UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                    FORM 10-K

           [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

                         SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended: December 31, 2000

                                       OR

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

For the transition period from:                       to:
                                --------------------       -------------------


                         Commission File Number: 1-7211

                              IONICS, INCORPORATED

             (Exact name of registrant as specified in its charter)

          MASSACHUSETTS                               04-2068530

(State or other jurisdiction of            (IRS Employer Identification Number)
 incorporation or organization)

65 Grove Street, Watertown, Massachusetts             02472
(Address of principal executive offices)            (Zip Code)

       Registrant's telephone number, including area code: (617) 926-2500


Securities registered pursuant to Section 12(b) of the Act:

                 Title of each class: Common Stock, $1 par value

       Name of each exchange on which registered: New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

                                      None

                                (Title of Class)

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

                                                YES   X   NO
                                                    -----    -----

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

State the aggregate market value of the voting and non-voting common equity held
by  non-affiliates  of the  registrant.  The  aggregate  market  value  shall be
computed by reference to the price at which the common  equity was sold,  or the
average bid and asked  prices of such  common  equity,  as of a  specified  date
within 60 days prior to the date of filing.  The  aggregate  market value of the
Common Stock of the registrant held by  non-affiliates  as of March 16, 2001 was
$397,895,987 (16,024,949 shares at $24.83 per share) (includes shares owned by a
trust for the indirect  benefit of a non-employee  director,  and by a trust for
the indirect  benefit of a spouse of a non-employee  director).  For purposes of
this disclosure,  non-affiliates are deemed to be all persons other than members
of the Board of Directors of registrant.

Indicate the number of shares outstanding of each of the registrant's classes of
common  stock,  as of  the  latest  practicable  date.  As of  March  16,  2001,
16,413,366 shares of Common Stock, $1 par value, were issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrant's Annual Report to stockholders
for the fiscal year ended December 31, 2000, included
as Exhibit 13 to this Form 10-K.                       Part I, Part II, Part IV



Portions of the Proxy Statement for registrant's 2001
Annual Meeting of Stockholders which will be filed
with the commission within 120 days after the close
of registrant's fiscal year.                           Part III





<PAGE>





                                     PART I

Statements  in this Annual Report on Form 10-K which are not  historical  facts,
so-called  "forward  looking  statements,"  are made pursuant to the safe harbor
provisions of the Private Securities  Litigation Reform Act of 1995. Readers are
cautioned that all  forward-looking  statements involve risks and uncertainties,
including  those  detailed in the  Company's  filings  with the  Securities  and
Exchange Commission.

ITEM 1.     BUSINESS

Ionics,   Incorporated   ("Ionics,"  or  the   "Company")  is  a  leading  water
purification  company  engaged  worldwide  in the  supply  of water and of water
treatment equipment through the use of proprietary separations  technologies and
systems.  Ionics' products and services are used by the Company or its customers
to desalt  brackish water and seawater,  to purify and supply bottled water,  to
treat water in the home, to manufacture and supply water treatment chemicals and
ultrapure water, to process food products, recycle and reclaim process water and
wastewater, and to measure levels of waterborne contaminants and pollutants. The
Company's customers include industrial companies, consumers,  municipalities and
other  governmental  entities,  and  utilities.  Unless  the  context  indicates
otherwise,  the terms  "Ionics" and  "Company" as used herein  includes  Ionics,
Incorporated and all its subsidiaries.

The Company's business  activities are reported in four business group segments.
The current reporting  reflects the business group structure,  which the Company
put into place in the latter part of 1998. The business group structure is based
upon  defined  areas of  management  responsibility  with  respect  to  markets,
applications  and  products.  These  business  group  segments are the Equipment
Business  Group,  Ultrapure  Water Group,  Consumer Water Group,  and Instrument
Business  Group.  In 2000,  these segments  accounted for  approximately  43.2%,
27.9%,  22.8%  and  6.1%,   respectively,   of  the  Company's  total  revenues.
Approximately 42% of the Company's 2000 revenues were derived from foreign sales
or operations.

Over fifty years ago, the Company  pioneered the development of the ion-exchange
membrane  and the  electrodialysis  process.  Since that time,  the  Company has
expanded  its  separations  technology  base to include a number of membrane and
non-membrane-based  separations  processes  which the  Company  refers to as The
Ionics Toolbox(R).  These separations processes include electrodialysis reversal
(EDR),  reverse  osmosis  (RO),   ultrafiltration  (UF),  microfiltration  (MF),
electrodeionization  (EDI),  electrolysis,  ion exchange, carbon adsorption, and
thermal processes such as evaporation and crystallization.  The Company believes
that it is the world's leading  manufacturer  of  ion-exchange  membranes and of
membrane-based systems for the desalination of water.

The Company was incorporated in  Massachusetts in 1948. The Company's  principal
executive  offices  are  located at 65 Grove  Street,  Watertown,  Massachusetts
02472.

FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS

Equipment Business Group

The Equipment  Business Group accounted for  approximately  43.2% of revenues in
2000. This segment  provides  technologies,  treatment  systems and services for
seawater  desalination,  brackish  water  desalination,   wastewater  reuse  and
recycle, potable water and high purity water. In addition, this segment includes
the Company's  custom  fabrication  activities and food and chemical  processing
activities.

Desalination and Related Water Treatment Equipment

Opportunities for the sale of desalination and related water treatment equipment
arise from changes in the needs of people and  municipalities,  from  industrial
shifts and growth,  and from  environmental  concerns.  With less than 1% of the
total water on the planet fresh and usable, desalination has played an important
role in creating new water sources.

The Company  sells a wide spectrum of products and systems to serve this market,
which utilize technologies  including EDR, ion exchange,  EDI, RO, UF, ozonation
and carbon  adsorption.  Depending on the customers' needs, the Company provides
standardized  versions  of  systems  utilizing  one or more of the  technologies
mentioned,  or can supply complete turnkey plants that may include  standardized
models as well as peripheral  water treatment  equipment,  complete  engineering
services,  process and equipment  design,  project  engineering,  commissioning,

                                      I-1
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operator  training and field  service.  During 2000,  the Company was awarded 20
desalination  contracts,   including  a  one  million-gallon  per  day  seawater
desalting  project  by the  government  of the  United  Arab  Emirates  and  two
contracts for brackish water RO plants in the Middle East region.

Wastewater Treatment Equipment

The market for  wastewater  treatment,  recycle and reuse has shown  significant
growth as world demand for water of specified  quality continues to increase and
as regulations  limiting waste discharges to the environment  continue to mount.
The wastewater market is increasingly driven by the concept of what Ionics calls
"Total  Water  Management(R),"  which  involves the  recognition  that the water
streams  which enter,  leave or become part of a process can be treated for use,
recycle or discharge to achieve overall economic  efficiencies.  Ionics services
the wastewater  market with proprietary brine  concentrators and  crystallizers,
traditional  wastewater  treatment  equipment,  and special  EDR  membrane-based
concentrators for recycle and reuse.

