without limitation,
cash,  Shares,  other  securities,   other  Awards  or  other  property  or  any
combination thereof), as the Committee shall determine.

     (h) General.

     (i) No Cash  Consideration for Awards.  Awards shall be granted for no cash
consideration  or for such  minimal  cash  consideration  as may be  required by
applicable law.

     (ii)  Awards May Be Granted  Separately  or  Together.  Awards  may, in the
discretion  of the  Committee,  be granted  either  alone or in addition  to, in
tandem with or in  substitution  for any other Award or any award  granted under
any plan of the Company or any Affiliate other than the Plan.  Awards granted in
addition to or in tandem  with other  Awards or in addition to or in tandem with
awards  granted under any such other plan of the Company or any Affiliate may be
granted either at the same time as or at a different time from the grant of such
other Awards or awards.

     (iii) Forms of Payment under  Awards.  Subject to the terms of the Plan and
of any  applicable  Award  Agreement,  payments or  transfers  to be made by the
Company or an Affiliate  upon the grant,  exercise or payment of an Award may be
made in such form or forms as the Committee shall determine (including,  without
limitation,  cash, Shares,  other securities,  other Awards or other property or
any combination  thereof),  and may be made in a single payment or transfer,  in
installments  or on a deferred  basis, in each case in accordance with rules and
procedures established by the Committee.  Such rules and procedures may include,
without  limitation,  provisions  for the  payment or  crediting  of  reasonable
interest on  installment  or  deferred  payments  or the grant or  crediting  of
Dividend Equivalents with respect to installment or deferred payments.

<PAGE>

     (iv) Limits on Transfer of Awards. No Award (other than Other Stock Grants)
and no  right  under  any such  Award  shall be  transferable  by a  Participant
otherwise  than by will or by the laws of descent  and  distribution;  provided,
however,  that,  if so determined by the  Committee,  a Participant  may, in the
manner  established  by the  Committee,  transfer  Options (other than Incentive
Stock  Options) or  designate a  beneficiary  or  beneficiaries  to exercise the
rights of the Participant and receive any property distributable with respect to
any Award upon the death of the Participant. Each Award or right under any Award
shall be exercisable  during the Participant's  lifetime only by the Participant
or, if permissible under applicable law, by the Participant's  guardian or legal
representative.  No  Award  or  right  under  any  such  Award  may be  pledged,
alienated,   attached  or  otherwise  encumbered,   and  any  purported  pledge,
alienation,  attachment or encumbrance  thereof shall be void and  unenforceable
against the Company or any Affiliate.

     (v) Term of Awards.  The term of each Award shall be for such period as may
be determined by the Committee.

     (vi)  Restrictions:  Securities  Exchange  Listing.  All  Shares  or  other
securities  delivered  under  the Plan  pursuant  to any  Award or the  exercise
thereof  shall  be  subject  to such  restrictions  as the  Committee  may  deem
advisable  under the  Plan,  applicable  federal  or state  securities  laws and
regulatory  requirements,  and the Committee may cause appropriate entries to be
made or legends to be affixed  to reflect  such  restrictions.  If the Shares or
other securities are listed on a securities  exchange,  the Company shall not be
required  to deliver  any Shares or other  securities  covered by an Award until
such Shares or other securities have been listed on such securities exchange.

     (i) Directors' Options.

     (i) Annual Grant.  Directors of the Company who are not otherwise employees
shall  receive  annually on January 2  Non-Qualified  Options to purchase  3,000
shares of Stock.  The  exercise  price for the Shares  shall be the Fair  Market
Value  of the  stock  on the  date  of  the  grant.  Each  Option  shall  become
exercisable  in  annual   increments  of  750  shares  beginning  on  the  first
anniversary of the date of grant,  shall be exercisable  for ten years following
grant,  and shall be generally  subject to the terms and conditions set forth in
the Plan.

     (ii) Options in Lieu of Director's Fees. Each Director who is not otherwise
an employee  of the Company  shall be  permitted  to elect to receive  fees that
would  otherwise  be due for  services as a Director  in the form of  discounted
Non-Qualified  Stock Options.  Such election must be made on or before June 1 of
each year with regard to fees that would  otherwise be payable for that calendar
year.  The exercise  price of such Options shall be 50% of the Fair Market Value
on the date of grant,  which shall be January 2 of the year  following  the year
for which the fees were earned. Each Option shall become exercisable in full six
months following the date of grant, shall be exercisable for ten years following
the date of grant,  and shall be generally  subject to the terms and  conditions
set forth in the Plan.  The  number of Shares  subject to each  Option  shall be
calculated  by dividing the fees owed by the dollar  amount of the discount from
Fair Market Value in the exercise price.

