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, 1997

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

                          Commission file number 0-944
                              POSSIS MEDICAL, INC.
             (Exact name of registrant as specified in its charter)

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

           9055 Evergreen Blvd, NW, Minneapolis, Minnesota 55433-800
               (Address of principal executive offices) (Zip Code)
        Registrant's telephone number, including area code: 612-780-4555

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

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

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant  was required to file such  reports) and (2) has been subject to such
filing  requirements  for the past 90 days. 

                                 YES X NO 

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

Aggregate  market  value  of the  voting  stock  held by  non-affiliates  of the
registrant as of October 17, 1997 was approximately $150,539,000.  

     The number of shares  outstanding  of the  registrant's  common stock as of
October 17, 1997:12,135,100.  

     Certain  responses  in Part III are  incorporated  herein by  reference  to
information  contained in the Company's  definitive Proxy Statement for its 1997
annual meeting to be filed on or before November 6, 1997 ("The Proxy").

<PAGE>

                              POSSIS MEDICAL, INC.

Forward-Looking Statements

     This  report on Form  10-K,  including  the  description  of the  Company's
business and  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations,  contains certain "forward-looking statements" as defined
in the  Private  Securities  Litigation  Reform  Act of  1995.  Such  statements
relating to future events and financial performance, including the submission of
applications  to  the  FDA,  revenue  and  expense  levels  and  future  capital
requirements,   are   forward-looking   statements   that   involve   risks  and
uncertainties,  including  the  Company's  ability to meet its timetable for FDA
submissions,  the review time at the FDA (which is largely out of the  Company's
control),   changes  in  the   Company's   marketing   strategies,   changes  in
manufacturing  methods,  the  Company's  dependence  on patents and  proprietary
technology,  the levels of sales of the Company's  products that can be achieved
and other risks detailed from time to time in the Company's  various  Securities
and Exchange  Commission  filings.  The Company can provide no assurance that it
will achieve significant sales or obtain the necessary FDA approvals in a timely
manner or at all.

 

                                     PART I
Item 1.  Business:

General

     The  Company  was  incorporated  in 1956 and went  public in 1960 as Possis
Machine Corporation.  Initial operations consisted of design, manufacturing, and
sales of industrial  equipment and a division that provided temporary  technical
personnel.  The Company's  involvement with medical products began in 1976, when
it sold its rights to a patented bileaflet  mechanical heart valve, which it had
obtained from Zinon C. Possis, the founder of the Company,  to St. Jude Medical,
Inc.  for  royalty  payments  based on St.  Jude's  valve  sales (the "St.  Jude
Royalties").  See Note 6 of Notes to Consolidated Financial Statements contained
in Part II, Item 8. In 1982 a subsidiary was  established to focus  initially on
the  development  of a synthetic  blood vessel used to bypass  blocked  coronary
arteries. In the late 1980's the Company decided to leverage existing management
expertise and entered the pacemaker  lead  business.  The strategic  role of the
pacemaker  lead  business  was to provide cash flow to fund the  development  of
synthetic grafts and thrombectomy  systems and to give the Company access to and
name recognition  within the medical device  industry.  In 1990 the Company made
the  decision  to  focus on  medical  products  and  subsequently  divested  all
non-medical  operations,  beginning  with its  Technical  Services  division  in
September 1991 followed by its industrial  equipment subsidiary and related land
and buildings in January  1994.  See Note 2 of Notes to  Consolidated  Financial
Statements  contained  in Part II,  Item 8. In March 1994 the  Company  sold its
pacemaker lead business  because it anticipated that revenues from this business
would decrease due to a pacemaker lead technology shift. In connection with this
sale, the Company received $1.1 million in cash and the right to receive royalty
payments  over a  twelve-month  period.  See Note 10 of  Notes  to  Consolidated
Financial  Statements  contained  in Part II, Item 8. The sale of the  pacemaker
lead  business  has enabled  Possis to focus its human and  financial  resources
exclusively on its other products, which are currently in clinical trials and in
early stages of commercialization.

<PAGE>

Products

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

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

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

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

<PAGE>

     Because the Possis  AngioJet  System is unlike any  existing  procedure  or
device,  market  potential is  difficult  to  quantify,  but may be estimated by
determining the number of thrombectomy  and  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 AngioJet  System may
potentially  be used for  alternative  or  supplemental  therapy for the 450,000
peripheral  thrombosis treatments performed each year and the 108,000 (U.S.) and
67,000 (Europe) AV access thrombectomy  treatments performed each year. AngioJet
may also  provide  a  potential  treatment  for the  400,000  patients  per year
presented with thrombosed central venous lines. More than 2.5 million people are
affected  with  deep vein  thrombosis  (DVT)  each  year.  DVT leads to  300,000
hospitalizations  and 50,000  deaths from  subsequent  pulmonary  embolism  (PE)
annually.  The Company believes that approximately 300,000 DVT/PE cases per year
could be treated with AngioJet.  Further,  the Company  estimates that more than
550,000  patients  annually  are  candidates  for AngioJet  System  treatment to
alleviate thrombosis and vessel occlusion resulting in unstable angina and acute
myocardial  infarction.  An emerging  market for  interventional  therapy is the
treatment of thrombotic disorders resulting in strokes, and the Company believes
its  technology  may be suitable for the estimated  576,000  arterial  occlusive
strokes occurring annually.

     The  Company's  established  price for the single use catheter and the pump
set to the hospital  (worldwide) is between $900 and $1,450.  The list price for
the drive unit in the U.S.  is $80,000.  Outside the U.S.  the list price of the
drive unit to the  Company's  independent  distributors  is between  $25,000 and
$40,000.  The  average  mechanical  thrombectomy  procedure  is  performed  in a
surgical setting with an overnight  hospital stay and could result in charges to
the patient  exceeding  $20,000.  Lytic drug therapy may cost $500 to $5,000 for
the drug plus hospital and procedure charges,  resulting in a total patient cost
of as much as $25,000.

     On December 6, 1996 the Company  received FDA  clearance  to commence  U.S.
marketing of the AngioJet  Rapid  Thrombectomy  System with labeling  claims for
removal of blood clots from grafts used by patients on kidney dialysis.  In July
1997 the Company submitted a 510(k)  application to the FDA seeking clearance to
expand label claims for its AngioJet Rapid Thrombectomy System to include use in
peripheral  arteries and bypass  grafts in the U.S.  The Company  expects an FDA
decision on the application early in calendar 1998.

     In March 1996,  Possis  received FDA approval to initiate  Phase 2 clinical
testing of its  AngioJet  System for use in removing  blood clots from  coronary
arteries and bypass grafts.  As of October 1997, 253 patients have been enrolled
in  Phase 2  comparing  the  performance  of the  AngioJet  System  to the  drug
urokinase.  The Company  believes that the coronary  application of the AngioJet
System will be subject to a PMA approval  process and  anticipates  filing a PMA
application with the FDA in 1998.

     PERMA-FLOW  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.