The Company designs,  engineers and constructs brine concentrators,  evaporators
and  crystallizers  which are used to clean,  recover  and  recycle  wastewater,
particularly in "zero liquid  discharge"  industrial uses. Such systems may also
incorporate EDR membrane  systems as  preconcentrators.  The Company was awarded
seven zero liquid discharge  contracts,  including a $20 million contract during
2000 to supply and install an integrated  water and wastewater  treatment system
for  a  "greenfield"  1000  megawatt  merchant  power  plant  being  built  near
Bakersfield, California.

Ionics also designs,  engineers and constructs customized systems for industrial
wastewater customers which may include conventional treatment systems as well as
advanced separation  technologies such as EDR, RO, UF and MF. Typical industrial
customers are power stations,  chemical and petrochemical  plants,  metalworking
and  automobile  factories,   textile  manufacturers  and  a  variety  of  other
industrial  applications.  The Company also provides  custom and packaged sewage
treatment  systems for  municipalities  and advanced membrane systems that treat
waste from conventional  sewage treatment plants so that the treated  wastewater
can be recycled and reused for irrigation and process water needs.

Drinking Water Supply

Ionics'  position as a seller of purified or treated  water has evolved from its
traditional  role  as a  supplier  of  water  treatment  equipment.  In  certain
situations,  opportunities  are  available for the Company to provide a complete
service package involving financing, construction,  operation and maintenance of
water treatment facilities.

Ionics,  through its wholly owned  subsidiary,  Ionics  Iberica,  S.A., owns and
operates a 5.5 million gallon per day capacity brackish water EDR facility and a
3.6 million gallon per day RO seawater  facility on Grand Canary Island,  Spain.
Under long-term  contracts,  the Company is selling the desalted water from both
facilities to the local water utility for distribution.

The Company's wholly owned subsidiary,  Ionics (Bermuda) Ltd., owns and operates
a 600,000  gallon per day EDR brackish  water  desalting  plant on the island of
Bermuda.  This plant  supplies  fresh  water  under a  long-term  contract  with
Watlington Waterworks Ltd., a Bermuda corporation partially owned by Ionics.

Construction  is  underway in  Trinidad  for what will be the  largest  seawater
desalination  plant in the  Western  Hemisphere  and the  second  largest in the
world.  The 109,000 cubic meter (28.8 million  gallon) per day seawater  reverse
osmosis (SWRO)  desalination plant will provide the Water and Sewerage Authority
of Trinidad and Tobago and the industries of the Point Lisas  Industrial  Estate
with a high quality water supply for industrial requirements.  This $120 million
project is a joint  venture  between the Company and its local  partner,  Hafeez
Karamath  Engineering  Services Ltd. The plant is scheduled to start  delivering
water later this year.

The Company also owns and operates more than 30 desalination  plants on a number
of  Caribbean  islands,  which  provide  drinking  water to hotels,  resorts and
governmental  entities.  Drinking  water on these  islands is  usually  supplied
pursuant to water supply contracts with terms ranging from five to ten years. On
the island of Barbados,  a 30,000  cubic meter per day  brackish  water RO plant
started up  successfully  in the first quarter of 2000,  and is providing  fresh
potable   drinking  water  to  about  one-fifth  of  the  island's   population.
Desalinated  water is being provided to the Barbados Water Authority on a build,
own,  operate  ("BOO")  basis by a joint  venture  between  Ionics and its local

                                      I-2
<PAGE>

partner,  Williams  Industries.  On the  island  of  Anguilla,  Ionics  signed a
contract in 2000 to expand Ionics' existing desalination plant by 50% to 900,000
gallons per day. This project is expected to be completed by the summer of 2001.
The Company was a member of one of the three teams  prequalified  in 2000 to bid
on a new 36  million  gallon  per  day  seawater  desalination  BOO  project  in
Ashkelon, Israel.

Chemical Supply

The Company  uses its  Cloromat(R)  electrolytic  membrane-based  technology  to
produce sodium hypochlorite and related  chlor-alkali  chemicals for industrial,
commercial  and other  non-consumer  applications.  The  Company's  wholly owned
Australian  subsidiary,  Elite Chemicals Pty. Ltd.  (Elite),  utilizes  Cloromat
systems to produce sodium  hypochlorite  on-site in Brisbane for the industrial,
commercial  and  janitorial  supply of  bleach  products,  and to supply  sodium
hypochlorite to treat the City of Brisbane's  drinking water supply.  Elite also
distributes  bleach  products to the Sydney  area.  The Company also owns sodium
hypochlorite generating facilities in Ludlow, MA and Acapulco, Mexico.

Food Processing

Under an agreement with a major U.S.  dairy  cooperative,  the Company  oversees
whey processing activities at two plants owned by the cooperative,  and receives
a processing fee based on the production of demineralized whey for its services.
Included in the equipment  being utilized by the Company at these plants are its
Electromat(R) electrodialysis systems.

Custom Fabricated Products

At its Bridgeville,  Pennsylvania  facility,  the Company  fabricates  specially
designed products for industrial and defense-related applications. The Company's
experience  and  expertise in design,  welding,  machining  and assembly to meet
exceptionally  fine tolerances have been utilized to fabricate  products ranging
from intricate small parts to large multi-ton  assemblies.  In 2000, the Company
continued  work on a contract  received in 1999 for the  fabrication  of storage
systems to contain spent nuclear fuel at a  decommissioned  U.S.  nuclear energy
plant.

Ultrapure Water Group

The Ultrapure  Water Group  accounted for  approximately  27.9% of the Company's
2000  revenues.  This segment  provides  equipment and services for  specialized
industrial  users of ultrapure  water,  such as companies in the life  sciences,
microelectronics  and power  industries.  Ultrapure water is water that has been
purified by a series of processes to the degree that  remaining  impurities  are
measured in parts per billion or trillion.

Ultrapure Water Equipment

The demand for  technologically  advanced  ultrapure water equipment and systems
has increased as the  industries,  which use ultrapure  water,  have become more
knowledgeable  about  their  quality  requirements.  Ultrapure  water  needs are
particularly important in the semiconductor, pharmaceutical, petroleum and power
generation industries. The semiconductor industry in particular has increasingly
demanded  higher purity water as the circuits on silicon wafers have become more
densely packed.

The Company  supplies  sophisticated  ultrapure  water systems,  which utilize a
combination  of ion  exchange,  EDI, RO and UF  technologies.  These systems are
either trailer-mounted or land-based and vary from standardized modules to large
multimillion dollar systems,  depending on the customer's  requirements.  During
2000,  the Company was awarded a contract to design,  construct and commission a
complete  ultrapure water system for a new semiconductor  facility in Singapore.
This  plant  will  treat the  Singapore  municipal  source  water to supply  the
semiconductor  manufacturing facility with ultrapure water containing impurities
of less than 10 parts per trillion.  In China, a project to design and supply an
ultrapure  water  and  wastewater  treatment  plant  for a  major  semiconductor
manufacturing  facility in Tianjin,  which had been on hold,  was  authorized to
proceed.

Included in the  equipment  sold by the  Ultrapure  Water Group is the Company's
Ozgen(R)  ozone-generation  equipment,  which is being utilized by semiconductor
plants as well as for swimming pool and aquarium disinfection.