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     (iii) The  provisions  of this  Section  6(i) herein  shall not prevent the
Committee or the Board from granting other and additional Awards to Directors of
the Company who are not employees of the Company,  subject only to the terms and
conditions set forth in the Plan.

     Section 7. Change in Control Provisions

     (a) In the event of a "Change in Control" as defined herein,  the following
acceleration and valuation provisions shall apply:

     (i) Any  Award,  unless  provided  to the  contrary  in the  related  Award
Agreement, shall become fully exercisable and vested.

     (ii) The value of all outstanding Awards shall, unless otherwise determined
by the  Committee  in its sole  discretion  at or after  grant  but prior to any
Change  in  Control,   with  respect  to  Options   granted  to  employees   and
non-Directors,  be cashed out on the basis of the  "Change in Control  Price" as
defined  herein as of the date such  Change in  Control  is  determined  to have
occurred or such other date as the Committee  may determine  prior to the Change
in Control.

     (b) Change in Control shall mean:

     (i) a change in control of a nature  that would be  required to be reported
in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not
the Company is then subject to such reporting requirement; or

     (ii) the public announcement (which, for purposes of this definition, shall
include,  without  limitation,  a report filed  pursuant to Section 13(d) of the
Exchange  Act) by the Company or any  "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) that such person has become the "beneficial
owner" (as defined in Rule 13d-3 promulgated  under the Exchange Act),  directly
or indirectly,  of securities of the Company (i)  representing  25% or more, but
not  more  than  50%,  of  the  combined  voting  power  of the  Company's  then
outstanding  securities  unless the transaction  resulting in such ownership has
been approved in advance by the Continuing Directors (as hereinafter defined) or
(ii)  representing  more than 50% of the combined  voting power of the Company's
then  outstanding  securities  (regardless  of any  approval  by the  Continuing
Directors);  provided, however, that notwithstanding the foregoing, no Change in
Control  shall be deemed to have  occurred for purposes of the Plan by reason of
the  ownership of 25% or more of the total voting  capital  stock of the Company
then issued and outstanding by the Company, any subsidiary of the Company or any
employee  benefit plan of the Company or of any subsidiary of the Company or any
entity holding Shares  organized,  appointed or established  for, or pursuant to
the terms of, any such plan; or

     (iii) the announcement of a tender offer by any person or entity for 20% or
more of the Company's  voting capital stock then issued and  outstanding,  which
tender  offer has not been  approved by the Board,  a majority of the members of
which are  Continuing  Directors,  and  recommended to the  shareholders  of the
Company; or

     (iv)  the  Continuing  Directors  cease to  constitute  a  majority  of the
Company's Board of Directors; or

<PAGE>

     (v) the shareholders of the Company approve (i) any consolidation or merger
of the  Company  in  which  the  Company  is not  the  continuing  or  surviving
corporation or pursuant to which shares of Company stock would be converted into
cash, securities or other property,  other than a merger of the Company in which
shareholders  immediately  prior  to the  merger  have  the  same  proportionate
ownership of stock of the surviving  corporation  immediately  after the merger;
(ii) any sale, lease, exchange or other transfer (in one transaction or a series
of  related  transactions)  of all or  substantially  all of the  assets  of the
Company; or (iii) any plan of liquidation or dissolution of the Company.

