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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED MARCH 31, 1998         COMMISSION FILE NUMBER 1-10728
 
                       UNITED STATES FILTER CORPORATION
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
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                  DELAWARE                                       33-0266015
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)

     40-004 COOK STREET, PALM DESERT, CA                           92211
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                       (ZIP CODE)
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      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (760) 340-0098
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
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<S>                                            <C>
        COMMON STOCK, $.01 PAR VALUE                      NEW YORK STOCK EXCHANGE

  4 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2001          NEW YORK STOCK EXCHANGE
            (TITLE OF EACH CLASS)               (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
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  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 8-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
 
  The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 26, 1998 was approximately $3,641,104,471.
 
  The number of shares of Common Stock outstanding on June 26, 1998 was
161,565,388 shares.
 
  Documents incorporated by reference:
 
  Notice of 1998 Annual Meeting and Proxy Statement (Part III of Form 10-K).
 
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                                    PART I
 
ITEM 1--BUSINESS
 
GENERAL
 
  United States Filter Corporation (the "Company"), is a leading global
provider of industrial, municipal, commercial and consumer water and
wastewater treatment systems, products and services, with an installed base of
systems that the Company believes is one of the largest worldwide. The Company
offers a single-source solution to its customers through what the Company
believes is the industry's broadest range of cost-effective systems, products,
services and proven technologies. In addition, the Company markets a broad
line of waterworks distribution products and services. The Company has one of
the industry's largest networks of sales and service and distribution
facilities through more than 2,000 locations, including over 1,100 franchised
dealerships, 833 Company-owned or leased facilities and manufacturing plants
in 94 countries. The Company capitalizes on its large installed base,
extensive distribution network and manufacturing capabilities to provide
customers with ongoing local service and maintenance. The Company is a leading
provider of outsourced water services, including the operation of water and
wastewater treatment systems at customer sites. In addition, the Company is
actively involved in the development of privatization initiatives for
municipal water treatment facilities throughout the world and, specifically,
in the United States, Mexico and Canada. The Company also owns a significant
amount of properties with appurtenant water rights in the Western and
Southwestern United States, substantially all of which are leased to
agricultural tenants.
 
  The Company's principal executive offices are located at 40-004 Cook Street,
Palm Desert, California 92211 and its telephone number is (760) 340-0098. In
this report, references to the Company or U.S. Filter shall mean United States
Filter Corporation and its subsidiaries, unless the context requires
otherwise.
 
  Since 1991, the Company has acquired more than 150 United States based and
international businesses. These acquisitions have enabled the Company to
expand significantly the segments of the water and wastewater treatment
industry and water-related industries in which it participates, to complement
its technologies, products or services, to enter into additional geographic
areas and serve additional industries, municipalities, governments and other
customers and to expand its installed base, service network, range of products
and technologies and global distribution network. The Company intends to
actively seek additional acquisitions that enhance its geographic network,
customer base, and range of product offerings, technologies, markets and
industries served, or that provide opportunities to implement the Company's
one-stop-shop approach in terms of technology, distribution or service.
 
  Kinetics. Effective December 31, 1997, the Company acquired The Kinetics
Group, Inc. ("Kinetics") in exchange for 5,803,803 shares of common stock of
the Company. Kinetics is a leading United States manufacturer and supplier of
sophisticated high-purity process piping systems for the handling of gases,
water and chemicals. Such systems are provided primarily to the
microelectronics, pharmaceutical and biotechnology industries, and are
critical to these operations. For its fiscal year ended September 30, 1997,
Kinetics' revenues were $387.8 million.
 
  Memtec. The Company completed the acquisition of Memtec Limited ("Memtec")
in December 1997 for a total cash purchase price of $397.2 million. Memtec
designs and manufactures large volume membrane-based systems featuring
Memtec's proprietary microfiltration ("CMF") technology. It also designs and
manufactures an extensive range of products and systems worldwide that are
used in the filtration of liquid and gas streams in a wide variety of
industrial, municipal and commercial applications. For its fiscal year ended
June 30, 1997, Memtec's revenues were $243.6 million.
 
  Culligan. Subsequent to the Company's fiscal year end, on June 15, 1998, the
Company acquired Culligan Water Technologies, Inc. ("Culligan"). Culligan is a
leading manufacturer and distributor of water purification and treatment
products and services for consumer, commercial and industrial applications.
Products and services offered by Culligan range from those designed to solve
residential water problems, such as filters for tap water
 
                                       2
<PAGE>
 
and household water softeners, to equipment and services for commercial and
industrial customers, such as ultrafiltration and microfiltration products.
Culligan also offers desalination systems and portable deionization services
("PDS") designed for commercial and industrial applications. In addition,
Culligan sells and licenses dealers to sell five-gallon bottled water under
the Culligan trademark. Culligan has been an active participant in the water
purification and treatment industry since 1936, and its Culligan(R),
Everpure(R), Ametek(R) and Bruner(R) brands are among the most recognized in
the industry. For its fiscal year ended January 31, 1998, Culligan's revenues
were $505.7 million.
 
  Bass Properties. In September 1997, the Company acquired more than 47,000
acres of land with appurtenant water rights (the "Properties") in the Western
and Southwestern United States from interests principally owned by affiliates
of the Bass family of Fort Worth, Texas. The Properties were acquired in
exchange for 8,000,000 shares of the Company's common stock and non-
transferable warrants to purchase 1,200,000 shares of common stock. The
substantial majority of the Properties are located in Imperial County,
California within the Imperial Irrigation District, and substantially all of
the Properties are currently leased to agricultural tenants.
 
THE WATER TREATMENT INDUSTRY
 
  Global population growth, economic expansion, scarcity of available water
resources, heightened public concern about water quality and growing
regulatory and legislative requirements have resulted in continued growth in
demand for water and wastewater treatment. In addition to the need for potable
water, industrial companies require treated water for most manufactured
products, whether as an ingredient in the finished product or as part of the
manufacturing process. Accordingly, most manufacturers utilize water treatment
systems to purify their incoming, or "process", water. Public water
departments and private water companies, responsible for providing potable
water, employ water treatment technology to purify their water supply.
Furthermore, government regulations require most industrial companies and
municipalities to treat their outgoing wastewater.
 
  Customers of the water and wastewater treatment industry can be classified
into three broad categories: (i) industrial and commercial businesses, which
include companies in such markets as pharmaceuticals, microelectronics,
automotive, power generation, chemical processing, oil and metal finishing;
(ii) municipal and private suppliers of public water and wastewater services;
and (iii) individual consumers of bottled water, household point-of-use
products, such as domestic filtration systems and parts, and water softening
and conditioning equipment.
 
  Industrial and Commercial Users. Industrial and commercial users have a
significant need for treated water because it is a necessary component in many
products and industrial and other processes. The quality of water varies
dramatically across geographic regions, and water contains impurities that, if
untreated, can render it effectively useless for most industrial purposes. The
use of untreated water in manufacturing processes can result not only in
inconsistent product quality, but also in substantial equipment degradation,
which can lead to costly maintenance or replacement costs. Consequently, most
manufacturers treat their process water in order to maintain a consistently
acceptable degree of purity. For example, treated water is an integral
component of many consumer goods and is used in the manufacture of
pharmaceutical products, microelectronics and chemicals. Food and beverage
manufacturers require water with consistent quality to preserve uniformity of
taste and appearance in their products. As a result of these process
specifications, industrial customers often require a broad range of treatment
technologies to treat their process water.
 
  In addition to treating their process water to ensure product quality,
industrial users are often required to treat their wastewater. Government
regulations regarding the disposal of aqueous industrial waste, combined with
public concern regarding industrial pollution, have led to increased awareness
on the part of businesses and public utilities as to the benefits of
wastewater treatment and waste minimization. In response to higher water
prices and rising wastewater discharge fees, industrial manufacturers have
also become aware of the cost-effectiveness of recycling their wastewater. As
a result of these factors, industrial companies increasingly require complex
systems and equipment to treat and recycle process water and wastewater.
 
 
                                       3
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  Municipal Users. Public awareness and governmental concern regarding the
increasing scarcity of water, the quality of drinking water, and the potential
health hazards associated with waste products discharged into the environment,
have resulted in legislation, regulation and enforcement requiring strict
standards for potable water and restrictions on the discharge of pollutants in
municipal wastewater.
 
  The Company believes that, in many areas of the United States and throughout
the world, aged municipal water and wastewater treatment infrastructure is
operating at or near capacity, is in need of substantial capital expenditures
and is not well-equipped to satisfy increasing regulatory and legislative
requirements. In addition, many municipalities are experiencing reduced
economic resources. The Company believes that, as a result, many such
customers are seeking innovative solutions to their water treatment needs,
such as improved technologies and equipment, and various outsourcing and
service options, such as contract operations and privatization. Privatization
involves the transfer of ownership and operation of water and wastewater
treatment facilities to companies capable of providing such services on a
long-term basis.
 
  Individual Consumers. The market for individual consumers consists of
bottled water, point-of-use products, such as residential filtration systems
and parts, and water softening and conditioning equipment installed at the
point of entry to a household water system. Consumers' needs vary by
geographic location as a result of differing water qualities and level of
economic development. This segment of the industry is highly fragmented, and
the Company believes there are thousands of participants in the water
conditioning and point-of-use products markets.
 
PRODUCTS AND SERVICES
 
 NORTH AMERICAN PROCEsS WATER GROUP
 
  The Company's North American Process Water Group provides single-source
solutions for the treatment of industrial process water through what the
Company believes to be the industry's broadest range of treatment systems,
services and proven technologies.
 
  Products
 
  The North American Process Water Group designs, engineers, manufactures and
installs pre-engineered and customized systems for the treatment of industrial
process water utilizing a broad range of physical, biological and chemical
treatment technologies that can be combined and configured to meet wide-
ranging customer needs. The Company's process water systems range from a pre-
packaged 0.5 liter-per-minute laboratory unit to a custom-designed boiler
feedwater system that delivers thousands of gallons of high-purity water per
minute.
 
  The separation processes and technologies utilized by the Company in process
water treatment equipment and systems include, among others, cross-flow
filtration (including reverse osmosis, ultrafiltration and microfiltration),
media filtration (including microfiltration, particle filtration and ceramic
filtration), ion exchange, continuous deionization ("CDI"), electrodialysis,
carbon adsorption, biological processes, oxidation, disinfection, aeration,
coagulation, flocculation, evaporation and crystallization. The Company's
proprietary CDI process uses ion exchange resins, ion exchange membranes and
an electrical current to produce high-purity water continuously, without the
need for strong chemicals such as sulfuric acid and caustic soda required in
typical ion exchange regeneration systems.
 
  The water treatment equipment and systems sold by the North American Process
Water Group are designed, engineered and assembled by the Company from one or
more pieces of equipment and a variety of other components manufactured by the
Company or purchased from third-party vendors. Larger industrial process water
treatment systems can be trailer- or skid-mounted, or permanently installed on
the customer's premises. Turnkey systems are generally designed and installed
within 24 months following acceptance of a customer order. On such projects,
the Company typically enters into lump-sum contracts under which the Company
receives payments throughout the contract term based on a predetermined
schedule.
 
 
                                       4
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  The Company's principal United States manufacturing facilities for the
design, engineering, fabrication and assembly of reverse osmosis, media
filtration and ion exchange process water treatment systems are located in
Rockford, Illinois; Whittier, California; Colorado Springs, Colorado;
Plantsville, Connecticut; and St. Genevieve, Missouri. These facilities
aggregate approximately 392,300 square feet, and typically include sales,
service and office space in addition to manufacturing capacity. The Company's
CDI equipment is assembled at its facility in Lowell, Massachusetts.
Laboratory and analytical testing for the North American Process Water Group
is done at the Rockford and Lowell facilities, and research and development is
centered at Lowell.
 
  The North American Process Water Group also manufactures and sells
replacement parts required to support treatment systems manufactured by both
the Company and, to a limited extent, its competitors. In addition, the
Company markets consumables, such as membranes, ion exchange resin and carbon,
to its customers.
 
  Services
 
  The North American Process Water Group is a leading provider of SDI and PDS
for industrial and commercial users. SDI and PDS are terms given to portable
water deionization treatment equipment that uses ion exchange resins as the
filtration medium to produce high-purity water. Resin is retrieved and
transported by a Company service representative to a Company regeneration
plant for chemical recharging when it is exhausted. In the United States, the
Company operates 27 regeneration plants in 16 states. Deionization is widely-
used in commercial and industrial applications and provides the Company with a
recurring source of revenues and the opportunity to market its systems and
other services to its existing service deionization customer base. The
Company, through its carbon reactivation facility located in Parker, Arizona,
also has the ability to recycle spent carbon utilized in water treatment
systems sold by the Company.
 
  Customer Markets
 
  The markets for the North American Process Water Group's products and
services span many industries. Systems and products manufactured at United
States facilities are also marketed and sold throughout the world and, in
particular, Europe, Asia and Latin America, as well as in North America.
 
  The North American Process Water Group's high-purity water treatment systems
are marketed to customers in the pharmaceutical/biotechnology, food and
beverage and medical/laboratory/research markets. Ultra-high-purity systems
are offered for the microelectronics industry, where the removal of
contaminants at a microscopic level is required. Other industrial markets for
the Company's process water treatment products and technologies include a wide
variety of applications in the automotive, chemical and petrochemical, metal
finishing, power generation, oil field and refinery, pulp and paper and mining
industries, all of which require improved or customized water in their
manufacturing or other industrial processes.
 
 NORTH AMERICAN WASTEWATER GROUP
 
  The Company's North American Wastewater Group is a leading provider of
systems and services to treat and recycle municipal and industrial wastewater,
and for the treatment of drinking water. It also provides liquid hazardous
waste treatment and recovery services.
 
  Products
 
  The North American Wastewater Group designs, engineers, manufactures and
installs equipment and systems for wastewater treatment by municipalities and
industrial and commercial customers, and for the treatment of drinking water,
utilizing a wide range of treatment technologies, including many of those
employed by the Company in process water applications. See "North American
Process Water Group--Products". Systems and products also are offered for the
treatment of municipal and industrial sludge and biosolids through dewatering,
thickening, conditioning, composting and drying techniques. In addition, the
Company provides systems to remove solids from liquid streams through the use
of self-cleaning bar filter screens, grinders, macerators, conveyors and
compactor systems. The Company also supplies material and equipment to
wastewater customers for the control and monitoring of hydrogen sulfide odor.
Time intervals for installation of
 
                                       5
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completed equipment and systems sold by the North American Wastewater Group
can range from six months to two years after acceptance of the Company's bid,
depending upon the nature and complexity of the project. Replacement parts and
consumables are marketed and sold to North American Wastewater Group customers
as well.
 
  The Company's broad range of technologies enables the North American
Wastewater Group to offer industrial customers products and systems for
removing from liquid waste streams heavy metals and other inorganic solids,
organics, toxic wastes, nitrogen compounds and solids, and free and emulsified
grease and oil. The Company's large volume fluid purification systems based on
its proprietary CMF membranes are particularly effective in the removal of
chlorine-resistant water-borne pathogens for both wastewater and potable water
applications, while also providing high tolerance to feed stream variation and
requiring minimal use of chemicals and human resources. Evaporation and
crystallization technologies are used to clean and recycle wastewater,
particularly in zero liquid discharge industrial applications. The Company's
significant disinfection and biological treatment capabilities, including
fixed-film and suspended growth systems that utilize microorganisms for
nitrification and denitrification, specific organic destruction, BOD/COD
reduction and nutrient removal, are critical in municipal wastewater and
sewage treatment. The Company offers cryptosporidium giardia cyst removal,
nitrate removal, reverse osmosis desalination and water softening
technologies, as well as intake screens, aerators, clarifiers and disinfection
feed equipment to private and municipal providers of drinking water.
Biological, chemical, carbon adsorption and fluidized bed technologies are
offered to customers which require groundwater remediation systems or landfill
leachate treatment. Landfill leachate treatment systems are designed to treat
or eliminate wastewater drainage into groundwater and surrounding waterways.
 
  The North American Wastewater Group manufactures a variety of equipment and
products for inclusion in its systems. Components for these systems are also
purchased from third party vendors. The Company's principal North American
facilities for the manufacture and assembly of wastewater treatment products
and systems are located in Madison, Indiana; Bradley, Illinois; Waukesha,
Wisconsin; Rothschild, Wisconsin; Thomasville, Georgia; Vineland, New Jersey;
Waterboro, South Carolina; Ames, Iowa; Edwardsville, Kansas; Warrendale,
Pennsylvania; Billerica, Massachusetts; Sarasota, Florida and Holland,
Michigan. These facilities aggregate approximately 1,030,000 square feet,
including, in most cases, sales and office space as well as manufacturing
capacity. Design and engineering for North American Wastewater Group products
is performed at the Warrendale location, as well as at facilities in
Naperville, Illinois and Pittsburgh, Pennsylvania. Laboratory and analytical
testing, including treatability studies, are conducted at the Warrendale and
Rothschild plants, and at Company facilities in Roseville, Minnesota; Parker,
Arizona and Vernon, California.
 
  The Company also manufactures automation and control systems for municipal
water and wastewater treatment equipment using liquid level pressure and flow
sensors, automatic pump controllers/alternators and remote control technology
capabilities at a plant in St. Paul, Minnesota.
 
  Services
 
  Contract Operations. The Company provides services under more than 200
municipal and industrial wastewater treatment plant maintenance and operation
contracts, including plant start-up assistance, plant operations and
maintenance, planning and management, training of plant supervisors, operators
and laboratory and maintenance personnel, refining process systems, management
systems for process control, and plant diagnostic evaluations and energy
audits. The Company also provides specialty repair and cleaning services for
industrial wastewater management equipment. The Company's maintenance and
operation contracts generally range in length from three to 10 years and often
provide the owner of the facility with renewal options. The majority of such
contracts are fixed price or lump sum contracts. In addition to operation and
maintenance of customer-owned facilities, the Company also offers the option
of Company-owned wastewater treatment facilities designed, constructed, owned
and operated by the Company adjacent to or within industrial customers'
facilities.
 
  Privatization. The Company is actively involved in the development of
privatization initiatives for municipal wastewater treatment facilities. In
July 1995, a subsidiary of the Company was the first to acquire a publicly-
owned wastewater treatment plant in the United States pursuant to Executive
Order 12803 issued in
 
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1992, which was intended to facilitate the privatization of municipal
facilities. The agreement provides for a subsidiary of the Company to operate
the 4.5 million gallon per day MCD Franklin Wastewater Treatment Plant in
Franklin, Ohio for a period of 20 years and to expand the facility as needed
to meet future population growth.
 
  Outsourced Water. The North American Wastewater Group's service business
also includes short- and long-term contracts for the construction and
operation of customer-owned process water treatment systems, ongoing service
and maintenance of existing process water treatment systems and mobile process
water treatment services. The Company's outsourcing programs involve standard
products and custom-designed systems installed and operated on the customers'
sites by the Company's trained service technicians. Service contracts range in
length depending on type of service from one to five years and are on a fixed-
price basis, subject to adjustments for inflation and other cost increases.
The Company also offers customers the opportunity to outsource their water
purification requirements through Company-owned and operated on-site water
treatment systems. These contracts range in length from three to 20 years. In
1995, the Company formed Treated Water Outsourcing ("TWO"), a joint venture
with Nalco Chemical Company ("Nalco"), to finance, build, own and operate
process water treatment systems at customer sites under long-term contracts.
Nalco, a leader in water chemistry, supplies the chemicals necessary for TWO's
water treatment systems, while the Company supplies the capital equipment,
design and service functions to meet TWO's customers' needs. TWO has access to
Nalco's extensive sales force and customer base. Nalco and the Company each
provide advisory and administrative services in order to assist TWO in bid and
contract preparation and marketing.
 
  Resource Recovery. Another component of the Company's service business is
its hazardous waste treatment facilities located in Roseville, Minnesota and
Vernon, California. The Roseville facility operates a Resource Conservation
and Recovery Act ("RCRA") permitted Part B centralized treatment and recovery
facility. The Vernon facility operates a similar RCRA Part B facility. These
facilities receive and treat wastes generated primarily by the metal finishing
industry and printed circuit board manufacturers, and recover from these
wastes and sell reusable chemicals and metals. These facilities offer the
Company's customers a cost-effective recovery approach that reduces processing
costs, the quantity of sludge generated and the environmental exposure
associated with industrial waste. The Company also operates a facility in
Parker, Arizona, which is authorized under Section 3005 of RCRA for the
reactivation of spent carbon. The Company is currently negotiating the final
terms and conditions for a RCRA Part B permit for such facility.
 
  Customer Markets
 
  Municipalities in North America, Europe, Asia and Latin America are a
significant market for systems and products manufactured by the North American
Wastewater Group in the United States. Municipal sewage plants often utilize
three stages of treatment (primary, secondary and tertiary) before discharge
to the environment. The Company offers wastewater and biosolids treatment
systems to address those requirements. In addition, the Company's media
filtration, reverse osmosis and ion exchange technologies have the capability
of adding a fourth stage of treatment of municipal wastewater by removing
remaining contaminants to a purity level that allows water to be recycled and
reused in industrial applications. These technologies can reduce the impact of
industrial growth in communities where water tables are low.
 
  Systems produced by the North American Wastewater Group are marketed to a
variety of industrial customers. Markets include the pulp and paper, chemical,
petrochemical, mining, power generation, meat and poultry, food processing,
automotive, metal finishing and microelectronics industries. The recycle/reuse
systems offered by the Company permit zero liquid discharge applications,
providing industrial customers with the ability to circulate treated water
back into plant processes, thereby reducing water usage, operating costs and
discharges to the environment. The Company also offers outsourced water
services to customers in these markets, including financing, operating and
maintaining process water treatment systems at customer sites, and providing
mobile water treatment services on an emergency or short-term basis. In
addition, prepackaged sewage treatment systems are sold to commercial and
residential land developers, as well as industrial plants.
 
  The North American Wastewater Group also sells both custom-engineered and
pre-assembled treatment systems to municipal and private providers of drinking
water.
 
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 WATERWORKS DISTRIBUTION GROUP
 
  The Company's Waterworks Distribution Group markets a broad line of water
distribution and sewer and stormwater collection equipment and supplies,
including underground pipe, pipe fittings, valves, fire hydrants, water meters
and other related equipment necessary to underground construction. The
Waterworks Distribution Group purchases more than 32,000 products from
approximately 2,000 manufacturers and suppliers. Certain products manufactured
by the Company also are sold by the Waterworks Distribution Group, as well as
through the Company's other sales channels. The Company believes it is one of
the largest suppliers of water distribution and sewer products in the United
States.
 
  The Waterworks Distribution Group's products are marketed primarily to
contractors and municipalities through a network in the United States of more
than 135 service centers located in 30 states. Each service center covers a
radius of up to 200 miles, and maintains an inventory of water and sewer
products that are sold to the industry at large. More than 95% of orders are
filled and shipped from the service centers on the date that the order is
requested by the customer. Products are transported to customers through a
fleet of more than 500 vehicles, with larger orders being shipped direct from
the manufacturer.
 
  All of the Waterworks Distribution Group's locations are electronically
linked through on-line systems. These systems give the individual service
centers the ability to utilize inventory located throughout the United States
to service their accounts. The system also includes an inventory management
system which ensures that sufficient levels of inventory are available at each
service center. The Waterworks Distribution Group also offers municipalities
on-line computer access that allows the customer to place orders, review
quotations, check inventory and shipment status and confirm invoices.
 
  The Waterworks Distribution Group also provides various services to its
customers, including automatic meter reading installations; water meter
testing, repair and certification; fire hydrant maintenance and replacement;
manhole rehabilitation; pipeline taps; valve installations, repairs,
replacement and testing; and on-the-job heavy duty polyethylene fusion
capabilities.
 
 NORTH AMERICAN CONSUMER AND COMMERCIAL GROUP
 
  Consumer
 
  The Company's North American Consumer and Commercial Group is a leading
manufacturer and distributor of water purification and treatment products to
residential customers in North America. The Company's consumer products and
services address residential water problems, including the removal of lead,
cysts and other health-related contaminants, the elimination of chlorine and
unpleasant odors and tastes and the softening of water by the ion exchange
process. The North American Consumer and Commercial Group also bottles, sells
and delivers five-gallon bottled water to homes and businesses, principally on
a route basis. The Company also supplies water filtration products and systems
to commercial enterprises.
 