                                      I-3
<PAGE>

The Company  established  the Ionics Life Sciences  division at the beginning of
1999 to expand its delivery of  ultrapure  water  equipment  and services to the
pharmaceutical and biotechnology industries.

Ultrapure Water Supply

In industries  such as power  generation,  semiconductors,  pharmaceuticals  and
biotechnology,  ultrapure  water is  critical  to  product  quality  and  yield.
Depending on the  composition  and quantity of the  impurities  to be removed or
treated,  any one of several  membrane  separations  methods  can be utilized to
provide ultrapure water to the customer. Ionics has pioneered in the application
of three membrane  technologies  (EDR, RO and UF) combined  together in a mobile
system  called the "triple  membrane"  trailer  (TMT) for use in the  commercial
processing of ultrapure water.  Ionics provides ultrapure water services and the
production and sale of ultrapure  water from  trailer-mounted  units at customer
sites.

The Company's EDI technology is becoming increasingly utilized in the production
of ultrapure water.  EDI is a continuous,  electrically  driven,  membrane-based
water  purification  process,  which produces ultrapure water without the use of
strong chemical  regenerants,  such as sulfuric acid and caustic soda, which are
commonly  required.  The Company's TMT-II trailers utilize a combination of EDI,
RO and UF  technologies  and represent what the Company  believes to be the most
advanced technology used in the commercial processing of ultrapure water.

At the end of 2000,  Company-owned  or operated  equipment for the production of
ultrapure  water and other purified  process water under contract with companies
in various  industries had a total capacity of approximately  25,000 gallons per
minute.

The Company has been  expanding its ultrapure  water  activities  into the Asian
market.  In  November  1997,  the  Company  acquired  a majority  interest  in a
Malaysian  company,  now  called  Ionics  Enersave  Engineering  Sdn Bhd,  which
provides  ultrapure  water services and systems to the southeast Asian and China
markets.   The  Company  established  an  ultrapure  water  sales,  service  and
regeneration  facility in Singapore  in 1998,  and opened an office in Taiwan in
1999.

One  of  the  Company's   important   ultrapure  water  service   activities  is
ion-exchange  regeneration  services,  which are  provided at four U.S. and four
overseas locations. In addition to commissioning the Singapore facility in 1998,
the Company  began  operations  in 1999 at a 66,000  square foot building in San
Jose,  California which contains resin  regeneration,  manufacturing and service
facilities.   The  Company  also  provides  system  sanitization  and  high-flow
deionization services at customer sites.

Consumer Water Group

This business group segment accounted for  approximately  22.8% of the Company's
2000  revenues.  The Company's  consumer water products serve the bottled water,
home water purification, and consumer bleach-based product market areas.

Aqua Cool(R) Pure Bottled Water

Ionics entered the bottled water business in 1984. The Company's  strategy is to
utilize its proprietary  desalination and  purification  technology to produce a
brand  of  drinking  water,  Aqua  Cool(R)  Pure  Bottled  Water,  which  can be
reproduced  with  uniform  consistency  and high  quality at numerous  locations
around  the  world.  Distribution  operations  have  been  established  at eight
Company-owned  locations  throughout  England;  at  16  Company-owned  locations
serving a number of metropolitan areas in the eastern,  southeastern and central
United States; and, through joint ventures, in Bahrain, Kuwait and Saudi Arabia.
The Company's  business focuses on the sale of Aqua Cool in five-gallon  bottles
to a variety of commercial and residential  customers.  The Company has recently
expanded its  product-line  to include  office coffee service and other services
complementary  to bottled water  distribution.  In 2000, the Company's  domestic
bottled water business was affected by charges relating to accounts  receivable,
by increased fuel, labor and other distribution  costs, and by a transition to a
new  computerized   billing  and  accounting  system.  The  Company  closed  two
unprofitable  distribution  centers,  has increased  prices,  and is focusing on
improving the profitability of its domestic bottled water operations.

At the end of 2000, there were a total of 33 Aqua Cool  distribution  centers in
the United  States and  overseas,  supplied with Aqua Cool Pure Bottled Water by
ten regional water  purification and bottling  facilities,  supplying a customer
base of approximately  165,000. Early in 1999, the Company acquired Aquarelle SA

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(now called Aqua Cool  France),  a French  bottled water  distributor  with five
locations in France,  with the intent of expanding the  Company's  bottled water
operations into continental Europe.

Home Water Purification Systems

Point-of-Use Devices

The  Company   participates   in  the   "point-of-use"   market  for  over-  and
under-the-sink water purifiers through the sale of RO and activated carbon-based
filtering  devices,  and  through  the  manufacture  and  sale of  HYgene(R),  a
proprietary,  EPA-registered,   silver-impregnated  activated  carbon  filtering
medium. The Company  incorporates HYgene, which is designed to prevent bacterial
build-up while providing the capability of removing undesirable tastes and odors
from the water supply,  into its own bacteriostatic  water conditioners and also
sells HYgene to manufacturers of household point-of-use water filters.

Point-of-Entry Devices

Ionics' point-of-entry water products include ion-exchange water conditioners to
"soften" hard water,  and chemicals and media for filtration and treatment.  The
Company  sells its  products,  under the General  Ionics and other brand  names,
through  both  independent  distributorships  and wholly owned sales and service
dealerships. In 2000, the Company opened a wholly owned sales and service center
in Denver, Colorado.

In 1999,  the  Company  commenced  operations  in  Galway,  Ireland,  to provide
bacteriostatic water conditioning systems to the European marketplace.  In 2000,
the Company further expanded its operations by starting operations in Dublin and
three other locations in Ireland and in Portugal.

Bleach-Based Consumer Products

The Company's Elite Consumer Products  division operates a Cloromat(R)  facility
to  produce  and  distribute  bleach-based  products  for the  consumer  market,
primarily  one-gallon bleach products under private label or under the Company's
own "Elite(R)",  "Super ValueTM" and "UltraPureTM"  brands,  and  methanol-based
automobile windshield wash solution. These operations are conducted in a 129,000
square foot manufacturing facility located in Ludlow, Massachusetts.

Instrument Business Group

The Company's  Instrument Business Group accounted for approximately 6.1% of the
Company's 2000 revenues.  During 2000, the Ionics Instrument Division, which was
located in  Watertown,  Massachusetts,  was moved and  consolidated  with Ionics
Sievers  Instruments,  located in Boulder,  Colorado.  This business  group also
includes Ionics Agar Environmental,  located in Herzlia, Israel. The Company has
become a leading  manufacturer of instruments  that measure total organic carbon
across the water  "spectrum" from ultrapure water to wastewater.  The Sievers(R)
Model 400 TOC analyzer is the only on-line TOC analyzer designed specifically to
comply with new United States  Pharmacopoeia  (USP) requirements for determining
water quality in the pharmaceutical industry. In 1999, Ionics Sievers introduced
TOC analyzers sensitive to the  parts-per-trillion  range, designed specifically
for  ultrapure  water  measurement  in the  semiconductor  and power  generation
industries.