     (c) Continuing Director shall mean: any person who is a member of the Board
of  Directors  of the  Company,  while  such  person is a member of the Board of
Directors,  who  is not an  Acquiring  Person  (as  hereinafter  defined)  or an
Affiliate or Associate (as  hereinafter  defined) of an Acquiring  Person,  or a
representative of an Acquiring Person or of any such Affiliate or Associate, and
who (i) was a member of the Board of Directors as of the Effective  Date or (ii)
subsequently  becomes  a member  of the  Board of  Directors,  if such  person's
initial nomination for election or initial election to the Board of Directors is
recommended or approved by a majority of the Continuing Directors.  For purposes
of this definition,  "Acquiring Person" shall mean any "person" (as such term is
used in Sections  13(d) and 14(d) of the  Exchange  Act) who or which,  together
with all Affiliates and Associates of such person, is the "beneficial owner" (as
defined  in  Rule 1 3d-3  promulgated  under  the  Exchange  Act),  directly  or
indirectly,  of  securities  of the  Company  representing  20% or  more  of the
combined  voting  power  of  the  Company's  then  outstanding  securities;  and
"Affiliate" and "Associate"  shall have their  respective  meanings  ascribed to
such terms in Rule 12b-2 promulgated under the Exchange Act.

     (d) Change in Control Price shall mean: the highest price per share paid in
any transaction reported on NASDAQ/NMS or, if the Company's Stock is listed on a
national securities exchange, such exchange, or paid or offered in any bona fide
transaction  related to the Change in Control of the  Company at any time during
the 60-day period immediately  preceding the occurrence of the Change in Control
in each case as determined by the Committee.

     Section 8. Amendment and Termination: Adjustments.

     (a)  Amendments  to the Plan.  The Board of  Directors  of the  Company may
amend, alter, suspend, discontinue or terminate the Plan.

     (b)  Amendments  to Awards.  Subject  to the  provisions  of the Plan,  the
Committee  may  waive any  conditions  of or  rights  of the  Company  under any
outstanding Award, prospectively or retroactively,  except as otherwise provided
herein or in an Award Agreement.  The Committee may not amend,  alter,  suspend,
discontinue or terminate any outstanding Award,  prospectively or retroactively,
if such action  would  adversely  affect the rights of the holder of such Award,
without the consent of the Participant or holder or beneficiary thereof.

     (c) Correction of Defects, Omissions and Inconsistencies. The Committee may
correct any defect,  supply any omission or reconcile any  inconsistency  in the
Plan or any Award in the manner and to the  extent it shall  deem  desirable  to
carry the Plan into effect.

<PAGE>

     Section 9. Income Tax Withholding; Tax Bonuses.

     (a)  Withholding.  In order to comply with all applicable  federal or state
income tax laws or  regulations,  the  Company  may take such action as it deems
appropriate to ensure that all applicable federal or state payroll, withholding,
income or other  taxes,  which  are the sole and  absolute  responsibility  of a
Participant, are withheld or collected from such Participant. In order to assist
a  Participant  in paying all or a portion of the  federal and state taxes to be
withheld or collected upon exercise or receipt of (or the lapse of  restrictions
relating to) an Award,  the  Committee,  in its  discretion  and subject to such
additional  terms and conditions as it may adopt,  may permit the Participant to
satisfy  such tax  obligation  by (i)  electing to have the  Company  withhold a
portion of the Shares  otherwise to be delivered upon exercise or receipt of (or
the lapse of restrictions relating to) such Award with a Fair Market Value equal
to the amount of such taxes or (ii)  delivering to the Company Shares other than
Shares  issuable  upon  exercise  or  receipt  of (or the lapse of  restrictions
relating  to) such Award with a Fair  Market  Value  equal to the amount of such
taxes. The election,  if any, must be made on or before the date that the amount
of tax to be withheld is determined.

     (b)  Tax  Bonuses.  The  Committee,  in  its  discretion,  shall  have  the
authority,  at the time of grant of any  Award  under  this  Plan or at any time
thereafter,  to approve cash bonuses to designated  Participants to be paid upon
their exercise or receipt of (or the lapse of  restrictions  relating to) Awards
in order to provide funds to pay all or a portion of federal and state taxes due
as a result of such exercise or receipt (or the lapse of such restrictions). The
Committee shall have full authority in its discretion to determine the amount of
any such tax bonus.

     Section 10. General Provisions.

     (a) No Rights to Awards.  No Eligible  Person,  Participant or other Person
shall have any claim to be  granted  any Award  under the Plan,  and there is no
obligation  for  uniformity of treatment of Eligible  Persons,  Participants  or
holders or  beneficiaries  of Awards under the Plan. The terms and conditions of
Awards need not be the same with respect to any  Participant  or with respect to
different Participants.