<PAGE>

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

     The Possis Perma-Flow Graft is a synthetic graft 5mm in diameter for use in
CABG  surgery.  The  Perma-Flow  Graft is intended  initially to provide a graft
alternative  to patients who require  bypass  surgery but have  insufficient  or
inadequate native vessels as a result of repeat procedures,  trauma,  disease or
other factors.  The Company  believes,  however,  that the Perma-Flow Graft will
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  1996  approximately   625,000  CABG
procedures  were  performed  worldwide,  of  which  approximately  390,000  were
performed in the United States.  Approximately 20% of these CABG procedures were
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,  as the number of  patients  who have the
procedure  increases.  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 4% of those receiving CABG procedures,  or
approximately  25,000 annually,  and that approximately 90,000 patients annually
are determined by the treating physician to have native vessels inadequate to be
used in bypass  surgery.  If initial use of the Perma-Flow  Graft is shown to be
clinically acceptable, the Company believes that the graft may be used for these
patients.  The Company further  believes that if long-term  clinical results are
acceptable  to clinicians  (generally  greater than 50% patency five years after
implant),  the graft may ultimately be used as a substitute for native saphenous
veins.

<PAGE>

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

     The Company  received  FDA  approval to  initiate  clinical  testing of its
Perma-Flow Graft in November 1991. In July 1995, the Company  received  approval
to commence Phase 2 of the study comprising 150 additional  patients at up to 20
U.S.  sites. As of September 1997, 32 Phase 1 and 72 Phase 2 study patients have
been enrolled at 16 sites.  Angiographic  results at 30 days  following  surgery
have been  reported on 82  patients,  which  confirmed  152 of 164  side-to-side
anastomoses to be patent (providing blood to the coronary arteries). Within this
30-day interval, of the remaining 17 patients, angiographic results were not yet
reported for nine and eight died of causes  reported by the  investigator  to be
unrelated  to the graft.  In  addition,  angiographic  follow-up  was  performed
approximately 12 months from implant on 25 patients,  which confirmed that 35 of
52  anastomoses   were  patent.   The  Company   believes  this  performance  is
substantially  equivalent  to  commonly-used  autologous  vessels.  The  Company
anticipates filing a PMA application for U.S. marketing authorization in 1999.

     In August 1997, the Company  received an HUD designation for the Perma-Flow
Graft  for  use in  patients  who  require  coronary  bypass  surgery  but  lack
autologous vessels with which to perform it. This designation was the first step
in the  two-step  HDE  process.  The  Company  intends  to  submit  an  HDE  for
authorization  to market  the  Perma-Flow  for this  limited  indication,  while
continuing  its IDE  clinical  trials of the Graft in support of an eventual PMA
approval for  Perma-Flow  Graft use as an  alternative  to available  autologous
graft sources.

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

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

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

<PAGE>

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

     The  U.S.   hospital   prices  of  ePTFE  and  biological   graft  products
manufactured  by certain other  manufacturers  currently range from $400 to $700
per unit,  depending on length,  style, and configuration.  Final pricing of the
Company's  Perma-Seal Graft will depend upon manufacturing  costs,  distribution
methods and competitive pressures.

     In July 1992,  Possis received FDA approval to initiate clinical testing of
its  Perma-Seal  Graft.  The study was  randomized  on a  one-to-one  basis with
patients  receiving either a Perma-Seal Graft or a conventional  ePTFE graft. In
May 1997, the Company  completed its patient  enrollment in its clinical  study.
There were 250  patients  enrolled in the study at six  clinical  sites,  129 of
which received the  Perma-Seal  Graft.  Clinical data indicates that  Perma-Seal
Graft  patients who have been  accessed for  dialysis  have reduced  compression
times to stop bleeding after removing the dialysis  needles and the graft can be
used for  dialysis  the same day it is  implanted.  The  Company  filed a 510(k)
application  for  marketing  authorization  with the FDA in August 1994.  In May
1995, the Company received a request for additional information from the FDA and
the Company  responded to the request on August 31, 1995. In November  1995, the
FDA responded to the 510(k) with additional  questions and in February 1996, the
FDA told the Company it wanted to see data on 124 study patients followed for 12
months.  In August 1997,  the Company  resubmitted  its 510(k)  application  and
anticipates an FDA Panel review and a final 510(k) decision in the first half of
calendar 1998.


Research and Development

     The Company's  product  development  efforts for its existing  products are
focused  primarily  on  clinical  testing,   obtaining   necessary  FDA  product
registrations and validating  manufacturing processes. The Company's new product
development efforts are focused primarily on developing additional  applications
of the AngioJet Thrombectomy System, including carotid, neurovascular and venous
applications,  and on  utilizing  its  Perma-Flow  Graft  and  Perma-Seal  Graft
technologies  to develop  other graft  products,  including  endovascular  stent
grafts. The Company also believes its AngioJet technology has application beyond
thrombectomy,  such as for  minimally  invasive  tissue  removal.  Research  and
development expenses are generally incurred for product design,  development and
qualification,  manufacturing process development and validation, the conduct of
clinical  trials  and  governmental   approvals.   The  Company's  research  and
development  expense is  expected  to  increase  as the  Company  continues  its
clinical trials and current product development plans.

<PAGE>

     As of September 30, 1997, the Company  employed  approximately 50 full-time
employees  in research  and  development,  including  42 in new product  concept
screening,  prototype  building,  product and process development and validation
and 8 in regulatory and clinical affairs. The Company performs substantially all
of its research and development  activities at its  headquarters in Coon Rapids,
Minnesota.  The Company  spent $5.0  million,  $3.2  million and $3.3 million in
fiscal 1997,  1996,  and 1995,  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 surgeons,  cardiovascular and thoracic surgeons. The
Company is  currently  marketing  the  AngioJet  System for  hemodialysis  graft
thrombosis and plans to market the system for other peripheral  vessel and graft
applications,  targeting interventional radiologists, vascular surgeons and some
cardiologists who perform PTA and other  thrombectomy or lytic  procedures.  The
AngioJet  System  for  coronary  applications  will  be  marketed  primarily  to
interventional  cardiologists  and some  cardiovascular  surgeons.  The AngioJet
System for stroke treatment will be marketed to interventional neuroradiologists
and cardiologists.  The primary customer for the Perma-Flow Graft is expected to
be the  cardiovascular  surgeon and thoracic  surgeon.  The initial focus of the
Company's  marketing  will be for use in procedures  involving  patients  having
inadequate  native  vessels.  The Perma-Seal  Graft will be marketed to vascular
surgeons,  who  typically  are the primary  decision  makers with respect to the
placement of vascular  access grafts for patients  receiving  dialysis for renal
failure.  The Company will also target other clinicians  influential in dialysis
treatment  selection,  including  nephrologists,  internists,  and dialysis unit
technicians.

     The Company is currently  marketing its AngioJet  System outside the United
States using an  independent  distributor  network.  The Company  currently  has
distributorship  agreements  with 18  distributors  covering  Belgium,  Denmark,
Italy, Luxembourg, The Netherlands, Norway, Spain, Switzerland, Austria, France,
Saudi Arabia, Israel,  Australia, New Zealand, Russia, Japan, Korea, and Taiwan.
Generally, the distributorship  agreements are for an initial five-year term and
provide that the distributors, at their own expense, will investigate, negotiate
and obtain  regulatory  approvals  for the  Company's  products in the specified
territory.   The  Company  closed  its  European   distribution  center  because
regulatory  European clearance for all Possis products was received in July 1997
and  it is now  more  cost-effective  to  ship  products  directly  to  European
customers  from the United States.  All sales made to the Company's  independent
distributors are denominated in United States dollars.