In addition to the Sievers  product line,  the Company offers a full line of TOC
monitors for process water and  wastewater  applications.  The  Company's  other
instrument products,  which are used both in the laboratory and on-line, measure
and detect, among other things,  total carbon,  sulfur,  nitric oxide,  chemical
oxygen demand and total oxygen demand.  The Company also sells  instruments  for
the measurement of dissolved metals and specific chemical analyzers for ammonia,
phosphates, nitrates and chlorine.

With the acquisition of Ionics Agar  Environmental in 1999, the Company now also
offers a line of  instruments  for the detection of thin layers of oil on water.
The Company's Leakwise(R)  oil-on-water detection systems are used by a range of
industries from oil refining to power generation.

                                      I-5
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OTHER INFORMATION CONCERNING THE BUSINESS OF THE COMPANY

Raw Materials and Sources of Supply

All raw  materials  and parts and  supplies  essential  to the  business  of the
Company can normally be obtained from more than one source. The Company produces
the  membranes  required for its equipment and systems that use the ED, EDR, MF,
UF, RO and EDI  processes.  Membranes used for the RO process are also purchased
from outside suppliers and are normally available from multiple sources.  During
2000, the Company formed a joint venture with Toray Industries,  Inc. and Mitsui
& Co. to manufacture  and market RO membranes for the  desalination  of seawater
and brackish water using Toray's proprietary RO manufacturing technology. Ionics
has a 43% interest in the joint venture company, Toray Membrane America, Inc.

Patents and Trademarks

The  Company  believes  that  its  products,  know-how,  servicing  network  and
marketing  skills are more significant to its business than trademarks or patent
protection of its technology. Nevertheless, the Company has a policy of applying
for  patents  both in the United  States and  abroad on  inventions  made in the
course  of its  research  and  development  work for which a  commercial  use is
considered  likely.  The Company owns numerous United States and foreign patents
and trademarks and has issued licenses thereunder,  and currently has additional
pending patent  applications.  Of the  approximately 77 outstanding U.S. patents
held  by  the  Company,  a  substantial  portion  involves  membranes,  membrane
technology and related separations processes such as ED and EDR, RO, UF and EDI.
The Company  does not believe  that any of its  individual  patents or groups of
related patents, nor any of its trademarks, is of sufficient importance that its
termination or abandonment,  or the  cancellation of licenses  extending  rights
thereunder, would have a material adverse effect on the Company.

Seasonality

The activities of the Company's  businesses are not of a seasonal nature,  other
than certain  activities of the Consumer Products  segment.  Bottled water sales
and bleach  products  for swimming  pool use tend to increase  during the summer
months.  Also, sales levels for automobile  windshield wash solution increase in
the winter months.

Customers

The nature of the Company's  business is such that it frequently has in progress
large contracts with one or more customers for specific projects; however, there
is no one  customer  whose  purchases  account for 10% or more of the  Company's
consolidated revenues and whose loss would have a material adverse effect on the
Company and its subsidiaries taken as a whole.

Backlog

The Company's  backlog of firm orders was  $270,622,000 at December 31, 2000 and
$241,332,000  at  December  31,  1999.  For  multi-year  contracts,  the Company
includes in reported  backlog the revenues  associated with the first five years
of the contract.  For multi-year contracts,  which are not otherwise included in
backlog, the Company includes in backlog up to one year of revenues. The Company
expects to fill  approximately 65% of its December 31, 2000 backlog during 2001.
The Company does not believe that there are any seasonal  aspects to its backlog
figures.

Government Contracts

The  Company  does not  believe  that any of its  sales  under  U.S.  Government
contracts or subcontracts during 2000 are subject to renegotiation.  The Company
has  not  had  adjustments  to its  negotiated  contract  prices,  nor  are  any
proceedings pending for such adjustments.

Research and Development

The Company is actively  engaged in research  and  development  directed  toward
products  for  use  in  water  purification,  processing  and  measurement,  and
separations  technology.  The Company's  research and development  expenses were
approximately $7,980,000 in 2000, $7,066,000 in 1999, and $6,635,000 in 1998.

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<PAGE>

Competition

The Company  experiences  competition  from a variety of sources with respect to
virtually all of its products, systems and services,  although the Company knows
of no single  entity that competes with it across the full range of its products
and  services.  Competition  in the markets  served by the Company is based on a
number of factors, which may include price, technology, applications experience,
know-how,   availability   of   financing,   reputation,   product   warranties,
reliability, service and distribution.

With respect to the Company's  Equipment  Business Group,  there are a number of
companies,   including  several  sizable  chemical  companies  that  manufacture
membranes,  but not equipment.  There are numerous smaller companies,  primarily
fabricators,  that build water treatment and desalination  equipment,  but which
generally  do not have  their own  proprietary  membrane  technology.  A limited
number of companies  manufacture  both membranes and equipment.  The Company has
numerous  competitors  in its  conventional  water  treatment,  instruments  and
fabricated products business lines.

In 2000, the International  Desalination Association released a report providing
data regarding the  manufacturers  of desalination  equipment.  According to the
report,  which covered land-based water  desalination  plants delivered or under
construction  as of  December  31,  1999,  with a capacity  to produce 100 cubic
meters  (approximately 25,000 gallons) or more of fresh water daily, the Company
ranked first in terms of the cumulative  number of such plants sold, having sold
more than the next three manufacturers combined. In addition, the Company ranked
first in the total capacity of such plants sold.

With respect to the Ultrapure Water Group business segment, the Company competes
with suppliers of ultrapure water services on a national and regional basis, and
with other manufacturers of membrane-related equipment.

With respect to the Company's  Consumer Water Group business segment,  there are
numerous  bottled water  companies,  which  compete with the Company,  including
several  which  are  much  larger  than  the  Company.  Most  of  the  Company's
competitors in point-of-entry  and point-of-use  products for the home are small
assemblers,  serving local or regional markets.  However, there are also several
large companies competing nationally in these markets.

In the  case of its  silver-impregnated  activated  carbon  product  lines,  the
Company knows of two competitors with which it competes on a national basis.

The Company  competes with many  suppliers of bleach and  bleach-based  cleaning
products and automobile  windshield  wash for the consumer  market,  a number of
which are much larger than the Company.

The Company is unable to state with  certainty its relative  market  position in
all aspects of its business.  Many of its  competitors  have financial and other
resources greater than those of the Company.

Environmental Matters

Continued compliance by the Company and its subsidiaries with federal, state and
local  provisions  regulating the discharge of materials into the environment or
otherwise  relating to the protection of the  environment is expected to have no
material effect upon capital expenditures,  earnings or the competitive position
of the Company or any of its subsidiaries.

In May 1998, a wholly owned California subsidiary of the Company was notified by
the U.S.  Environmental  Protection  Agency  ("EPA")  that it was a  potentially
responsible  party  (PRP) in  connection  with the  Operating  Industries,  Inc.
Superfund Site in Monterey  Park,  California.  Because of its relatively  small
volumetric  contribution  of waste to the site,  the  subsidiary was eligible to
participate  in a de minimis  settlement,  and in  January  1999 made a full and
timely payment of $13,685 in settlement.