     (b)  Award  Agreements.  No  Participant  will have  rights  under an Award
granted to such Participant  unless and until an Award Agreement shall have been
duly executed on behalf of the Company and, if requested by the Company,  signed
by the Participant.

     (c) No Rights of Shareholders.  Except with respect to Restricted Stock and
other  Stock  grants,   neither  a  Participant  nor  the  Participant's   legal
representative  shall  be,  or have  any of the  rights  and  privileges  of,  a
Shareholder  of the Company in respect of any shares  issuable upon the exercise
or payment of any Award,  in whole or in part,  unless and until the Shares have
been issued.

     (d) No Limit on Other Compensation  Arrangements.  Nothing contained in the
Plan shall prevent the Company or any  Affiliate  from adopting or continuing in
effect other or additional compensation arrangements,  and such arrangements may
be either generally applicable or applicable only in specific cases.

     (e) No Right to Employment. The grant of an Award shall not be construed as
giving a  Participant  the right to be  retained in the employ of the Company or
any  Affiliate,  nor will it affect in any way the  right of the  Company  or an
Affiliate to terminate such  employment at any time,  with or without cause.  In
addition, the Company or an Affiliate may at any time dismiss a Participant from
employment  free from any  liability  or any claim  under the Plan or any Award,
unless otherwise expressly provided in the Plan or in any Award Agreement.

<PAGE>

     (f) Governing Law. The validity, construction and effect of the Plan or any
Award, and any rules and regulations relating to the Plan or any Award, shall be
determined in accordance with the laws of the State of Minnesota.

     (g)  Severability.  If any provision of the Plan or any Award is or becomes
or is deemed to be invalid,  illegal or  unenforceable  in any  jurisdiction  or
would  disqualify  the Plan or any Award under any law deemed  applicable by the
Committee,  such  provision  shall be construed or deemed  amended to conform to
applicable laws, or if it cannot be so construed or deemed amended  without,  in
the determination of the Committee, materially altering the purpose or intent of
the Plan or the Award,  such provision shall be stricken as to such jurisdiction
or Award,  and the  remainder of the Plan or any such Award shall remain in full
force and effect.

     (h) No Trust or Fund  Created.  Neither the Plan nor any Award shall create
or be  construed  to create a trust or separate  fund of any kind or a fiduciary
relationship between the Company or any Affiliate and a Participant or any other
Person.  To the extent that any Person acquires a right to receive payments from
the  Company or any  Affiliate  pursuant  to an Award,  such  right  shall be no
greater than the right of any unsecured  general  creditor of the Company or any
Affiliate.

     (i) No Fractional Shares. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Award,  and the Committee  shall  determine  whether
cash shall be paid in lieu of any  fractional  Share or whether such  fractional
Share  or  any  rights  thereto  shall  be  canceled,  terminated  or  otherwise
eliminated.

     (j)  Headings.  Headings are given to the Sections and  subsections  of the
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or  interpretation of
the Plan or any provision thereof.

     (k) Other  Benefits.  No  compensation or benefit awarded to or realized by
any  Participant  under the Plan shall be included  for the purpose of computing
such  Participant's   compensation  under  any  compensation-based   retirement,
disability  or similar plan of the Company  unless  required by law or otherwise
provided by such other plan.

     Section 11. Effective Date of the Plan.

     The Plan shall be  effective  as of December  16,  1999.  If the  Company's
shareholders  do not  approve  the Plan at the Annual  Meeting  of  Shareholders
scheduled for December 15, 1999, the Plan shall be null and void.

     Section 12. Term of the Plan.

     Awards  shall  only be  granted  under  the Plan  during a  10-year  period
beginning on the effective date of the Plan. However, unless otherwise expressly
provided in the Plan or in an applicable Award Agreement,  any Award theretofore
granted may extend beyond the end of such 10-year  period,  and the authority of
the Committee  provided for  hereunder  with respect to the Plan and any Awards,
and the  authority  of the Board of  Directors of the Company to amend the Plan,
shall extend beyond the termination of the Plan.


     Section 13. Applicability to Grants under Other Company Plans.

     No further Awards shall be granted under any other Stock  Compensation Plan
currently maintained by the Company. All existing Plans shall,  however,  remain
in effect  until  all  options  or awards  granted  pursuant  thereto  have been
exercised or have expired or terminated by their terms.

<PAGE>