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

     In early 1995, the Company  entered into a 10 year  distribution  agreement
with C. R.  Bard  ("Bard")  pursuant  to  which  the  Company  granted  Bard the
exclusive   worldwide  right  to  market,  sell  and  distribute  the  Company's
Perma-Seal  Graft.  The  initial  grafts  were  shipped to Bard in May 1996.  In
January 1997,  the Company  terminated  the agreement  with Bard. The Company is
seeking another  distributor and is in discussion with several companies.  Until
another  distributor  is  selected,  there will  likely be no  Perma-Seal  Graft
product sales.

<PAGE>

     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. Baxter has developed marketing material
and in October 1997 launched the product  within the European  market  following
the receipt of CE Mark approval in July 1997.

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


Patents, Patent Applications, Licenses and Proprietary Rights

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

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

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

<PAGE>

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


Competition

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

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

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


Government Regulation

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

<PAGE>

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

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

     If a manufacturer or distributor of medical devices cannot establish that a
proposed  device is  substantially  equivalent to another  device via the 510(k)
process,  the manufacturer or distributor must seek PMA approval of the proposed
device.  A PMA  application  must be  submitted,  supported by  extensive  data,
including  pre-clinical and clinical trial data to prove the safety and efficacy
of the  device.  Generally,  a company  is  required  to obtain an 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 (HDE).
These  regulations  permit that certain  devices,  if intended for a small (less
than  4,000  per  year),  medical  defined  group of  patients,  to  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 FDA
upon approval of an appropriate HDE submission.  Such submissions must establish
the safety and probably benefit of the device for the proposed  intended use. An
HDE approval lasts 18 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  quality  control and  manufacturing
procedures by requiring the Company to demonstrate  compliance  with current GMP
as specified in published FDA regulations.  The FDA monitors compliance with GMP
by requiring  manufacturers  to register  with the FDA,  which  subjects them to
periodic unannounced FDA inspections of manufacturing  facilities. If violations
of  applicable  regulations  are noted during FDA  inspections  of the Company's
manufacturing facilities,  the continued marketing of the Company's products may
be adversely affected. Such regulations are subject to change and depend heavily
on administrative interpretations.

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

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

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

<PAGE>


Employees

     As of September 30, 1997,  the Company had 168 full-time  employees and one
contract  employee.  Of  these  full-time  employees,  50  are in  research  and
development,  60 are in manufacturing and production, 12 are in quality systems,
6 are in  facilities/maintenance,  24 are in sales and  marketing  and 16 are in
management  or  administrative  positions.  None of the  Company's  employees is
covered by a collective  bargaining  agreement,  and  management  considers  its
relations with its employees to be good.


Item 2.  Properties:

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


Item 3.  Legal Proceedings:

None

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

None

<PAGE>

                      EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
<S>                    <C>  <C>         
       Name            Age                    Position
         
Robert G. Dutcher      52   Director, Chief Executive Officer and President
Joseph J. Afryl Jr     49   Vice President, Sales and Marketing
Russel E. Carlson      51   Vice President, Finance and Chief Financial Officer
Irving R. Colacci      44   Vice President, Legal Affairs and Human Resources
                                            General Counsel and Secretary
James D. Gustafson     41   Vice President, Quality Systems and
                                            Regulatory/Clinical Affairs
Robert J. Scott        52   Vice President, Manufacturing Operations
</TABLE>

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


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


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


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

<PAGE>

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


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

<PAGE>

                                     PART II


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

     The Company had 1,725 common  shareholders  of record at July 31, 1997. 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, 1997
and 1996 are presented below:

<TABLE>
<CAPTION>
<S>                                  <C>         <C>         <C>        <C>
                                             1997                   1996
                                      High         Low        High       Low
QUARTER:
   First.......................      19           14-1/2     17-5/8     12-1/4
   Second......................      20-7/8       15-7/8     18-1/4     13-3/4
   Third.......................      20-29/64     11-7/8     19-3/4     14-1/8
   Fourth......................      17-1/8       14         21-3/4     12-7/8
</TABLE>

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

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

Item 6.  Selected Financial Data:

                                      SELECTED FINANCIAL DATA
                              POSSIS MEDICAL, INC. AND SUBSIDIARIES
                                        YEARS ENDED JULY 31,
<TABLE>
<CAPTION>
In Thousands Except Earnings Per Share Data
<S>                                        <C>        <C>               <C>          <C>          <C>
                                            1997            1996         1995         1994         1993   
                                                
INCOME STATEMENT DATA:
Operating revenues-
  Continuing operations...............     $4,834          $1,606       $3,207       $6,315       $8,342
Net income (loss)
  Continuing operations...............     (8,608)         (8,578)      (5,153)      (1,246)        (181)
  Discontinued operations.............        112             405          421          523       (1,331)
Net income (loss) per common share:
  Continuing operations...............       (.71)           (.74)        (.53)        (.15)       (.02)
  Discontinued operations.............        .01             .04          .04          .06        (.16)
Weighted average shares outstanding...     12,099          11,611        9,726        8,436        8,361

BALANCE SHEET DATA:
Working capital.......................    $16,840         $24,780       $6,846       $4,007       $5,183
Total assets..........................     22,423          29,361       10,321        8,882       11,472
Long-term debt,
  excluding current maturities........         10              39           93           80        1,279
Shareholders' equity..................     19,800          27,597        8,648        5,684        5,947
</TABLE>
<PAGE>

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

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

General

     The  Company  was  incorporated  in 1956 and went  public in 1960 as Possis
Machine Corporation.  Initial operations consisted of design,  manufacturing and
sales of industrial  equipment and a division that provided temporary  technical
personnel.  The Company's  involvement with medical products began in 1976, when
it sold its rights to a patented bileaflet  mechanical heart valve, which it had
obtained from Zinon C. Possis, the founder of the Company,  to St. Jude Medical,
Inc.  for  royalty  payments  based on St.  Jude's  valve  sales (the "St.  Jude
Royalties"). See Note 6 of Notes to Consolidated Financial Statements. 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. In
connection  with this sale,  the Company  received  $1.1 million in cash and the
right to receive  royalty  payments over a twelve-month  period.  See Note 10 of
Notes to  Consolidated  Financial  Statements.  The sale of the  pacemaker  lead
business in March 1994 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.

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

<PAGE>

Results of Operations

Fiscal Years ended July 31, 1997, 1996 and 1995

     Total  revenue  increased  201% in fiscal 1997 and  decreased 50% in fiscal
1996,  compared to prior years. The main factor in the product sales increase in
fiscal 1997 was the December 1996 FDA  clearance to commence  U.S.  marketing of
the AngioJet  Rapid  Thrombectomy  System,  with labeling  claims for removal of
blood clots from grafts used by patients on kidney dialysis. The AngioJet System
drive unit is a piece of capital  equipment and  currently  lists for $80,000 to
U.S.  hospitals.  The purchasing  cycle for the AngioJet  System drive unit, the
Company believes, will average nine to twelve months depending on the customer's
budget cycle. The Company offers an AngioJet System  evaluation  program lasting
up to 90 days during which,  in return for free placement of the drive unit, the
hospital  purchases a minimum number of disposable  catheters and pumps.  If the
hospital  requires  additional time to complete the purchase and chooses to keep
the drive unit,  monthly  rent is charged with a portion of rent paid applied to
the final purchase price.  Drive unit rental programs are available and, through
a third party,  the Company offers various drive unit financing  plans including
prime interest rate capital leases,  operating  leases and a plan to acquire the
drive unit  through the  purchase of a minimum  number of  marked-up  disposable
products.  AngioJet  System drive unit and disposable  product sales in the U.S.
during fiscal 1997 were $283,000 and $1,543,000,  respectively. Foreign sales of
the AngioJet System,  drive units and disposable  products,  during fiscal 1997,
1996 and 1995 were $806,000, $919,000 and $195,000,  respectively. The Company's
German  AngioJet  System  distributor  was  terminated  in  February  1997 which
impacted  fiscal 1997  foreign  sales.  The Company is  evaluating  its European
AngioJet System  distribution  options.  The Company believes that U.S. AngioJet
System sales will grow through the addition of sales people,  the  completion of
clinical trials designed to yield additional label-approved product uses and the
introduction of additional catheter designs.