  The North American Consumer and Commercial Group, through its independent
dealers and Company-owned outlets, sells, installs and services a wide range
of products which address household water problems. These products include
point-of-use filtration units for improving the quality of drinking water,
which utilize media filtration, reverse osmosis and/or carbon filter
processes. These products are designed to be installed in basements or
garages, under sinks or directly at the point of use. The Company also markets
a line of point-of-use filtration systems for recreational vehicles. Point-of-
use systems are designed to reduce or remove from household water dirt and
other sediment, rust, lead, chlorine, sulfur, off-tastes, odors, and other
chemicals and microscopic impurities, including parasitic protozoan cysts. In
1988, the Company's Culligan subsidiary became the first to receive
certification from the independent National Sanitation Foundation ("NSF")
under NSF's standard for residential reverse osmosis drinking water systems.
Culligan has since developed many proprietary reverse osmosis systems to
improve the quality of drinking water, including the latest model of The Good
Water Machine(TM) Drinking Water System that utilizes the reverse osmosis
process to filter tap water three times before it comes out of the faucet.
 
                                       8
<PAGE>
 
  The North American Consumer and Commercial Group also sells water softening
and conditioning equipment and other products installed at the point of entry
to a residential water system, designed to soften hard water by reducing or
removing minerals through ion exchange technology. Household automatic water
softeners and portable exchange water conditioners have constituted a large
portion of the business of the Company's Culligan subsidiary since its
inception in 1936.
 
  The North American Consumer and Commercial Group also manufactures and sells
a line of water filtration products for sale through department stores, mass
retailers and home centers. These products include faucet mount filters,
under-counter systems, refrigerator water/ice maker filter systems and a
sediment and rust reduction whole-house filtration system. A designer glass
pitcher filtration system and monitored faucet mount systems were introduced
in the fiscal year ended March 31, 1998 ("fiscal 1998"). The Company's
Culligan subsidiary has entered into marketing partnerships with a major
appliance manufacturer to provide a refrigerator water/ice maker filtration
system and with Moen Incorporated to develop Moen(R) faucet products
incorporating the Company's water filtration assemblies.
 
  The North American Consumer and Commercial Group's more than 750 independent
franchised dealers and more than 115 Company-owned businesses serving the
North American market provide complete solutions to household water problems
through testing, product selection, installation, monitoring and service.
Franchised dealers generally purchase all their requirements for water
treatment products from the Company, including equipment for sale, rental or
use in their portable exchange service programs. Generally, approximately one-
half of a franchised dealer's or Company-owned business' revenues are derived
from rental and service income from existing customers. The Company also
offers financing of systems to residential customers.
 
  The principal design, manufacturing and assembly facilities for consumer
products in North America are located in Northbrook, Illinois; Wesmont,
Illinois; Sheboygan, Wisconsin; Regina, Saskatchewan, Canada and Mississauga,
Ontario, Canada. These facilities aggregate approximately 730,000 square feet.
The Northbrook facility also includes approximately 100,000 square feet of
office space and laboratories for testing and analysis of water samples.
Household products for the European market are also manufactured and assembled
at the Northbrook facility.
 
  The Company sells water in five-gallon bottles on a route basis through its
residential and commercial distribution network, and in a limited number of
shopping centers on a walk-up basis. Purified drinking water is produced at
over 100 Company-owned, franchised or licensed bottling locations and sold
through over 500 dealers and Company-owned branches in the United States. The
Company receives royalty payments from its licensed producers and franchised
dealers based on sales volume. The North American Consumer and Commercial
Group's representatives typically pick up for refill and deliver the five-
gallon bottles to a customer's home or office on a regular route. Customers
rent the bottled water dispensers from the Company or the franchised dealers.
In addition, at a small number of locations in Texas and Florida, the Company
also sells purified water by refilling customer-supplied containers at
shopping center locations. Consumer water filtration and water-quality related
products are also sold at these locations. Through a recent acquisition, the
Company also has established a base in the self-fill vend segment in food,
drug and convenience stores. The Company currently does not participate to any
significant extent in any other segment of the bottled water market.
 
  The North American Consumer and Commercial Group also assembles and sells
water bottling plant equipment, including semi-automatic, adjustable fill
tables, bottling machines, injection systems for minerals, chemicals and
flavors, and ozone and repressurization post-treatment systems for bacterial
control in a 4,800 square foot facility in Santa Ana, California.
 
  Commercial
 
  The North American Consumer and Commercial Group designs, manufactures,
sells, installs and services a wide range of products to address the water
problems of commercial enterprises. These products include filtration systems,
reverse osmosis units, water softeners, deionizers and high quality
ultrafiltration and microfiltration products capable of producing ultrapure
water.
 
                                       9
<PAGE>
 
  Commercial users require water treatment systems that remove dissolved
minerals, such as calcium, magnesium, iron or manganese, and health-related
contaminants from the available water supply and are capable of treating large
quantities of water on a cost-effective basis. The Company's commercial
products use technologies similar to its residential products, but that afford
greater capacity, durability and effectiveness and allow customers increased
flexibility for customization. For example, the Company's filters, deionizers
and softeners provide food and beverage manufacturers with consistently high
quality water enabling them to preserve uniformity of taste and appearance in
their products, reduce health-related contaminants and minimize equipment
maintenance costs. Other commercial enterprises such as airlines, hotels,
restaurants, car washes, laundromats, office buildings and apartment complexes
use the Company's products to condition, filter, deionize and otherwise treat
large quantities of water.
 
  The Company's Everpure subsidiary is a leading supplier of water filtration
products to the food service industry. Everpure's line of food service water
filtration products includes systems for post-mix beverage dispensers, ice
machines, coffee makers, steamers and vending machines that are designed to
treat all levels of water contamination and to ensure that consumer products
such as coffee, soups or ice are of the highest quality. Everpure(R) systems
also decrease maintenance costs and extend the life of water-using equipment
by removing dirt and other abrasive particles that can damage the internal
workings of such equipment. Everpure(R) products are used extensively in many
major food and beverage retailers, including McDonalds's(R), Burger King(R)
and Starbucks(R), as well as convenience store chains around the world,
including 7-Eleven(R) and Circle K(R).
 
  Sales, installation and service for the commercial market are primarily
through the North American Consumer and Commercial Group's distribution
network for consumer and commercial products. In addition, there are over 250
distributors and authorized agents in the United States, Western Europe and
other locations that distribute Everpure(R) water filtration products and over
30 independent distributors throughout the United States that distribute the
Novatech Water Filtration products. Products for the commercial market are
manufactured and assembled at the Northbrook, Wesmont, Sheboygan and
Mississauga facilities of the North American Consumer and Commercial Group.
 
 FILTRATION AND SEPARATION GROUP
 
  The Company's Filtration and Separation Group includes the businesses
acquired through the acquisition of Memtec, other than the Memcor division
(which is included in the North American Wastewater Group), and also includes
the Company's ceramic membrane and metal screens businesses.
 
  The Filtration and Separation Group designs, engineers, manufactures and
markets a broad range of proprietary and standard disposable filters and
filter housings for the fine filtration of liquid and gas streams. The Company
produces cartridge and bag filters in a variety of configurations using four
primary types of filtration media: textile fibers, non-woven sheet, meltblown
polymers and proprietary asymmetric membranes. The Company's filters and
filter housings are sold primarily into the chemical processing, coatings, oil
and gas, food and beverage and electronics markets. They are manufactured at
Company facilities in Baltimore, Maryland and Lyon, France.
 
  The Filtration and Separation Group also designs and manufactures a wide
range of fine metallic fiber filter media, elements, housings and valves for
applications in environments where extreme heat, pressure or corrosive
chemicals are present. These products currently are marketed principally to
polymer manufacturers and airbag manufacturers. The Company's metallic fiber
filters also are used in catalyst containment; in the filtration and
purification of hot gases; in the filtration of ink in ink jet printer
cartridges; and in a variety of non-filtration applications. These products
are manufactured at an approximately 278,400 square foot facility in DeLand,
Florida.
 
  The Filtration and Separation Group also manufactures and markets a wide
range of depth filters, a targeted range of pre-filter cartridges in pleated
and wound configurations, proprietary membrane filters and associated
filtration products. These filters are manufactured at an approximately
245,600 square foot facility in Bad
 
                                      10
<PAGE>
 
Krenzbach, Germany, and are sold primarily into the food and beverage, fine
chemicals and pharmaceuticals markets.
 
  The Company manufactures Membralox(R) ceramic membranes in France and
Germany that are used to permit the achievement of selective separations in
extreme operating environments.
 
  The Filtration and Separation Group produces and installs profile wire
screens for groundwater applications, oil and gas wells, food processing and
coal/mineral processing. These welded, continuous-slot screen products are
designed and manufactured at a 188,800 square foot facility in New Brighton,
Minnesota as well as facilities in Brisbane, Australia; Ternay, France;
Ahmedabad, India; Hyderabad, India; Dublin, Ireland; Yokohama, Japan and
Auckland, New Zealand.
 
 INDUSTRIAL PRODUCTS AND SERVICES GROUP
 
  The Company's Industrial Products and Services Group is the leading domestic
producer of sophisticated high-purity process piping systems for the handling
of gases, water and chemicals. The Company also performs retrofits and
expansions of these systems for its installed base of customers, typically as
recurring contract revenue. Such systems are provided primarily to the
microelectronics, pharmaceutical and biotechnology industries, where they are
critical to operations. The Company's orders and contracts for these systems
range from several thousand to tens of millions of dollars and vary from
components and fabricated assemblies to entire manufacturing systems.
 
  The Industrial Products and Services Group's piping assemblies must meet
strict purity and documentation requirements and are typically pre-fabricated
at a Company cleanroom and other fabricating facilities or on construction
sites in cleanrooms. In order to meet the strict requirements for welding, the
Company uses automatic orbital welding machines which employ microprocessors
to control all aspects of the welding operation. The Company typically does
not manufacture commodity pipes or fittings. The Industrial Products and
Services Group offers its customers turnkey and design/build operations,
including engineering and design, quality assurance and control and program
management services and the manufacturing of specialty components.
 
  The Industrial Products and Services Group also manufactures a line of
surface finishing and preparation systems for use by a variety of industrial
customers, including foundries, steel processors, aircraft manufacturing,
automobile producers and rubber and plastics producers, in cleaning and
finishing metal and other materials. The Company manufactures portable, fully-
enclosed units for finishing difficult-to-clean surfaces such as concrete
surfaces, ship decks and hulls. These systems capture the emissions
particulate generated by such operations, preventing contamination of the
environment.
 
 INTERNATIONAL PROCESS AND WASTEWATER GROUP
 
  The Company has substantial sales and significant operations outside the
United States, principally in Europe, the Asia Pacific region, Latin America
and the Middle East. Information regarding the amounts of revenue, operating
profit and identifiable assets attributable to each of the Company's
geographic areas and export sales is described in the Notes to Consolidated
Financial Statements included in Item 8 of this Form 10-K.
 
  Europe, the Middle East and Africa
 
  Process water and wastewater treatment equipment and systems are designed,
engineered, serviced and manufactured at over 50 facilities in more than 15
countries throughout Europe, the Middle East and Africa. This broad presence
allows the Company to provide systems that respond to important local
differences in environmental legislation, water quality, availability and
treatment cost. A wide range of separation processes and treatment
technologies are employed in these systems, including most of those utilized
by the North American Process Water Group and the North American Wastewater
Group in the United States. The Company's systems and products are sold
internationally to municipalities for drinking water purification, sewage
treatment and sludge handling. The Company also has a wide variety of
industrial customers in the pharmaceutical, food
 
                                      11
<PAGE>
 
and beverage, power generation, metal finishing, chemical, petrochemical and
automotive markets. Manufacturing facilities in Europe for industrial and
municipal water and wastewater treatment equipment and systems include plants
in Tarbes, France; Almelo, the Netherlands; Stoke-on-Trent, United Kingdom;
Ransbach-Baumbach, Germany; Soresina, Italy; and Madrid, Spain.
 
  The Company also provides deionization services for industrial and
laboratory users throughout western Europe, operating regeneration plants in
the United Kingdom, France, the Netherlands, Germany and Spain. Also as part
of its service business in Europe, the Company operates two municipal water
treatment plants in Italy serving more than 1.5 million people under long-term
contracts.
 
  Asia Pacific
 
  Through manufacturing facilities in Australia, Singapore, Taiwan, Japan, and
India, and regeneration facilities in Singapore, Malaysia and the Philippines,
the Company supplies a variety of process water and wastewater treatment
products and services, including SDI, to microelectronics manufacturers and
other industrial, commercial and municipal customers in the Asia Pacific
region. In addition, water, wastewater and sewage treatment systems designed
and manufactured at these locations and in the United States and Europe are
marketed through engineering and sales offices in Australia, New Zealand,
Singapore, Malaysia, Australia, Indonesia, The Peoples Republic of China,
Taiwan, Japan, Korea and India. Accordingly, the Company can offer a full
range of project capabilities in the Asia Pacific region, from the supply of
standard equipment to design/build and outsourcing projects. In addition to
the Company's local engineering and sales offices, the Company's products and
systems are marketed throughout the Asia Pacific region through a network of
manufacturers' representatives.
 
  Latin America
 
  The Company markets process water and wastewater treatment systems
engineered and assembled by the North American Process Water Group and the
North American Wastewater Group, through sales locations in Mexico, Venezuela,
Brazil, Puerto Rico and Argentina. In Mexico, the Company also has a
manufacturing facility where pumps and other equipment are made for sale
around the world. The Company operates an SDI business that is focused on
industrial and commercial customers throughout Mexico. The Company also owns
and operates two concessions for wastewater treatment facilities under long
term contracts for the cities of Cuernavaca and Yautepec, Mexico. These
wastewater systems were designed, manufactured, and installed by the Company.
 
  Consumer and Commercial Group
 
  The International Process and Wastewater Group also sells, installs and
services a broad range of household and consumer water filtration products
through a network of 240 independent dealers and distributors and 70 Company-
owned businesses throughout Europe and in other international markets. In
addition, the Company's Everpure subsidiary supplies water filtration
equipment to the food service industry in most western European countries and
Japan. Consumer and commercial water filtration equipment is manufactured by
the Company at facilities in Bologna, Italy and Barcelona, Spain. Everpure has
facilities in Atsugi, Japan and Hwertic, Belgium that do light assembly and
also warehouse and sell products manufactured in the United States.
 
SALES AND MARKETING
 
  The Company maintains a worldwide distribution network of sales and service
facilities, a global network of manufacturers' representatives and
international representatives, and numerous distributors and licensees.
 
  North American Process Water and Wastewater Groups. Sales and marketing
responsibilities for the North American Process Water Group and North American
Wastewater Group are divided across five geographic regions in the United
States. Each industrial, commercial and municipal sales prospect is reviewed
to determine which of the Company's engineering and manufacturing resources
should be utilized to best meet the customer's
 
                                      12
<PAGE>
 
needs. Technical support is available across the Company to assist marketing
personnel in working with the end-user to select the appropriate technology
for a given application.
 
  North American Process Water Group products and systems are sold
predominantly through a direct sales force. The North American Wastewater
Group's sales are made principally through a network of independent
manufacturer's representatives. The Company's manufacturer's representatives
are independent businesses which are paid on a commission basis and in certain
cases have the exclusive right to sell the Company's products and systems in a
specified geographical area. The Company provides both engineering and
marketing support to its manufacturer's representatives. A portion of the
Company's revenues are derived from recommendations by independent engineers
and consultants who advise the ultimate customer.
 
  North American Consumer and Commercial Group. The North American Consumer
and Commercial Group distributes and services its products through a network
of independent franchised dealers, Company-owned businesses, independent water
treatment dealers, plumbing wholesalers, consumer retailers and food, drug and
convenience stores operating throughout the United States and Canada. The
franchised dealers range from small local operations involving only a few
employees to large multiple-site operations. Each franchised dealer and
Company-owned business is assigned a primary area of geographic responsibility
(typically, a local community or metropolitan area), although the territories
are not exclusive. Certain of the franchised dealers and Company-owned
business locations, particularly the larger ones, are capable of providing
standard and special order products and services to the commercial market. The
Company also has a network of distributors and authorized agents for its
Everpure(R) water filtration products.
 
  The Company provides its franchised dealers and branch operations with a
variety of services, including training, education and technical assistance.
The Company employs technical service engineers who travel throughout the
United States assisting with water quality needs. Commercial job
specifications and proposals are supported by applications and technical
engineers located at the Northbrook facility. In addition, the Company
provides the franchised dealers with significant marketing services and
support, including an extensive co-operative advertising program. A finance
subsidiary of the Company provides intermediate-term loans to franchised
dealers for equipment placed on rental or lease.
 
  International Process and Wastewater Group.  Sales of process water and
wastewater treatment systems and products outside the United States are
conducted through a direct sales force and international representatives. In
addition, a number of licensees manufacture and sell certain of the Company's
products in Europe, Asia, Africa, Australia and Mexico. The Company provides
technical support to these licensees and is either paid a royalty on sales or
participates in the sale directly.
 
  Consumer and commercial water filtration products are distributed throughout
Europe and in other international locations through a network of independent
dealers and distributors and Company-owned businesses. Water filtration
equipment for the food service industry outside the United States is also
marketed directly to fast food and convenience store chains and equipment
manufacturers.
 
  Other Groups. The Waterworks Distribution Group's equipment and supplies are
marketed by Company-employed salesmen. Salesmen call directly on customers
within their assigned territories and work with architects, engineers and
government agencies to assist customers in determining their product needs.
 
  The Filtration and Separation Group's products are distributed through a
worldwide network of both independent distributors and Company-employed sales
personnel.
 
  The Industrial Products and Services Group markets its systems principally
through a direct sales force. Sales outside the United States may also be made
by representatives of partnering companies.
 
                                      13
<PAGE>
 
RAW MATERIALS AND SUPPLIES
 
  Raw materials, primarily steel, plastics, filtration media, ion exchange
resins, membranes, cartridges and component parts such as pumps and valves,
and products purchased for resale by the Waterworks Distribution Group, are
available from a number of sources. The Company has not experienced difficulty
in obtaining the materials, components and supplies used in its operations.
 
BACKLOG AND SEASONALITY
 
  The Company had the following backlog as of March 31, 1997 and 1998, which
includes capital equipment purchase orders and revenues expected to be
generated during the next 12 months under certain long-term contracts. The
capital equipment orders are scheduled for delivery and installation during
the following 12 months and are believed by management to be firm.
 
<TABLE>
<CAPTION>
                                                                      AMOUNT
       DATE                                                       (IN THOUSANDS)
       ----                                                       --------------
       <S>                                                        <C>
       March 31, 1997............................................    $783,217
       March 31, 1998............................................    $944,869
</TABLE>
 
 
  The rate of booking new orders varies from month to month. In addition, the
orders have varying delivery schedules, and the Company's backlog as of any
particular date may not be representative of actual revenues for any
succeeding period. There is no material backlog for water distribution
equipment and supplies since these orders normally are shipped within one to
ten days following receipt of an order. Backlog also is not a meaningful
measure of ongoing business in the filtration and separation and the consumer
and commercial water businesses.
 
  Certain of the Company's contracts for engineered products and services
provide for progress payments during the engineering and manufacturing period.
The balance is due upon acceptance or start-up, or, in the case of most
municipal and governmental purchasers, 90 to 180 days after delivery and
installation. Demand for most of the Company's products and services is not
typically affected by seasonal changes. The Waterworks Distribution Group's
operations are affected by winter weather in parts of the United States, and
generally can be expected to generate lower sales in the third and fourth
fiscal quarters.
 
PRODUCT DEVELOPMENT; PATENTS, TRADEMARKS AND LICENSES
 
  In order to provide its customers with cost-effective water treatment
solutions, the Company offers a wide variety of filtration and purification
technologies. The Company uses its own research and development, augmented by
customer-funded, vendor-funded and government-funded research spending, in
order to provide its customers with advanced products. In addition, the
Company uses its analytical laboratories to perform water analyses and to test
the effectiveness of filtration media and techniques in order to enhance the
Company's capability to design systems tailored specifically for the
particular needs of customers. The Company's product development expenditures
for the fiscal years ended March 31, 1996, 1997 and 1998 were approximately
$6.5 million, $8.3 million and $15.9 million, respectively.
 
  The Company currently owns a significant number of patents in the United
States and in various countries worldwide. Although the Company believes that
the patents and trademarks associated with the Company's various product lines
are of value, it does not consider any of them to be essential to its
business.
 
  Trademarks and brand name recognition are important to the Company,
particularly in the North American Consumer and Commercial Group. The Company
has registered its trademarks and believes that there is significant value
associated with them. The loss of the Culligan trademark could have a material
adverse effect on the Company.
 
                                      14
<PAGE>
 
COMPETITION
 
  All of the industries in which the Company competes are highly competitive,
and most are fragmented, with numerous regional and local participants. There
are competitors of the Company in certain industries that are divisions or
subsidiaries of companies that have significantly greater resources than the
Company.
 
  The process water and wastewater treatment industry is fragmented, with
numerous regional participants in the United States and in countries
throughout the world that are limited in their current geographic focus. This
fragmentation is primarily due to local differences in water quality and
supply, different levels of demand for water resulting from varying
concentrations of industry and population, customer relationships and local
governmental regulation. Most participants in the water and wastewater
treatment industry provide a limited number of treatment technologies, a
limited number of products or services, or focus on a particular industry.
While the number of industry participants ranges from several large companies
to hundreds of small local companies, there are few competitors in the
industry that offer a full range of water and wastewater treatment equipment,
technologies and services. The Company believes it offers the industry's
broadest range of cost-effective treatment systems, services and proven
technologies.
 
  The process water and wastewater treatment industry is highly competitive.
The Company knows of no reliable statistics that provide a basis from which to
estimate the Company's relative competitive position in these industries. The
Company's process water treatment business competes in the United States and
internationally principally on the basis of product quality and
specifications, technology, reliability, price, customized design and
technical qualifications, reputation and prompt availability of local service.
The Company's wastewater treatment business competes in the United States and
internationally largely on the basis of the same factors, except that pricing
considerations can be predominant among competitors that have sufficient
technical qualifications, particularly in the municipal contract bid process.
 
  The residential water industry is also highly competitive and fragmented.
The Company competes in this market with companies with national distribution
networks, businesses with regional scope and local product assemblers or
service companies, as well as retail outlets. The Company believes that there
are thousands of participants in the residential water business. The consumer
products business competes principally on the basis of price, product quality
and "taste," service, distribution capabilities, geographic presence and
reputation.
 
  In connection with the marketing of waterworks distribution equipment and
supplies, the Company competes not only with a large number of independent
wholesalers and with other distribution chains similar to the Company, but
also with manufacturers who sell directly to customers. The principal methods
of competition for the Company's waterworks distribution business include
prompt local service capability, product knowledge by the sales force and
service branch management, and price. Due to the various sources and methods
of competition and types of products sold by the Company, the Company knows of
no reliable statistics upon which there might be based an estimate of the
Company's relative competitive position in this market.
 
  The Company's filtration and separation business competes in the United
States and internationally principally on the basis of price, technical
expertise, product quality and responsiveness to customer needs, including
service and technical support. The high-purity process piping systems business
within the Company's Industrial Products and Services Group competes in the
United States and internationally principally on the basis of reputation,
previous project experience, the ability to meet system specifications and
project deadlines and price. The surface finishing and preparation business
within that Group competes principally on the basis of reputation, product
offering, service and technical capabilities.
 
PRODUCT WARRANTIES; INsURANCE
 
  The Company generally offers one-year product warranties on its equipment,
and many of the Company's consumer products carry a limited lifetime warranty.
In some instances the warranties may be for shorter or longer periods,
consistent with market practices. Performance guarantees apply to most of the
Company's systems. The costs incurred by the Company to date under its product
warranties and systems guarantees have not been material.
 
                                      15
<PAGE>
 
  The Company maintains insurance for itself and its principal United States
based and international subsidiaries in amounts and with coverages which the
Company believes to be adequate and appropriate for the covered risks.
 
