UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended October 31, 2006

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the 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 (I.R.S. Employer Identification No.)
of incorporation organization)

9055 EVERGREEN BLVD NW MINNEAPOLIS MN 55433-8003
- --------------------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)

763-780-4555
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)

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 file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [_] Yes No [_]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.

Large accelerated filer ___ Accelerated filer __X__ Non-accelerated filer ___

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ___ No __X__

The number of shares outstanding of the Registrant's Common Stock, $.40 par
value, as of November 30, 2006 was 17,219,616.

POSSIS MEDICAL, INC.

INDEX

PAGE

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements........................................... 3

Consolidated Balance Sheets, October 31, 2006 and

July 31, 2006.................................................. 3

Consolidated Statements of Income and Comprehensive
Income for the three months ended October 31, 2006 and 2005.... 4

Consolidated Statements of Cash Flows for the three months
ended October 31, 2006 and 2005................................ 5

Notes to Consolidated Financial Statements..................... 6

ITEM 2. Management's Discussion and Analysis of Financial

Condition and Results of Operations............................ 11

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..... 17

ITEM 4. Controls and Procedures........................................ 17

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings............................................. 17

ITEM 1A. Risk Factors.................................................. 17

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds... 18

ITEM 6. Exhibits...................................................... 18

SIGNATURES..................................................... 19

PART 1 FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

POSSIS MEDICAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

ASSETS OCTOBER 31, JULY 31,
2006 2006
--------------- ------------
CURRENT ASSETS:

Cash and cash equivalents ..................................................... $ 2,365,461 $ 3,505,796
Marketable securities ......................................................... 44,985,998 44,610,130
Trade receivables (less allowance for doubtful accounts and returns
of $570,000 and $580,000, respectively) ..................................... 8,121,299 8,356,776
Inventories ................................................................... 6,194,666 5,915,950
Prepaid expenses and other assets ............................................. 2,524,244 1,663,322
Deferred tax asset ............................................................ 1,331,000 1,331,000
------------ ------------
Total current assets ...................................................... 65,522,668 65,382,974

PROPERTY AND EQUIPMENT, net ..................................................... 4,939,148 5,090,198
DEFERRED TAX ASSET .............................................................. 11,009,000 10,756,000
OTHER ASSET ..................................................................... 825,054 723,262
------------ ------------

TOTAL ASSETS .................................................................... $ 82,295,870 $ 81,952,434
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Trade accounts payable ........................................................ $ 2,326,758 $ 2,040,367
Accrued salaries, wages, and commissions ...................................... 2,611,350 3,468,961
Other liabilities ............................................................. 2,773,858 2,715,421
------------ ------------
Total current liabilities .................................................. 7,711,966 8,224,749

OTHER LIABILITES ................................................................ 943,468 823,975

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
Common stock-authorized, 100,000,000 shares of $0.40 par value each; issued and
outstanding, 17,219,616 and 17,146,825 shares,
respectively ............................................................... 6,887,846 6,858,730
Additional paid-in capital .................................................... 78,126,535 77,378,276
Accumulated other comprehensive loss .......................................... (136,000) (329,000)
Retained deficit .............................................................. (11,237,945) (11,004,296)
------------ ------------
Total shareholders' equity .............................................. 73,640,436 72,903,710
------------ ------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................................... $ 82,295,870 $ 81,952,434
============ ============

See notes to consolidated financial statements.

POSSIS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED OCTOBER 31, 2006 AND 2005
(UNAUDITED)

2006 2005
------------ ------------

Product sales .......................................... $ 15,603,881 $ 15,475,674

Cost of sales and other expenses:

Cost of medical products ............................ 4,408,194 4,230,155
Selling, general and administrative ................. 9,816,040 8,393,727
Research and development ............................ 2,414,679 2,509,293
------------ ------------

Cost of sales and other expenses ................ 16,638,913 15,133,175
------------ ------------

Operating (loss) income ................................ (1,035,032) 342,499
Interest income .................................... 539,492 403,449
Gain (loss) on sale of securities .................. 18,891 (6,346)
------------ ------------
(Loss) income before income taxes ...................... (476,649) 739,602
(Benefit) provision for income taxes ................... (243,000) 474,000
------------ ------------

Net (loss) income ...................................... (233,649) 265,602

Other comprehensive income (loss), net of tax:

Unrealized gain (loss) on securities ................... 193,000 (99,000)
------------ ------------
Comprehensive (loss) income ............................ $ (40,649) $ 166,602
============ ============
Weighted average number of common of Shares outstanding:

Basic .............................................. 17,149,993 17,315,847
Diluted ............................................ 17,149,993 17,864,582

Net (loss) income per common share:
Basic .............................................. $ (0.01) $ 0.02
============ ============
Diluted ............................................ $ (0.01) $ 0.01
============ ============

See notes to consolidated financial statements.