     During fiscal 1997, 1996 and 1995, sales of the Perma-Flow  Coronary Bypass
Graft were  $58,000,  $111,000  and  $29,000,  respectively.  Baxter  Healthcare
Corporation, the Company's Perma-Flow Graft worldwide distribution partner since
March 1996,  has developed  marketing  materials and in October 1997  officially
launched the product within the European market following the receipt of CE Mark
approval for the Perma-Flow  Graft in July 1997.  The  Perma-Flow  Graft was the
first  synthetic  coronary  bypass  graft to  clear  this  significant  European
regulatory milestone. In addition, the Company plans to submit an application to
the  FDA by  December  1997  requesting  that  the  Perma-Flow  Graft  be  given
Humanitarian Device Exemption status, thereby allowing the Company to market the
product in the U.S. for a limited  indication as it completes the U.S.  clinical
study and PMA registration designed to provide broad marketing approval.

     Due to the  termination  of the  Company's  worldwide  Perma-Seal  Dialysis
Access Graft  distributor in January 1997,  sales of this product in fiscal 1997
were only $124,000. Perma-Seal Graft sales in fiscal 1996 and 1995 were $163,000
and $3,000,  respectively.  Until another  distributor  is selected,  there will
likely be no Perma-Seal  Graft  product  sales.  The Company is seeking  another
distributor  for  this  product  and is in  discussion  with  several  potential
companies.  The Company submitted a 510(k) application to the FDA in August 1997
seeking clearance to market the Perma-Seal Graft in the United States.

<PAGE>

     Sales  agreement  and other revenue  includes  $200,000 per year for fiscal
1997 and 1996 from Baxter Healthcare  Corporation due the Company under a supply
and  distribution  agreement  for  the  Perma-Flow  Coronary  Bypass  Graft.  In
addition,  fiscal 1997 sales agreement and other revenue includes  $1,799,000 in
cash  and  returned  unused  product  due to the  termination  of the  Company's
Perma-Seal  Graft  supply  and  distribution  agreement.  The  Company  received
$1,000,000  through July 31, 1996 from it's Perma-Seal  Graft  distributor.  See
Note 11 of Notes to Consolidated Financial Statements.

     The Company is planning for  continued  growth in product  sales for fiscal
1998 and beyond and believes that for the next several years most of this growth
will come from AngioJet System sales in the U.S. marketplace.

     Cost of medical  products  decreased 6% in fiscal 1997 and increased 58% in
fiscal 1996,  compared to prior years.  Production expenses relating to vascular
grafts were $299,000, $1,555,000 and $1,449,000 for fiscal years 1997, 1996, and
1995,  respectively.  During  most of  fiscal  1997 the  Company  has  worked to
validate the vascular  graft  production  processes and was not producing  graft
products. The cost of product and process validation is reported as research and
development expense.  AngioJet System production costs for fiscal 1997, 1996 and
1995 were $4,540,000,  $3,680,000 and $1,889,000,  respectively. The increase is
primarily  due to  significant  growth in AngioJet  System  product  sales.  The
Company  believes that  manufacturing  costs per unit will be reduced as product
sales and related  production volumes grow and as identified product and process
improvements  are made. In April 1997 the Company received full ISO 9001 quality
system certification. ISO certification is issued by the International Standards
Organization  and  incorporates  standards of quality and excellence  recognized
worldwide in design, development, production, installation and service.

     Selling,  general and administrative  expenses increased 49% in fiscal 1997
and 44% in fiscal 1996,  compared to prior years.  The primary  factor in fiscal
1997 is increased sales and marketing  expense related to the establishment of a
direct U.S. sales  organization to sell the AngioJet Rapid  Thrombectomy  System
and expenses of  marketing  the product in the United  States.  Based upon early
physician  interest,  the Company has grown the U.S.  AngioJet  System sales and
marketing  organization  from eight employees in January 1997 to 23 employees in
July 1997.  The Company  plans to at least  double its field sales  organization
during  fiscal 1998 and sales and  marketing  expenditures  are expected to grow
significantly in the current year and beyond. In fiscal 1996, the primary factor
in the growth in selling, general and administrative expense was increased sales
and marketing  expenditures  necessary to broaden  non-U.S.  distribution and to
prepare for FDA marketing clearance of the AngioJet System.

<PAGE>

     Research  and  development  expenses  increased  57%  in  fiscal  1997  and
decreased 4% in fiscal 1996, as compared to prior periods. Fiscal 1997 increases
are due primarily to vascular  graft product and production  process  validation
expenses and increased  expenses of conducting the Perma-Flow Graft and Coronary
AngioJet  System  clinical  trials.  The  Company  believes  that  research  and
development  expenses will continue to increase as it completes the  development
of  its  current  products,   invests  in  development  of  new  AngioJet  Rapid
Thrombectomy  System   applications,   new  vascular  grafts  and  new  AngioJet
technology-based products.

     Interest  income has decreased in fiscal 1997 from the previous year due to
use of the Company's cash reserves to fund the Company's 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,  cash  equivalents  and marketable  securities  totaled
approximately  $14.8  million at July 31,  1997, a decrease of $8.7 million from
the prior year.  The  primary  factor in the  reduction  of the  Company's  cash
position was the net loss of approximately $8.5 million.

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

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

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

<PAGE>

     The Company  believes that product sales of the AngioJet System in the U.S.
and  internationally  will yield meaningful  sales growth going forward.  At the
same time, sales and marketing  expenditures  will continue to increase with the
sales  growth.  Research and  development  expenditures  are expected to grow as
well.  The Company  expects to report a loss for fiscal 1998.  In addition,  the
Company  expects that increasing  working capital  investments in trade accounts
receivable and inventory will be required to support growing product sales.  The
Company is currently  evaluating its capital needs and the options available for
raising cash. Additional capital will likely be sought in fiscal 1998.


Forward-Looking Statements

     This  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations and certain other sections of this 10-K,  contain  certain
"forward-looking  statements"  as defined in the Private  Securities  Litigation
Reform Act of 1995.  Such  statements  relating to future  events and  financial
performance,  including the submission of applications  to the FDA,  revenue and
expense levels and future capital requirements,  are forward-looking  statements
that involve risks and  uncertainties,  including the Company's  ability to meet
its  timetable for FDA  submissions,  the review time at the FDA which is out of
the  Company's  control,  changes in the  Company's  marketing  strategies,  the
Company's  ability  to  establish  product  distribution  channels,  changes  in
manufacturing methods,  market acceptance of the AngioJet System, changes in the
levels  of  capital  expenditures  by  hospitals,  the  levels  of  sales of the
Company's  products  that can be achieved and other risks  detailed from time to
time in the Company's various Securities and Exchange Commission filings.