The Company  was  notified in 1992 that it is a  potentially  responsible  party
(PRP)  at a  Superfund  Site,  Solvent  Recovery  Services  of  New  England  in
Southington,  Connecticut (the "SRS Site"). Ionics' share of assessments to date
for site work totals  approximately  $65,000.  The United  States  Environmental
Protection  Agency  ("EPA") has delayed  issuing a decision  regarding  clean-up
methods  and costs.  While it is too soon to  predict  the scope and cost of the
final  remedy  that the EPA will  select,  based  upon the large  number of PRPs
identified,  the Company's small volumetric ranking (approximately 0.5%) and the
identities of the larger PRPs,  the Company  believes that its liability in this
matter will not have a material effect on the Company or its financial position.

                                      I-7
<PAGE>

By letter dated March 29, 2000, the Company and other PRPs for the SRS Site were
notified  that  they may also  have  potential  liability  with  respect  to the
Angelillo  Property  Superfund  Site,  also  in  Southington,  Connecticut  (the
"Angelillo Site"),  because hazardous  materials were allegedly shipped from the
SRS Site to the Angelillo Site. It is too early to determine what liability,  if
any,  the Company may incur  arising out of the EPA's claim with  respect to the
Angelillo Site.

The Company has never had a product  liability  claim grounded in  environmental
liability,  and believes that the nature of its products and business makes such
a claim unlikely.

Employees

The  Company  and  its  consolidated  subsidiaries  employ  approximately  2,900
full-time persons.  None of the Company's employees are represented by unions or
have  entered  into  workplace  agreements  with  the  Company,  except  for the
employees of the Company's Australian  subsidiary,  certain employees of an Aqua
Cool distribution center in Pennsylvania, and certain employees of the Company's
Spanish subsidiary. The Company considers its relations with its employees to be
good.

Foreign Operations

The  Company's  sales  to  customers  in  foreign  countries  primarily  involve
desalination  systems,  ultrapure water systems,  water and wastewater treatment
systems,  Cloromat  systems,  products and services  related to these  foregoing
systems,  instruments and bottled water. The Company seeks to minimize financial
risks relating to its international  operations.  Wherever possible, the Company
obtains  letters of credit or similar  payment  assurances  denominated  in U.S.
dollars.  If  U.S.  dollar  payments  cannot  be  secured,  the  Company,  where
appropriate, enters into foreign currency hedging transactions. The Company also
uses foreign sources for equipment parts and may borrow funds in local (foreign)
currencies to offset the asset risk of foreign currency devaluation. Net foreign
currency transaction  (losses)/gains  included in income before income taxes and
minority interest totaled  $(782,000) in 2000, $11,000 in 1999, and $(28,000) in
1998.

The Company engages in certain foreign  operations both directly and through the
following wholly owned  subsidiaries:  Aqua Cool France S.A.; Aqua Design,  Inc.
(including  its  subsidiaries  and  affiliates);   Elite  Chemicals  Pty.  Ltd.;
Favourable  Trading Ltd.;  Global Water  Services,  S.A.;  Ionics Acapulco S.A.;
Ionics Agar Environmental  Ltd.; Ionics  Asia-Pacific Pte Ltd.; Ionics (Bermuda)
Ltd.;  Ionics  Constructors  Trinidad,  Ltd.;  Ionics Foreign Sales  Corporation
Limited;  Ionics France S.A.; Ionics (Korea) Inc.; Ionics Iberica,  S.A.; Ionics
Italba,  S.p.A.;  Ionics  Nederland  B.V.;  Ionics Taiwan,  Inc.;  Ionics (U.K.)
Limited;  Ionics Watertec Pty. Ltd.; Resources  Conservation Co.  International;
and  Separatech  Ltd.  In  1997,  the  Company  acquired,  through  its  Spanish
subsidiary,  a 55% ownership interest in Ionics Enersave  Engineering Sdn Bhd, a
Malaysian corporation with subsidiary operations in China.

The Company also engages in various foreign  operations  through  investments in
affiliated companies and joint venture relationships. The activities include the
production, sale and distribution of bottled water through a 40% owned affiliate
in Bahrain,  a 40% owned affiliate in Saudi Arabia, and a 49% owned affiliate in
Kuwait.

In addition,  the Company has a 26% ownership interest in Watlington Waterworks,
Limited in Bermuda. Watlington collects, treats and distributes water throughout
Bermuda  for both  potable and  non-potable  uses.  The  Company  also has a 50%
ownership  interest in Yuasa-Ionics  Co., Ltd.,  Tokyo,  Japan,  which among its
activities  serves as a  distributor  of certain of the  Company's  products  in
Japan; and, through Ionics Iberica, S.A., a 20% interest in Grupo Empresarial de
Mejoramiento  Ambiental,  S. de R. L. de C. V., which provides  water  treatment
services  in Mexico.  Through  its  Italian  subsidiary,  the  Company has a 75%
ownership  interest  (increased  from 50% at the  beginning of 2000) in Agrinord
S.r.l., an Italian company engaged in waste treatment  operations.  In 1999, the
Company  acquired a controlling  interest in Ionics  Freshwater Ltd., a Barbados
corporation which owns and operates a major brackish water desalination facility
in Barbados.  In 2000, the Company formed a joint venture with Toray Industries,
Inc. and Mitsui & Co. (U.S.A.), Inc. to manufacture and market RO membranes. The
Company  has a 43%  ownership  in the  joint  venture  company,  Toray  Membrane
America,  Inc. The Company also holds a 40% interest in Desalination  Company of
Trinidad and Tobago Ltd., which is constructing and will own and operate a major
seawater desalination facility in Trinidad.

                                      I-8
<PAGE>

Further geographical and financial information  concerning the Company's foreign
operations appears in Notes 1, 5, 9, 14, 15 and 16 to the Company's Consolidated
Financial  Statements  included as part of the  Company's  2000 Annual Report to
Stockholders, which Notes are included in Exhibit 13 and are incorporated herein
by reference.

FINANCIAL INFORMATION ABOUT GEOGRAPHICAL AREAS

The  information  contained  in  Note  16 of  Notes  to  Consolidated  Financial
Statements contained in the Company's Annual Report to Stockholders for the year
ended December 31, 2000 is included in Exhibit 13 and is incorporated  herein by
reference.

ITEM 2.    PROPERTIES

The  Company's  executive  offices  are  located  in  Watertown,  Massachusetts.
Manufacturing and other operations are carried out in a number of locations. The
following  table  provides  certain  information  as to the Company's  principal
general offices and manufacturing facilities:

                        Business Segment          Property   Approximate Square
Location                Utilizing the Location    Interest   Feet of Floor Space
--------                ----------------------    --------   -------------------

Watertown, MA         Equipment Business Group     Owned       134,000
(headquarters)        Instrument Business Group
                      Consumer Water Group

Watertown, MA         Equipment Business Group     Owned       127,000
                      Consumer Water Group

Bridgeville, PA       Equipment Business Group     Owned        77,000

Canonsburg, PA        Equipment Business Group     Leased       88,000

Elkton, MD            Consumer Water Group         Owned       234,000

Ludlow, MA            Consumer Water Group         Owned       129,000

San Jose, CA          Ultrapure Water Group        Owned        66,000

Boulder, CO           Instrument Business Group    Leased       74,000

Sydney, Australia     Equipment Business Group     Owned       140,000

Brisbane, Australia   Equipment Business Group     Owned        38,000

Brisbane, Australia   Ultrapure Water Group        Leased       62,000

London, England       Consumer Water Group         Owned        36,000

The  Company  also  owns or leases  smaller  facilities  in which  its  business
segments conduct business.  The Company makes use primarily of leased facilities
for its Aqua Cool  bottled  water  distribution  centers.  The majority of these
facilities contain less than 10,000 square feet.