POSSIS MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2006 AND 2005
(UNAUDITED)

2006 2005
------------ -------------
OPERATING ACTIVITIES:

Net (loss) income ................................................. $ (233,649) $ 265,602
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ................................................ 674,170 615,442
Loss on asset disposal ...................................... 22,206
-----------
Stock-based compensation expense ............................ 931,689 749,054
Loss on sale of marketable securities ....................... 31,601 20,857
Deferred taxes .............................................. (373,000) 363,991
Decrease in trade receivables ............................... 235,477 83,678
Increase in inventories ..................................... (439,716) (281,332)
(Increase) decrease in prepaid expenses and other ........... (962,714) 205,283
assets
Increase in trade accounts payable .......................... 203,982 691,247
Decrease in accrued and other liabilities ................... (912,681) (702,718)
------------ -----------
Net cash (used) provided by operating activities .......... (822,635) 2,011,104

INVESTING ACTIVITIES:
Additions for property and equipment ........................ (301,917) (595,990)
Proceeds from sale of marketable securities .................. 18,097,396 6,577,704
Purchase of marketable securities ............................ (18,191,865) (7,955,485)
------------ -----------
Net cash used in investing activities ..................... (396,386) (1,973,771)

FINANCING ACTIVITIES:
Proceeds from issuance of common stock and exercise of options

78,686 211,858
Excess tax benefits from stock-based compensation ............ -- (9,000)
Repurchase of common stock .................................. (1,093,114)
------------ -----------
-----------
Net cash provided by (used in) financing activities ....... 78,686 (890,256)
------------ -----------

DECREASE IN CASH AND CASH
EQUIVALENTS ............................................. (1,140,335) (852,923)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
QUARTER ................................................. 3,505,796 5,257,244
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF QUARTER
$ 2,365,461 $ 4,404,321
============ ===========

SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for income taxes ................................... $ 254,850 $ 166,520
Issuance of restricted stock ................................. 548,957 230,600

See notes to consolidated financial statements.

POSSIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. The accompanying consolidated
financial statements and notes should be read in conjunction with the
audited financial statements and accompanying notes thereto included in our
2006 Annual Report.

INTERIM FINANCIAL STATEMENTS

Operating results for the three months ended October 31, 2006 are not
necessarily indicative of the results that may be expected for the year
ending July 31, 2007.

2. NET (LOSS) INCOME PER COMMON SHARE

Basic (loss) income per common share is computed by dividing net income for
the period by the weighted average number of common shares outstanding
during the period. Diluted income per share is computed using the treasury
stock method by dividing net income by the weighted average number of
common shares plus the dilutive effect of outstanding stock options, and
shares issuable under the employee stock purchase plan.

The following table presents a reconciliation of the numerators and
denominators of basic and diluted earnings per share:

Three Months Ended
October 31,
---------------------------
2006 2005
------------ -----------
Numerator:

Net (loss) income, basic and diluted $ (233,649) $ 265,602
============ ===========

Denominator:
Weighted average common shares outstanding 17,149,993 17,315,847

Effect of potentially dilutive securities:
Stock options and other -- 548,735
------------ -----------
Weighted average common shares
outstanding, assuming dilution
17,149,993 17,864,582
============ ===========
Basic earnings per share $ (0.01) $ 0.02
Diluted earnings per share $ (0.01) $ 0.01

Potential dilutive securities include stock options, non-vested share
awards and shares issuable under our employee stock purchase plan (ESPP).

The computation of dilutive shares outstanding excluded options to purchase
1,781,000 and 1,910,000 shares of common stock for the three months ended
October 31, 2006 and 2005, respectively. These amounts were excluded
because the options' exercise prices were greater than the weighted average
closing market price of our common stock for the periods presented and
therefore, the effect would be antidilutive (i.e., including such options
would result in higher earnings per share.)