<PAGE>

Item 8.  Financial Statements and Supplementary Data:









INDEPENDENT AUDITORS' REPORT


To the Shareholders of Possis Medical, Inc.:

     We have  audited the  accompanying  consolidated  balance  sheets of Possis
Medical,  Inc. and  subsidiaries  (the Company) as of July 31, 1997 and 1996 and
the related  consolidated  statements of operations,  cash flows, and changes in
shareholders'  equity for each of the three  years in the period  ended July 31,
1997. Our audits also included the financial  statement  schedule  listed in the
Index at Item 14. These financial  statements and financial  statement  schedule
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the 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, 1997 and 1996 and the  results of their  operations
and their  cash flows for each of the three  years in the period  ended July 31,
1997, 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 29, 1997

<PAGE>
<TABLE>

                                             POSSIS MEDICAL, INC. AND SUBSIDIARIES
                                                  CONSOLIDATED BALANCE SHEETS
<CAPTION>
                                                                       July 31, 1997          July 31, 1996
ASSETS
<S>                                                                     <C>                    <C>
CURRENT ASSETS:
    Cash and cash equivalents (Note 1)............................      $ 3,849,194            $ 7,688,507
    Marketable securities (Note 1)................................       10,964,170             15,838,543
    Receivables:
      Trade (less allowance for doubtful accounts:
          $80,000 and $60,000, respectively)......................          878,893                389,983
      Other.......................................................          120,558                218,154
    Inventories (Note 1):
      Parts.......................................................        1,242,580                755,081
      Work-in-process.............................................          940,918                898,721
      Finished goods..............................................        1,191,870                466,985
    Prepaid expenses and other assets.............................          264,117                207,156              
           Total current assets...................................       19,452,300             26,463,130


PROPERTY (Notes 1 and 3):
    Leasehold improvements........................................        1,166,306              1,090,935
    Machinery and equipment.......................................        3,317,391              2,782,287
    Assets in construction........................................           51,753                 92,743
                                                                          4,535,450              3,965,965
    Less accumulated depreciation.................................        1,906,500              1,482,233
         Property - net...........................................        2,628,950              2,483,732

OTHER ASSETS:
    Goodwill (Note 1).............................................          341,922                413,922

TOTAL ASSETS......................................................      $22,423,172            $29,360,784
 











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

<PAGE>
<TABLE>

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

<CAPTION>
                                                                             July 31, 1997       July 31, 1996
<S>                                                                         <C>                   <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
    Trade accounts payable.............................................     $    648,502          $    317,905
    Accrued salaries, wages, and commissions...........................          762,587               725,988
    Current portion of long-term debt (Note 3).........................           28,356                73,386
    Clinical trials accrual............................................          879,166               378,638
           Other liabilities (Note 3)..................................          294,002               187,675
Total current liabilities..............................................        2,612,613             1,683,592

DEFERRED REVENUE (Note 2)..............................................           --                    41,768

LONG-TERM DEBT (Note 3)................................................           10,213                38,569

COMMITMENTS AND CONTINGENCIES (Note 8)

SHAREHOLDERS' EQUITY (Note 5):
    Common stock-authorized 100,000,000 shares,
         of $ .40 par value each; issued and outstanding,
        12,121,312 and 12,052,644 shares, respectively.................        4,848,525             4,821,058
    Additional paid-in capital.........................................       41,118,611            40,688,535
    Unearned compensation..............................................           --                  (102,690)
    Unrealized loss on investments.....................................           (5,836)             (145,276)
    Retained deficit...................................................      (26,160,954)          (17,664,772)
          Total shareholders' equity...................................       19,800,346            27,596,855
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................      $22,423,172           $29,360,784













<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                                             POSSIS MEDICAL, INC. AND SUBSIDIARIES
                                             CONSOLIDATED STATEMENTS OF OPERATIONS
                                                      YEARS ENDED JULY 31
<CAPTION>
                                                                          1997               1996             1995    
REVENUES:
<S>                                                                    <C>                <C>               <C>
     Medical products sales (Note 9).........................          $2,814,646         $1,156,170        $229,984
     Net heart valve patent payments (Note 6)................              --                 --           1,817,388
     Royalty payments relating to
         pacemaker lead business (Note 10)...................              --                 --             410,118
     Sales agreement and other (Note 11).....................           2,019,431            450,000         750,000
         Total revenues......................................           4,834,077          1,606,170       3,207,490

COST OF SALES AND OTHER EXPENSES:
     Cost of medical products ...............................           4,934,887          5,256,179       3,334,589
     Selling, general and administrative.....................           4,545,937          3,052,422       2,116,251
     Research and development ...............................           4,964,239          3,167,013       3,297,524
     Interest................................................               5,422             14,296          23,568
         Total cost of sales and other expenses..............          14,450,485         11,489,910       8,771,932

Operating loss...............................................          (9,616,408)        (9,883,740)     (5,564,442)

Interest income..............................................           1,001,578          1,369,453         411,696
Gain (loss) on sale of  investments..........................               7,109            (64,007)          --             
Loss from continuing operations..............................          (8,607,721)        (8,578,294)     (5,152,746)

Income from discontinued operations - net (Note 2)...........             111,539            405,416         420,901
Net loss ....................................................         $(8,496,182)       $(8,172,878)    $(4,731,845)

Weighted average number
     of common shares outstanding............................          12,099,217         11,611,070       9,726,105
Earnings (loss) per common share:
     Continuing operations    ...............................               $(.71)             $(.74)          $(.53)
     Discontinued operations  ...............................                  01                .04             .04
Net loss ....................................................               $(.70)             $(.70)          $(.49)











<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                                             POSSIS MEDICAL, INC. AND SUBSIDIARIES
                                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                      YEARS ENDED JULY 31
<CAPTION>
                                                                                1997            1996              1995   
<S>                                                                        <C>              <C>               <C>           
OPERATING ACTIVITIES:
     Net loss .........................................................    $(8,496,182)     $(8,172,878)      $(4,731,845)
Adjustments to reconcile net loss to net
         cash used in operating activities:
     (Gain) loss on sale of marketable securities......................         (7,109)          64,007            --
Loss on disposal of assets.............................................          4,932           24,239             5,631
Depreciation...........................................................        473,816          395,132           361,024
Amortization of goodwill...............................................         72,000           72,000            72,000
     Stock compensation................................................        155,083          505,432           113,298
     (Increase) decrease in receivables................................       (391,314)        (741,886)        3,157,870
     (Increase) decrease in inventories................................     (1,286,860)      (1,109,773)           32,610
     (Increase) decrease in other current assets.......................        (56,961)         (19,968)           56,493
     Increase in trade accounts payable................................        330,597          158,540            44,006
     Increase (decrease) in accrued and other current liabilities......        601,686           (4,225)       (1,059,792)
         Net cash used in operating activities.........................     (8,600,312)      (8,829,380)       (1,948,705)