The Company  considers the business  facilities  that it utilizes to be adequate
for the uses to which they are being put.

ITEM 3.    LEGAL PROCEEDINGS

The  Company  is  involved  in the  normal  course of its  business  in  various
litigation  matters,  some of which are in the pre-trial  discovery stages.  The
Company believes generally that it has meritorious defenses and that none of the
pending  matters  will have an outcome  material to the  financial  condition or
business of the Company.

                                      I-9
<PAGE>

The Company  was  notified in 1992 that it is a  potentially  responsible  party
(PRP)  at a  Superfund  Site,  Solvent  Recovery  Services  of  New  England  in
Southington,  Connecticut (the "SRS Site"). Ionics' share of assessments to date
for site work totals  approximately  $65,000.  The United  States  Environmental
Protection  Agency  ("EPA") has delayed  issuing a decision  regarding  clean-up
methods  and costs.  While it is too soon to  predict  the scope and cost of the
final  remedy  that the EPA will  select,  based  upon the large  number of PRPs
identified,  the Company's small volumetric ranking (approximately 0.5%) and the
identities of the larger PRPs,  the Company  believes that its liability in this
matter will not have a material effect on the Company or its financial position.

By letter dated March 29, 2000, the Company and other PRPs for the SRS Site were
notified  that  they may also  have  potential  liability  with  respect  to the
Angelillo  Property  Superfund  Site,  also  in  Southington,  Connecticut  (the
"Angelillo Site"),  because hazardous  materials were allegedly shipped from the
SRS Site to the Angelillo Site. It is too early to determine what liability,  if
any,  the Company may incur  arising out of the EPA's claim with  respect to the
Angelillo Site.

On March 27,  1998,  the  Company was served  with a summons  and  complaint  in
connection with a lawsuit now captioned United States Filter  Corporation,  U.S.
Filter/Ionpure,  Inc., IP Holding Company,  Millipore  Corporation and Millipore
Investment Holdings Limited v. Ionics, Incorporated,  filed in the U.S. District
Court, District of Massachusetts (Boston). Plaintiffs allege that the Company is
infringing a certain reissue patent,  which issued on March 10, 1998, by making,
selling,  offering  to sell and using the  Company's  electrodeionization  (EDI)
systems  within the United  States.  On June 10, 1999, the Company was served by
the plaintiffs in the pending suit with a second summons and complaint  alleging
infringement of six  EDI-related  patents issued earlier than the reissue patent
which is the  subject of the first  lawsuit.  The  Company  has been  vigorously
defending plaintiffs'  infringement claims in these lawsuits,  and believes that
it has valid  defenses to such  claims.  Trial has been  scheduled  in the first
case, and the second case is still in the discovery stages.

On October 14,  2000,  the Company  was served with a summons and  complaint  in
connection with a lawsuit  captioned  United States Filter  Corporation and U.S.
Filter/Ionpure,  Inc. v. Ionics, Incorporated, filed in the U.S. District Court,
District of Massachusetts  (Boston).  Plaintiffs  allege  infringement of a U.S.
patent involving a certain aspect of reverse osmosis technology. This case is in
the pre-discovery stage.

The  Company is engaged in  settlement  discussions  with United  States  Filter
Corporation with respect to all pending patent infringement  litigation matters,
although there is no assurance  that  settlement  will be achieved.  The Company
established  a reserve in the fourth  quarter of 2000 that it  believes  will be
sufficient  to cover future  charges in  connection  with the  resolution of the
litigation.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the fiscal year covered by this report.

                                      I-10
<PAGE>




                                     PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
           ---------------------------------------------------------------------

The Company's  common stock is traded on the New York Stock  Exchange  under the
symbol ION. As of March 16, 2001, there were approximately 1,200 shareholders of
record.  No cash  dividends  were paid in either  2000 or 1999  pursuant  to the
Company's  current policy to retain earnings for use in its business.  Also, the
Company's  principal domestic credit facility does not permit the payment by the
Company of cash dividends to its shareholders.

During the period  January 1, 1999 to December 31,  2000,  the range of high and
low sales prices of the common stock for each quarterly period was as follows:

                             2000                             1999
                 -----------------------------     ---------------------------
                      High            Low               High          Low
                 -------------- --------------     ------------- -------------
  First Quarter     $37 11/16      $24 1/2            $35 3/4       $24 7/8
  Second Quarter     30 5/8         20 5/8             36 11/16      29 3/8
  Third Quarter      34 1/16        20 13/16           36 15/16      27 1/4
  Fourth Quarter     29 7/16        18 3/16            33 1/4        25 1/2


ITEM 6.    SELECTED FINANCIAL DATA

The information  required by this Item 6, captioned  "Selected  Financial Data -
Statement of Operations Data" and "Selected Financial Data - Balance Sheet Data"
and contained in the Company's  Annual Report to Stockholders for the year ended
December  31,  2000,  is included  on page 29 of Exhibit 13 and is  incorporated
herein by reference.

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
           FINANCIAL CONDITION
           -----------------------------------------------------------------

The  information  required by this Item 7,  contained  in the  Company's  Annual
Report to  Stockholders  for the year ended  December 31,  2000,  is included on
pages 2 through 6 of Exhibit 13 and is incorporated herein by reference.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Derivative Instruments

The Company had no foreign exchange contracts  outstanding at December 31, 2000.
The Company has no other derivative financial instruments or other financial and
commodity  instruments for which fair value  disclosure  would be required under
SFAS No. 119. The Company  holds no  investment  securities  that would  require
disclosure of market risk.

Market Risk

The Company's  primary  market risk  exposures are in the areas of interest rate
risk and foreign currency exchange rate risk. The Company's investment portfolio
of cash  equivalents is subject to interest rate  fluctuations,  but the Company
believes  this  risk is not  material  due to the  short-term  nature  of  these
investments.  At December 31, 2000,  the Company had $75.0 million of short-term
debt and $10.9 million of long-term debt outstanding.  The major portion of this
debt has variable interest rates and, therefore,  interest rate risk. However, a
hypothetical increase of 10% in these interest rates for a one-year period would
result in additional  interest expense after taxes that would not be material in
the aggregate. The Company's net foreign currency exchange loss was $0.8 million
in 2000 compared to a gain of $11,000 in 1999. The Company's exposure to foreign
currency exchange rate fluctuations is moderated by the fact that the operations
of its  international  subsidiaries are primarily  conducted in their respective
local  currencies.  Also,  in certain  situations,  the  Company  will  consider
entering  into  forward  exchange  contracts  to mitigate  the impact of foreign
currency exchange fluctuations.