3. STOCK BASED-COMPENSATION

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

On August 1, 2005, we adopted the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
SHARE-BASED PAYMENT (123(R)), requiring us to recognize expense related to
the fair value of our stock-based compensation awards. We elected the
modified prospective transition method as permitted by SFAS No. 123(R).
Under this transition method, stock-based compensation expense for the
three months ended October 31, 2006 and 2005, includes: (a) compensation
expense for all stock-based compensation awards granted prior to, but not
yet vested as of July 31, 2005, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION; and (b) compensation expense for
all stock-based awards granted subsequent to July 31, 2005, based on the
grant-date fair value estimated in accordance with the provisions of SFAS
No. 123(R). We recognized compensation expense for stock options and
non-vested share awards, that are either market-based or time-based, on a
straight-line basis over the vesting period of the award. Total stock-based
compensation expense included in our statement of income for the three
months ended October 31, 2006 and 2005, was $932,000 and $749,000,
respectively.

The following table summarizes the stock option transactions for the three
months ended October 31, 2006:

Options Weighted- Average Weighted-
Exercise Price Per Average Remaining
Share Contractual Term
(in years)

Outstanding on July 31, 2006 3,208,000 $11.55
Granted 279,000 $ 8.74
Exercised - $ -
Forfeited/Canceled (97,000) $16.63
============== =======================
Outstanding on October 31, 2006 3,390,000 $11.18 5.08
============== ======================= =========================
Exercisable on October 31, 2006 2,285,000 $10.77 4.69
============== ======================= =========================

Note: At October 31, 2006, shares associated with our ESPP were not
significant and are excluded from the table above.

The aggregate intrinsic value of options (the amount by which the market
price of the stock on date of exercise exceeded the market price of the
stock on the date of grant) exercised during the three months ended October
31, 2006 and 2005, was $0 and $25,000, respectively.

We estimated the fair values using the Actuarial Binomial option-pricing
model, modified for dividends and using the following assumptions:

Three Months Ended
October 31,
----------------------------------------------
2006(1) 2005(1)
-------------------- -------------------

Risk-free rate(2)............................. 4.89% 4.09%

Expected dividend yield...................... 0% 0%
Expected stock price volatility(3)............ 56.16% 37.82%
Expected life of stock options(4)............. 4.15 years 4.14 years
Fair value per option........................ $4.17-$4.72 $4.38-$5.60

1. Forfeitures are estimated based on historical experience.

2. Based on the U.S. Treasury interest rates whose term is consistent with the
expected life of our stock options.

3. We used an outside valuation advisor to assist us in more accurately
projecting expected stock price volatility. Historical market price data
was used.

4. We estimate the expected life of stock options based upon historical
experience.

Net cash proceeds from the exercise of stock options were $0 and $212,000
for the three months ended October 31, 2006 and 2005, respectively.

The actual income tax benefit realized from stock option exercises was $0
and $9,000 for the three months ended October 31, 2006 and 2005,
respectively.

Non-Vested Share Awards

The fair value of non-vested market-based and time-based share awards is
determined based on generally accepted valuation techniques and the closing
market price of our stock on the date of grant. A summary of the status of
our non-vested market-based and time-based share awards as of October 31,
2006 and changes during the three-month period ended October 31, 2006, is
as follows:

MARKET-BASED AND TIME-BASED SHARE AWARDS SHARES FAIR VALUE
- ---------------------------------------- ------------- --------------

Outstanding at July 31, 2006 3,594 $ 8.36
Granted 63,390 8.66
Vested - -
Forfeited/Canceled - -
-------------- --------------
Outstanding at October 31, 2006 66,984 $10.02
============== ==============

No time-based share awards vested during the three months ended October 31,
2006. As of October 31, 2006, there was $484,000 of unrecognized
compensation expense related to non-vested time-based share awards that is
expected to be recognized over the life of the awards.

4. ACCOUNTING PRONOUNCEMENTS

In February 2006, the FASB issued FASB No. 155, "Accounting for Certain
Hybrid Financial Instruments". This Statement amends FASB Statements No.
133, Accounting for Derivative Instruments and Hedging Activities, and No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. This Statement resolves issues addressed in
Statement 133 Implementation Issue No. D1, "Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets." This Statement is
effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15,
2006. The fair value election provided for in paragraph 4(c) of this
Statement may also be applied upon adoption of this Statement for hybrid
financial instruments that had been bifurcated under paragraph 12 of
Statement 133 prior to the adoption of this Statement. Earlier adoption is
permitted as of the beginning of an entity's fiscal year, provided the
entity has not yet issued financial statements, including financial
statements for any interim period for that fiscal year. Provisions of this
Statement may be applied to instruments that an entity holds at the date of
adoption on an instrument-by-instrument basis. Adoption is not expected to
have a material impact on our consolidated earnings, financial position or
cash flows.