EMPLOYEES
 
  As of March 31, 1998, the Company had approximately 18,500 full-time
employees assigned to the Company's various worldwide offices and facilities.
Certain of the Company's United States employees at 22 plants are covered by
collective bargaining agreements, the terms of which expire between June 1998
and November 2003. Certain of the Company's non-United States based employees
also are covered by statutory and other contractual arrangements. The Company
believes that its relationships with the unions and with its non-represented
employees are good.
 
                                      16
<PAGE>
 
                              EXECUTIVE OFFICERS
 
  The following table sets forth certain information regarding the executive
officers of the Company:
 
<TABLE>
<CAPTION>
                NAME                AGE                 POSITION
                ----                ---
 <C>                                <C> <S>
 Richard J. Heckmann..............  54  Chairman of the Board of Directors,
                                         Chief Executive Officer and President

 Nicholas C. Memmo................  36  President and Chief Operating Officer--
                                         North American Process Water Group

 Andrew D. Seidel.................  36  President and Chief Operating Officer--
                                         North American Wastewater Group

 Harry K. Hornish, Jr. ...........  53  President and Chief Operating Officer--
                                         Waterworks Distribution Group

 Calvin R. Hendrix................  47  President and Chief Operating Officer--
                                         North American Consumer and Commercial
                                         Group

 Kenneth I. Wellings..............  51  President--U.S. Filter International

 Andrew Denver....................  49  President and Chief Operating Officer--
                                         Filtration and Separation Group

 David J. Shimmon.................  39  President and Chief Operating Officer--
                                         Industrial Products and Services Group

 Thierry Reyners..................  53  President and Chief Operating Officer--
                                         European Water and Wastewater Group

 Kevin L. Spence..................  41  Executive Vice President and Chief
                                         Financial Officer

 Damian C. Georgino...............  37  Executive Vice President, General
                                         Counsel and Corporate Secretary

 Michael J. Reardon...............  44  Executive Vice President and Chief
                                         Administrative Officer

 Tim L. Traff.....................  39  Executive Vice President--Corporate
                                         Development

 James W. Dierker.................  35  Vice President, Controller and
                                         Treasurer

 Michael E. Hulme, Jr. ...........  36  Assistant General Counsel and Assistant
                                         Secretary
</TABLE>
 
  Richard J. Heckmann was elected Chairman of the Board of Directors, Chief
Executive Officer and President of the Company on July 16, 1990. Mr. Heckmann
was a Senior Vice President at Prudential-Bache Securities in Rancho Mirage,
California from January 1982 to August 1990. He joined the U.S. Small Business
Administration in 1977 and served as Associate Administrator for Finance and
Investment from 1978 to 1979. Prior thereto he was founder and Chairman of the
Board of Tower Scientific Corporation, a manufacturer of custom prosthetic
devices, which was sold to Hexcel Corporation in 1977. He is also a director
of United Rentals, Inc., USA Waste Services, Inc. and K2, Inc.
 
  Nicholas C. Memmo was appointed President and Chief Operating Officer of the
North American Process Water Group of the Company in February 1998. From July
1995 to February 1998, Mr. Memmo served as Executive Vice President--Process
Water of the Company and from March 1994 to July 1995, Mr. Memmo served as
Senior Vice President and General Manager of U.S. Filter/Ionpure Inc. From
December 1992 to March 1994, Mr. Memmo served as Senior Vice President Sales &
Marketing of the Company. Mr. Memmo received a B.S. degree in chemical
engineering from Drexel University, and completed an M.B.A. program at the
John E. Anderson Graduate School of Management at UCLA.
 
  Andrew D. Seidel was appointed President and Chief Operating Officer--North
American Wastewater Group in February 1998, having previously served as
Executive Vice President--Wastewater Group since July 1995, and as Senior Vice
President--Wastewater Group and General Manager of U.S. Filter, Inc.,
Warrendale,
 
                                      17
<PAGE>
 
Pennsylvania, from September 1993 to July 1995. He had previously served as
Vice President--Membralox Group of the Company since December 8, 1992. Mr.
Seidel received a B.S. degree in chemical engineering from the University of
Pennsylvania, and completed an M.B.A. program at the Wharton School, the
University of Pennsylvania in 1990. Mr. Seidel is also a member of the
management board of TWO.
 
  Harry K. Hornish, Jr. was appointed President and Chief Operating Officer--
Waterworks Distribution Group in February 1998, having previously served as
Executive Vice President--Distribution Group since February 20, 1997.
Beginning in November 1991, Mr. Hornish had served as President of the Utility
Supply Group, Inc. ("USG") subsidiary of CertainTeed Corporation
("CertainTeed"), a leading manufacturer of building materials for new
construction and remodeling. Mr. Hornish led a buyout of USG from CertainTeed
in 1994. Mr. Hornish continued to serve as President of USG until October 25,
1996, when the Company acquired USG. Mr. Hornish holds a B.A. in Political
Science and Business Administration from Marshall University. Mr. Hornish is
also a director of Cameron Ashley Building Products Inc.
 
  Calvin R. Hendrix was appointed President and Chief Operating Officer--North
American Consumer and Commercial Group in June 1998. Mr. Hendrix had
previously served as Group President--North America of Culligan since February
1997. From September 1993 to January 1997, he served as Vice President--
General Manager of the Irrigation Division of The Toro Company, a leader in
turf and landscape products and services. For more than five years previous to
joining Toro, Mr. Hendrix was President of Thermador Corporation, a major
kitchen appliance company; and Group Product Manager with the Frito-Lay
division of PepsiCo. Mr. Hendrix received BBA and MBA degrees from the
University of North Carolina at Charlotte.
 
  Kenneth I. Wellings was appointed President--U.S. Filter International in
June 1998. Mr. Wellings had previously served as Group President--
International of Culligan since January 1997. From August 1995 to January
1997, Mr. Wellings served as Vice President, International of Culligan and
from August 1994 to August 1995, he served as Vice President, European
Operations. From 1991 to 1994, he was employed with Culligan as General
Manager, Retail Division.
 
  Andrew Denver was appointed President and Chief Operating Officer--
Filtration and Separation Group in February 1998. In 1987 Mr. Denver joined
Memtec Limited as President and Chief Operating Officer, where he was
responsible for managing all aspects of Memtec's operation including research
and development, manufacturing, marketing and sales. Mr. Denver graduated with
Honors in Chemistry from the University of Manchester and achieved a
Distinction in his MBA at the Harvard Business School. Mr. Denver was a
founding member and Director of the Australian Environment Management Export
Corporation (AUSTEMEX) and was inaugural Chairman of the Board for the first
two years. He was a founding member and Director of the Environment Management
Industry Association of Australia (EMIAA).
 
  David J. Shimmon was appointed President and Chief Operating Officer--
Industrial Products and Services Group in February 1998. Mr. Shimmon has
served as President of Kinetics since March 1996, as Chief Operating Officer
and a Director of Kinetics since October 1990, and had served as Chief
Financial Officer of Kinetics since 1991 and as Executive Vice President of
Kinetics from October 1990 to March 1996.
 
  Thierry Reyners was appointed President and Chief Operating Officer--
European Water and Wastewater Group in February 1998, having previously served
as Executive Vice President--European Group since July 1995, and as Senior
Vice President--Europe from March 1994 to July 1995. He had previously been
Senior Vice President--European Sales since December 1, 1993, the date the
Company acquired Ionpure. Mr. Reyners served as Vice President and General
Manager--Europe of Ionpure Technologies Corporation from 1990 to December
1993. Mr. Reyners has a Ph.D. in Organic Chemistry from the Research Institute
in Natural Substances, University of Orsay, France and an M.B.A. from INSEAD,
Fontainebleau, France.
 
  Kevin L. Spence was appointed Executive Vice President and Chief Financial
Officer of the Company in February 1998, having served as Vice President of
the Company since December 1991 and as Chief Financial Officer of the Company
since January 1992. Prior to that, Mr. Spence served as Treasurer of the
Company from February 17, 1992 until June 9, 1995. Mr. Spence is a certified
public accountant and received a B.S. in Business Administration in 1978 from
the University of Southern California.
 
 
                                      18
<PAGE>
 
  Damian C. Georgino was appointed Executive Vice President, General Counsel
and Corporate Secretary of the Company in February 1998, having served as Vice
President, General Counsel and Secretary of the Company since August 1995.
From September 1992 through July 31, 1995, he served as General Attorney with
Aluminum Company of America ("Alcoa"), where his primary responsibilities
included mergers and acquisitions and serving as chief legal counsel for
several growing international manufacturing and service businesses. Mr.
Georgino received a B.S. degree in economics and political science from
Dickinson College in 1982 and received a JD/MBA joint degree from Emory
University in 1986.
 
  Michael J. Reardon was appointed Executive Vice President and Chief
Administrative Officer of the Company in February 1998, having served as
Executive Vice President of the Company since June 1995, and having previously
served as Executive Vice President and Chief Operating Officer, and prior to
that as the Chief Financial Officer and Secretary of the Company. From May
1995 to April 1996, Mr. Reardon served as President of Arrowhead Industrial
Water, Inc. a subsidiary of the Company. He became President and General
Manager of Illinois Water Treatment, Inc., a subsidiary of the Company, in
March 1992. Mr. Reardon is a member of the management board of TWO. In June
1978, Mr. Reardon received a B.S. in Business Administration from California
State Polytechnic University, and from 1994 to 1995 attended the Kellogg
Management Institute, Northwestern University.
 
  Tim L. Traff was appointed Executive Vice President--Corporate Development
in February 1998, having served as a Senior Vice President of the Company
since December 1992, and as Vice President--Corporate Development since March
1992. Mr. Traff received a B.S. degree in business economics from the
University of Minnesota.
 
  James W. Dierker was appointed Vice President, Controller and Treasurer on
June 9, 1995. From July 1985 to June 1995 he was with KPMG Peat Marwick LLP,
and was a senior manager with that firm at the time of his departure. Mr.
Dierker is a certified public accountant, and received a B.S. degree in
business administration with an emphasis in accounting from California State
Polytechnic University.
 
  Michael E. Hulme, Jr. was appointed Assistant General Counsel and Assistant
Secretary on February 13, 1996. From December 1994 through January 1996, he
served as Vice President/Corporate Counsel of Forte Hotels, Inc., formerly a
wholly owned subsidiary of Forte Plc, and from October 1992 through December
1994 as Corporate Counsel of Forte Hotels, Inc. His primary responsibilities
included hotel and real estate development, acquisition and sale transactions.
Mr. Hulme received a B.A. degree in economics from the University of
California at Davis in 1983 and received a JD from the University of Southern
California in 1986.
 
ITEM 2--PROPERTIES
 
  The Company has a global network of approximately 833 sales, service and
distribution facilities and 85 manufacturing plants. Because the Company has
grown by acquisition, the Company's facilities vary in terms of age and
condition, but management generally believes that these facilities are
suitable and adequate for their respective operations. Many of the Company's
manufacturing facilities operated at or near their productive capacities
during fiscal 1998.
 
  The Company's corporate headquarters is located in a Company-owned office
building in Palm Desert, California, with 20,500 square feet of floor space. A
description of the Company's other principal facilities is included in Item 1
of this Form 10-K. Approximately 53% of the Company's manufacturing facilities
are owned, with the remainder under leases expiring from July 31, 1998 through
April 30, 2026, in most cases with Company options to renew. Of the Company's
36 regeneration plants, 12 are owned and the majority of the remainder are
held under short-term leases. In most cases, the Company's 85 manufacturing
and 36 regeneration plants include sales and service offices. The Company also
owns or leases various small production facilities and numerous sales, service
and warehousing facilities not described in this Form 10-K. A small number of
the Company's facilities are subject to mortgages securing notes payable due
in fiscal years 1999 and 2013.
 
 
                                      19
<PAGE>
 
ITEM 3--LEGAL PROCEEDINGS
 
  Various lawsuits, claims and proceedings have been or may be instituted or
asserted against the Company, including those pertaining to environmental,
product liability and safety and health matters. While the amounts claimed may
be substantial, the ultimate liability cannot now be determined because of the
considerable uncertainties that exist. Therefore, it is possible that results
of operations or liquidity in a particular period could be materially affected
by certain contingencies. However, based on facts currently available,
management believes that the disposition of matters that are pending or
asserted will not have a materially adverse effect on the financial position
of the Company. Information regarding certain environmental contingencies is
incorporated herein by reference to Item 7 of this Form 10-K under the caption
"Certain Trends and Uncertainties--Potential Environmental Risks".
 
ITEM 4--SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
 
  None.
 
                                    PART II
 
ITEM 5--MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
PRICE RANGE AND HOLDERS OF COMMON STOCK
 
  The common stock of the Company is listed on the New York Stock Exchange and
traded under the symbol "USF." The following table sets forth for the fiscal
periods indicated the high and low sales prices of the common stock as
reported on the New York Stock Exchange Composite Tape. No cash dividends were
paid on the common stock during such periods. The amounts below have been
adjusted to reflect a three for two split of the common stock effective July
15, 1996.
 
<TABLE>
<CAPTION>
                                                                   HIGH   LOW
                                                                   ----   ---
   <S>                                                            <C>    <C>
   Fiscal year ended March 31, 1997
     1st Quarter................................................. $23.75 $18.42
     2nd Quarter.................................................  34.75  18.50
     3rd Quarter.................................................  36.25  30.38
     4th Quarter.................................................  39.00  28.88
   Fiscal year ended March 31, 1998
     1st Quarter................................................. $33.38 $25.75
     2nd Quarter.................................................  43.19  26.94
     3rd Quarter.................................................  44.44  27.63
     4th Quarter.................................................  36.44  28.75
</TABLE>
 
  On June 26, 1998, the last reported sales price for the common stock as
reported on the New York Stock Exchange Composite Transactions Tape was $26.75
per share. The number of holders of record of the Common Stock on June 26,
1998 was approximately 4,258.
 
DIVIDENDS
 
  The Company currently intends to retain earnings to provide funds for the
operation and expansion of its business and accordingly does not anticipate
paying cash dividends on the Common Stock in the foreseeable future. Any
payment of cash dividends on the Common Stock in the future will depend upon
the Company's financial condition, earnings, capital requirements and such
other factors as the Board of Directors deems relevant. The Company's Amended
and Restated Multicurrency Credit Agreement, dated as of October 20, 1997,
imposes, and future debt or equity instruments or securities of the Company
may impose, restrictions on the Company's ability to pay dividends.
 
                                      20
<PAGE>
 
ITEM 6--SELECTED CONSOLIDATED FINANCIAL DATA
 
  The selected consolidated financial data of the Company are derived from the
Company's audited Consolidated Financial Statements and related Notes thereto.
Each fiscal year of the Company is ended March 31. The selected consolidated
financial data should be read in conjunction with and is qualified in its
entirety by the Company's Consolidated Financial Statements and related Notes
thereto and other financial information included elsewhere herein.
 
<TABLE>
<CAPTION>
                                     FISCAL YEAR ENDED MARCH 31,(1)
                             --------------------------------------------------
                             1994(2)   1995(3)   1996(4)    1997(5)    1998(6)
                             --------  -------  ---------  ---------  ---------
                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                          <C>       <C>      <C>        <C>        <C>
CONSOLIDATED STATEMENT OF
 OPERATIONS DATA:
Revenues...................  $620,709  830,765  1,090,745  1,764,406  3,234,580
Cost of sales..............   500,731  658,834    836,973  1,376,615  2,456,173
                             --------  -------  ---------  ---------  ---------
  Gross Profit.............   119,978  171,931    253,772    387,791    778,407
Selling, general and
 administrative expenses...   115,979  131,210    192,387    316,190    573,002
Purchased in-process
 research and development..       --       --         --         --     299,505
Merger, restructuring,
 acquisition and other
 related charges...........       --       --         --       5,581    141,109
                             --------  -------  ---------  ---------  ---------
                              115,979  131,210    192,387    321,771  1,013,616
                             --------  -------  ---------  ---------  ---------
  Operating income (loss)..     3,999   40,721     61,385     66,020   (235,209)
Other income (expenses):
  Interest expense.........    (5,570)  (8,807)   (16,280)   (26,509)   (53,887)
  Other....................    (6,953)   1,611      5,923      3,678      4,900
                             --------  -------  ---------  ---------  ---------
                              (12,523)  (7,196)   (10,357)   (22,831)   (48,987)
                             --------  -------  ---------  ---------  ---------
  Income (loss) before
   income tax expense
   (benefit)...............    (8,524)  33,525     51,028     43,189   (284,196)
Income tax expense
 (benefit).................    (5,751)   8,904     20,329     10,681     15,583
                             --------  -------  ---------  ---------  ---------
  Net income (loss)........  $ (2,773)  24,621     30,699     32,508   (299,779)
                             ========  =======  =========  =========  =========
PER COMMON SHARE DATA: (7)
Basic:
  Net income (loss)........  $  (0.11)    0.68       0.62       0.51      (3.13)
                             ========  =======  =========  =========  =========
  Weighted average number
   of common
   shares outstanding......    31,267   35,198     48,369     64,082     95,909
                             ========  =======  =========  =========  =========
Diluted:
  Net income (loss)........  $  (0.11)    0.66       0.61       0.49      (3.13)
                             ========  =======  =========  =========  =========
  Weighted average number
   of common
   shares outstanding......    31,267   43,707     49,668     66,531     95,909
                             ========  =======  =========  =========  =========
CONSOLIDATED BALANCE SHEET
 DATA (END OF PERIOD):
Working capital............  $113,105  135,079    159,148    515,152    591,776
Total assets...............  $430,206  583,633  1,003,316  2,397,563  3,597,844
Notes payable and long-term
 debt, including current
 portion...................  $ 41,398   65,192     74,848     86,066    710,282
Convertible subordinated
 debt......................  $ 60,000  105,000    200,000    554,000    554,000
Shareholders' equity.......  $171,758  200,548    407,390  1,045,830  1,293,410
</TABLE>
 
                                      21
<PAGE>
 
--------
(1) The historical consolidated financial data for the fiscal years ended
    March 31, 1994, 1995, 1996 and 1997 have been restated to include the
    accounts and operations of Kinetics which was merged with the Company in
    December 1997, and accounted for as a pooling of interests. Separate
    results of operations of each of the Company and Kinetics for the years
    ended March 31, 1994 through March 31, 1998 are presented below:
 
<TABLE>
<CAPTION>
                                      FISCAL YEAR ENDED MARCH 31
                            -------------------------------------------------
                             1994(2)   1995(3)  1996(4)   1997(5)    1998(6)
                            ---------  ------- --------- ---------  ---------
                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                         <C>        <C>     <C>       <C>        <C>
REVENUES
Company (as previously
 reported)................. $ 475,236  600,832   812,322 1,376,601  3,234,580
Kinetics...................   145,473  229,933   278,423   387,805        --
                            ---------  ------- --------- ---------  ---------
                            $ 620,709  830,765 1,090,745 1,764,406  3,234,580
                            =========  ======= ========= =========  =========
OPERATING INCOME (LOSS)
Company (as previously
 reported)................. $  (2,358)  28,047    45,382    82,913   (235,209)
Kinetics...................     6,357   12,674    16,003   (16,893)       --
                            ---------  ------- --------- ---------  ---------
                            $   3,999   40,721    61,385    66,020   (235,209)
                            =========  ======= ========= =========  =========
NET INCOME (LOSS)
Company (as previously
 reported)................. $  (7,892)  15,267    21,967    46,197   (299,779)
Kinetics...................     5,119    9,354     8,732   (13,689)       --
                            ---------  ------- --------- ---------  ---------
                            $  (2,773)  24,621    30,699    32,508   (299,779)
                            =========  ======= ========= =========  =========
NET INCOME (LOSS) PER
 COMMON SHARE(7):
Basic:
  As previously reported... $   (0.34)    0.50      0.50      0.79      (3.13)
  As restated.............. $   (0.11)    0.68      0.62      0.51      (3.13)
Diluted:
  As previously reported... $   (0.34)    0.50      0.49      0.77      (3.13)
  As restated.............. $   (0.11)    0.66      0.61      0.49      (3.13)
</TABLE>
 
(2) The fiscal year ended March 31, 1994 includes four months of results of
    Ionpure Technologies Corporation and IP Holding Company ("Ionpure"),
    acquired December 1, 1993 and accounted for as a purchase. Selling,
    general and administrative expenses for the year ended March 31, 1994
    reflect four months of integration of Ionpure, certain charges totaling
    $2.4 million related to the rationalization of certain wastewater
    operations and write-off certain intangibles in the Company's Continental
    Penfield subsidiary totaling $3.7 million. In addition, the year ended
    March 31, 1994 includes a charge of $8.9 million to reflect a plan to
    shutdown and reorganize certain operations of Davis.
 
(3) The fiscal year ended March 31, 1995 includes the results of operations of
    Smogless S.p.A., Crouzat S.A., Sation S.A., Seral Erich Alhauser GmbH and
    the Cereflo ceramic product line from the dates of their respective
    acquisitions, accounted for as purchases.
 
(4) The fiscal year ended March 31, 1996 includes the results of operations of
    The Permutit Company Limited and The Permutit Company Pty Ltd., Interlake
    Water Systems, Arrowhead Industrial Water Inc. and Polymetrics Inc. from
    the dates of their respective acquisitions, accounted for as purchases.
    Selling, general and administrative expenses for the year ended March 31,
    1996 includes charges totaling $3.2 million related to the write-down of
    certain patents and equipment of Zimpro.
 
(5) The fiscal year ended March 31, 1997 includes the results of operations of
    USG, WaterPro, WSMG, and PED from the dates of their respective
    acquisitions, accounted for as purchases. The year ended March 31, 1997
    also includes merger expenses of $5.6 million, related to the acquisition
    of Davis, which was accounted for as a pooling of interests. Costs of
    goods sold for the year ended March 31, 1997 including charges recorded by
    Kinetics totaling $26.0 million related to certain unreimbursed project
    costs. Selling, general and administrative expenses for the year ended
    March 31, 1997 includes charges totaling $6.8 million for increases in
    Kinetics allowance for doubtful accounts, the write-off of certain
    receivables the write-down of certain assets and the establishment of
    certain accruals.
 
                                      22
<PAGE>
 
(6) The fiscal year ended March 31, 1998 includes the results of operations
    for Memtec from the date of its acquisition on December 9, 1997, accounted
    for as a purchase. The year ended March 31, 1998 also includes a charge of
    $299.5 million related to the acquisition from Memtec of certain in-
    process research and development projects that had not reached
    technological feasibility and that had no alternative future uses.
    Additionally, the Company recorded charges totaling $141.1 million related
    to a restructuring plan that the Company implemented concurrent with the
    acquisitions of Memtec and Kinetics. Cost of goods sold for the year ended
    March 31, 1998 includes charges recorded by Kinetics totaling $13.7
    million related to certain unreimbursed project costs. Selling, general
    and administrative expenses for the year ended March 31, 1998 includes
    charges recorded by Kinetics totaling $3.6 million related to increases in
    Kinetics allowance for doubtful accounts, the write-off of certain
    receivables, the write down of certain assets and the establishment of
    certain accruals.
 
(7) Net income (loss) per common share amounts are computed in accordance with
    SFAS 128 after dividends on the Series A Preferred Stock of $.7 million
    for the fiscal year ended March 31, 1994, $.7 million for the fiscal year
    ended March 1995 and $.5 million for the Fiscal year ended March 31, 1997
    The Series A Preferred Stock was converted into shares of Common Stock in
    March 1996.
 
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
  The discussion contained in this Item 7 should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Form 10-K.
 
GENERAL
 
 
  Since July 1991, the Company has acquired and integrated more than 150
businesses with substantial expertise in the design and manufacture of systems
of the filtration and treatment of water and wastewater. Due to the magnitude
of these acquisitions and the integration of the acquired operations with the
Company's existing businesses, results of operations for prior periods are not
necessarily comparable to or indicative of results of operation for current or
future periods.
 
RESULTS OF OPERATIONS
 
  In December 1997 a subsidiary of the Company merged with Kinetics, in a
transaction accounted for as pooling of interests. Historical consolidated
financial data for the fiscal years ended March 31, 1994 through March 31,
1997 have been restated to reflect this acquisition.
 