                                      II-1
<PAGE>


ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements of the Company contained in the Company's Annual Report
to Stockholders for the year ended December 31, 2000 are included on pages 6-28
of Exhibit 13.  Selected  quarterly  financial  data  contained in the Company's
Annual  Report for the year ended  December 31, 2000 under  "Selected  Financial
Data - Selected Quarterly  Financial Data (unaudited)" is included on page 29 of
Exhibit 13. These materials are incorporated  herein by reference.  The Schedule
required under  Regulation S-X is filed under  "Financial  Statement  Schedules"
pursuant to Item 14 hereof.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE
           ---------------------------------------------------------------

This item is not applicable to the Company.

                                      II-2
<PAGE>





                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  required  by Item 10  with  respect  to  directors  is  hereby
incorporated by reference from the Company's  definitive proxy statement for the
Annual Meeting of Stockholders to be held May 2, 2001,  which will be filed with
the  Securities  and  Exchange  Commission  within  120 days of the close of the
Company's fiscal year.

The information regarding executive officers is as follows:

                        Age as of               Positions
Name                    March 1, 2001           Presently Held

Arthur L. Goldstein*       65         President, Chief Executive Officer
                                      and Director since 1971; Chairman
                                      of the Board since 1990

William E. Katz            76         Executive Vice President since 1983;
                                      Director since 1961

Edward J. Cichon           46         Vice President, Equipment Business Group
                                      since July 1998

Alan M. Crosby             48         Vice President, Consumer Products Group
                                      since March 2000

Anthony Di Paola           34         Vice President and Corporate Controller
                                      since May 2000

Gary W. Groom              50         Vice President, Project Finance and
                                      Treasurer since December 2000

Stephen Korn               55         Vice President, General Counsel and Clerk
                                      since 1989

Daniel M. Kuzmak           48         Vice President, Finance and Chief
                                      Financial Officer since January 11, 2001

William J. McMahon         45         Vice President, Ultrapure Water Group
                                      since November 2000

Theodore G. Papastavros    67         Vice President since 1975; Vice President,
                                      Strategic Planning since 1990

Michael W. Routh           53         Vice President, Instrument Business Group
                                      since April 2000

------------------
* Member of Executive Committee

There are no family  relationships  between any of the  officers  or  directors.
Executive  officers  of the Company  are  appointed  each year at the meeting of
directors held on the date of the annual meeting of  shareholders.  There are no
arrangements  or  understandings  pursuant  to which any  executive  officer was
selected.

Except for Messrs.  Cichon, Di Paola, Groom,  Kuzmak,  McMahon and Routh, all of
the above  executive  officers  have been  employed  by the  Company  in various
capacities for more than five years.

                                     III-1
<PAGE>

Prior to joining the Company in July,  1998,  Mr. Cichon served as a Senior Vice
President  of  Metcalf & Eddy,  Inc.,  a water and  wastewater  engineering  and
services firm, where he was employed for 18 years.

Mr.  Di  Paola  served  in  various   finance  and  accounting   positions  with
Thyssen-Dover  Elevator  Company  North  America  from 1997  until he joined the
Company,  including as Corporate Controller from 1998 to 2000. Prior to 1997, he
served as Assistant Controller for Vector Health Systems, Incorporated.

Mr. Groom was employed by Raytheon  Engineers & Constructors  from 1994 until he
joined the Company in December  2000.  He held the  position of Vice  President,
Project Finance and Development from 1994 to 1998.

Mr. Kuzmak  joined the Company after 15 years with ABB and its U.S.  subsidiary,
including serving as Chief Financial Officer of ABB Inc. (US) from 1998 to 2000,
and Vice President,  Finance of ABB Nuclear  Operations and ABB Nuclear Business
from 1995 to 1998.

Mr.  McMahon  served  as  President  and  Chief  Executive  Officer  of  Stone &
Webster/Sonat  Energy  Resources  LLC from  1998  until he joined  the  Company;
President  of Stone & Webster  Energy  Services  from 1997 to 1998;  and General
Manager/Environmental Systems of DB Riley Consolidated, Inc. from 1995 to 1997.

Mr.  Routh  served as  President  of the  Baird  Division  of Thermo  Instrument
Systems,  Inc.  from  1995 to 1997,  and  General  Manager  of the  Spectroscopy
Division of BioRad Laboratories, Inc., from 1998 to March, 2000.

ITEM 11.   EXECUTIVE COMPENSATION

The information required by Item 11 is hereby incorporated by reference from the
Company's  definitive  proxy statement for the Annual Meeting of Stockholders to
be held May 2,  2001,  which  will be filed  with the  Securities  and  Exchange
Commission within 120 days of the close of the Company's fiscal year.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is hereby incorporated by reference from the
Company's  definitive  proxy statement for the Annual Meeting of Stockholders to
be held May 2,  2001,  which  will be filed  with the  Securities  and  Exchange
Commission within 120 days of the close of the Company's fiscal year.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is hereby incorporated by reference from the
Company's  definitive  proxy statement for the Annual Meeting of Stockholders to
be held May 2,  2001,  which  will be filed  with the  Securities  and  Exchange
Commission within 120 days of the close of the Company's fiscal year.

                                     III-2
<PAGE>




                                     PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
           ---------------------------------------------------------------

(a)  1.  Financial Statements

         See Index to Financial Statements and Financial Schedules on page IV-7.
         The  Financial  Statement  Schedules  are filed as part of this  Annual
         Report on Form 10-K.

2.       Financial Statement Schedules

         See Index to Financial Statements and Financial Statement Schedules on
         page IV-7.

3.       Exhibits

         Exhibit No.Description


         3.0        Articles of Organization and By-Laws


                    3.1    Restated Articles of Organization  filed          *
                           April 16,  1986  (filed  as Exhibit 3.1
                           to the  Company's  Annual Report on Form
                           10-K for the  year  ended  December  31,
                           1997).


                    3.1(a) Amendment   to   Restated   Articles  of          *
                           Organization   filed  June  19,    1987
                           (filed   as   Exhibit   3.1(a)   to  the
                           Company's Annual Report on Form 10-K for
                           the year ended December 31, 1997).


                    3.1(b) Amendment to Restated Articles of Organization    *
                           filed May 13,  1988 (filed as Exhibit 3.1(b) to
                           Registration Statement No.  33-38290 on Form S-2
                           effective  January 24, 1991).

                    3.1(c) Amendment   to   Restated   Articles  of          *
                           Organization  filed May 8,  1992 (filed
                           as   Exhibit   3.1  to   the   Company's
                           Quarterly  Report  on Form  10-Q for the
                           quarterly period ending June 30, 1996.


                    3.1(d) Amendment   to   Restated   Articles  of          *
                           Organization  filed May 8,  1998 (filed
                           as   Exhibit   3.1  to   the   Company's
                           Quarterly  Report  on Form  10-Q for the
                           quarterly period ending March 31, 1998).


                    3.2  By-Laws,  as  amended  through  May 2,  2000        *
                         (filed as Exhibit 3.2 to the Company's Quarterly
                         Report on Form 10-Q for the quarterly period
                         ended March 31, 2000).