In March 2006, the FASB issued FASB No. 157, "Fair Value Measurements".
This Statement defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value
measurements. However, for some entities, the application of this Statement
will change current practice. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. Earlier application is
encouraged, provided that the reporting entity has not yet issued financial
statements for that fiscal year, including financial statements for an
interim period within that fiscal year. Adoption is not expected to have a
material impact on the our consolidated earnings, financial position or
cash flows. In June 2006, The FASB issued FASB Interpretation No. 48.
"Accounting for Uncertainty in Income Taxes", an Interpretation of FASB
Statement No. 109. This Interpretation clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. This Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The evaluation of a tax position in accordance
with this Interpretation is a two-step process. The first step is
recognition: The enterprise determines whether it is more likely than not
that a tax position will be sustained upon examination, including
resolution of any related appeals or litigation processes, based on the
technical merits of the position. In evaluating whether a tax position has
met the more-likely-than-not recognition threshold, the enterprise should
presume that the position will be examined by the appropriate taxing
authority that has full knowledge of all relevant information. The second
step is measurement: A tax position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of benefit to
recognize in the financial statements. The tax position is measured at the
largest amount of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. This Interpretation is effective for
fiscal years beginning after December 15, 2006. Earlier application of the
provisions of this Interpretation is encouraged if the enterprise has not
yet issued financial statements, including interim financial statements, in
the period this Interpretation is adopted. We are is in the process of
evaluating the impact of adopting this interpretation and adoption is not
expected to have a material impact on our consolidated earnings, financial
position or cash flows.

5. MARKETABLE SECURITIES

During the quarters ended October 31, 2006 and 2005, we primarily invested
excess cash and cash equivalents in a professionally managed portfolio of
marketable securities. All securities in this portfolio are classified as
available-for-sale and consist primarily of U.S. government securities and
corporate bonds. These investments are reported at fair value. The
unrealized gain, net of taxes, on these investments, of approximately
$193,000 for the three months ended October 31, 2006 is included within
other comprehensive gain. The unrealized loss, net of taxes, on these
investments of approximately $99,000 for the three months ended October 31,
2005 is included within other comprehensive loss. The net unrealized loss
included in shareholders' equity as of October 31, 2006 and 2005 was
$136,000 and $329,000, net of tax.

6. INVENTORIES

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

Oct. 31, 2006 July 31, 2006
------------------ --------------------

Finished goods.......................... $ 2,240,239 $ 2,021,448
Work-in-process......................... 1,627,110 1,381,157
Raw materials........................... 2,327,317 2,513,345
------------------ --------------------
$ 6,194,666 $ 5,915,950
================== ====================

7. PROPERTY AND EQUIPMENT

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

Oct.31, 2006 July 31, 2006 Life
------------------- ------------------ -------------------

Leasehold improvements........................ 2,827,449 2,805,467 7-10 years
Equipment.................................... 11,582,760 11,532,405 3 to 10 years
Assets in construction........................ 463,493 482,071 N/A
------------------- ------------------
14,873,702 14,819,943
Less accumulated depreciation................. (9,934,554) (9,729,745)
------------------- ------------------
Property and equipment - net................. $ 4,939,148 $ 5,090,198
=================== ==================

8. SEGMENT AND GEOGRAPHIC INFORMATION

Our operations are in one business segment: the design, manufacture and
distribution of endovascular medical devices. We evaluate revenue
performance based on the worldwide revenues of each major product line and
profitability based on an enterprise-wide basis due to shared
infrastructures to make operating and strategic decisions.

Total revenues from sales in the United States and outside the United
States are as follows:

Three Months Ended
October 31,
2006 2005
-------------------- ------------------

United States............................ $ 15,181,046 $ 15,050,856
Non-United States....................... 422,835 424,818
-------------------- ------------------
Total Revenues.......................... $ 15,603,881 $ 15,475,674
==================== ==================

9. COMMON STOCK

During the three months ended October 31,2006, there were no stock options
exercised. During the three months ended October 31, 2005, stock options
for the purchase of 20,186 shares of our common stock were exercised at
prices between $6.38 and $12.44 per share resulting in proceeds of
$212,000.

During the three months ended October 31, 2006, we issued 9,401 shares in
connection with our employee stock purchase plan. There were no shares
issued in connection with our employee stock purchase plan during the three
months ended October 31, 2005.