INVESTING ACTIVITIES:
     Proceeds from sale of discontinued operations.....................         --              589,441           349,679
Additions to plant and equipment.......................................       (612,641)      (1,453,379)         (561,817)
     Proceeds from sale of fixed assets................................         20,954           10,945             2,728
     Purchase of marketable securities.................................     (1,990,718)     (17,992,853)      (11,431,373)
     Proceeds from sale/maturity of marketable securities..............      7,011,640        3,215,681        10,160,719
         Net cash provided by (used in)
         investing activities..........................................      4,429,235      (15,630,165)       (1,480,064)

FINANCING ACTIVITIES:
     Proceeds from notes payable.......................................         --               19,000           115,673
     Repayment of long-term debt.......................................        (73,386)         (82,925)         (594,530)
     Proceeds from issuance of stock and exercise
         of options and warrants.......................................        405,150       26,761,920         7,588,335
         Net cash provided by financing activities.....................        331,764       26,697,995         7,109,478 

(DECREASE) INCREASE  IN CASH AND
    CASH EQUIVALENTS...................................................     (3,839,313)       2,238,450         3,680,709

CASH AND CASH EQUIVALENTS AT BEGINNING
   OF PERIOD...........................................................      7,688,507        5,450,057         1,769,348
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................     $3,849,194      $ 7,688,507        $5,450,057

SUPPLEMENTAL CASH FLOW DISCLOSURE:
     Cash paid for interest............................................       $  5,422          $14,296           $23,568
Inventory transferred to fixed assets..................................         32,279           19,983            30,473



<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                                             POSSIS MEDICAL, INC. AND SUBSIDIARIES
                                                  CONSOLIDATED STATEMENTS OF
                                                CHANGES IN SHAREHOLDERS' EQUITY
<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, 1994........  8,456,252  $3,382,501    $ 7,180,089  $ (118,836)    $   --      $ (4,760,049)  $ 5,683,705

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

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     Basis of Consolidation The accompanying  consolidated  financial statements
include the accounts of Possis Medical,  Inc. (the Company) and its wholly-owned
subsidiaries,  Possis Holdings, Inc., JEI Liquidation,  Inc. (Jet Edge) (Note 2)
and Possis Medical Europe B.V., after  elimination of intercompany  accounts and
transactions.

     The Company is a developer,  manufacturer  and marketer of medical devices.
The Company was  incorporated in 1956 and has operated  several  businesses over
the last 41 years.  In 1990 the Board of  Directors  decided to focus on medical
products,  which led to the sale of the Technical  Services Division in 1991 and
the Jet Edge  industrial  waterjet  business in 1994.  In March 1994 the Company
sold its pacemaker lead business  because it anticipated that revenues from this
business would decline due to a pacemaker lead technology shift. The name of the
Company  was  changed to Possis  Medical,  Inc. in 1993.  In January  1995,  the
Company  established a 100% owned subsidiary (Possis Medical Europe B.V.) in the
Netherlands to support international product distribution.

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

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

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

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

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

     Goodwill  Goodwill is being amortized on a straight-line  basis over 13-1/2
years,  based on the remaining  life of patent rights  related to the Perma-Flow
Graft acquired in 1988.  Accumulated  amortization at July 31, 1997 and 1996 was
$645,500 and $573,500, respectively.

<PAGE>

     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.  Heart valve patent  revenue and royalty
payments  related to the  pacemaker  leads  business  sale were accrued based on
estimated  sales of the  companies  making the royalty  payments.  Revenue under
product  supply and  distribution  agreements  is  recognized  when the required
milestones have been achieved.

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

     Earnings (Loss) Per Share The Company's outstanding stock options and stock
warrants are not considered in the computation of earnings per share because the
impact would be  antidilutive  because of the net loss. The  difference  between
primary and fully diluted earnings per share was not significant in any period.

     In February 1997, the Financial  Accounting Standards Board issued SFAS No.
128,  "Earnings per Share," which is effective for interim and annual  reporting
periods ending  December 1997.  SFAS No. 128  supersedes  Accounting  Principles
Board  Opinion   ("APB")  No.  15,   "Earnings  per  Share,"  and  replaces  the
presentation of primary earnings per share with a presentation of basic earnings
per share.  It also  requires  dual  presentation  for all entities with complex
capital  structures and provides guidance on other  computational  changes.  The
implementation of SFAS No. 128 is not expected to have a material impact on loss
per share.

     Cash  Equivalents  The Company  considers  highly liquid  investments  with
original maturities of three months or less to be cash equivalents.
 
     Marketable  Securities All Company  securities as of July 31, 1997 and 1996
are classified as  available-for-sale  and consist primarily of U.S.  government
securities.  These  investments are reported at fair value with a net unrealized
loss of $5,836 and $145,276 included in shareholders' equity as of July 31, 1997
and 1996,  respectively.  These  securities  have  maturity  dates  ranging from
October  31,  1997  to  March  5,  2001.  The  Company   utilizes  the  specific
identification  method in computing  gains or losses.  During 1997 and 1996, the
Company sold available-for-sale  securities aggregating approximately $1,012,000
and  $1,941,000,  realizing  a gain of $7,109 in 1997 and a loss of  $64,007  in
1996. There was no material difference between amortized cost and fair value for
the marketable securities at July 31, 1995.

     Impairment  of  Long-Lived  Assets  SFAS  No.  121,   "Accounting  for  the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of,"
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>

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

     During 1996, ATS prepaid the notes  receivable and the estimated  remaining
royalty  payments  in  connection  with the sale of ATS. At July 31,  1997,  all
amounts related to the Company's sale of ATS were paid in full.
 
     Income from  Discontinued  Operations  Operating  results of the  Technical
Services  division  were as follows for the years ended July 31, 1997,  1996 and
1995:
<TABLE>
<CAPTION>

                                             1997        1996        1995    
<S>                                       <C>         <C>         <C>
 Sales  ................................. $   --      $   --      $  --  
 Income from operations.................. $   --      $    225    $ 87,306
 Amortization of not-to-compete
  agreement..............................   41,768     154,647     113,916
 Percentage of ATS's revenues............   69,771     250,544     219,679 
         
 Income from discontinued operations .... $111,539    $405,416    $420,901 

</TABLE>
 
3.   LONG-TERM DEBT
<TABLE>
<CAPTION>

     Long-term debt at July 31, 1997 and 1996 is as follows:    1997      1996     
 <S>                                                          <C>      <C>
     Notes payable, interest at 9.75%-10.15%,
        principal and interest payable monthly, final
        payments due between November 1997 and
        December 1998, collateralized by
        the Company's equipment.............................  $25,269  $ 92,955
     Noninterest bearing note payable, principal payable
        in 10 equal quarterly payments beginning
        January 1997, final payment due April 1999,
        unsecured...........................................   13,300    19,000
                                                               38,569   111,955
       Less current maturities..............................   28,356    73,386
                                                              $10,213  $ 38,569
</TABLE>
<PAGE>

4.   INCOME TAXES
     At July 31,  1997,  the Company has net  operating  loss  carryforwards  of
approximately  $22,935,000 for federal tax purposes which expire in 2003 through
2012 and  $7,683,000  for  Minnesota  tax purposes  which expire in 2003 through
2012.

     In addition, at July 31, 1997 the Company has approximately  $1,653,000 and
$455,000 in federal and state tax credits,  respectively,  substantially  all of
which are research and development  tax credits,  which expire from 2000 through
2012, and a $65,182 AMT credit which does not expire.