  The following table sets forth for the periods indicated certain items in
the Selected Consolidated Financial Data as a percentage of total revenues:
 
<TABLE>
<CAPTION>
                                                          FISCAL YEAR ENDED
                                                              MARCH 31,
                                                          -------------------
                                                          1996   1997   1998
                                                          -----  -----  -----
   <S>                                                    <C>    <C>    <C>
   Revenues.............................................. 100.0% 100.0% 100.0 %
   Cost of sales.........................................  76.7%  78.0%  75.9 %
   Gross profit..........................................  23.3%  22.0%  24.1 %
   Selling, general and administrative expenses..........  17.6%  17.9%  17.7 %
   Purchase in-process research and development..........   --     --     9.3 %
   Merger, restructuring, acquisition and other related
    charges..............................................   --     0.3%   4.4 %
   Operating income (loss)...............................   5.6%   3.7%  (7.2)%
   Interest expense......................................   1.5%   1.5%   1.7 %
   Net income (loss).....................................   2.8%   1.8%  (9.3)%
</TABLE>
 
                                      23
<PAGE>
 
  The following table sets forth a percentage breakdown of the Company's sales
by product category for the past three fiscal years:
<TABLE>
<CAPTION>
                                                                 FISCAL YEAR
                                                                    ENDED
                                                                  MARCH 31,
                                                                ----------------
                                                                1996  1997  1998
                                                                ----  ----  ----
   <S>                                                          <C>   <C>   <C>
   Sales by product category:
     Capital equipment.........................................  50%   52%   46%
     Services and operations...................................  25%   24%   25%
     Distribution..............................................  25%   24%   27%
     Retail and consumer products.............................. --    --      2%
</TABLE>
 
TWELVE MONTHS ENDED MARCH 31, 1998 ("FISCAL 1998") COMPARED WITH TWELVE MONTHS
ENDED MARCH 31, 1997 ("FISCAL 1997")
 
  Revenues
 
  Revenues for fiscal 1998 were $3.2 billion, an increase of $1.4 billion from
$1.8 billion for the comparable period of the prior fiscal year. This 83.3%
increase was due primarily to acquisitions completed by the Company after
fiscal 1997. For fiscal 1998 revenues from capital equipment sales represented
46% of total revenues, while revenues from services and operations represented
25% of total revenues, revenues from distribution represented 27% of total
revenues and revenues from retail and consumer products represented 2% of
total revenues. The percentage of revenues from capital equipment sales
decreased in the current year due to the Company's emphasis on the recurring
revenues of the distribution business and the establishment of the higher
margin retail and consumer products business.
 
  Gross Profit
 
  Gross profit increased 100.7% to $778.4 million for fiscal 1998 from $387.8
million for the comparable period of the prior fiscal year. Total gross profit
as a percentage of revenue ("gross margin") was 24.1% for fiscal 1998 compared
to 22.0% for the comparable period of the prior fiscal year. The increase in
the gross margin can be attributed primarily to the incurrence of certain
unreimbursed project costs at Kinetics during fiscal 1997 after restatement
for the acquisition of Kinetics in the current period accounted for as a
pooling of interests.
 
  Selling, General and Administrative Expenses
 
  For fiscal 1998, selling, general, and administrative expenses, excluding
purchased in-process research and development and merger, restructuring,
acquisition and other related charges ("certain charges"), increased $256.8
million to $573.0 million as compared to the $316.2 million in the comparable
period in the prior year. The increase in these expenses can be attributed
primarily to the addition of sales and administrative personnel accompanying
the Company's acquisitions during the period. During fiscal 1998, selling,
general and administrative expenses, excluding certain charges, were 17.7% of
revenues compared to 17.9% for the comparable period in the prior year.
 
  Purchased In-Process Research and Development
 
  On December 9, 1997, the Company, through a wholly-owned subsidiary,
completed its tender offer ("Offer") to purchase all of the outstanding
ordinary shares of Memtec. The purchase price was $36.00 per share. The
Company acquired certain shares in privately negotiated and open market
purchases prior to the Offer resulting in a total cash purchase price of
approximately $397.2 million (including transaction costs of $10.6 million).
The purchase price was allocated to the assets and liabilities of Memtec based
on their estimated respective fair values. The Company also acquired from
Memtec certain in-process research and development projects that had not
reached technological feasibility and that had no alternative future uses.
Such projects were valued by an independent appraiser using a risk adjusted
cash flow model under which expected future cash flows were discounted, taking
into account risks related to existing and future markets and assessments of
the life expectancy of such projects. The estimated market value of such in-
process research and development (R&D) projects was $299.5 million and was
expensed at the acquisition date.
 
                                      24
<PAGE>
 
  In addition, the Company also acquired from Memtec and its subsidiaries
(consisting of Memcor, Fluid Dynamics, Filterite, and Seitz) developed
technologies including large volume purification product lines; membrane
systems for water purification and waste treatment; metal fiber product lines
for industrial applications involving elevated pressures, temperatures and
corrosive environments; disposable product lines for industrial applications;
and depth media product lines for the pharmaceutical and food and beverage
industries.
 
  As a result of the degree of competition in the filtration industry and the
use of technological change as a competitive tool, a significant proportion of
Memtec's technology will be superseded, although the rate of change varies
significantly across the markets addressed. Memtec's R&D initiatives are
therefore targeted at superseding current products. Memtec has a range of
ongoing R&D projects in each of its product lines. Certain of these projects
are directed at next generation products for existing market applications
while others are directed at new market opportunities where Memtec's
technological base may be applicable.
 
  Memcor R&D projects are primarily directed at enhanced microfiltration
products capable of cost effectively addressing larger scale applications or
more chemically aggressive environments. These R&D projects are at the
laboratory to pilot stage of development and require a number of years of
additional work before full introduction to the market of a product is likely.
Other Memcor R&D projects seek to utilize Memtec's knowledge of
electrochemical processes to enter new markets ranging from high quality water
production to environmental sensors. These R&D projects are also at the
laboratory to pilot stage and similarly require a number of years of
additional R&D before a product may be available for launching.
 
  Fluid Dynamics R&D projects are directed at developing new applications for
Memtec's proprietary metallic media. The media enables precise fine filtration
in a range of hostile environments as well as having unique conductive
properties. These R&D projects are at the laboratory stage of development and
require additional research ranging from twelve months to several years
depending upon the particular product before any market launch is possible.
 
  Filterite R&D projects center around its two proprietary technologies--the
unique Filterite highly assymetric membrane and the cold melt spinning
technology. R&D projects are examining expansion of product offerings from
these core technologies. These projects require further materials science
laboratory work followed by manufacturing prototyping and tailoring to market
applications--a process which will range from eighteen months to several
years.
 
  Seitz R&D is directed at next generation filtration technologies for the
food and beverage and chemicals industries drawing on the core technologies of
Seitz. These R&D projects are predominantly at the pilot stage, requiring
extensive trialing evaluation and development based on the trialing before
market launches are possible.
 
  Failure to complete these R&D projects successfully and on time would open
the way for competitors to introduce alternate technologies, with consequent
implications for Memtec's revenues. To be successful in most cases, the R&D
projects must be developed from laboratory or pilot scale models to full scale
products capable of production within a quality accredited manufacturing
process. The existing R&D projects are expected to be completed and
commercialized over the next ten years with expected R&D and project related
expenditures of approximately $275 million over such ten year period. The
expenditures will be expensed or capitalized in accordance with generally
accepted accounting principles.
 
  The valuation process distinguished between R&D projects with no alternate
uses or values and those with alternate uses. Predominantly all R&D projects
are at a stage of development where the progress to date is not applicable to
any other use within Memtec nor is it saleable to any third party known to
management.
 
  Merger, Restructuring, Acquisition and Other Related Charges
 
  As of December 31, 1997, the Company completed the acquisition of Kinetics
in a tax-free reorganization, which was accounted for as a pooling of
interests. Concurrent with the acquisitions of Kinetics and Memtec, the
Company designed and implemented a restructuring plan to streamline its
manufacturing and production base, improve efficiency and enhance its
competitiveness. The restructuring plan resulted in a pre-tax charge of
 
                                      25
<PAGE>
 
$141.1 million. The plan identifies certain products and technologies acquired
in conjunction with the Memtec transaction that supersede products and
technologies acquired in earlier acquisitions of membrane related businesses.
As a result certain carrying amounts of goodwill and other intangible assets
were determined to be impaired by approximately $55.0 million in accordance
with Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). SFAS 121 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. In determining the
amount of the impairment of these assets, the Company valued the assets using
the present value of estimated expected future cash flows using discount rates
commensurate with the risks involved. The restructuring plan also included
closing or reconfiguring of certain facilities and reducing the work force by
approximately 350 employees, most of whom work in the facilities to be closed.
 
  Included in merger, restructuring, acquisition and other related charges are
the following:
 
<TABLE>
<CAPTION>
                                                                  (IN THOUSANDS)
                                                                  --------------
   <S>                                                            <C>
   Write-down of goodwill and other intangible assets............    $ 54,950
   Asset write-offs, including equipment and facilities..........      47,887
   Merger, integration and other acquisition costs...............      21,135
   Severance and related costs...................................      17,137
                                                                     --------
     Total.......................................................    $141,109
                                                                     ========
   Cash charges..................................................    $ 36,431
   Non-cash charges..............................................     104,678
                                                                     --------
     Total.......................................................    $141,109
                                                                     ========
</TABLE>
 
  After an income tax benefit of $34.5 million, the charges detailed above
totaling $440.6 million reduced earnings by $406.1 million. Approximately
$15.4 million of merger and restructuring related charges are included in
accrued liabilities at March 31, 1998. Additional costs to complete the
restructuring plan are not expected to be material.
 
  The write-down of assets as a result of the restructuring plan (including
assets of business' whose products were superseded by Memtec's products) will
not have a material affect on the Company's consolidated results of operations
in the future.
 
  Operating Income (Loss)
 
  For fiscal 1998, the Company recorded an operating loss of $235.2 million as
compared to operating income of $66.0 million in the comparable period in the
prior year. The operating loss can be attributed to the recording of charges
for purchased in-process research and development and merger, restructuring,
acquisition and other related charges as detailed above. Before the impact of
these charges, operating income for fiscal 1998 was $205.4 million or 6.4% of
revenue. For fiscal 1997, operating income before merger expenses was 4.1% of
revenues. The improvement in operating margin before certain charges can be
attributed primarily to improvements in gross margin as described above.
 
  Interest Expense
 
  Interest expense increased to $53.9 million for fiscal 1998 from $26.5
million for the corresponding period in the prior year. Interest expense for
fiscal 1998 consisted primarily of interest on the Company's: (i) 6%
Convertible Subordinated Notes issued on September 18, 1995 due 2005; (ii)
4.5% Convertible Subordinated Debentures issued on December 11, 1996 due 2001;
(iii) borrowings under Kinetics' long-term line-of-credit; (iv) 8.0% Senior
Subordinated Debentures issued by Kinetics; (v) borrowings under Memtec's
long-term line-of-credit; (vi) Senior Guaranteed Notes issued by Memtec
bearing interest at rates ranging from 7.7% to 8.0%;
 
                                      26
<PAGE>
 
(viii) other long-term debt bearing interest at rates ranging from 2.0% to
10.1% and (viii) borrowings under the Company's Senior Credit Facility. At
March 31, 1998, the Company had cash, cash equivalents and short-term
investments of $48.9 million.
 
  Income Tax Expense
 
  Income tax expense increased to $15.6 million in fiscal 1998 from $10.7
million in the corresponding period in the prior year. Before certain charges
the Company had income tax expense of $50.1 or an effective tax rate of 32.0%
for fiscal 1998 as compared to 24.7% in the corresponding period in the prior
year.
 
  Net Income (Loss)
 
  For fiscal 1998 net income before certain charges increased $69.8 million to
$106.3 million from $36.5 million before certain charges for the same period
in the prior year. After certain charges net loss in fiscal 1998 was $299.8
million as compared to net income of $32.5 million for fiscal 1997. Net income
per common share for fiscal 1997 and 1998 were as follows:
 
<TABLE>
<CAPTION>
                                                                   1997   1998
                                                                   ----- ------
       <S>                                                         <C>   <C>
       Basic...................................................... $0.51 $(3.13)
       Diluted.................................................... $0.49 $(3.13)
</TABLE>
 
TWELVE MONTHS ENDED MARCH 31, 1997 ("FISCAL 1997") COMPARED WITH TWELVE MONTHS
ENDED MARCH 31, 1996 ("FISCAL 1996")
 
  Revenues
 
  Revenues for fiscal 1997 were $1,764.4 million, an increase of $673.7
million from $1,090.7 for the comparable period of the prior fiscal year. This
61.8% increase was due primarily to acquisitions completed by the Company
after fiscal 1996. For fiscal 1997, revenues from capital equipment sales
represented 52% of total revenues, while revenues from services and operations
represented 24% of total revenues and revenues from distribution represented
24% of total revenues.
 
  Gross Profit
 
  Gross profit increased 52.8% to $387.8 million for fiscal 1997 from $253.8
million for the comparable period of the prior fiscal year. Total gross profit
as a percentage of revenue ("gross margin") was 22.0% for fiscal 1997 compared
to 23.3% for the comparable period of the prior fiscal year. The decrease in
gross margin is due primarily to the incurrence of certain unreimbursed
project costs at Kinetics during the fiscal year ended March 31, 1997 after
restatement for the acquisition of Kinetics in the current period accounted
for as a pooling of interests.
 
  Selling, General and Administrative Expenses
 
  For fiscal 1997, selling, general, and administrative expenses, excluding
merger expenses, increased $123.8 million to $316.2 million as compared to the
$192.4 million in the comparable period in the prior year. The increase in
these expenses can be attributed primarily to the addition of sales and
administrative personnel accompanying the Company's acquisitions after fiscal
1996. During fiscal 1997, selling, general and administrative expenses,
excluding Davis merger expenses, were 17.9% of revenues compared to 17.6% for
the comparable period in the prior year. The increase was primarily due to
Kinetics recording certain charges in selling, general and administrative
expenses during the fiscal year ended March 31, 1997 for the write-off of
certain receivables, the write-down of certain assets, the increase in
Kinetics allowance for doubtful accounts and the establishment of certain
accruals. These charges are included in fiscal 1997 after restatement for the
acquisition of Kinetics in the current period accounted for as a pooling of
interests.
 
  Excluding Davis merger expenses, operating income as a percentage of
revenues decreased to 4.1% for fiscal 1997 from 5.6% for the corresponding
period in fiscal 1996 due primarily to the decrease in the gross margin.
 
                                      27
<PAGE>
 
  Merger Expenses
 
  Merger expenses were incurred during fiscal 1997 relating to the Company's
acquisition of Davis which was accounted for as a pooling of interests. These
merger expenses, which totaled $5.6 million, consisted primarily of investment
banking fees, printing, stock transfer fees, legal fees, accounting fees,
governmental filing fees and certain other costs related to existing Davis
pension plans and change of control payments.
 
  Interest Expense
 
  Interest expense increased to $26.5 million for fiscal 1997 from $16.3
million for the corresponding period in the prior year. Interest expense for
fiscal 1997 consisted primarily of interest on the Company's: (i) 5%
Convertible Debentures due 2000 (all of which were, as of October 25, 1996,
converted into shares of Common Stock); (ii) 6% Convertible Subordinated Notes
due 2005 issued on September 18, 1995; (iii) 4.5% Convertible Subordinated
Debentures due 2001 issued on December 11, 1996; (iv) 8% Senior Subordinated
Notes issued by Kinetics; (v) borrowings under the Company's bank line of
credit and (vi) borrowings under Kinetics' line of credit. At March 31, 1997,
the Company had cash, cash equivalents and short-term investments of
$137.3 million.
 
  Income Tax Expense
 
  Income tax expense decreased to $10.7 million in fiscal 1997 from $20.3
million in the corresponding period in the prior year. The Company's effective
tax rate for fiscal 1997 was 24.7% as compared to 39.8% in the corresponding
period in the prior year. At March 31, 1997, the Company had net operating
loss carryforwards of approximately $16.4 million in France for which
financial statement benefit was recognized in fiscal 1997.
 
  Net Income
 
  For fiscal 1997, net income increased $1.8 million to $32.5 million from
$30.7 million for the same period in the prior year. Excluding Davis merger
expenses, net income totaled $36.5 million, an increase of 19.1% over fiscal
1996.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company's principal sources of funds are cash and other working capital,
cash flow generated from operations and borrowings under the Company's Senior
Credit Facility. At March 31, 1998, the Company had working capital of $591.8
million including cash and short-term investments of $48.9 million. The
Company's long-term debt at March 31, 1998, was $554.0 million consisting of
$140.0 million of 6.0% Convertible Subordinated Notes due 2005 and $414.0
million of 4.5% Convertible Subordinated Notes due 2001. The Company also had
other long-term debt totaling $135.5 million consisting of $60.0 million of
Senior Guaranteed Notes issued by Memtec bearing interest at rates ranging
from 7.7% to 8.0% and other long-term debt of $75.5 million bearing interest
at rates ranging from 2.0% to 10.1%.
 
  As of March 31, 1998, the Company had a Senior Credit Facility which
provides credit facilities to the Company of up to $750.0 million, of which
there were outstanding borrowings of $544.1 million and outstanding letters of
credit of $40.7 million. Borrowings under the Senior Credit Facility bear
interest at variable rates of up to 0.45% above certain Eurocurrency rates or
0.15% above BankBoston's base rate. The Senior Credit Facility is subject to
customary and usual terms.
 
  In connection with the acquisitions of Kinetics and Memtec, the Company
assumed through its subsidiaries two additional loan agreements with banks.
One agreement provides a revolving line-of-credit with borrowings of up to
$100.0 million, of which no amounts were outstanding at March 31, 1998.
Borrowings under this agreement bear interest at the bank's reference rate or
other interest rate options that the subsidiary may select. The other
agreement is a Multi-Option, Multi-Currency Master Facility that provides
borrowings of up to $60.0 million, of which $30.7 million was outstanding as
of March 31, 1998. Borrowings under this agreement bear interest at LIBOR plus
0.75%. The Company anticipates that it will terminate these two agreements
during fiscal 1999.
 
                                      28
<PAGE>
 
  Subsequent to the Company's Fiscal year end, on May 15, 1998, the Company
issued $500,000,000 6.375% Remarketable or Redeemable Securities due 2011
(Remarketing Date May 15, 2001) and $400,000,000 6.50% Remarketable or
Redeemable Securities due 2013 (Remarketing Date May 15, 2003) (collectively,
the "ROARS"). The net proceeds from the sale of the ROARS, including a premium
payment to the Company by NationsBanc Montgomery Securities LLC, were $913.6
million. The net proceeds were used to repay indebtedness outstanding under
the Senior Credit Facility, indebtedness assumed in the acquisition of Memtec,
and a portion of the indebtedness assumed in the acquisition of Culligan.
 
  The Company believes its current cash position, cash flow from operations,
and available borrowings under the Company's line-of-credit will be adequate
to meet its anticipated cash needs from working capital, revenue growth,
scheduled debt repayment and capital investment objectives for at least the
next twelve months.
 
CERTAIN TRENDS AND UNCERTAINTIES
 
  The Company and its representatives may from time to time make written or
oral forward-looking statements, including statements contained in the
Company's filings with the United States Securities and Exchange Commission
and in its reports to stockholders. In connection with the "Safe Harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the
Company is hereby identifying important factors that could cause actual
results to differ materially from those contained in any forward-looking
statement made by or on behalf of the Company; any such statement is qualified
by reference to the following cautionary statements.
 
  Acquisition Strategy. In pursuit of its strategic objective of becoming the
leading global single-source provider of water and wastewater treatment
systems and services, the Company has, since 1991, acquired more than 150
United States based and international businesses. The Company plans to
continue to pursue acquisitions that expand the segments of the water and
wastewater treatment and water-related industries in which it participates,
complement its technologies, products or services, broaden its customer base
and geographic areas served and/or expand its global distribution network, as
well as acquisitions which provide opportunities to further and implement the
Company's one-stop-shop approach in terms of technology, distribution or
service. The Company's acquisition strategy entails the potential risks
inherent in assessing the value, strengths, weaknesses, contingent or other
liabilities and potential profitability of acquisition candidates and in
integrating the operations of acquired companies. In addition, the Company's
acquisition of Memtec was accomplished through an unsolicited tender offer,
and the Company could make other such acquisitions. The level of risk
associated with such acquisitions is generally greater because frequently they
are accomplished, as was the case with the acquisition of Memtec, without the
customary representations or due diligence typical of negotiated transactions.
Although the Company generally has been successful in pursuing acquisitions,
there can be no assurance that acquisition opportunities will continue to be
available, that the Company will have access to the capital required to
finance potential acquisitions, that the Company will continue to acquire
businesses or that any business acquired will be integrated successfully or
prove profitable.
 
  International Transactions. The Company has made and expects it will
continue to make acquisitions and expects to obtain contracts in markets
outside the United States. In addition, a substantial portion of the business
of a wholly owned subsidiary of the Company includes non-U.S. sales. While
these activities may provide important opportunities for the Company to offer
its products and services internationally, they also entail the risks
associated with conducting business internationally, including the risk of
currency fluctuations, slower payment of invoices, the lack in some
jurisdictions of well-developed legal systems, nationalization and possible
social, political and economic instability. In particular, the Company has
significant operations in Asia which have been and may in the future be
adversely affected by current economic conditions in that region. While the
full impact of this economic instability cannot be predicted, it could have a
material adverse effect on the Company's revenues and profitability.
 
  Reliance on Key Personnel. The operations of the Company are dependent on
the continued efforts of senior management, in particular Richard J. Heckmann,
the Company's Chairman of the Board, President and Chief Executive Officer.
The Company has entered into an employment agreement with Mr. Heckmann and the
Company is considering employment agreements for other members of senior
management, most of whom do
 
                                      29
<PAGE>
 
not currently have such agreements, although such members have yet to be
determined. There can be no assurance that the Company will enter into
employment agreements with members of senior management. Should any of the
Company's senior managers be unable or choose not to continue in their present
roles, the Company's prospects could be adversely affected.
 
  Profitability of Fixed Price Contracts. A significant portion of the
Company's revenues are generated under fixed price contracts. To the extent
that original cost estimates are inaccurate, scheduled deliveries are delayed
or progress under a contract is otherwise impeded, revenue recognition and
profitability from a particular contract may be adversely affected. The
Company routinely records upward or downward adjustments with respect to fixed
price contracts due to changes in estimates of costs to complete such
contracts. There can be no assurance that future downward adjustments will not
be material.
 
  Cyclicality, Seasonality and Possible Earnings Fluctuations. The sale of
capital equipment within the water treatment industry is cyclical and
influenced by various economic factors including interest rates and general
fluctuations of the business cycle. A significant portion of the Company's
revenues are derived from capital equipment sales. While the Company sells
capital equipment to customers in diverse industries and in global markets,
cyclicality of capital equipment sales and instability of general economic
conditions, including those currently unfolding in Asian markets, could have a
material adverse effect on the Company's revenues and profitability.
 
  The sale of water and wastewater distribution equipment and supplies is also
cyclical and influenced by various economic factors including interest rates,
land development and housing construction industry cycles. Sales of such
equipment and supplies are also subject to seasonal fluctuation in temperate
climates. The sale of water and wastewater distribution equipment and supplies
is a significant component of the Company's business. Cyclicality and
seasonality of water and wastewater distribution equipment and supplies sales
could have a material adverse effect on the Company's revenues and
profitability.
 
  The Company's high-purity process piping systems have been sold principally
to companies in the semiconductor and, to a lesser extent, pharmaceutical and
biotechnology industries, and sales of those systems are critically dependent
on these industries. The success of customers and potential customers for
high-purity process piping systems is linked to economic conditions in these
respective industries, which in turn are each subject to intense competitive
pressure and are affected by overall economic conditions. The semiconductor
industry in particular has historically been, and will likely continue to be,
cyclical in nature and vulnerable to general downturns in the economy. The
semiconductor and pharmaceutical industries also represent significant markets
for the Company's water and wastewater treatment systems. Downturns in these
industries could have a material adverse effect on the Company's revenues and
profitability.
 
  Operating results from the sale of high-purity process piping systems also
can be expected to fluctuate significantly as a result of the limited pool of
existing and potential customers for these systems, the timing of new
contracts, possible deferrals or cancellations of existing contracts and the
evolving and unpredictable nature of the markets for high-purity process
piping systems.
 
  As a result of these and other factors, the Company's operating results may
be subject to quarterly or annual fluctuations. There can be no assurance that
at any given time the Company's operating results will meet or exceed stock
market analysts' expectations, in which event the market price of the common
stock could be adversely affected.
 