On August 15, 2006, we issued 63,390 shares of restricted stock to
executives and key management as part of the fiscal 2006 management
incentive program. The fair market value of the restricted stock was
$549,000. The restricted stock vests over four years or earlier if the
stock price closes at $11.26 or greater for twenty consecutive trading
days. In the three months ended October 31, 2006, $70,700 was expensed as
compensation expense.

On August 29, 2005, we issued 18,353 shares of restricted stock to
executives as part of the fiscal 2005 management incentive program. The
fair market value of the restricted stock was $230,600. The restricted
stock vested if our stock price closed at $13.00 or greater and became
vested on August 31, 2005 when our stock price closed at $13.03.
Accordingly, the full $230,600 was expensed in fiscal 2005 as compensation
expense. We cancelled 6,289 shares of restricted stock due to the
executives electing to receive fewer shares in lieu of paying the
withholding taxes.

During the three months ended October 31, 2006, there were no stock
repurchases. During the three months ended October 31, 2005, we repurchased
99,600 shares in the public market at prices between $10.93 and $11.06 per
share for $1,093,000.

10. ACCRUED WARRANTY COSTS

We estimate the amount of warranty claims on sold product that may be
incurred based on current and historical data. The actual warranty expense
could differ from the estimates made by the Company based on product
performance. The following table presents the changes in our product
warranty liability:

Accrued warranty costs at July 31, 2006 $ 91,500
Payments made for warranty costs.............................. (89,700)
Provision for product costs.................................. 85,700
-----------------
Accrued warranty costs at October 31, 2006................... $ 87,500
=================

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD LOOKING STATEMENTS

We make a number of forward-looking statements in this Management's Discussion
and elsewhere in this 10-Q that are based on our current expectations and on
assumptions that may not prove correct. The realization of these forward-looking
statements is subject to various risks and uncertainties that are indentified in
our Form 10-K for the year ended October 31, 2006 under the Item 1A Risk Factors
and are summarized below under in Part II, Item 1A of this Form 10-Q. You should
read these factors when assessing these forward looking statements.

OUR BUSINESS

Possis Medical Inc. develops, manufactures, and markets pioneering medical
devices for mechanical thrombectomy in native coronary arteries and coronary
bypass grafts, leg arteries, upper- and lower- extremity peripheral veins and in
kidney dialysis access grafts. Our primary product, the AngioJet(R) RheolyticTM
Thrombectomy System (AngioJet System) uses miniaturized waterjet technology,
which enables interventional cardiologists, interventional radiologists,
vascular surgeons, and other specialists to rapidly, safely and effectively
remove blood clots throughout the body.

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

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

To further expand the range of products we offer, we began selling the
SafeSeal(TM) Hemostasis Patch to control bleeding from the puncture made to
perform an endovascular procedure in May 2006. In addition, we started selling a
manual aspiration device, Fetch(TM) Aspiration Catheter, an alternative for the
aspiration of small, fresh blood clots in October 2006. In December 2006, we
anticipate the first human use of the GuardDOG(R) Occlusion System. The GuardDOG
System enables physicians to quickly and effectively manage local blood flow
while employing interventional techniques and devices to treat vascular disease.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements include accounts of Possis Medical, Inc.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying consolidated financial statements and related footnotes. In
preparing these financial statements, we have made our best estimates and
applied our best judgment of certain amounts included in the financial
statements, giving due consideration to materiality. Our most critical
accounting policies are those described below. Application of these accounting
policies involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.

Revenue Recognition

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

Allowance for Returns

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

Allowance for Doubtful Accounts

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

Inventories

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

Warranty Reserve

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

Non-GAAP (General Accepted Accounting Principles) Disclosures

In our Management's Discussion and Analysis, and Notes to Consolidated Financial
Statements, we make reference to non-GAAP financial measures - the effect on net
income, net income after tax and net income per share resulting from
compensation charges under SFAS 123 (R), and other non-GAAP line items from the
Consolidated Statements of Income and Comprehensive Income, including cost of
medical products, operating expenses (including selling, general and
administrative, and research and development), and provision for income taxes.
These measures are not in accordance with, or are an alternative to, generally
accepted accounting principles and may be different from non-GAAP measures used
by other companies. Possis believes that the presentation of non-GAAP net
income, non-GAAP net income per share data, and other non-GAAP line items from
the Consolidated Statements of Income and Comprehensive Income, when shown in
conjunction with the corresponding GAAP measures, provides useful information to
management and investors regarding financial and business trends relating to its
financial condition and results of operations. Possis further believes that
where the adjustments used in calculating non-GAAP net income and non-GAAP net
income per share are based on specific identified charges that impact different
line items in the statements of income (including cost of medical products,
selling, general and administrative and research and development expense), that
it is useful to investors to know how these specific line items in the
statements of income are affected by these adjustments. In particular, as Possis
applies SFAS 123(R), it believes that it is useful to investors to understand
how the expenses associated with the application of SFAS 123(R) are reflected in
its Consolidated Statements of Income and Comprehensive Income.