     Deferred  tax  assets  and  liabilities  as of July  31,  1997 and 1996 are
described in the table below.  The Company has not recorded any net deferred tax
assets due to the uncertainty of realizing such assets:
<TABLE>
<CAPTION>
                                                    1997            1996     
<S>                                            <C>             <C>
 Current assets (liabilities):
 Allowance for doubtful accounts.............. $     28,000    $    20,000
 Inventory....................................      284,000        302,000
 Accrued vacation.............................       34,000         34,000
 Other  ......................................       57,000         80,000
                                                    403,000        436,000
 Valuation allowance..........................     (403,000)      (436,000)
 Net    ...................................... $       --      $      --         

 Long-term assets:
 Net operating losses......................... $  8,551,000    $ 5,647,000
 Amortization of patents......................      187,000        142,000
 Tax credits..................................    1,687,000      1,506,000
 Depreciation.................................     (133,000)       (74,000)
                                                 10,292,000      7,221,000
 Valuation allowance..........................  (10,292,000)    (7,221,000)
 Net    ...................................... $     --        $   --           

</TABLE>

     The effective income tax rate differed from the U.S. federal statutory rate
for each of the three years ended July 31, 1997, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
                                                   1997           1996            1995         
<S>                                           <C>             <C>           <C>           
Tax benefit on loss from
  continuing operations computed at
  statutory rate of 34%.....................  $(2,889,000)    $(2,778,000)    $(1,608,000)
Decrease in tax benefit due to  
  nonrecognizable benefits of net 
  operating loss carryforwards and others...    2,889,000      2,778,000        1,608,000
Total income tax expense
  continuing operations.....................  $     --        $   --          $   --     

</TABLE>
<PAGE>

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

     The total number of shares of stock reserved and available for distribution
under the 1992 Plan originally was 600,000 shares, a maximum of 350,000 of which
may be issued as Incentive  Stock Options.  The total number of shares  reserved
and available for distribution  under the plan was increased annually on January
2, 1993,  1994 and 1995, by 1% of the number of shares of the  Company's  common
stock  outstanding  at July 31 of the prior  fiscal  year.  In 1995 the  Company
amended  the 1992 Stock  Compensation  Plan by  increasing  the number of common
shares  issuable  under the plan each year from 1% to 2% of the total  number of
shares outstanding at July 31 of the prior fiscal year. In addition,  the number
of  common  shares  issuable  as  Incentive  Stock  Options  under  the plan was
increased to 1,000,000.  At July 31, 1997,  there were 1,291,775 shares reserved
for  outstanding  options and 242,902  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 1997, 1996 and 1995, the Company granted 5,207,  4,760 and 11,574
compensatory  options,  respectively,  to its outside  directors in lieu of cash
payments for directors fees. These options were granted under the 1992 Plan.
 
<PAGE>

     A summary of changes in  outstanding  options  for each of the three  years
ended July 31, 1997 follows:

<TABLE>
<CAPTION>
                                                                 1997                      1996                       1995
<S>                                                        <C>                       <C>                       <C>
     Shares under option at
        beginning of year............................           899,787                   728,102                   880,478
     Options granted - 1992 plan.....................           460,557                   254,660                    33,374
     Options granted - Non plan......................             --                       55,000                       --
     Options exercised...............................           (68,109)                 (123,800)                 (147,000)
     Options canceled................................           (79,291)                  (14,175)                  (38,750)
        Shares under option at end of year...........         1,212,944                   899,787                   728,102
     Shares exercisable at end of year...............           581,238                   348,204                   497,841
     Exercise price of options granted...............      $10.62-20.45               $8.75-17.50               $3.875-7.75
     Exercise price of options exercised.............      $1.00-14.625              $2.75-14.625              $2.625-11.38
     Market price of options exercised                     16.75-19.625              $13.75-21.25              $6.25-13.625
     Aggregate market value of options
        exercised....................................        $1,241,296                $2,245,906                $1,180,469
</TABLE>

     Stock option  weighted  average  exercise  prices  during 1997 and 1996 are
summarized below:
<TABLE>
<S>                                                  <C>             <C>
                                                        1997           1996    
         Outstanding at beginning of year..........  $ 9.15          $ 6.73
         Granted  .................................   15.81           14.71
         Exercised.................................    4.46            7.33
         Canceled .................................   12.40           14.08
         Outstanding at end of year................  $11.63            9.15
</TABLE>
  
     The following table summarizes  information  concerning options outstanding
and exercisable options as of July 31, 1997:

<TABLE>
<CAPTION>
                                              Weighted
                                               Average
         Range of                             Remaining              Weighted-                              Weighted
         Exercise              Shares      Contractual Life           Average              Shares            Average
          Price             Outstanding        in Years           Exercise Price        Exercisable       Exercise Price
<S>      <C>                  <C>                <C>                  <C>                  <C>
         $1 - $6              250,427            4.2                  $ 4.54               225,615            $4.41
         $6 - $11             265,367            5.5                    8.55               248,117             8.62
         $11 - $16            465,150            9.0                   13.98                97,006            14.08
         $16 - $21            232,000            9.2                   18.08                10,500            18.25

</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 $265,540 was recorded at
the date of grant and is being  recognized  over the vesting  period.  In fiscal
1997,  1996 and 1995,  total  compensation  expense of  $102,690,  $213,197  and
$68,449, respectively, was recognized on these restricted stock grants.

<PAGE>

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

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

 <S>                                <C>                       <C>
                                        1997                      1996     
    Net Loss:
      As reported.................  $(8,496,182)              $(8,172,878)
      Pro forma...................   (9,752,401)               (8,617,407)
    Loss per Share:
      As reported.................  $      (.70)              $      (.70)
      Pro forma...................         (.81)                     (.74)

</TABLE>

     The fair value of options  granted  under the various  option  plans during
1997  and 1996  was  estimated  on the  date of  grant  using  the  Black-Sholes
option-pricing  model  with  the  following  weighted  average  assumptions  and
results:

<TABLE>
<CAPTION>

                                                       1997          1996     
<S>                                                  <C>           <C>
    Dividend yield.............................        None          None
    Expected volatility........................         40%           42%
    Risk-free interest rate....................         6.5%          6.5%
    Expected life of option....................        120 mo.       120 mo.
    Fair value of options on grant date........      $4,353,803    $2,803,806

</TABLE>

     Stock  Warrants  Stock   purchase   warrants  held  by  unrelated   parties
representing  the  right to  purchase  an  aggregate  of  26,400  shares  of the
Company's common stock at $8.52 a share were outstanding at July 31, 1997. These
warrants  do not have an  expiration  date and must be  exercised  if the market
value of the  Company's  common stock  exceeds  $22.73 per share for a specified
period.

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

<PAGE>

     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 8,537 shares in 1997,
17,194 shares in 1996 and 10,932 shares in 1995 under this plan.

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

7.  401 K PLAN
     The  Company has an  employees'  savings  and profit  sharing  plan for all
qualified   employees  who  have   completed   one  year  of  service.   Company
contributions  are made at the  discretion of the Board of Directors  subject to
the maximum amount allowed under the Internal  Revenue Code.  Contributions  for
the years ended July 31, 1997, 1996 and 1995 were $97,765,  $90,114 and $77,907,
respectively.