  Potential Environmental Risks. The Company's business and products may be
significantly influenced by the constantly changing body of environmental laws
and regulations, which require that certain environmental standards be met and
impose liability for the failure to comply with such standards. The Company is
also subject to inherent risks associated with environmental conditions at
facilities owned, and the state of compliance with environmental laws, by
businesses acquired by the Company. While the Company endeavors at each of its
facilities to assure compliance with environmental laws and regulations, there
can be no assurance that the
 
                                      30
<PAGE>
 
Company's operations or activities, or historical operations by others at the
Company's locations, will not result in cleanup obligations, civil or criminal
enforcement actions or private actions that could have a material adverse
effect on the Company.
 
  In that regard, at a Connecticut ion exchange resin regeneration facility
(the "South Windsor Facility") operated by a wholly owned subsidiary of the
Company (the "South Windsor Subsidiary"), acquired by the Company in October
1995 from Anjou International Company ("Anjou"), U.S. federal and state
environmental regulatory authorities issued certain notices of violation
alleging multiple violations of applicable wastewater pretreatment standards.
The South Windsor Subsidiary has reached an agreement with the U.S. Attorney's
Office and the U.S. Environmental Protection Agency ("USEPA") to settle all
agency claims and investigations relating to this matter entering into a plea
agreement pursuant to which the South Windsor Subsidiary will plead guilty to
a single violation of the Clean Water Act. The settlement includes a payment
of $1.36 million, including a criminal penalty of $1.0 million and annual
environmental compliance audits at the South Windsor Facility for five years.
The Company believes that this settlement will conclude this matter in its
entirety; however, the settlement does not include a formal release of all
liabilities in this regard. The Company has certain rights of indemnification
from Anjou which may be available with respect to this matter pursuant to the
laws of the State of New York or the Stock Purchase Agreement dated as of
August 30, 1995 among the Company, Anjou and Polymetrics, Inc.
 
  In addition to the foregoing, the Company's activities as owner and operator
of certain hazardous waste treatment and recovery facilities are subject to
stringent laws and regulations and compliance reviews. Failure of these
facilities to comply with those regulations could result in substantial fines
and the suspension or revocation of the facility's hazardous waste permit. The
Company serves as contract operator of various municipal and industrial
wastewater collection and treatment facilities, which were developed and are
owned by governmental or private entities. The Company also operates other
facilities, including service deionization centers and manufacturing
facilities, that discharge wastewater in connection with routine operations.
Under certain service contracts and applicable environmental laws, the Company
as operator of such facilities may incur certain liabilities in the event
those facilities experience malfunctions or discharge wastewater which does
not meet applicable permit limits and regulatory requirements. In some cases,
the potential for such liabilities depends upon design or operational
conditions over which the Company has limited, if any, control. In other
matters, the Company has been notified by the USEPA that it is a potentially
responsible party under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 ("CERCLA") at certain sites to which
the Company or its predecessors allegedly sent waste in the past. It is
possible that the Company could receive other such notices under CERCLA or
analogous state laws in the future. Based on sites which are currently known
to the Company that may require remediation, the Company does not believe that
its liability, if any, relating to such sites will be material. However, there
can be no assurance that such matters will not be material. In addition, to
some extent, the liabilities and risks imposed by environmental laws on the
Company's customers may adversely impact demand for certain of the Company's
products or services or impose greater liabilities and risks on the Company,
which could also have an adverse effect on the Company's competitive and
financial position.
 
  In 1995, Culligan purchased an equity interest in Anvil Holdings, Inc. As a
result of this transaction, Culligan assumed certain environmental liabilities
associated with soil and groundwater contamination at Anvil Knitwear's
Asheville Dyeing and Finishing Plant (the "Plant") in Swannanoa, North
Carolina. Since 1990, Culligan has delineated and monitored the contamination
pursuant to an Administrative Consent Order entered into with the North
Carolina Department of Environment, Health and Natural Resources related to
the closure of an underground storage tank at the site. Groundwater testing at
the Plant and at two adjoining properties has shown levels of a cleaning
solvent believed to be from the Plant that are above action levels under state
guidelines. The Company has begun remediation of the contamination. The
Company currently estimates that the costs of future site remediation will
range from up to $1.0 million to $1.8 million and that it has sufficient
reserves for the site cleanup. The Company anticipates that the potential
costs of further monitoring and corrective measures to address the groundwater
problem under applicable laws will not have a material adverse effect on the
financial position or the results of operations of the Company. However,
because the full extent of
 
                                      31
<PAGE>
 
the required cleanup has not been determined, there can be no assurance that
this matter will not have a material adverse effect on the Company's financial
position or results of operations.
 
  Certain of the Company's facilities contain or in the past contained
underground storage tanks which may have caused soil or groundwater
contamination. At one site formerly owned by Culligan, the Company is
investigating, and has taken certain actions to correct, contamination that
may have resulted from a former underground storage tank. Based on the amount
of contamination believed to have been present when the tank was removed, and
the probability that some of the contamination may have originated from nearby
properties, the Company believes, although there can be no assurance, that
this matter will not have a material adverse effect on the Company's financial
position or results of operations.
 
  Competition. All of the markets in which the Company competes are highly
competitive, and most are fragmented, with numerous regional and local
participants. There are competitors of the Company in certain markets that are
divisions or subsidiaries of companies that have significantly greater
resources than the Company. Competitive pressures, including those described
above, and other factors could cause the Company to lose market share or could
result in significant price erosion, either of which could have a material
adverse effect upon the Company's financial position, results of operations
and cash flows. See "Business--Competition."
 
  Potential Risks Related to Water Rights and Water Transfers. The Company
recently acquired more than 47,000 acres of agricultural land (the
"Properties"), situated in the Southwestern United States, the substantial
majority of which are in Imperial County, California (the "IID Properties")
located within the Imperial Irrigation District (the "IID"). Substantially all
of the Properties are currently leased to third party agricultural tenants,
including prior owners of the Properties. The Company acquired the Properties
with appurtenant water rights, and is actively seeking to acquire additional
properties with water rights, primarily in the Southwestern and Western United
States. The Company may seek in the future to transfer water attributable to
water rights appurtenant to the Properties, particularly the IID Properties
(the "IID Water"). However, since the IID holds title to all of the water
rights within the IID in trust for the landowners, the IID would control the
timing and terms of any transfers of IID Water by the Company. The
circumstances under which transfers of water can be made and the profitability
of any transfers are subject to significant uncertainties, including
hydrologic risks of variable water supplies, risks presented by allocations of
water under existing and prospective priorities, and risks of adverse changes
to or interpretations of U.S. federal, state and local laws, regulations and
policies. Transfers of IID Water attributable to water rights appurtenant to
the IID Properties (the "IID Water Rights") are subject to additional
uncertainties. Allocations of Colorado River water, which is the source of all
water deliveries to the IID Properties, are subject to limitations under
complex international treaties, interstate compacts, U.S. federal and state
laws and regulations, and contractual arrangements and, in times of drought,
water deliveries could be curtailed by the U.S. government. Further, any
transfers of IID Water would require the approval of the U.S. Secretary of the
Interior. Even if a transfer were approved, other California water districts
and users could assert claims adverse to the IID Water Rights, including but
not limited to claims that the IID has failed to satisfy U.S. federal law and
California constitutional requirements that IID Water must be put to
reasonable and beneficial use. A finding that the IID's water use is
unreasonable or nonbeneficial could adversely impact title to the IID Water
Rights and the ability to transfer IID Water. Water transferred by the IID to
metropolitan areas of Southern California, such as San Diego, currently would
be transported through aqueducts owned or controlled by the Metropolitan Water
District, a quasi-governmental agency (the "MWD"). The transportation cost for
any transfer of IID Water and the volume of water which the MWD can be
required to transport at any time are subject to California laws of uncertain
application, some aspects of which are currently in litigation. The
uncertainties associated with water rights could have a material adverse
effect on the Company's future profitability.
 
  Technological and Regulatory Risks. Portions of the water and wastewater
treatment business are characterized by changing technology, competitively
imposed process standards and regulatory requirements, each of which
influences the demand for the Company's products and services. Changes in
regulatory or industrial requirements may render certain of the Company's
treatment products and processes obsolete.
 
                                      32
<PAGE>
 
Acceptance of new products may also be affected by the adoption of new
government regulations requiring stricter standards. The Company's ability to
anticipate changes in technological and regulatory standards and to develop
successfully and introduce new and enhanced products on a timely basis will be
a significant factor in the Company's ability to grow and to remain
competitive. There can be no assurance that the Company will be able to
achieve the technological advances that may be necessary for it to remain
competitive or that certain of its products will not become obsolete. In
addition, the Company is subject to the risks generally associated with new
product introductions and applications, including lack of market acceptance,
delays in development or failure of products to operate properly. The market
growth potential of acquired in-process research and development is subject to
certain risks, including costs to develop and commercialize such products, the
cost and feasibility of production of products utilizing the applicable
technologies, introduction of competing technologies and market acceptance of
the products and technologies involved.
 
  There can be no assurance that the Company's existing or any future
trademarks or patents will be enforceable or will provide substantial
protection from competition or be of commercial benefit to the Company. In
addition, the laws of certain non-United States countries may not protect
proprietary rights to the same extent as do the laws of the United States.
Successful challenges to certain of the Company's patents or trademarks could
materially adversely affect its competitive and financial position.
 
  Municipal Water and Wastewater Business. A significant percentage of the
Company's revenues is derived from municipal customers. While municipalities
represent an important part of the water and wastewater treatment industry,
contractor selection processes and funding for projects in the municipal
sector entail certain additional risks not typically encountered with
industrial customers. Competition for selection of a municipal contractor
typically occurs through a formal bidding process which can require the
commitment of resources and
 
                                      33
<PAGE>
 
greater lead times than industrial projects. In addition, this segment is
dependent upon the availability of funding at the local level, which may be
the subject of increasing pressure as local governments are expected to bear a
greater share of the cost of public services.
 
  Year 2000 Risks. The Year 2000 issue concerns the potential exposures
related to the automated generation of business and financial misinformation
resulting from the application of computer programs which have been written
using two digits, rather than four, to define the applicable year of business
transactions. Most of the Company's operating systems with Year 2000 issues
have been modified to address those issues; accordingly, management does not
anticipate any significant costs, problems or uncertainties associated with
becoming Year 2000 compliant. The Company is currently developing a plan
intended to assure that its other internal operating systems with Year 2000
issues are modified on a timely basis. Suppliers, customers and creditors of
the Company and Culligan also face similar Year 2000 issues. A failure to
successfully address the Year 2000 issue could have a material adverse effect
on the Company's business or results of operations.
 
  Impact of Recently Issued Accounting Standards. In June 1997, the Financial
Accounting Standards Board ("FASB") issued a new statement titled "Reporting
Comprehensive Income". The new statement is effective for fiscal years
beginning after December 15, 1997. The Company is currently evaluating its
options for disclosure under this new standard and will implement the
statement during its fiscal year ending March 31, 1999.
 
  In June 1997, FASB also issued a new statement titled "Disclosures about
Segments of an Enterprise and Related Information". The new statement is
effective for fiscal years beginning after December 15, 1997. The Company is
currently evaluating its options for disclosure under this new standard and
will implement the statement during its fiscal year ending March 31, 1999.
 
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  Reference is made to Part IV, Item 14 of this Annual Report for the
information required by Item 8.
 
                                      34
<PAGE>
 
               UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                                          <C>
Independent Auditors' Report--KPMG Peat Marwick LLP.........................  36
Report of Independent Auditors--Ernst & Young LLP...........................  37
Financial Statements:
  Consolidated Balance Sheets as of March 31, 1997 and 1998.................  38
  Consolidated Statements of Operations for the Years Ended
   March 31, 1996, 1997 and 1998............................................  39
  Consolidated Statements of Shareholders' Equity for the
   Years Ended March 31, 1996, 1997 and 1998................................  40
  Consolidated Statements of Cash Flows for the Years Ended
   March 31, 1996, 1997 and 1998............................................  41
  Notes to Consolidated Financial Statements................................  42
Independent Auditors' Report on Schedule....................................  67
Schedule:
  Schedule II -- Valuation and Qualifying Accounts..........................  68
</TABLE>
 
                                       35
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Shareholders
United States Filter Corporation:
 
  We have audited the accompanying consolidated balance sheets of United
States Filter Corporation and subsidiaries as of March 31, 1997 and 1998, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended March 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
consolidated financial statements of The Kinetics Group, Inc., a wholly owned
subsidiary, as of March 31, 1997, which statements reflect total assets
constituting 7 percent in 1997, and total revenues constituting 26 percent and
22 percent in 1996 and 1997, respectively, of the related consolidated totals.
Those consolidated financial statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for The Kinetics Group, Inc., is based solely on the report
of the other auditors.
 
  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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of United States Filter Corporation
and subsidiaries as of March 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
 
                                          KPMG Peat Marwick LLP
Orange County, California
June 1, 1998
 
                                      36
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
The Kinetics Group, Inc.
 
  We have audited the consolidated balance sheets of the Kinetics Group, Inc.
as of September 30, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended September 30, 1997 (not presented separately herein).
These financial statements 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Kinetics
Group, Inc. at September 30, 1996 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1997 in conformity with generally accepted accounting
principles.
 
                                                              Ernst & Young LLP
 
Walnut Creek, California
January 16, 1998
 
                                      37
<PAGE>
 
               UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                            MARCH 31, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                                            1997       1998
                                                         ----------  ---------
                                                            (IN THOUSANDS)
<S>                                                      <C>         <C>
                         ASSETS
Current assets:
  Cash and cash equivalents............................. $  135,144     48,673
  Short-term investments................................      2,158        241
  Accounts receivable, less allowance for doubtful
   accounts of $27,095 at March 31, 1997 and $33,370 at
   March 31, 1998.......................................    572,940    728,486
  Costs and estimated earnings in excess of billings on
   uncompleted contracts................................    130,310    217,935
  Inventories...........................................    245,201    386,100
  Prepaid expenses......................................      8,931     15,481
  Deferred taxes........................................     53,152    131,618
  Other current assets..................................     17,086     47,416
                                                         ----------  ---------
    Total current assets................................  1,164,922  1,575,950
                                                         ----------  ---------
Property, plant and equipment, net......................    319,687    806,475
Investment in leasehold interests, net..................     23,230     21,699
Costs in excess of net assets of businesses acquired,
 net....................................................    788,096  1,027,481
Other assets............................................    101,628    166,239
                                                         ----------  ---------
                                                         $2,397,563  3,597,844
                                                         ==========  =========
          LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable...................................... $  274,653    335,232
  Accrued liabilities...................................    275,537    434,028
  Current portion of long-term debt.....................     11,956     79,171
  Billings in excess of costs and estimated earnings on
   uncompleted contracts................................     61,441     90,073
  Other current liabilities.............................     26,183     45,670
                                                         ----------  ---------
    Total current liabilities...........................    649,770    984,174
                                                         ----------  ---------
Notes payable...........................................     42,646    574,806
Long-term debt, excluding current portion...............     31,464     56,305
Convertible subordinated debt...........................    554,000    554,000
Deferred taxes..........................................     12,198     51,849
Other liabilities.......................................     61,655     83,300
                                                         ----------  ---------
    Total liabilities...................................  1,351,733  2,304,434
                                                         ----------  ---------
Shareholders' equity:
  Preferred stock, authorized 3,000 shares..............        --         --
  Common stock, par value $.01. Authorized 300,000
   shares; issued and outstanding 80,334 and 107,422 at
   March 31, 1997 and 1998, respectively................        803      1,074
  Additional paid-in capital............................  1,013,734  1,577,847
  Currency translation adjustment.......................    (19,491)   (51,329)
  Retained earnings (accumulated deficit)...............     50,784   (234,182)
                                                         ----------  ---------
    Total shareholders' equity..........................  1,045,830  1,293,410
Commitments and contingencies...........................
                                                         ----------  ---------
                                                         $2,397,563  3,597,844
                                                         ==========  =========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       38
<PAGE>
 
               UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                   YEARS ENDED MARCH 31, 1996, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                         1996           1997          1998
                                     -------------  ------------  ------------
                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                  <C>            <C>           <C>
Revenues............................ $   1,090,745     1,764,406     3,234,580
Costs of sales......................       836,973     1,376,615     2,456,173
                                     -------------  ------------  ------------
    Gross profit....................       253,772       387,791       778,407
                                     -------------  ------------  ------------
Selling, general and administrative
 expenses...........................       192,387       316,190       573,002
Purchased in-process research and
 development........................           --            --        299,505
Merger, restructuring, acquisition
 and other related charges..........           --          5,581       141,109
                                     -------------  ------------  ------------
                                           192,387       321,771     1,013,616
                                     -------------  ------------  ------------
    Operating income (loss).........        61,385        66,020      (235,209)
                                     -------------  ------------  ------------
Other income (expense):
  Interest expense..................       (16,280)      (26,509)      (53,887)
  Interest and other income.........         5,923         3,678         4,900
                                     -------------  ------------  ------------
                                           (10,357)      (22,831)      (48,987)
                                     -------------  ------------  ------------
    Income (loss) before income tax
     expense........................        51,028        43,189      (284,196)
Income tax expense..................        20,329        10,681        15,583
                                     -------------  ------------  ------------
    Net income (loss)............... $      30,699        32,508      (299,779)
                                     =============  ============  ============
Net income (loss) per common share:
    Basic........................... $        0.62          0.51         (3.13)
                                     =============  ============  ============
    Diluted......................... $        0.61          0.49         (3.13)
                                     =============  ============  ============
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                       39
<PAGE>
 
               UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
                   YEARS ENDED MARCH 31, 1996, 1997 AND 1998
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                           PREFERRED STOCK      COMMON STOCK                              RETAINED
                          ------------------  ----------------- ADDITIONAL   CURRENCY     EARNINGS
                          NUMBER OF           NUMBER OF          PAID-IN    TRANSLATION (ACCUMULATED
                           SHARES    AMOUNT    SHARES   AMOUNT   CAPITAL    ADJUSTMENT    DEFICIT)     TOTAL
                          --------- --------  --------- ------- ----------  ----------- ------------ ---------
<S>                       <C>       <C>       <C>       <C>     <C>         <C>         <C>          <C>
Balance at March 31,
 1995...................    1,065   $ 25,577    30,054  $   224   151,707      (2,026)       1,603     177,085
Restatement for
 acquisition of Kinetics
 acquired through
 pooling of interests...      --         --      5,804       58    18,984         --         4,421      23,463
                            -----   --------   -------  ------- ---------     -------     --------   ---------
Balance at March 31,
 1995, restated.........    1,065     25,577    35,858      282   170,691      (2,026)       6,024     200,548
Compensation related to
 excess of fair value of
 director stock options
 over exercise price....      --         --        --       --        112         --           --          112
Conversion of preferred
 shares to common
 shares.................     (926)   (22,936)    2,083       14    22,922         --           --          --
Redemption of Series B
 convertible preferred
 stock..................     (139)    (2,641)      --       --     (2,068)        --           --       (4,709)
Issuance of common stock
 in connection with
 acquisitions...........      --         --      2,453       16    36,284         --           --       36,300
Shares issued through
 public offering net of
 offering costs of
 $6,106.................      --         --     10,350       69    97,325         --           --       97,394
Conversion of
 subordinated debt to
 common stock...........      --         --      3,750       25    44,975         --           --       45,000
Dividends paid on
 preferred stock........      --         --        --       --        --          --          (715)       (715)
Exercise of common stock
 options................      --         --        488        3     3,678         --           --        3,681
Issuances of common
 stock to acquire
 assets.................      --         --        224        2     2,974         --           --        2,976
Currency translation
 adjustment.............      --         --        --       --        --        3,862          --        3,862
Shareholders' equity
 transactions of
 Kinetics and other
 entities prior to
 merger.................      --         --        --       --      2,438         --       (10,196)     (7,758)
Net income..............      --         --        --       --        --          --        30,699      30,699
                            -----   --------   -------  ------- ---------     -------     --------   ---------
Balance at March 31,
 1996...................      --         --     55,206      411   379,331       1,836       25,812     407,390
Exercise of common stock
 options................      --         --        659        7     6,081         --           --        6,088
Issuance of common stock
 in connection with
 acquisitions...........      --         --      7,686       76   196,548         --           --      196,624
Issuance of common stock
 to pay off
 indebtedness...........      --         --        271        2     6,741         --           --        6,743
Par value of shares
 issued in connection
 with three-for-two
 stock split............      --         --        --       143      (143)        --           --          --
Shares issued through
 public offering, net of
 offering costs of
 $17,154................      --         --     11,804      118   356,036         --           --      356,154
Conversion of
 subordinated debt to
 common stock...........      --         --      4,389       43    58,535         --           --       58,578
Issuance of common stock
 to acquire assets......      --         --        319        3     5,894         --           --        5,897
Shareholders' equity
 transactions of
 Kinetics and other
 entities prior to
 merger.................      --         --        --       --      4,711         --        (7,536)     (2,825)
Currency translation
 adjustment.............      --         --        --       --        --      (21,327)         --      (21,327)
Net income..............      --         --        --       --        --          --        32,508      32,508
                            -----   --------   -------  ------- ---------     -------     --------   ---------
Balance at March 31,
 1997...................      --         --     80,334      803 1,013,734     (19,491)      50,784   1,045,830
Exercise of common stock
 options................      --         --        506        5     5,536         --                     5,541
Issuance of common stock
 in connection with
 acquisitions...........      --         --     26,536      265   527,955         --           --      528,220
Shareholders' equity
 transactions of
 Kinetics and other
 entities prior to
 merger.................      --         --        --       --     29,480         --        14,813      44,293
Issuance of common stock
 to acquire assets......      --         --         46        1     1,142         --           --        1,143
Currency translation
 adjustment.............      --         --        --       --        --      (31,838)         --      (31,838)
Net loss................      --         --        --       --        --          --      (299,779)   (299,779)
                            -----   --------   -------  ------- ---------     -------     --------   ---------
Balance at March 31,
 1998...................      --    $    --    107,422  $ 1,074 1,577,847     (51,329)    (234,182)  1,293,410
                            =====   ========   =======  ======= =========     =======     ========   =========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       40
<PAGE>
 
               UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                   YEARS ENDED MARCH 31, 1996, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                                    1996      1997      1998
                                                  --------  --------  --------
                                                        (IN THOUSANDS)
<S>                                               <C>       <C>       <C>
Cash flows from operating activities:
 Net income (loss)............................... $ 30,699    32,508  (299,779)
 Adjustments to reconcile net income (loss) to
  net cash provided by (used in) operating
  activities:
   Deferred income taxes.........................   (4,932)    1,732   (27,308)
   Depreciation..................................   25,224    35,969    64,682
   Amortization..................................    7,245    14,674    28,322
   Write-off of purchased in-process research and
    development and goodwill.....................      --        --    352,025
   Provision for doubtful accounts...............    5,929     5,536     7,620
   (Gain) loss on sale or disposal of property
    and equipment................................     (260)      (15)   11,549
   Stock and stock option compensation...........      112       --        --
   Increase in closure reserves and write-off of
    intangible assets............................      768       --        --
   Change in operating assets and liabilities:
   (Increase) decrease in accounts receivable....  (39,603)  (23,364)   16,736
   Increase in costs and estimated earnings in
    excess of billings on uncompleted contracts..   (8,471)  (53,302)  (37,337)
   Increase in inventories.......................   (5,468)  (29,136)  (30,500)
   Increase in prepaid expenses and other assets.   (5,359)  (43,913)  (46,658)
   Increase in accounts payable and accrued
    expenses.....................................    4,473    37,885     4,890
   Increase (decrease) in billings in excess of
    costs and estimated earnings on uncompleted
    contracts....................................   (2,110)    8,182   (10,154)
   Increase (decrease) in other liabilities......   (1,612)   (2,564)    2,063
                                                  --------  --------  --------
     Net cash provided by (used in) operating
      activities.................................    6,635   (15,808)   36,151
                                                  --------  --------  --------
Cash flows from investing activities:
 Investment in leasehold interests...............   (8,347)      --        --
 Purchase of property, plant and equipment.......  (38,335)  (56,834) (127,592)
 Proceeds from disposal of equipment.............    7,670     6,301     7,500
 (Purchase) sale of short-term investments.......    9,871      (374)    1,923
 Payment for purchase of acquisitions, net of
  cash acquired.................................. (206,936) (586,059) (461,174)
                                                  --------  --------  --------
     Net cash used in investing activities....... (236,077) (636,966) (579,343)
                                                  --------  --------  --------
Cash flows from financing activities:
 Net proceeds from sale of common stock..........   97,783   356,154       --
 Net proceeds from sale of convertible
  subordinated debt..............................  136,249   403,650       --
 Proceeds from exercise of common stock options..    3,681     6,088     5,541
 Principal payments of debt......................  (71,909)  (13,393)  (51,885)
 Dividends paid on common and preferred stock....   (9,988)   (3,901)      (50)
 Payment to repurchase Series B preferred stock..   (4,709)      --        --
 Net proceeds from borrowings on notes payable...   76,990    11,590   503,115
                                                  --------  --------  --------
     Net cash provided by financing activities...  228,097   760,188   456,721
                                                  --------  --------  --------
     Net increase (decrease) in cash and cash
      equivalents................................   (1,345)  107,414   (86,471)
Cash and cash equivalents at beginning of year...   29,075    27,730   135,144
                                                  --------  --------  --------
Cash and cash equivalents at end of year......... $ 27,730   135,144    48,673
                                                  ========  ========  ========
Supplemental disclosures of cash flow
 information:
 Cash paid during the year for interest.......... $ 16,463    21,472    45,548
                                                  ========  ========  ========
 Cash paid during the year for income taxes...... $ 11,275    14,936    24,882
                                                  ========  ========  ========
Noncash investing and financing activities
 consisted of the following:
 Common stock issued:
   Conversion of subordinated debt............... $ 45,000    60,000       --
   Purchase of property or equipment.............    2,976     5,897     1,143
 Property, plant and equipment exchanged for
  receivables....................................    5,318       --        --
                                                  --------  --------  --------
                                                  $ 53,294    65,897     1,143
                                                  ========  ========  ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       41
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                   YEARS ENDED MARCH 31, 1996, 1997 AND 1998
 
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
PRINCIPLES OF CONSOLIDATION
 
  The consolidated financial statements include the financial statements of
United States Filter Corporation and wholly owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
 
REVENUE RECOGNITION
 
 Method of Accounting for Contracts
 
  The accounting records of the Company are maintained and income is reported
for financial reporting and income tax purposes for long-term contracts under
the percentage-of-completion method of accounting. Under this method, an
estimated percentage for each contract, based on the cost of work performed to
date that has contributed to contract performance compared to the total
estimated cost, is applied to the contract price and recognized as revenue.
Provision is made for the entire amount of future estimated losses on
contracts in progress in the period such losses are determined. Claims for
additional contract compensation due the Company are not reflected in the
accounts until the year in which such claims are allowed, except where
contract terms specifically provide for certain claims.
 