RESULTS OF OPERATIONS

Three Month Periods Ended October 31, 2006 and 2005

Summary

Total product sales for the three months ended October 31, 2006 increased
$128,000, or 1 percent, to $15,604,000 compared to $15,476,000 for the
comparable period in fiscal 2006.

We recorded a net loss for the quarter ended October 31, 2006 of $234,000, or
$0.01 per diluted share, compared to net income of $266,000, or $0.01 per
diluted share, in the comparable quarter in fiscal 2006. Net income for the
quarters ended October 31, 2006 and 2005, reflects the impact of SFAS No.123(R),
which resulted in stock-based compensation expense of $852,000 ($666,000 after
tax, or $0.04 per diluted share) and $822,000, ($702,000 after tax, or $0.04 per
diluted share), respectively.

Operating Expenses

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

-------------------------------------------- ------------------------------------------------
Pro-forma Non-GAAP
As Reported Excluding SFAS 123(R)
-------------------------------------------- ------------------------------------------------
31-Oct Increase (Decrease) 31-Oct Increase (Decrease)
2006 2005 Dollars Percent 2006 2005 Dollars Percent

Product Sales $ 15,604 $ 15,476 $ 128 0.8% $ 15,604 $ 15,476 $ 128 0.8%

Operating expenses

Cost of medical products 4,408 4,230 178 4.2% 4,314 4,128 186 4.5%
Selling, general and 9,816 8,394 1,422 16.9% 9,232 7,863 1,369 17.4%
administrative
Research and development 2,415 2,509 (94) (3.7%) 2,241 2,320 (79) -3.4%
Total 16,639 15,133 1,506 10.0% 15,787 14,311 1,476 103. %

Operating (loss) income (1,035) 343 (1,378) (401.7%) (183) 1,165 (1,348) -115.7%

Other income 558 397 161 40.6% 558 397 161 40.6%

(Loss) income before income taxes (477) 740 (1,217) (164.5%) 375 1,562 (1,187) -76.0%

Income tax benefit (provision) 243 (474) (717) (151.3%) 57 (594) 651 -109.6%

Net (loss) income $ (234) $ 266 (500) (188.0%) $ 432 $ 968 $ (536) -55.4%

The following tables show the Statement of Income as a percentage of product
sales for the three months ended October 31, 2006 and 2005.

Pro-forma Non-GAAP
As Reported Excluding SFAS 123(R)
----------- ----------------------
2006 2005 2006 2005
---- ---- ---- ----

Product sales 100% 100.0% 100% 100.0%

Operating expenses

Cost of medical products 28.2% 27.3% 27.6% 26.7%
Selling, general and administrative 62.9% 54.2% 59.2% 50.8%
Research and development 15.5% 16.2% 14.4% 15.0%
Total 106.6% 97.8% 101.2% 92.5%

Operating income (6.6%) 2.2% (1.2%) 7.5%
Other income 3.6% 2.6% 3.6% 2.6%
Income before income taxes (3.1%) 4.8% 2.4% 10.1%
Income taxes provision 1.6% -3.1% .4% -3.8%
Net income (1.5%) 1.7% 2.8% 6.3%

Revenue

Product sales for the three months ended October 31, 2006 increased 1 percent to
$15,604,000 from $15,476,000 for the same period in 2006. The slight revenue
increase during fiscal 2006 relates to increased peripheral (medium length
catheters) sales partially offset by a reduction in coronary (long length
catheters) and AV sales. Peripheral sales increased 21 percent, coronary sales
decreased by seven percent and AV sales decreased by ten percent over the prior
year period. We also sold fewer drive units during the quartered ended October
31, 2006 versus the 2005 quarter, in part we believe because customers await
introduction of our new AngioJet Ultra Console. We anticipate FDA clearance of
this product within the next several months and expect that our catheter sales
will be enhanced by the AngioJet Ultra Console introduction.