8.   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, 1997.  Rental expense charged against  earnings was $237,742 in fiscal 1997,
$329,340 in fiscal 1996,  and $379,706 in fiscal 1995. The future annual rentals
on this  operating  lease  are  $242,000  per year  through  2006.  The lease is
noncancelable  before April 2001, after which it can be canceled with notice and
payment of a termination fee.

     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.

9.   SALES TO MAJOR CUSTOMERS
     The  Company's  continuing  operations  are in  one  segment,  the  design,
manufacture and  distribution of  cardiovascular  and vascular  medical devices.
Approximately 29% of 1997's medical product sales are to foreign customers. This
is down  from 80% in 1996 and 100% in 1995.  In 1997  there  were no  individual
customers that sales exceeded 10%. In 1996, sales to four customers  amounted to
21%, 17%, 14% and 12% of medical products revenues,  and the receivables related
to these customers were 21%, 2%, 0%, and 6% of total receivables,  respectively.
In 1995,  sales to two  customers  amounted  to 62% and 15% of medical  products
revenues.

<PAGE>

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

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

     On March 15, 1996 the Company  entered into a  Distribution  Agreement with
Baxter Healthcare Corporation ("Baxter"). This Agreement grants Baxter exclusive
worldwide distribution rights to the Possis Perma-Flow Coronary Bypass Graft for
a three-year  term.  Under this  Agreement,  through July 31, 1997,  the Company
received $400,000 and will receive up to an additional  $200,000,  on the second
anniversary  date of  agreement  signing,  as long as the  agreement is still in
effect.

<PAGE>

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

     During fiscal 1996 and 1997, there were no changes in or disagreements with
the Company's  independent certified public accountants on accounting procedures
or accounting and financial disclosures.

<PAGE>
                                    PART III


Item 10.  Directors and Executive Officers of the Registrant:

     Information  under  the  heading  "Election  of  Directors"  in  the  Proxy
Statement  is  incorporated  herein  by  reference.  The  information  regarding
executive  officers  is  included  in Part I of this  report  under the  caption
"Executive Officers of the Registrant."


Item 11.  Executive Compensation:

     Information regarding compensation of directors and officers for the fiscal
year ended July 31, 1997 is in the Proxy Statement and is incorporated herein by
reference.


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

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


Item 13.  Certain Relationships and Related Transactions:

     Information  regarding related party transactions is contained in Note 6 of
Notes to Consolidated Financial Statements in Part II, Item 8 of this report and
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, 1997 and 1996
 Consolidated Statements of Operations for each of the three years in the period
   ended July 31, 1997
 Consolidated Statements of Cash Flows for each of the three years in the
   period ended July 31, 1997.
 Consolidated Statements of Changes in Shareholders' Equity for each of the
   three years in the period ended July 31, 1997.
 Notes to Consolidated Financial Statements

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

         Consent of independent certified public accountants.

         SCHEDULE II - Valuation Accounts

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

      3. Exhibits

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

<PAGE>

Exhibit    Form      Date Filed                      Description  
                     

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

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


  4.1      10-K      Fiscal year ended   Norwest Equipment Finance, Inc.
                     July 31, 1994       loan agreement, dated January 12,
                                         1994
 
  4.2      8-A       December 13, 1996   Rights agreement, dated December 12,
                                         1996, between the Company and
                                         Norwest Bank Minnesota N.A., as
                                         rights agent

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

  10.1     S-1       June 30, 1988       Agreement with St. Jude Medical,
                                         Inc., dated August 2, 1983

  10.2     10-Q      Quarter ended       Asset purchase agreement with
                     January 31, 1994    Innovex, Inc., dated March 11, 1994

  10.  3   8-K       Quarter ended       Settlement agreement and mutual
                     January 31, 1997    release relating to the termination
                                         of the Perma-Seal supply and
                                         distribution agreement with C.R.Bard, 
                                         Inc.

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

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

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

<PAGE>

Exhibit    Form      Date Filed                      Description   
                    

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

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

* 10.9     10-K      Fiscal year ended   Form of incentive stock option
                     July 31, 1989       agreement for officers

* 10.10    10-K      Fiscal year ended   Form of stock option agreement for
                     July 31, 1989       directors

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

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

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

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

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

* 10.16    10-K      Fiscal year ended    Form of nonqualified stock option
                     July 31, 1993        agreement for 1990 directors' fees

* 10.17    10-K      Fiscal year ended    Form of nonqualified stock option
                     July 31, 1993        agreement for 1989 directors' fees

  10.18    10-Q      Quarter ended        Supply & distribution agreement
                     January 31, 1995     with Bard Vascular Systems
                                          Division, C.R.Bard, Inc.
 
  10.19    10-Q      Quarter ended        Lease agreement for corporate
                     January 31, 1996     headquarters and manufacturing
                                          facility dated December 15, 1995.

  10.20   8-K        March 28, 1996       Supply and distribution agreement
                                          with Edwards CVS Division, Baxter 
                                          Healthcare Corporation

<PAGE>

Exhibit   Form       Date Filed                      Description      
                    

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

  23                                      Consent of independent certified
                                          public accountants

  27                                      Financial data schedule



*    Indicates management contract or compensatory plan or arrangement.

(b)   Reports on Form 8-K

     Possis Medical,  Inc. filed no reports on Form 8-K during the quarter ended
July 31, 1997.

<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 24, 1997

     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 24, 1997
Donald C. Wegmiller

/s/ Robert G. Dutcher        Director, President and          October 24, 1997
Robert G. Dutcher            Chief Executive Officer

/s/ Dean Belbas              Director                         October 24, 1997
Dean Belbas

/s/ Seymour J. Mansfield     Director                         October 24, 1997
Seymour J. Mansfield

/s/ Demetre Nicoloff, MD     Director                        October 24, 1997
Demetre Nicoloff, MD

/s/ Ann M. Possis            Director                        October 24, 1997
Ann M. Possis

/s/ Joe A. Walters           Director                        October 24, 1997
Joe A. Walters
<PAGE>
                                                        


                                                                  SCHEDULE II

                              POSSIS MEDICAL, INC.

VALUATION ACCOUNTS
YEARS ENDED JULY 31, 1997, 1996 AND 1995


        Column A            Column BColumn C Column D Column E 

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

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

Year ended July 31, 1997       $   60,000    $  96,530    $ 76,530  $    80,000
Year ended July 31, 1996           27,019       50,000      17,019       60,000
Year ended July 31, 1995          120,000      (76,375)     16,606       27,019

Valuation allowance on
deferred tax asset:

Year ended July 31, 1997       $7,657,000   $3,038,000    $  --     $10,695,000
Year ended July 31, 1996        4,898,000    2,759,000       --       7,657,000
Year ended July 31, 1995        2,556,000    2,342,000       --       4,898,000
 
Reserve for inventory
obsolescence:

Year ended July 31, 1997       $  150,000   $    86,000   $136,427  $    99,573
Year ended July 31, 1996          125,000        38,795     13,795      150,000
Year ended July 31, 1995          150,000       136,086    161,086      125,000

<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, and  Registration  Statement No. 33-56728 on
Form S-8 of our report,  dated August 29, 1997,  appearing in this Annual Report
on Form 10-K of Possis Medical, Inc. for the year ended July 31, 1997.



Deloitte & Touche LLP
Minneapolis, Minnesota
October 24, 1997