  Contract costs include all direct material and labor and indirect costs
related to contract performance. General and administrative expenses are
charged to expense as incurred.
 
 Products and Services
 
  Sales of other products and services are recorded as products are shipped or
services rendered.
 
INCOME TAXES
 
  Deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
tax rates in effect for the year in which the differences are expected to
reverse.
 
  United States income taxes are not provided on the undistributed earnings of
its non-U.S. subsidiaries as such earnings are intended to be indefinitely
reinvested in those operations.
 
FOREIGN CURRENCY TRANSLATION
 
  Assets and liabilities denominated in a functional currency other than U.S.
dollars are translated into U.S. dollars at the current rate of exchange
existing at period-end and revenues and expenses are translated at the average
monthly exchange rates. Translation adjustments are included as a separate
component of shareholders' equity. Transaction gains and losses included in
net income (loss) are immaterial. The effects of exchange rate changes on cash
are immaterial as of March 31, 1997 and 1998 and for each of the years in the
three year period ended March 31, 1998.
 
INVENTORIES
 
  Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
 
                                      42
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
PROPERTY, PLANT AND EQUIPMENT
 
  Property, plant and equipment are stated at cost and depreciated on the
straight-line method over the estimated useful lives of the respective assets
which range from three to 25 years. Leasehold improvements are amortized on
the straight-line method over the lesser of their estimated useful lives or
the related lease term.
 
COSTS IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED
 
  Costs in excess of net assets of businesses acquired are amortized on the
straight-line method over a 20- to 40-year life. The Company evaluates the
recoverability of these costs based upon expectations of non-discounted cash
flows of each subsidiary.
 
INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
 
  Investments in unconsolidated joint ventures are accounted for using the
equity method. The Company's share of earnings or losses from these joint
ventures is reflected in income and dividends are credited against the
investment when received.
 
NET UNAMORTIZED DEBT ISSUANCE COSTS
 
  Net unamortized debt issuance costs, aggregating $16.9 million and $11.2
million at March 31, 1997 and 1998, respectively, have been deferred and are
being amortized over the term of the related debt ranging from five to ten
years.
 
WARRANTIES
 
  The Company's products are generally warrantied against defects in material
and workmanship for a period of one year. The Company has accrued for
estimated future warranty costs.
 
ENVIRONMENTAL EXPENDITURES
 
  Expenditures for environmental protection are expensed or capitalized, as
appropriate. Costs associated with remediation activities are expensed.
Liabilities are recorded when remedial efforts are probable and the costs can
be reasonably estimated.
 
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.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable, and accrued liabilities approximate
fair value because of the short maturity of these instruments. The carrying
amount of the Company's revolving credit facility approximates its fair value
because the interest rate on the instrument changes with market interest
rates. The fair value of the Company's long-term debt (including current
portion) is estimated to be equal to the carrying amounts based on quoted
market prices for similar issues or on the current rates offered to the
Company for debt of the same remaining maturities.
 
                                      43
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
INCOME (LOSS) PER COMMON SHARE
 
  Income (loss) per common share is computed based on the weighted average
number of shares outstanding and in accordance with SFAS No. 128 "Earnings Per
Share". Dilutive securities consisting of convertible preferred stock,
convertible subordinated debt and common stock options are included in the
computation of income (loss) per diluted share when their effect is dilutive.
Accordingly, "Basic EPS" and "Diluted EPS" were calculated as follows:
 
<TABLE>
<CAPTION>
                                      1996          1997            1998
                                  -------------  ------------   -------------
                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                               <C>            <C>            <C>
BASIC
Net income (loss) applicable to
 common shares..................  $      30,699       32,508         (299,779)
Dividends on preferred stock....           (536)         -- ***           -- ***
                                  -------------  -----------    -------------
                                  $      30,163       32,508         (299,779)
                                  =============  ===========    =============
Weighted average common shares
 outstanding....................         48,369       64,082           95,909
                                  =============  ===========    =============
Basic income (loss) per common
 share..........................  $        0.62         0.51            (3.13)
                                  =============  ===========    =============
DILUTED
Net income (loss) applicable to
 common shares..................  $      30,163       32,508         (299,779)
Add:
  Effect on net income (loss) of
   conversions of convertible
   subordinated debt............            -- *         -- *             -- *
                                  -------------  -----------    -------------
Adjusted net income (loss)
 applicable to common shares....       $ 30,163       32,508         (299,779)
                                  =============  ===========    =============
Weighted average common shares
 outstanding....................         48,369       64,082           95,909
Add:
  Exercise of options...........          1,299        2,449              -- **
  Assumed conversion of
   subordinated debt............            -- *         -- *             -- *
                                  -------------  -----------    -------------
Adjusted weighted average common
 shares outstanding.............         49,668       66,531           95,909
                                  =============  ===========    =============
Diluted income (loss) per common
 share..........................  $        0.61         0.49            (3.13)
                                  =============  ===========    =============
</TABLE>
--------
*  The calculation of diluted EPS for the years ended March 31, 1996, 1997 and
   1998 does not assume conversion of subordinated debt as its effect would be
   antidilutive to income (loss) per common share.
 
** The calculation of diluted EPS for the year ended March 31, 1998 does not
   assume the exercise of options as the effect would be antidilutive to loss
   per common share. Under the treasury stock method, the exercise of all
   outstanding options would have increased the weighted average number of
   shares by 2,449 for the year ended March 31, 1998.
 
*** On March 4, 1996, the preferred shareholder tendered its Series A
    Preferred Stock for conversion into Company common stock thus eliminating
    further dividends.
 
RECLASSIFICATIONS
 
  Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform with the 1998 presentation.
 
(2) CASH AND CASH EQUIVALENTS
 
  Cash equivalents consist of demand deposits and certificates of deposit with
original maturities of 90 days or less.
 
                                      44
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(3) SHORT-TERM INVESTMENTS
 
  Short-term investments consist of highly liquid municipal issues available
for sale with original maturities of more than 90 days when purchased, and are
carried at amortized cost, which approximates market value.
 
(4) INVENTORIES
 
  Inventories at March 31, 1997 and 1998 consist of:
<TABLE>
<CAPTION>
                                                                 1997     1998
                                                               --------- -------
                                                                (IN THOUSANDS)
   <S>                                                         <C>       <C>
   Raw materials.............................................. $  56,830 108,870
   Work-in-process............................................    58,619  92,089
   Finished goods.............................................   129,752 185,141
                                                               --------- -------
                                                               $ 245,201 386,100
                                                               ========= =======
</TABLE>
 
(5) PROPERTY, PLANT AND EQUIPMENT
 
  Property, plant and equipment at March 31, 1997 and 1998 consist of:
<TABLE>
<CAPTION>
                                                             1997       1998
                                                           ---------  ---------
                                                             (IN THOUSANDS)
   <S>                                                     <C>        <C>
   Land................................................... $  20,697    250,668
   Buildings and improvements.............................   110,925    262,520
   Equipment..............................................   199,240    333,190
   Furniture and fixtures.................................    65,415    102,108
   Vehicles...............................................    14,477     21,449
   Construction in progress...............................    18,668     35,714
                                                           ---------  ---------
                                                             429,422  1,005,649
   Less accumulated depreciation..........................  (109,735)  (199,174)
                                                           ---------  ---------
                                                           $ 319,687    806,475
                                                           =========  =========
</TABLE>
 
(6) INVESTMENT IN LEASEHOLD INTERESTS
 
  The Company has concession agreements to operate wastewater treatment plants
in Mexico. The terms of the concessions are approximately 15 to 18 years, as
amended, and include monthly payments to be received by the Company at various
prices per cubic meter of sewage treated at the facilities based upon the
Company's initial investments, fixed operating expenses and variable operating
expenses. The Company is amortizing the investments on a straight-line basis
over the terms of the concessions. Accumulated amortization at March 31, 1997
and 1998 totaled $3.2 million and $4.7 million, respectively. The investments
are stated at cost which is not impaired based on projected non-discounted
future cash flows.
 
(7) COSTS IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED
 
  Costs in excess of net assets of businesses acquired and accumulated
amortization at March 31, 1997 and 1998 consists of the following:
 
<TABLE>
<CAPTION>
                              1997       1998
                            ---------  ---------
                              (IN THOUSANDS)
   <S>                      <C>        <C>
   Costs in excess of net
    assets of businesses
    acquired............... $ 811,054  1,073,155
   Less accumulated
    amortization...........   (22,958)   (45,674)
                            ---------  ---------
                            $ 788,096  1,027,481
                            =========  =========
</TABLE>
 
 
                                      45
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(8) OTHER ASSETS
 
  Other assets at March 31, 1997 and 1998 consist of:
 
<TABLE>
<CAPTION>
                                                                 1997     1998
                                                               --------- -------
                                                                (IN THOUSANDS)
   <S>                                                         <C>       <C>
   Investment in joint ventures at equity..................... $  10,645   7,761
   Long-term receivables and advances.........................     7,837   4,953
   Other assets at amortized cost:
     Developed technology.....................................       --   56,587
     Deferred debt costs......................................    16,939  11,154
     Operating permits and development costs..................     5,994  10,054
     Patents..................................................     3,074   4,990
     Other....................................................    57,139  70,740
                                                               --------- -------
                                                               $ 101,628 166,239
                                                               ========= =======
</TABLE>
 
  The above amounts reflect accumulated amortization of $3.8 million and $7.4
million at March 31, 1997 and 1998, respectively.
 
(9) ACQUISITIONS
 
 Fiscal 1998 Acquisitions
 
  As of December 31, 1997, a wholly-owned subsidiary of the Company completed
the acquisition of The Kinetics Group, Inc. ("Kinetics") in a tax-free
reorganization. In connection with the acquisition, the Company issued
5,803,803 shares of the Company's common stock for all of the outstanding
common stock of Kinetics (0.5824 share of the Company's common stock for each
outstanding share and each outstanding option or other right to acquire a
share of Kinetics common stock). In addition, the Company assumed
approximately $50.0 million of third party institutional debt.
 
  Kinetics, based in Santa Clara, California, is a provider and manufacturer
of sophisticated high-purity process piping systems and is also a leading
integrator in the United States of high-purity water, fluid and gas handling
systems that are critical to the pharmaceutical, biotechnology and micro
electronics industries.
 
                                      46
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  This transaction has been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements and notes thereto for all
periods presented have been restated to include the accounts of Kinetics. In
restating the Company's historical financial statements for the pooling of
interests with Kinetics, the Company's balance sheet as of March 31, 1997 was
combined with Kinetics audited balance sheet as of September 30, 1997. The
results of the Company for the fiscal year ended March 31, 1997 were combined
with historical results of Kinetics for the year ended September 30, 1997;
historical results of the Company for the year ended March 31, 1996 were
combined with historical results of Kinetics for the year ended September 30,
1996. Accordingly, results of Kinetics for the six month period ended
September 30, 1995 (including revenue of $106.9 million and net income of $2.8
million) are not included in the combined results of operations presented
herein. Concurrent with the Company's merger, Kinetics year end was recast to
March 31. Accordingly, results of Kinetics for the six month period ended
September 30, 1997 (including revenue of $227.4 million and a net loss of $8.5
million) are included in both the restated historical results for the year
ended March 31, 1997 and the results for the year ended March 31, 1998.
Separate results of operations of the combined entities for the years ended
March 31, 1996 and 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED
                                                                MARCH 31,
                                                           --------------------
                                                              1996      1997
                                                           ---------- ---------
                                                              (IN THOUSANDS)
<S>                                                        <C>        <C>
Revenues:
  U.S. Filter (as previously reported).................... $  812,322 1,376,601
  Kinetics................................................    278,423   387,805
                                                           ---------- ---------
      Combined............................................ $1,090,745 1,764,406
                                                           ========== =========
Net income (loss):
  U.S. Filter (as previously reported)....................     21,967    46,197
  Kinetics................................................      8,732   (13,689)
                                                           ---------- ---------
      Combined............................................ $   30,699    32,508
                                                           ========== =========
Net income per common share:
  Basic:
    As previously reported................................ $     0.50      0.79
                                                           ========== =========
    As restated........................................... $     0.62      0.51
                                                           ========== =========
  Diluted:
    As previously reported................................ $     0.49      0.77
                                                           ========== =========
    As restated........................................... $     0.61      0.49
                                                           ========== =========
</TABLE>
 
Separate unaudited results of operations of U.S. Filter and Kinetics for the
period during the year ended March 31, 1998 proceeding the mergers between
U.S. Filter and Kinetics are included in the Consolidated Statement of
Operations for the year ended March 31, 1998 as follows:
 
<TABLE>
<CAPTION>
                                                             REVENUES  NET LOSS
                                                            ---------- --------
<S>                                                         <C>        <C>
U.S. Filter................................................ $2,009,767 (325,791)
Kinetics...................................................    336,786  (11,510)
                                                            ---------- --------
  Nine Months ended December 31, 1997...................... $2,346,553 (337,301)
                                                            ========== ========
</TABLE>
 
                                      47
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Merger expenses incurred to consummate the Kinetics transaction totaled $4.3
million consisting of investment banking, printing, stock transfer, legal,
accounting, governmental filing fees and certain other transaction costs and
are included in merger, restructuring, acquisition and other related charges
in the accompanying Consolidated Statement of Operations for the year ended
March 31, 1998.
 
  On December 9, 1997, the Company, through a wholly-owned subsidiary,
completed its tender offer ("Offer") to purchase all of the outstanding
ordinary shares of Memtec Limited ("Memtec"). The total cash purchase price
was $397.2 million (including transaction costs of $10.6 million). Memtec is
incorporated under the law of the State of New South Wales, Australia and has
worldwide operations. Memtec is a leader in the designing, engineering,
manufacturing and marketing of an extensive range of filtration products and
systems, focusing on two principal areas of the filtration market: industrial
filtration and water filtration. Memtec had revenues of approximately $243.6
million and net income of approximately $7.5 million for the year ended June
30, 1997. The purchase price was allocated to the assets and liabilities of
Memtec based on their estimated respective fair values. The value of developed
technology was approximately $57.2 million, and is being amortized on a
straight-line basis over 25 years. The value of other intangible assets
including patents, trademarks, license and distribution fees was approximately
$7.3 million, and is being amortized over periods ranging from 5 to 12 years.
 
  The Company also acquired from Memtec certain in-process research and
development projects that had not reached technological feasibility and that
had no alternative future uses. Such projects were valued by an independent
appraiser using a risk adjusted cash flow model under which expected future
cash flows were discounted using rates ranging from 31.9% to 45.9%. The
discount rates were determined by various internal and external factors
including general economic and industry economic conditions, cost and
availability of capital, product completion and technology risk, competition
and market acceptance. The future cash flows were based on significant
estimates of revenues, cost of goods sold, operating expenses, research and
development expenses, capital expenditures, depreciation and interest charges
on financed capital expenditures over the next ten years. The estimates of
these items included significant assumptions regarding (i) revenue growth,
which was assumed to grow from no revenue in the current period for the
projects currently in-process to substantially all of the revenue for the
Memtec subsidiary over the ten year period as the projects in-process supplant
or supersede the current Memtec product offerings; (ii) gross margin, which is
projected to improve approximately 5% by the end of the ten year period as the
new projects with higher gross margins supplant or supersede the current
Memtec product offerings; (iii) operating expenses as a percentage of sales,
which were projected to be 20%. The estimated market value of such in-process
research and development projects was $299.5 million and was expensed at the
acquisition date. The allocation of the purchase price of Memtec is final and
is not expected to change materially subsequent to March 31, 1998.
 
  The acquisition of Memtec has been accounted for as a purchase and,
accordingly, the results of Memtec's operations have been included in the
consolidated financial statements of the Company from the date of acquisition.
Summarized below are the unaudited pro forma results of operations of the
Company as though Memtec had been acquired as of April 1, 1997:
<TABLE>
<CAPTION>
                                                                  1998
                                                          ---------------------
                                                          (IN THOUSANDS, EXCEPT
                                                             PER SHARE DATA)
   <S>                                                    <C>
   Revenues..............................................      $ 3,403,083
                                                               ===========
   Net loss..............................................      $  (309,170)
                                                               ===========
   Net loss per common share:
     Basic...............................................      $     (3.22)
                                                               ===========
     Diluted.............................................      $     (3.22)
                                                               ===========
</TABLE>
 
                                      48
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
   Concurrent with the merger with and into Kinetics and the acquisition of
Memtec, the Company designed and implemented a restructuring plan to
streamline its manufacturing and production base, improve efficiency and
enhance its competitiveness. The restructuring plan resulted in a pre-tax
charge of $141.1 million. The plan identifies certain products and
technologies acquired in conjunction with the Memtec transaction that
supersede products and technologies acquired in earlier acquisitions of
membrane related businesses. As a result certain carrying amounts of goodwill
and other intangible assets were determined to be impaired by approximately
$55.0 million in accordance with SFAS No. 121, which requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. In
determining the amount of the impairment of these assets, the Company valued
the assets using the present value of estimated expected future cash flows
using discount rates commensurate with the risks involved. The restructuring
plan also included closing or reconfiguring of certain facilities and reducing
the work force by approximately 350 employees, most of whom work in the
facilities to be closed.
 
   Included in merger, restructuring, acquisition and other related charges
are the following:
 
<TABLE>
<CAPTION>
                                                                  (IN THOUSANDS)
   <S>                                                            <C>
   Write-down of goodwill and other intangible assets...........     $ 54,950
   Asset write-offs, including equipment and facilities.........       47,887
   Merger, integration and other acquisition costs..............       21,135
   Severance and related costs..................................       17,137
                                                                     --------
     Total merger, restructuring, acquisition and other related
      charges...................................................     $141,109
                                                                     ========
   Cash charges.................................................     $ 36,431
   Non-cash charges.............................................      104,678
                                                                     --------
                                                                     $141,109
                                                                     ========
</TABLE>
 
  Approximately $15.4 million of merger and restructuring related charges are
included in accrued liabilities at March 31, 1998. Additional costs to
complete the restructuring plan are not expected to be material. After an
income tax benefit of $34.5 million, the charges detailed above totaling
$440.6 million reduced earnings by $406.1 million.
 
  During the year ended March 31, 1998, the Company completed other
acquisitions with an aggregate purchase price, including acquisition costs, of
approximately $861.0 million, consisting of $80.0 million in cash and the
delivery of approximately 26,515,000 shares of Company common stock. The
excess of fair value of net assets acquired was approximately $263.8 million,
and is being amortized on a straight-line basis over 40 years.
 
 Fiscal 1997 Acquisitions
 
  On October 25, 1996, the Company acquired all of the outstanding capital
stock of the Utility Supply Group, Inc. ("USG") pursuant to an Agreement and
Plan of Merger. The purchase price for the acquisition of USG, including
acquisition costs, was approximately $40 million, consisting of the repayment
of $18.3 million of USG long-term debt paid in cash and the delivery of
771,157 shares of Company common stock.
 
 
  USG, headquartered in Waco, Texas, is a distributor of water and wastewater
related products and services to industrial and municipal customers throughout
the United States.
 
  The acquisition of USG has been accounted for as a purchase and,
accordingly, the results of operations of USG are included in the Company's
consolidated statements of operations from the date of acquisition. The excess
of fair value of net assets acquired was approximately $18 million, and is
being amortized on a straight-line basis over 40 years.
 
                                      49
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  On October 28, 1996, the Company acquired all of the outstanding capital
stock of WaterPro Supplies Corporation ("WaterPro") pursuant to a Stock
Purchase Agreement. The purchase price for the acquisition of WaterPro,
including acquisition costs, was approximately $91 million, consisting of
3,201,507 shares of Company common stock.
 
  WaterPro, headquartered in Edina, Minnesota is a national distributor of
water and wastewater related products and services for municipal water, sewer
authorities and underground contractors, and has locations throughout the
United States.
 
  The acquisition of WaterPro has been accounted for as a purchase and,
accordingly, the results of operations of WaterPro are included in the
Company's consolidated statements of operations from the date of acquisition.
The excess of fair value of net assets acquired was approximately $29 million,
and is being amortized on a straight-line basis over 40 years.
 
  On December 2, 1996, pursuant to an Amended and Restated Purchase and Sale
Agreement dated September 14, 1996 between the Company and Wheelabrator Water
Technologies Inc. ("Seller"), the Company completed the acquisition of the
capital stock of certain of the Seller's subsidiaries and certain other
entities, and substantially all of the assets and liabilities of certain other
subsidiaries, collectively Wheelabrator's Water Systems and Manufacturing
Group ("WSMG"). The purchase price, as amended, for the acquisition of WSMG,
including acquisition costs, was approximately $374 million and was paid
entirely in cash.
 
  WSMG provides a broad range of water and wastewater engineering, technology
and systems. The acquisition of WSMG has been accounted for as a purchase and,
accordingly, the results of operations of WSMG are included in the Company's
consolidated statements of operations from the date of acquisition. The excess
of fair value of net assets acquired was approximately $308 million and is
being amortized on a straight-line basis over 40 years.
 
  On January 6, 1997, pursuant to a Purchase and Sale Agreement dated October
7, 1996, between the Company and United Utilities PLC ("Seller"), the Company
completed the acquisition of the capital stock of certain other subsidiaries,
collectively, the Process Equipment Division ("PED") of Seller. The purchase
price for the acquisition of PED, including acquisition costs, was
approximately $166 million in cash and 1,320,312 shares of Company stock.
 
  PED provides a broad range of water and wastewater engineering, technology
and systems. The acquisition of PED has been accounted for as a purchase and,
accordingly, the results of operations of PED are included in the Company's
consolidated statements of operations from the date of acquisition. The excess
of fair value of net assets acquired was approximately $108 million and is
being amortized on a straight-line basis over 40 years.
 