As of October 31, 2006, we had a total of 1,699 domestic drive units in the
field, compared to 1,560 drive units at October 31, 2004, and 1,672 units as of
July 31, 2006. During the three month period ended October 31, 2006, our
catheter sales decreased approximately 2% to approximately 11,700 catheters from
approximately 11,900 catheters in the same prior year period. The average
catheter utilization rate per installed domestic drive unit was 6.7 in the first
quarter of fiscal 2007 compared to 7.5 in the first quarter last year and
compared sequentially to a rate of 7.1 in the fourth quarter of fiscal 2006. We
sold 30 domestic drive units during the three months ended October 31, 2006,
compared to 42 drive units in the same period in the prior year and to 22 drive
units in the fourth quarter of fiscal 2006.

Foreign product sales for the three months ended October 31, 2006 and 2005 were
$423,000 and $425,000, respectively.

Cost of Medical Products/Gross Profit

Cost of medical products increased $178,000 to $4,408,000 in the three month
period ended October 31, 2006 over the same period in the previous year. The
increase was primarily due to an increase in overhead costs. Cost of medical
products for the three months ended October 31, 2006 and 2005 both reflect the
impact of SFAS No. 123(R), which resulted in increased stock-based compensation
expense of $94,000 and $102,000, respectively.

Gross profit decreased by $50,000 to $11,196,000, or 71.7 percent of product
sales, for the three months ended October 31, 2006, from $11,246,000 or 72.7
percent of product sales in the same period in the previous year. The decrease
in the gross profit margin was primarily due to lower unit sales of higher
margin coronary products compared to the first quarter in the previous year.

Selling, General and Administrative Expense

Selling, general and administrative expense increased $1,422,000 to $9,816,000
for the three months ended October 31, 2006 compared to the same period in the
previous year. The expense increase for the three months ended October 31, 2006,
relates primarily to higher sales expense under our new compensation plan and
additional sales staff, combined with increased marketing clinical study
spending. The impact of the stock-based compensation expense relating to SFAS
No. 123(R) for the three months ended October 31, 2006 and 2005 was $584,000 and
$531,000, respectively.

Research and Development Expense

Research and development expense decreased $94,000 to $2,415,000 or 15 percent
of sales, in the three months ended October 31, 2006, when compared to the first
quarter in the previous year. For the three months ended October 31, 2005,
research and development was $2,509,000 or 16% of sales. The impact of the
stock-based compensation expense relating to SFAS No. 123(R) for the three
months ended October 31, 2006 and 2005 was $174,000 and $189,000, respectively.
Current research and development projects include the completion of the Ultra
Console, combined unit systems and the distal occlusion guidewires.

Interest Income

Interest income increased $136,000 in the three months ended October 31, 2006 to
$539,000, over the same period in the prior year. The increased interest income
is attributable to a combination of higher interest rates and a larger available
investment base. The majority of excess cash is invested in a portfolio of
marketable securities. We expect interest income to increase in fiscal 2007 as
compared to fiscal 2006 due to generating positive operating cash flows.

Gain (Loss) On Sale of Securities

Gain on sales of securities was $19,000 for the three months ended October 31,
2006. Loss on sales of securities was $6,000 for the three months ended October
31, 2005. The gains and losses in fiscal 2007 and 2006 were due to interest rate
fluctuations that change the fair market value of the investments in marketable
securities. Future gain (loss) on sale of securities is dependent on interest
rate fluctuations.

Provision For Income Taxes

Our effective tax rate in the three month periods ending October 31, 2006 and
2005, was 51 percent and 64 percent, respectively. The GAAP effective tax rate
in the current quarter is attributable to how Incentive Stock Options (or ISO's)
are treated under SFAS 123 (R). There is no tax benefit recognized for ISO
expense under SFAS 123(R) until there is an exercise and associated
disqualifying disposition resulting in an actual tax benefit for the Company.
Non-Qualified stock options are fully tax affected under SFAS 123 (R) as the
value is expensed over the vesting period. Approximately 43 percent of our
outstanding options as of October 31, 2006 are ISO's so the impact on Possis
Medical is significant. This ISO tax treatment under SFAS 123 (R) reduced
earnings by $0.01 per share for the three months ended October 31, 2006 and
2005, respectively.

We continue to maintain a valuation allowance of $1,413,000 against our deferred
tax asset because we believe we it is more likely than not that $1,413,000 of
the deferred tax asset will not be realizable due to the expiration of research
and development tax credits.