  Supplementary information related to the acquisitions of USG, WaterPro, WSMG
and PED is as follows:
 
<TABLE>
<CAPTION>
                                                                        (IN
                                                                     THOUSANDS)
   <S>                                                               <C>
   Assets acquired.................................................. $1,018,537
   Liabilities assumed..............................................   (318,059)
   Common stock issued..............................................   (139,025)
                                                                     ----------
   Cash paid........................................................    561,453
   Fees and expenses................................................      3,001
   Less cash acquired...............................................    (11,039)
                                                                     ----------
     Net cash paid.................................................. $  553,415
                                                                     ==========
</TABLE>
 
                                      50
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Summarized below are the unaudited pro forma results of operations of the
Company as though Memtec, USG, WaterPro, WSMG and PED had been acquired on
April 1, 1996:
 
<TABLE>
<CAPTION>
                                                                   1997
                                                           ---------------------
                                                           (IN THOUSANDS, EXCEPT
                                                              PER SHARE DATA)
   <S>                                                     <C>
   Revenues...............................................      $2,743,614
                                                                ==========
   Net income.............................................      $   37,637
                                                                ==========
   Net income per common share:
     Basic................................................      $     0.48
                                                                ==========
     Diluted..............................................      $     0.46
                                                                ==========
</TABLE>
 
  During the year ended March 31, 1997, the Company completed other
acquisitions with an aggregate purchase price, including acquisition costs, of
approximately $77 million, consisting of $19.0 million in cash and the
delivery of 2,392,768 shares of Company common stock. The excess of fair value
of net assets acquired was approximately $65 million, and is being amortized
on a straight-line basis over 40 years.
 
(10) CONTRACT BILLING STATUS
 
  Information with respect to the billing status of contracts in process at
March 31, 1997 and 1998 is as follows:
 
<TABLE>
<CAPTION>
                                                           1997        1998
                                                        ----------  ----------
                                                           (IN THOUSANDS)
   <S>                                                  <C>         <C>
   Contract costs incurred to date..................... $  971,292   1,348,386
   Estimated profits...................................    160,949     255,347
                                                        ----------  ----------
   Contract revenue earned to date.....................  1,132,241   1,603,733
   Less billings to date............................... (1,063,372) (1,475,871)
                                                        ----------  ----------
   Cost and estimated earnings in excess of billings,
    net................................................ $   68,869     127,862
                                                        ==========  ==========
 
  The above amounts are included in the accompanying consolidated balance
sheets as:
 
<CAPTION>
   <S>                                                  <C>         <C>
   Costs and estimated earnings in excess of billings
    on uncompleted contracts........................... $  130,310     217,935
   Billings in excess of costs and estimated earnings
    on uncompleted contracts...........................    (61,441)    (90,073)
                                                        ----------  ----------
                                                        $   68,869     127,862
                                                        ==========  ==========
</TABLE>
 
  Accounts receivable include retainage which has been billed, but is not due
pursuant to retainage provisions in construction contracts until completion of
performance and acceptance by the customer. This retainage aggregated $21.7
million and $16.1 million at March 31, 1997 and 1998, respectively.
Substantially all retained balances are collectible within one year.
 
                                      51
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(11) LONG-TERM DEBT
 
  Long-term debt at March 31, 1997 and 1998 consists of the following:
 
<TABLE>
<CAPTION>
                                                              1997     1998
                                                            --------  -------
                                                             (IN THOUSANDS)
   <S>                                                      <C>       <C>
   Mortgage notes payable, secured by land and buildings,
    interest rates ranging from 2.0% to 10.0%, due in 1999
    through 2013..........................................  $ 13,304   11,676
   Guaranteed bank notes, interest rates ranging from 2.0%
    to 9.2%, due in 1999 through 2004.....................     1,631   61,416
   Unsecured notes payable, interest rates ranging from
    3.8% to 10.1%, due in 1999 through 2008...............    24,954   62,384
   Other..................................................     3,531      --
                                                            --------  -------
                                                              43,420  135,476
   Less current portion...................................   (11,956) (79,171)
                                                            --------  -------
                                                            $ 31,464   56,305
                                                            ========  =======
</TABLE>
 
  The aggregate maturities of long-term debt for each of the five years
subsequent to March 31, 1998 are as follows: 1999, $79.2 million; 2000, $13.9
million; 2001, $9.1 million; 2002, $7.1 million; 2003, $4.2 million; and
thereafter, $22.0 million.
 
  The Company has a long-term, unsecured revolving line of credit with a bank
of up to $750.0 million, of which $544.1 million was outstanding at March 31,
1998 and is included in notes payable in the accompanying consolidated balance
sheet. The line of credit expires December 2001 and bears interest at 0.15%
above the bank's base rate or at variable rates of up to 0.45% above certain
Eurocurrency rates. The line of credit is subject to certain covenants for
which the Company was in compliance at March 31, 1998. At March 31, 1998,
$40.7 million of standby letters of credit were issued under this line of
credit.
 
  In connection with the acquisitions of Kinetics and Memtec, the Company
assumed through its subsidiaries two additional loan agreements with banks.
One agreement provides a revolving line-of-credit with borrowings of up to
$100.0 million, of which no amounts were outstanding at March 31, 1998.
Borrowings under this agreement bear interest at the banks reference rate or
other interest rate options that the subsidiary may select. The other
agreement is a Multi-Option, Multi-Currency Master Facility that provides
borrowings of up to $60.0 million, of which $30.7 million was outstanding as
of March 31, 1998. Borrowings under this agreement bear interest at LIBOR plus
0.75%. The Company anticipates that it will terminate these two agreements
during fiscal 1999.
 
(12) CONVERTIBLE SUBORDINATED DEBT
 
  On December 11, 1997, the Company sold $414.0 million aggregate principal
amount of 4.5% Convertible Subordinated Debentures due December 15, 2001 (the
"Debentures"). The Debentures are convertible into common stock at any time
prior to maturity, redemption or repurchase at a conversion price of $39.50
per share, subject to adjustments in certain circumstances. The Debentures are
not redeemable prior to December 15, 1999, at which time the Debentures become
redeemable at the option of the Company, in whole or in part, at specified
redemption prices plus accrued and unpaid interest to the date of redemption.
Interest is payable semi-annually on June 15 and December 15, commencing June
15, 1997.
 
  On September 18, 1995 the Company sold $140.0 million aggregate principal
amount of 6% Convertible Subordinated Notes due September 15, 2005 (the
"Notes"). The Notes are convertible into common stock at any time prior to
maturity, redemption or repurchase at a conversion price of $18.33 per share,
subject to
 
                                      52
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
adjustment in certain circumstances. The Notes are not redeemable prior to
September 23, 1998 at which time the Notes become redeemable at the option of
the Company, in whole or in part, at specified redemption prices plus accrued
and unpaid interest to the date of redemption. Interest is payable semi-
annually on March 15 and September 15 of each year, commencing on March 15,
1996.
 
  Effective August 31, 1994, the Company issued $45.0 million of convertible
subordinated debt with common stock purchase warrants in connection with the
acquisition of Smogless. On September 18, 1995, these warrants to purchase 3.8
million shares of Company common stock were exercised in exchange for the
delivery of the $45.0 million principal amount of subordinated debt.
 
  On October 20, 1993, the Company issued $60.0 million aggregate principal
amount of 5% convertible subordinated debentures due October 15, 2000. As of
October 25, 1996, all of such debentures were converted into a total of
approximately 4.4 million shares of Company common stock pursuant to the terms
of the debentures.
 
(13) ACCRUED LIABILITIES
 
  Accrued liabilities at March 31, 1997 and 1998 consist of the following:
<TABLE>
<CAPTION>
                                                                  1997    1998
                                                                -------- -------
                                                                 (IN THOUSANDS)
   <S>                                                          <C>      <C>
   Accrued job costs and customer deposits..................... $ 75,108  96,802
   Payroll, benefits and related taxes.........................   71,157  95,504
   Relocation and closure costs................................   41,088  96,019
   Warranty....................................................   25,727  42,089
   Future remediation..........................................   10,625   2,760
   Sales commissions...........................................   10,014  15,630
   Sales, property and other taxes.............................    9,647  38,379
   Interest....................................................    7,978   9,494
   Other.......................................................   24,193  37,351
                                                                -------- -------
                                                                $275,537 434,028
                                                                ======== =======
</TABLE>
 
(14) INCOME TAXES
 
  Income tax expense (benefit) from continuing operations for the years ended
March 31, 1996, 1997 and 1998 consist of:
 
<TABLE>
<CAPTION>
                                                        1996     1997    1998
                                                       -------  ------  -------
                                                           (IN THOUSANDS)
   <S>                                                 <C>      <C>     <C>
   Federal:
     Current.......................................... $ 9,569   5,806  (10,091)
     Deferred.........................................   2,584   2,342   21,451
   State:
     Current..........................................   2,393   2,904   (1,442)
     Deferred.........................................    (542)   (768)   3,064
   Non-U.S.:
     Current..........................................   4,085   5,821   (7,123)
     Deferred.........................................   2,240  (5,424)   9,724
                                                       -------  ------  -------
                                                       $20,329  10,681   15,583
                                                       =======  ======  =======
</TABLE>
 
                                      53
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Total income tax expense (benefit) differed from the amounts computed by
applying the U.S. Federal corporate tax rate of 34% for 1996 and 35% for 1997
and 1998 to income (loss) from continuing operations before income taxes as a
result of the following:
 
<TABLE>
<CAPTION>
                                                      1996     1997     1998
                                                     -------  -------  -------
                                                         (IN THOUSANDS)
   <S>                                               <C>      <C>      <C>
   Expected income tax provision.................... $17,350   15,116  (99,469)
   Permanent differences............................   1,573    2,302    1,969
   Non-deductible expenses related to purchased in-
    process research and development and merger,
    restructuring, acquisition and other related
    charges.........................................     --       --   113,949
   State franchise tax, net of Federal tax benefit..   1,641    1,937    1,623
   Change in balance of valuation allowance.........  (3,351) (10,796)  (1,941)
   Difference in U.S. tax rate and foreign tax
    rates...........................................   2,032    1,762     (548)
   Other............................................   1,084      360      --
                                                     -------  -------  -------
                                                     $20,329   10,681   15,583
                                                     =======  =======  =======
</TABLE>
 
  As of March 31, 1998, the Company has net operating loss carryforwards in
France of approximately $14.0 million with an indefinite carryforward period
for which income tax benefit was recognized during fiscal 1997. Any benefit of
the French loss carryforward was required to be shared equally between the
Company and Alcoa until March 31, 1997. As of March 31, 1998, the Company also
had net operating loss carryforwards in other non-U.S. countries of
approximately $126.5 million which expire from 1999 to indefinite.
 
  Additionally, as of March 31, 1998, the Company has recognized the future
benefit of net operating loss carryforwards generated from Liquipure of $14.4
million. These loss carryforwards expire from 2002 to 2007. These operating
loss carryforwards can be used only against future taxable income of
Liquipure.
 
  The Company also has available, at March 31, 1998, other net operating loss
carryforwards for U.S. Federal income tax purposes of approximately $68.3
million which expire in 2007 to 2011.
 
                                      54
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The sources and tax effects of temporary differences between the financial
statement carrying amounts and tax basis of assets and liabilities are as
follows:
<TABLE>
<CAPTION>
                                                                1997     1998
                                                              --------  -------
                                                               (IN THOUSANDS)
   <S>                                                        <C>       <C>
   Deferred tax assets:
     Operating loss carryforwards............................ $ 36,514   87,449
     Inventory...............................................    8,044    6,940
     Allowance for doubtful accounts.........................    6,250    9,018
     Warranty................................................    2,656    6,793
     Vacation................................................    1,465    4,492
     Other accruals..........................................   33,495   51,268
     Tax credits.............................................      276      258
     Other...................................................    1,049   13,009
                                                              --------  -------
                                                                89,749  179,227
     Valuation allowance.....................................  (20,659) (44,440)
                                                              --------  -------
       Total deferred tax assets.............................   69,090  134,787
   Deferred tax liabilities:
     Depreciation and amortization...........................   12,658   33,292
     Prepaid expenses........................................      353      360
     Long-term contracts.....................................   11,123    4,625
     Other...................................................    4,002   16,741
                                                              --------  -------
                                                                28,136   55,018
                                                              --------  -------
       Net deferred tax assets............................... $ 40,954   79,769
                                                              ========  =======
</TABLE>
 
  The Company believes that it is more likely than not that the net deferred
tax assets, including Federal net operating loss carryforwards, will be
realized prior to their expiration. This belief is based on recent and
anticipated future earnings and, in part, on the fact that the Company has
completed several acquisitions during and including the three years ended
March 31, 1998 of companies with strong earnings potential. A valuation
allowance of $44.4 million at March 31, 1998 has been provided primarily for
state and foreign net operating losses which may not be realized prior to
expiration.
 
(15) SHAREHOLDERS' EQUITY
 
CONVERTIBLE PREFERRED STOCK
 
  In January 1992 and September 1994, the Company issued 880,000 shares of a
new Series A Cumulative Convertible Preferred Stock and 185,185 shares of a
new Series B Convertible Preferred Stock, respectively, in connection with
acquisitions. On September 18, 1995, the Company repurchased and canceled
139,518 shares of Series B Preferred stock for $4.7 million and converted
45,667 shares of Series B Preferred Stock into 102,750 shares of Company
common stock. On March 4, 1996, the holder of the Company's Series A Preferred
Stock tendered the 880,000 preferred shares for conversion into 1,980,000
shares of Company Common Stock pursuant to terms of the security.
 
COMMON STOCK
 
  On July 15, 1996, the Company paid in the form of stock dividends a three-
for-two split of the Company's common stock. All references herein to income
(loss) per common share and other common stock information in the accompanying
consolidated financial statements and notes thereto have been restated to
reflect those splits.
 
                                      55
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  On December 11, 1996, the Company sold 11,804,206 shares of its common stock
at $31.625 per share. The net proceeds to the Company, after underwriting
discounts and commissions and other related expenses, were $356.1 million.
 
  On May 3, 1995, the Company sold 10,350,000 shares of its common stock at
$10.00 per share. The net proceeds to the Company, after underwriting
discounts and commissions and other related expenses, were $97.3 million.
 
OPTIONS
 
  Under the Company's 1991 Employee Stock Option Plan (the "Plan"), the
exercise price of options granted is equal to their fair market value at the
date of grant and the maximum term of the option may not exceed 10 years. If
the optionee is a holder of more than 10% of the outstanding common stock of
the Company, the option price per share is increased to at least 110% of fair
market value, and the option term is limited to 5 years. The total number of
shares of common stock available under the Plan is 7,131,250 shares. Each
option granted becomes exercisable on a cumulative basis, 25% six months
following the date of grant and 25% on each subsequent anniversary of the
grant date until fully vested.
 
  Under the Company's 1991 Director Stock Option Plan (the "Directors Plan"),
the exercise price of options granted was equal to the higher of $2.00 below
the market price or 60% of the market price on the date of grant. Effective
April 1, 1996 the Directors Plan was amended to grant options equal to their
fair market value at the date of grant. Under the Plan, each director of the
Company who is not a full-time employee of the Company will receive each year
an option to purchase 12,000 shares of common stock. The total number of
shares available under the Directors Plan is 562,500 shares. Compensation
expense of $.1 million was recorded in fiscal 1996 related to the Directors
Plan.
 
  The per share weighted-average fair value of stock options granted during
fiscal 1996, 1997 and 1998 was $5.93, $9.49 and $12.87 respectively, on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1996, 1997 and 1998:
 
<TABLE>
<CAPTION>
                                                               1996  1997  1998
                                                               ----  ----  ----
   <S>                                                         <C>   <C>   <C>
   Risk-free interest rate....................................  6.3%  6.3%  5.7%
   Expected dividend yield....................................  --    --    --
   Expected stock price volatility............................ 41.9% 41.9% 44.9%
   Expected remaining life in years...........................    5     5     5
</TABLE>
 
                                      56
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company continues to apply APB Opinion No. 25 in accounting for its Plan
and the Directors' Plan and, accordingly, no compensation cost has been
recognized for its stock options in the consolidated financial statements. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net income (loss)
and net income (loss) per common share would have been reduced to the pro
forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED MARCH 31,
                                        --------------------------------------
                                            1996        1997         1998
                                        ------------ -------------------------
                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
   <S>                                  <C>          <C>         <C>
   Net income (loss)
     As reported....................... $     30,699      32,508      (299,779)
                                        ============ =========== =============
     Pro forma......................... $     28,057      23,650      (311,899)
                                        ============ =========== =============
   Net income (loss) per common share:
     Basic:
       As reported..................... $       0.62        0.51         (3.13)
                                        ============ =========== =============
       Pro forma....................... $       0.58        0.37         (3.25)
                                        ============ =========== =============
     Diluted:
       As reported..................... $       0.61        0.49         (3.13)
                                        ============ =========== =============
       Pro forma....................... $       0.56        0.36         (3.25)
                                        ============ =========== =============
</TABLE>
 
  Pro forma net income (loss) and net income (loss) per common share reflects
only options granted after April 1, 1995. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net income (loss) and net income (loss) per common
share amounts presented above because compensation reflected over the options'
vesting period of 10 years and compensation cost for options granted prior to
April 1, 1995 is not considered. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options that do not
have vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
value of an estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
 
                                      57
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Transactions involving the Plan and Directors Plan are summarized as
follows:
 
<TABLE>
<CAPTION>
                                        NUMBER OF                   AGGREGATE
                                         SHARES    EXERCISE PRICE     VALUE
                                        ---------  -------------- --------------
                                                                  (IN THOUSANDS)
   <S>                                  <C>        <C>            <C>
   Balance at March 31, 1995........... 2,636,058  $1.35 to 10.95    $ 27,038
   Options granted..................... 1,425,759   1.35 to 18.67      14,838
   Options exercised...................  (487,886)  1.35 to 10.95      (3,678)
   Options canceled....................   (20,626)  8.53 to 10.58        (183)
                                        ---------  --------------    --------
   Balance at March 31, 1996........... 3,553,305   1.35 to 18.67      38,015
   Options granted..................... 2,129,572  12.02 to 34.88      39,909
   Options exercised...................  (659,210)  1.35 to 26.25     (11,886)
   Options canceled....................   (27,415)  4.97 to 13.83        (309)
                                        ---------  --------------    --------
   Balance at March 31, 1997........... 4,996,252   1.35 to 34.88      65,729
   Options granted..................... 1,656,850  26.00 to 37.75      49,220
   Options exercised...................  (505,846)  1.35 to 27.25      (5,539)
   Options canceled....................   (20,976) 13.83 to 30.25        (417)
                                        ---------  --------------    --------
   Balance at March 31, 1998........... 6,126,280  $1.35 to 37.75    $108,993
                                        =========  ==============    ========
</TABLE>
 
  At March 31, 1997 and 1998, the number of options exercisable was 2.2
million and 3.0 million, respectively.
 
  The following table summarizes certain information regarding options
outstanding at March 31, 1998:
 
<TABLE>
<CAPTION>
                                          WEIGHTED       WEIGHTED
              RANGE OF        NUMBER      AVERAGE        AVERAGE
           EXERCISE PRICE   OF OPTIONS REMAINING LIFE EXERCISE PRICE
           --------------   ---------- -------------- --------------
           <S>              <C>        <C>            <C>
           $ 1.35 to 11.63  1,860,274    6.1 years        $ 7.62
            12.02 to 22.75  2,092,856       8.4            15.88
            26.00 to 37.75  2,173,150       9.0            28.33
           --------------   ---------    ---------        ------
           $ 1.35 to 37.75  6,126,280    7.9 years         17.79
           ==============   =========    =========        ======
</TABLE>
 
  In connection with the options and convertible subordinated debt, the
Company has reserved approximately 19.1 million shares at March 31, 1998 for
future issuance.
 
(16) RETIREMENT PLANS
 
  Pursuant to the terms of a collective bargaining agreement, one of the
Company's U.S. subsidiaries has a defined benefit pension plan covering
substantially all of its hourly employees. Pension plan benefits are generally
based upon years of service and compensation. The Company's funding policy is
to contribute at least the minimum amounts required by the U.S. Employee
Retirement Income Security Act of 1974 ("ERISA") or additional amounts to
assure that plan assets will be adequate to provide retirement benefits. Plan
assets are invested in broadly diversified portfolios of government
obligations, mutual funds and fixed income and equity securities. The
accumulated benefit obligation under this plan is not material to the
consolidated financial statements.
 
  A subsidiary of the Company provides pension and health and welfare benefits
to employees who are members of the United Association of Journeymen and
Apprentices of the Plumbing and Pipefitting Industry of
 
                                      58
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
the United States and Canada (the "Pipefitters Union") under multiemployer
defined benefit plans. Contributions to the Pipefitters Union pension and
health and welfare plans were not material to the Company's financial position
as of March 31, 1997 and 1998 nor to its results of operations for each of the
years in the three year period ended March 31, 1998.
 
  The Company has a defined contribution plan (under IRC Section 401(k))
covering substantially all U.S. salaried and hourly participating employees
which provide for contributions based primarily upon compensation levels and
employee contributions. The Company funds its contributions to these plans as
provided by ERISA. Defined contribution plan expense to the Company was $1.6
million, $3.8 million and $7.6 million for the years ended March 31, 1996,
1997 and 1998, respectively.
 
(17) BUSINESS SEGMENT DATA AND EXPORT SALES
 
  The Company's sole business segment is the design, manufacture, operation,
distribution and service of equipment and supplies for filtration, water
treatment and wastewater treatment for industrial, municipal, commercial and
retail customers. No individual customers accounted for 10% or more of revenue
in fiscal 1996, 1997 and 1998. Export sales were $58.6 million, $85.4 million
and $112.7 million in fiscal 1996, 1997 and 1998, respectively.
 
  Information about the Company's operations in different geographic locations
for the years ended March 31, 1996, 1997 and 1998 is as follows:
 
<TABLE>
<CAPTION>
                                                    1996      1997      1998
                                                 ---------- --------- ---------
                                                         (IN THOUSANDS)
   <S>                                           <C>        <C>       <C>
   Revenues from unaffiliated customers:
     United States.............................. $  875,792 1,342,496 2,384,744
     Non-U.S....................................    214,953   421,910   849,836
                                                 ---------- --------- ---------
                                                 $1,090,745 1,764,406 3,234,580
                                                 ========== ========= =========
   Operating income (loss):
     United States.............................. $   44,565    38,535    66,628
     Non-U.S....................................     16,820    27,485  (301,837)
                                                 ---------- --------- ---------
                                                 $   61,385    66,020  (235,209)
                                                 ========== ========= =========
   Income (loss) before income taxes
     United States.............................. $   37,635    21,578    22,449
     Non-U.S....................................     13,393    21,611  (306,645)
                                                 ---------- --------- ---------
                                                 $   51,028    43,189  (284,196)
                                                 ========== ========= =========
   Identifiable assets:
     United States.............................. $  701,649 1,695,336 2,374,206
     Non-U.S....................................    301,667   702,227 1,223,638
                                                 ---------- --------- ---------
                                                 $1,003,316 2,397,563 3,597,844
                                                 ========== ========= =========
</TABLE>
(18) COMMITMENTS AND CONTINGENT LIABILITIES
 
COMMITMENTS
 
  The Company and its subsidiaries lease certain facilities and equipment
under various noncancelable long term and month-to-month leases. These leases
are accounted for as operating leases. Rent expense aggregated $10.5 million,
$16.3 million and $41.9 million in 1996, 1997 and 1998, respectively.
 
                                      59
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  A summary of the future minimum annual rental commitments as of March 31,
1998, under operating leases follows:
 
<TABLE>
<CAPTION>
                                                                    OPERATING
                                                                      LEASES
                                                                  --------------
                                                                  (IN THOUSANDS)
     <S>                                                          <C>
     Fiscal year ending:
       1999......................................................    $ 32,119
       2000......................................................      25,649
       2001......................................................      19,227
       2002......................................................      14,452
       2003......................................................      10,279
       Thereafter................................................      33,102
                                                                     --------
     Total minimum lease payments................................    $134,828
                                                                     ========
</TABLE>
 
CONTINGENT LIABILITIES
 
  In December of 1995, allegations were made by federal and state
environmental regulatory authorities of multiple violations in connection with
wastewater discharges at a facility owned by the Company. The Company as part
of its acquisition of Polymetrics, Inc. on October 2, 1995 acquired the
facility. The Company has rights of indemnity from the seller which could be
available if monetary damages and penalties are incurred in connection with
any alleged violations occurring prior to the Company's acquisition of
Polymetrics. In the opinion of management, the ultimate liability that may
result from the above matter will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
 
  Legal proceedings pending against the Company consist of litigation
incidental to the Company's business and in the opinion of management, based
in part upon the opinion of counsel, the outcome of such litigation will not
materially affect the Company's consolidated financial position or results of
operations.
 
(19) QUARTERLY FINANCIAL DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                               NET INCOME
                                                            (LOSS) PER SHARE
                                                 NET INCOME -------------------
                           REVENUES GROSS PROFIT   (LOSS)    BASIC     DILUTED
                           -------- ------------ ---------- --------  ---------
                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                        <C>      <C>          <C>        <C>       <C>
1997
First quarter............. $295,153    71,707        9,379      0.17       0.16
Second quarter............ $336,060    69,488           71       --         --
Third quarter............. $463,423    93,687        6,328      0.10       0.09
Fourth quarter............ $669,770   152,909       16,730      0.21       0.20
1998
First quarter............. $693,533   150,314       12,703      0.15       0.15
Second quarter............ $823,593   190,110       24,091      0.27       0.26
Third quarter............. $829,427   207,534     (374,095)    (3.71)     (3.71)
Fourth quarter............ $888,027   230,449       37,522      0.35       0.34
</TABLE>
 
                                      60
<PAGE>
 
                       UNITED STATES FILTER CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(20) SUBSEQUENT EVENTS
 
  Remarketable or Redeemable Securities Issuance. On May 15, 1998, the Company
issued $500,000,000 6.375% Remarketable or Redeemable Securities due 2011
(Remarketing Date May 15, 2001) and $400,000,000 6.50% Remarketable or
Redeemable Securities due 2013 (Remarketing Date May 15, 2003) (collectively,
the "ROARS"). The net proceeds from the sale of the ROARS, including a premium
payment to the Company by NationsBanc Montgomery Securities LLC, were $913.6
million. The net proceeds were used to repay indebtedness outstanding under
the Senior Credit Facility, indebtedness assumed in the acquisition of Memtec,
and a portion of the indebtedness assumed in the acquisition of Culligan.
 
  Culligan Acquisition. On June 15, 1998, a wholly owned subsidiary of the
Company and Culligan Water Technologies, Inc. ("Culligan") consummated a
merger and acquisition in a tax-free reorganization contemplated under and
pursuant to a definitive Agreement and Plan of Merger (the "Merger Agreement")
by and among the Company, Palm Water Acquisition Corp. ("Merger Sub"), a
wholly owned subsidiary of the Company and Culligan. Pursuant to the Merger
Agreement, Merger Sub has been merged with and into Culligan (the "Merger").
The Company issued approximately 48.5 million shares of the Company's common
stock for all of the outstanding common stock of Culligan (1.875 shares of the
Company's common stock for each outstanding share and each outstanding option
or other right to acquire a share of Culligan common stock, par value $.01).
In addition, the Company assumed approximately $491.7 million of third party
institutional debt. The Merger will be accounted for as a pooling of
interests.
 
  Culligan is a leading manufacturer and distributor of water purification and
treatment products and services for household, consumer, and commercial
applications. Products and services offered by Culligan range from those
designed to solve residential water problems, such as filters for tap water
and household softeners, to equipment and services, such as ultrafiltration
and microfiltration products. Culligan also offers desalination systems and
protable deionization services ("PDS"), designed for commercial and industrial
applications. In addition, Culligan sells and licenses its dealers to sell
under the Culligan trademark five-gallon bottled water.
 
 
                                      61
<PAGE>
 
ITEM 9--CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
  None.
 
                                   PART III
 
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
 
  The information required by this Item (other than the information regarding
executive officers set forth at the end of Item 1 of Part I of this Form 10-K)
will be contained in the Company's definitive Proxy Statement for its 1998
Annual Meeting of Stockholders under the captions "Election of Directors" and
"Security Ownership--Section 16(a) Beneficial Ownership Reporting Compliance,"
and is incorporated herein by reference.
 
ITEM 11--EXECUTIVE COMPENSATION
 
  The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders under
the captions "Election of Directors" and "Executive Compensation," and is
incorporated herein by reference.
 
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders under
the caption "Security Ownership," and is incorporated herein by reference.
 
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  Not applicable.
 
                                      62
<PAGE>
 
                                    PART IV
 
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
 
(A)(1) FINANCIAL STATEMENTS:
 
  The following report and financial statements are filed as part of this Form
10-K:
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
     <S>                                                                   <C>
     Independent Auditors' Report--KPMG Peat Marwick LLP..................  36
     Report of Independent Auditors--Ernst & Young LLP....................  37
     Consolidated Balance Sheets as of March 31, 1997 and 1998............  38
     Consolidated Statements of Operations--Years Ended March 31, 1996,
      1997 and 1998.......................................................  39
     Consolidated Statements of Shareholders' Equity--Years Ended March
      31, 1996,
      1997 and 1998.......................................................  40
     Consolidated Statements of Cash Flows--Years Ended March 31, 1996,
      1997 and 1998.......................................................  41
     Notes to Consolidated Financial Statements...........................  42
</TABLE>
 
(A)(2) FINANCIAL STATEMENT SCHEDULE:
 
  See (d) below.
 
(A)(3) EXHIBITS:
 
  The following exhibits are filed herewith or incorporated by reference
herein:
 
<TABLE>
   <C> <S>
   2.1 Stock Purchase Agreement dated August 30, 1995 among United States
       Filter Corporation, Anjou International Company and Polymetrics, Inc.
       (incorporated by reference to Exhibit 1.0 to Form 8-K dated October 2,
       1995 (File No. 1-10728)).*
   2.2 Offer by USFC Acquisition Inc., a wholly owned subsidiary of United
       States Filter Corporation to purchase all of the ordinary shares and
       American Depositary Shares in Memtec Limited dated as of October 25,
       1997 (incorporated by reference to Exhibit 2.1 to Form 8-K dated
       September 19, 1997 (File No. 1-10728)).*
   2.3 Agreement for Sale and Purchase of Partnership Interests by and among
       Western Farm & Cattle Company, California Land & Cattle Company, N.N.
       Investors, L.P., ST Ranch GenPar, Inc., FW Ranch Partners, L.P. and
       United States Filter Corporation dated as of August 3, 1997
       (incorporated by reference to Exhibit 2.1 to Form 8-K dated August 4,
       1997 (File No. 1-10728)).*
   2.4 Merger Agreement dated as of December 31, 1997, among United States
       Filter Corporation, U.S. Filter/KG Acquisition Corp., The Kinetics
       Group, Inc., The Bianco Family 1991 Trust Dated February 1, 1991, David
       J. Shimmon and BT Capital Partners, Inc. (incorporated by reference to
       Exhibit 2.1 to Form 8-K dated January 16, 1998 (File No. 1-10728)).*
   2.5 Agreement and Plan of Merger, dated as of February 9, 1998, by and among
       United States Filter Corporation, Palm Water Acquisition Corp. and
       Culligan Water Technologies, Inc. (incorporated by reference to Exhibit
       2.1 to Form 8-K dated February 9, 1998 (File No. 1-10728)).*
   3.0 Restated Certificate of Incorporation, as amended (incorporated by
       reference to Exhibit 3.01 to Quarterly Report on Form 10-Q for the
       quarter ended September 30, 1997 (File No. 1-10728)).
   3.1 Restated Bylaws (incorporated by reference to Exhibit 3.3 to
       Registration Statement on Form S-1 (No. 33-41089)).
   4.0 6% Convertible Subordinated Notes Indenture dated as of September 18,
       1995 between United States Filter Corporation and The First National
       Bank of Boston, as Trustee (incorporated by reference to Exhibit 4.3 to
       Registration Statement on Form S-3 (No. 33-63281)).
</TABLE>
 
 
                                       63
<PAGE>
 
<TABLE>
   <C>   <S>
    4.1  4 1/2 % Convertible Subordinated Notes Indenture dated as of December
         17, 1996 between United States Filter Corporation and State Street
         Bank and Trust Company of California, N.A., as Trustee (incorporated
         by reference to Exhibit 4.1 to Registration Statement on Form S-3 (No.
         333-14281)).
    4.2  Debt Securities Indenture dated as of May 19, 1998 between United
         States Filter Corporation and The Bank of New York, as Trustee.
    4.3  First Supplemental Indenture dated as of May 19, 1998, between United
         States Filter Corporation and The Bank of New York, supplementing the
         Indenture dated as of May 19, 1998.
    4.4  Amended and Restated Multicurrency Credit Agreement, dated as of
         October 20, 1997, among United States Filter Corporation, BankBoston,
         N.A. ("BKB"), DLJ Capital Funding, Inc. ("DLJ"), ABN AMRO Bank N.V.,
         Los Angeles International Branch, Banque Paribas ("Paribas"), The Bank
         of New York ("BNY"), Bank of America National Trust and Savings
         Association ("BOA"), The Sumitomo Bank, Limited (Los Angeles Branch),
         Fleet Bank, N.A. ("Fleet"), The Industrial Bank of Japan, Limited (Los
         Angeles Agency), Banque Nationale De Paris ("BNP"), Deutsche Bank AG,
         New York and/or Cayman Islands Branches ("Deutsche Bank"), The Long-
         Term Credit Bank of Japan Ltd. (Los Angeles Agency), Union Bank of
         California, N.A. ("Union"), The Sanwa Bank Limited, Los Angeles Branch
         ("Sanwa"), NationsBank, N.A. ("NationsBank"), BHF-BANK
         Aktiengesellschaft, The Sakura Bank, Limited and Credito Italiano,
         with DLJ as Documentation Agent, NationsBank as Syndication Agent,
         BOA, Deutsche Bank and Union as Co-Agents, BNY, Fleet, Paribas, BNP
         and Sanwa as Lead Managers and BKB as Managing Agent (incorporated by
         reference to Exhibit 4.01 to Registration Statement on Form S-4 dated
         November 6, 1997 (File No. 333-39711)).
    4.5  Transfer, Registration and Other Rights Agreement dated as of August
         31, 1994 by and among United States Filter Corporation, Laidlaw
         International Investments (Luxembourg) S.A., Laidlaw Investments
         (Barbados) Ltd., Marfit, S.p.A., Laidlaw, Inc. and Ing. Gilberto
         Cominetta (incorporated by reference to Exhibit 2.5 to Form 8-K dated
         October 4, 1994 (File No. 1-10728)).
    4.6  Letter Dated May 29, 1996 from Laidlaw Inc. to United States Filter
         Corporation, amending the Transfer, Registration and Other Rights
         Agreement dated as of August 31, 1994 (incorporated by reference to
         Exhibit 4.4 to Form 10-K for the year ended March 31, 1996 (File No.
         1-10728)).
    4.7  Transfer, Registration Rights and Governance Agreement among United
         States Filter Corporation, Western Farm & Cattle Company, N.N.
         Investors, L.P., California Land & Cattle Company, ST Ranch GenPar,
         Inc. and FW Ranch Partners, L.P. dated as of September 17, 1997
         (incorporated by reference to Exhibit 2.2 to Form 8-K dated as of
         September 17, 1997 (File No. 1-10728)).
    4.8  Warrant Agreement dated as of September 17, 1997 by and among United
         States Filter Corporation, Western Farm & Cattle Company, California
         Land & Cattle Company, N.N. Investors, L.P., ST Ranch GenPar, Inc. and
         FW Ranch Partners, L.P. (incorporated by reference to Exhibit 4.1 to
         Form 8-K dated September 17, 1997 (File No. 1-10728)).
    4.9  Registration Rights Agreement dated as of February 9, 1998 by and
         among United States Filter Corporation, Apollo Investment Fund, L.P.
         and Lion Advisors, L.P. (incorporated by reference to Exhibit 99.4 to
         Form 8-K dated February 9, 1998 (File No. 1-10728)).
    4.10 First Amendment to Amended and Restated Multicurrency Credit Agreement
         dated as of February 3, 1998.
    4.11 Second Amendment to Amended and Restated Multicurrency Credit
         Agreement dated as of March 20, 1998.
   10.1  License Agreements dated November 22, 1989 between Millipore
         Corporation, Millipore Investment Holdings Limited and IP Holding
         Company (incorporated by reference to Exhibit 10.4 to Form 10-K for
         the year ended March 31, 1994 (File No. 1-10728)).
   10.2  United States Filter Corporation 1991 Employees Stock Option Plan, as
         amended through June 12, 1997 (incorporated by reference to Exhibit
         4.02 to Form 10-Q for the quarter ended September 30, 1997 (File No.
         1-10728)).**
</TABLE>
 
 
                                       64
<PAGE>
 
<TABLE>
   <C>   <S>
   10.3  United States Filter Corporation 1991 Directors Stock Option Plan, as
         amended through September 13, 1996 (incorporated by reference to
         Exhibit 10.0 to Form 10-Q for the quarter ended September 30, 1996
         (File No. 1-10728)).**
   10.4  Form of Executive Retention Agreement (incorporated by reference to
         Exhibit 10.6 to Form 10-K for the year ended March 31, 1995 (File No.
         1-10728)).**
   10.5  Form of Executive Retirement Plan (incorporated by reference to
         Exhibit 10.7 to Form 10-K for the year ended March 31, 1995 (File No.
         1-10728)).**
   10.6  Annual Incentive Compensation Plan Summary (incorporated by reference
         to Exhibit 10.6 to Form 10-K for the year ended March 31, 1996 (File
         No. 1-10728)).**
   10.7  Employment Agreement dated October 25, 1996 between Harry K. Hornish,
         Jr. and United States Filter Corporation (incorporated by reference to
         Exhibit 10.7 to Form 10-K for the year ended March 31, 1997 (File No.
         1-10728)).**
   10.8  Employment Agreement dated as of January 1, 1998 between Richard J.
         Heckmann and United States Filter Corporation.**
   10.9  United States Filter Corporation Management Deferred Compensation
         Plan, as amended through January 1, 1998.**
   10.10 United States Filter Corporation Executive Severance Pay Plan.**
   10.11 Employment Agreement dated September 19, 1997 between Thierry Reyners
         and USF Euroholding, S.A. (incorporated by reference to Exhibit 10.1
         to Form 10-Q for the quarter ended December 31, 1997 (File No. 1-
         10728)).**
   12.1  Statement re computation of ratio of earnings to fixed charges.
   21.0  Schedule of Subsidiaries.
   23.0  Independent Auditors' Consent--KPMG Peat Marwick LLP.
   23.1  Report of Independent Auditors'--Ernst & Young LLP.
   27.0  Financial Data Schedule.
</TABLE>
--------
 * Certain exhibits and schedules to the Exhibits incorporated by reference
   herein have been omitted in accordance with Item 601(b)(2) of Regulation S-
   K. A copy of any omitted exhibit or schedule will be furnished to the
   Commission upon request.
 
** Management contract or compensatory plan or arrangement required to be
   filed as an exhibit to this Annual Report on Form 10-K.
 
(B)  REPORTS ON FORM 8-K:
 
  The Company filed two reports on Form 8-K (and four amendments to reports on
Form 8-K) during the quarter ended March 31, 1998 as follows:
 
  Form 8-K dated January 16, 1998 (as amended on Forms 8-K/A dated February
  6, 1998 and March 4, 1998);
 
  Amendments to Form 8-K dated December 9, 1997 on Forms 8-K/A dated February
  6, 1998 and March 4, 1998.
 
                                      65
<PAGE>
 
  The first report, dated January 16, 1998, reported the consummation of the
acquisition by the Company of all of the outstanding capital stock of The
Kinetics Group, Inc. ("Kinetics") pursuant to Item 2. Two amendments to this
report (and two amendments to a report on Form 8-K dated December 9, 1997
relating to the acquisition of the outstanding capital stock of Memtec Limited
("Memtec")) were filed on February 6 and March 4, 1998. The two amendments
filed on February 6, 1998 included the following financial statements (and
notes thereto) of Memtec and Kinetics:
 
    Memtec
    Consolidated Statements of Income for the years ended June 30, 1995,
    1996 and 1997
    Consolidated Balance Sheets as of June 30, 1996 and 1997
    Consolidated Statements of Shareholders' Equity for the years ended
    June 30, 1995, 1996 and 1997
    Consolidated Statements of Cash Flows for the years ended June 30,
    1995, 1996 and 1997
    Condensed Consolidated Statements of Operations for the three months
    ended
    September 30, 1996 and 1997 (unaudited)
    Condensed Consolidated Balance Sheets as of June 30, 1997 (audited) and
    September 30, 1997 (unaudited)
    Condensed Consolidated Statements of Cash Flows for the three months
    ended
    September 30, 1996 and 1997 (unaudited)
 
    Kinetics
    Consolidated Balance Sheets as of September 30, 1997 and 1996
    Consolidated Statements of Operations for the years ended September 30,
    1997 and 1996
    Consolidated Statements of Stockholders' Equity for the years ended
    September 30, 1997 and 1996
    Consolidated Statements of Cash Flows for the years ended September 30,
    1997 and 1996
 
  The two amendments filed on February 6, 1998 also included pro forma
financial information (and notes thereto) for the Company, including an
Unaudited Pro Forma Combined Balance Sheet as of September 30, 1997; Unaudited
Pro Forma Combined Statement of Operations for the fiscal years ended March
31, 1997, June 30, 1997 and September 30, 1997 and the six months ended
September 30, 1997. The two amendments filed on March 4, 1998 amended such pro
forma financial information.
 
  Form 8-K dated February 9, 1998.
 
  The second report, dated February 9, 1998, reported that the Company, a
wholly-owned subsidiary of the Company and Culligan Water Technologies, Inc.,
had entered into an Agreement and Plan of Merger dated as of February 9, 1998.
This report was filed pursuant to Item 5.
 
(C) EXHIBITS:
 
  See (a) (3) above.
 
(D) FINANCIAL STATEMENT SCHEDULE:
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
       <S>                                                                  <C>
       Independent Auditors' Report on Schedule............................  67
       SCHEDULE
       II  Valuation and Qualifying Accounts...............................  68
</TABLE>
 
  All other schedules for which provision is made in the applicable accounting
regulations of the United States Securities and Exchange Commission have been
omitted because such schedules are not required under the related instructions
or are inapplicable or because the information required is included in the
consolidated financial statements or notes thereto.
 
                                      66
<PAGE>
 
                   INDEPENDENT AUDITORS' REPORT ON SCHEDULE
 
To the Board of Directors and Shareholders
United States Filter Corporation:
 
  The audits referred to in our report dated June 1, 1998 included the related
financial statement schedule as of March 31, 1997 and 1998, and for each of
the years in the three-year period ended March 31, 1998, included in the
annual report on Form 10-K of United States Filter Corporation. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits and the report of other auditors. In our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
 
                                          KPMG Peat Marwick LLP
Orange County, California
June 26, 1998
 
                                      67
<PAGE>
 
         SCHEDULE II--UNITED STATES FILTER CORPORATION AND SUBSIDIARIES
 
                       VALUATION AND QUALIFYING ACCOUNTS
                        THREE-YEARS ENDED MARCH 31, 1998
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                         BALANCE AT  ACQUIRED    AMOUNTS                BALANCE
                         BEGINNING    THROUGH   CHARGED TO   AMOUNTS    AT END
      DESCRIPTION        OF PERIOD  ACQUISITION  EXPENSE   WRITTEN OFF OF PERIOD
      -----------        ---------- ----------- ---------- ----------- ---------
<S>                      <C>        <C>         <C>        <C>         <C>
Year Ended March 31,
 1998:
Allowance for Doubtful
 Accounts...............  $27,095     $ 7,159     $7,620     $(8,504)   $33,370
                          =======     =======     ======     =======    =======
Year Ended March 31,
 1997:
Allowance for Doubtful
 Accounts...............  $11,365     $14,437     $5,536     $(4,243)   $27,095
                          =======     =======     ======     =======    =======
Year Ended March 31,
 1996:
Allowance for Doubtful
 Accounts...............  $ 5,528     $ 2,063     $5,929     $(2,155)   $11,365
                          =======     =======     ======     =======    =======
</TABLE>
 
                                       68
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the United States
Securities Exchange Act of 1934, the Registrant has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
                                          UNITED STATES FILTER CORPORATION
 
                                          By: /s/ Richard J. Heckmann
                                            -----------------------------------
                                                    Richard J. Heckmann
                                               Chairman of the Board, Chief
                                                     Executive Officer
                                                       and President
 
                                          Date: June 29, 1998
 
  Pursuant to the requirements of the United States 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 dates indicated.
 
<TABLE>
<CAPTION>
             SIGNATURE                           TITLE                    DATE
             ---------                           -----                    ----
<S>                                  <C>                           <C>
      /s/ Richard J. Heckmann        Chairman of the Board, Chief    June 29, 1998
____________________________________ Executive Officer and
        Richard J. Heckmann          President and a Director
 
        /s/ Kevin L. Spence          Executive Vice President and    June 29, 1998
____________________________________ Chief Financial Officer
          Kevin L. Spence            (Principal Accounting
                                     Officer)
      /s/ Michael J. ReaRdon         Executive Vice President and    June 29, 1998
____________________________________ Chief Administrative Officer
         Michael J. Reardon          and a Director
       /s/ Nicholas C. Memmo         President and Chief             June 29, 1998
____________________________________ Operating Officer-North
         Nicholas C. Memmo           American Process Water Group
                                     and a Director
        /s/ James E. Clark           Director                        June 29, 1998
____________________________________
           James E. Clark
       /s/ John L. Diederich         Director                        June 29, 1998
____________________________________
         John L. Diederich
       /s/ Robert S. Hillas          Director                        June 29, 1998
____________________________________
          Robert S. Hillas
       /s/ Arthur B. Laffer          Director                        June 29, 1998
____________________________________
          Arthur B. Laffer
</TABLE>
 
                                      69
<PAGE>
 
<TABLE>
<CAPTION>
             SIGNATURE                           TITLE                    DATE
             ---------                           -----                    ----
 
<S>                                  <C>                           <C>
        /s/ Ardon E. Moore           Director                        June 29, 1998
____________________________________
           Ardon E. Moore
 
    /s/ Alfred E. Osborne, Jr.       Director                        June 29, 1998
____________________________________
       Alfred E. Osborne, Jr.

      /s/ J. Danforth Quayle         Director                        June 29, 1998
____________________________________
         J. Danforth Quayle

    /s/ C. Howard Wilkins, Jr.       Director                        June 29, 1998
____________________________________
       C. Howard Wilkins, Jr.
</TABLE>
 
                                       70
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 EXHIBIT NO.                       DESCRIPTION OF EXHIBIT
 -----------                       ----------------------
 <C>         <S>
  4.2        Debt Securities Indenture dated as of May 19, 1998 between United
             States Filter Corporation and The Bank of New York, as Trustee.
  4.3        First Supplemental Indenture dated as of May 19, 1998, between
             United States Filter Corporation and The Bank of New York,
             supplementing the Indenture dated as of May 19, 1998.
  4.10       First Amendment to Amended and Restated Multicurrency Credit
             Agreement dated as of February 3, 1998.
  4.11       Second Amendment to Amended and Restated Multicurrency Credit
             Agreement dated as of March 20, 1998.
 10.8        Employment Agreement dated as of January 1, 1998 between Richard
             J. Heckmann and United States Filter Corporation.**
 10.9        United States Filter Corporation Management Deferred Compensation
             Plan, as amended through January 1, 1998.**
 10.10       United States Filter Corporation Executive Severance Pay Plan.**
 12.1        Statement re computation of ratio of earnings to fixed charges.
 21.0        Schedule of Subsidiaries.
 23.0        Independent Auditors' Consent--KPMG Peat Marwick LLP.
 23.1        Consent of Independent Auditors--Ernst & Young LLP.
 27.0        Financial Data Schedule.
</TABLE>
--------
** Management contract or compensatory plan or arrangement required to be
   filed as an exhibit to this Annual Report on Form 10-K.
 
                                      71