LIQUIDITY AND CAPITAL RESOURCES

Our cash, cash equivalents and marketable securities totaled approximately
$47,351,000 at October 31, 2006 versus $48,116,000 at July 31, 2006.

During the three months ended October 31, 2006, we used $823,000 of cash
for operating activities. We used cash to fund our $234,000 net loss, and an
increase in deferred taxes of $373,000, an increase in inventories of $440,000,
an increase in prepaid expenses and other assets of $963,000 and a decrease in
accrued liabilities of $913,000. These uses of cash from operations were
partially offset by cash generated from depreciation of $674,000, stock
compensation expense of $932,000, a decrease in accounts receivable of $235,000
and an increase in accounts payable of $204,000. We depreciate company-owned
drive units at customer locations, as well as property and equipment. The
increase in the deferred tax asset was due to the tax benefit relating to the
current quarter net loss. Inventory increased as new products were released
during the past two quarters and a buildup of the new Ultra Console for the
anticipated launch later in fiscal 2007. The increase in other assets relate
primarily to deposits for the delivery of the Ultra Consoles later in fiscal
2007. The decreases in accrued liabilities were due to the timing of payments
and included the payment of fiscal 2006 corporate incentives in September 2006.
The increase in accounts payable was due to the timing of payments.

Cash used in investing activities was $396,000 including the net purchase of
marketable securities of $94,000 and the purchase of $302,000 of property and
equipment.

Net cash generated in financing activities was $79,000, which resulted from the
cash received in connection with the sale of stock as part of the employee stock
purchase plan. There were no stock repurchases during the first quarter of
fiscal 2007.

There have been no material changes in our capital commitments, including our
contractual obligations, since the beginning of our fiscal year. We expect our
cash on hand and funds from operations to be sufficient to cover both short-term
and long-term operating requirements of our AngioJet business and the repurchase
of our common stock as authorized by our Board of Directors.

OFF-BALANCE SHEET OBLIGATIONS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We invest our excess cash in a professionally managed, institutional fixed
income portfolio of short duration. The market risk on a diversified portfolio
of relatively short duration is minimal, while enhancing returns above money
market levels.

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

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the fiscal quarter ended October 31, 2006, there has been no change in
our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) that has materially affected, or is likely to materially
affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

We identify a number of risks that effect our operations, and our ability to
realize statements that we make that are "forward-looking" in our annual report
on Form 10-K under Item 1A. There have been no material changes in those risks,
which are summarized below, since the filing of our Form 10-K. Among the risks
we have identified are:

o our dependence on a single product line--the AngioJet Rheolytic System
o the effects of adverse clinical studies
o the effects of extensive regulation of our product development, product
manufacturing and product sales
o our dependence on our current manufacturing facility;

o unanticipated costs or other difficulties and uncertainties associated with
lengthy and costly new product development and regulatory clearance
processes;
o the existence of larger entities in our industry which may develop new
competitive products such as inexpensive aspiration devices, combined
aspiration/occlusion products and compounds with which we would have
difficulty competing or that may make our products obsolete;
o the effect of changes in the health care industry generally, such as
restrictions imposed on sales time at interventional labs; consolidation of
industry participants, cost containment and trends toward managed care;
o the cost and effectiveness of our intellectual property protection
o the effects of changes in reimbursement;
o our ability to retain key personnel and motivate skilled employees,
especially for sales positions; o the possibility of medical product
liability issues;
o possible sudden restrictions in supply of key materials
o the effectiveness of our sales and marketing efforts in re-establishing
coronary product usage,

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) Our Board of Directors has authorized the repurchase of up to $15,000,000 of
our common stock in open-market transactions through December 2006, of which we
had purchase $5,003,000 through October 31, 2006. During the three months ended
October 31, 2006, no shares of our common stock were repurchased pursuant this
program. .

ITEM 6. EXHIBITS

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 below.

Exhibit Description
----------------- -------------------------------------------------------
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

POSSIS MEDICAL, INC.

DATE: December 8, 2006 By: /s/ Robert G. Dutcher
--------------------------------
ROBERT G. DUTCHER
Chairman, President and
Chief Executive Officer

DATE: December 8, 2006 By: /s/ Jules L. Fisher
--------------------------------
JULES L. FISHER
Vice President of Finance and
Chief Financial Officer

EXHIBIT INDEX

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 below.

Exhibit Description
----------------- --------------------------------------------------------

31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.