         4.0        Instruments defining the rights of security holders,
                    including indentures

                    4.1  Renewed Rights  Agreement,  dated as of August      *
                         19, 1997 between Registrant and BankBoston N.A.
                         (filed as Exhibit 1 to the Company's Current
                         Report on Form 8-K dated August 27, 1997).

                    4.2  Form of Common Stock Certificate (filed as          *
                         Exhibit 4.2 to the Company's Annual Report
                         on Form 10-K for the year ended December 31, 1997).



                                      IV-1

<PAGE>



         10.0      Material Contracts

                   10.1   1979  Stock  Option  Plan,  as amended             *
                          through  February 22, 1996  (filed as
                          Exhibit 10.1 to the  Company's  Annual
                          Report on Form 10-K for the year ended
                          December 31, 1995).

                   10.2   1986    Stock    Option    Plan    for             *
                          Non-Employee  Directors,  as amended
                          through  February  19,  1997 (filed as
                          Exhibit 10.2 to the  Company's  Annual
                          Report on Form 10-K for the year ended
                          December 31, 1996).

                   10.3   Second  Amended  and  Restated  Credit             *
                          Agreement dated as of July 28, 2000,
                          among the Company, Fleet National Bank
                          and  Fleet   National  Bank  as  agent
                          (filed   as   Exhibit   10.1   to  the
                          Company's  Quarterly  Report  on  Form
                          10-Q for the  quarterly  period  ended
                          June 30, 2000.)

                  10.3(1) Amended Agreement No. 1 to Second Amended
                          and Restated Credit Agreement among the
                          Company, Fleet National Bank and Fleet
                          National Bank as Agent dated March 1, 2001.

                  10.3(2) Security  Agreement  dated as of March
                          1,  2001  by and  among  the  Company,
                          certain of its domestic  subsidiaries,
                          and Fleet National Bank as agent.

                  10.3(3) Escrow  Agreement dated as of March 1,
                          2001  by  and   among   the   Company,
                          Hutchins, Wheeler & Dittmar, and Fleet
                          National Bank as agent.

                  10.3(4) Seventh Amended and Restated Revolving Credit
                          Note dated March 1, 2001.

                  10.4    Operating   Agreement   dated   as  of            *
                          September   27,  1989  between  the
                          Company  and  Aqua  Cool  Enterprises,
                          Inc.  (filed  as  Exhibit  10.4 to the
                          Company's  Annual  Report on Form 10-K
                          for the year ended December 31, 1997).

                  10.5    Term Lease Master  Agreement  dated as            *
                          of  September  27,  1989  between the
                          Company  and  Aqua  Cool  Enterprises,
                          Inc.  (filed  as  Exhibit  10.5 to the
                          Company's  Annual  Report on Form 10-K
                          for the year ended December 31, 1997).

                  10.6    Option Agreement dated as of September 27,        *
                          1989 among the Company, Aqua Cool Enterprises,
                          Inc. and the other parties named therein
                          (filed as Exhibit to the Company's registration
                          statement on Form S-2, No. 33-38290, effective
                          January 24, 1991).

                  10.7    1994 Restricted Stock Plan (filed as Exhibit      *
                          10.12 to the Company's Annual Report on Form
                          10-K dated March 30, 1995).


                                      IV-2
<PAGE>




                  10.8   1997 Stock Incentive Plan (filed as Exhibit        *
                         10.12 to the Company's Annual Report on Form
                         10-K dated December 31, 1996).

                  10.9   Ionics,    Incorporated   Supplemental             *
                         Executive  Retirement Plan  effective
                         as  of  January  1,  1996   (filed  as
                         Exhibit 10.9 to the  Company's  Annual
                         Report on Form 10-K dated December 31,
                         1997).

                  10.10  Form of Employee  Retention  Agreement             *
                         dated  February 24, 1998 between the
                         Company  and  certain  officers of the
                         Company and its subsidiaries (filed as
                         Exhibit 10.10 to the Company's  Annual
                         Report on Form 10-K dated December 31,
                         1997).

                  10.11  1998  Non-Employee  Directors Fee Plan             *
                         (filed  as  Exhibit   10.1  to    the
                         Company's  Quarterly  Report  on  Form
                         10-Q for the  quarterly  period ending
                         September 30, 1998).

                  10.12  Shareholders'  Agreement  dated  as of             *
                         May  12,  2000,  by  and  among  the
                         Company,  Hafeez Karamath  Engineering
                         Services  Limited,   and  Desalination
                         Company of Trinidad  and Tobago  Ltd.,
                         as amended on June 16,  2000 (filed as
                         Exhibit   10.2   to   the    Company's
                         Quarterly  Report on Form 10-Q for the
                         quarterly period ended June 30, 2000.)

                  10.13  Loan Agreement dated as of October 25,
                         2000  between  the  Company and Hafeez
                         Karamath Engineering Services Limited.

         13.0     Annual Report to  Stockholders  for the year ended
                  December 31, 2000  (furnished for the  information
                  of the  Commission and not to be deemed "filed" as
                  part of this  Report  except  to the  extent  that
                  portions thereof are expressly incorporated herein
                  by reference).

         21.0     Subsidiaries of the Registrant.

         23.0     Consents

                  23.1        Consent of PricewaterhouseCoopers  LLP
                              to  incorporation by reference of that
                              firm's  report  dated March 19,  2001,
                              which is contained in the Registrant's
                              Annual Report to Stockholders  for the
                              year ended  December 31, 2000,  and is
                              included  on page 6 of  Exhibit  13 to
                              this Form 10-K.

         24.0     Power of Attorney.

         --------------------------
         *    incorporated herein by reference



(b)      Reports on Form 8-K

         No  reports on Form 8-K were  filed by the  Registrant  during the last
         quarter of fiscal 2000.


                                      IV-3
<PAGE>


         Undertaking

         For purposes of complying  with the  amendments to the rules  governing
         Form S-8 effective  July 13, 1990 under the Securities Act of 1933, the
         undersigned  hereby  undertakes as follows,  which undertaking shall be
         incorporated by reference into Registrant's  registration statements on
         Form S-8 Nos. 33-14194,  33-5814,  33-2092,  2-72936, 2-82780, 2-64255,
         33-41598,  33-54293,  33-59051,  333-05225,   333-29135,  33-54400  and
         333-39684.

         Insofar as indemnification for liabilities arising under the Securities
         Act of 1933 may be permitted  to  directors,  officers and  controlling
         persons of the  registrant  pursuant to the  foregoing  provisions,  or
         otherwise,  the  registrant has been advised that in the opinion of the
         Securities  and Exchange  Commission  such  indemnification  is against
         public policy as expressed in the Act and is, therefore, unenforceable.
         In the event that a claim for indemnification  against such liabilities
         (other than the payment by the registrant of expenses  incurred or paid
         by a director,  officer or controlling  person of the registrant in the
         successful  defense of any action,  suit or  proceeding) is asserted by
         such  director,  officer or controlling  person in connection  with the
         securities being registered, the registrant will, unless in the opinion
         of its counsel the matter has been  settled by  controlling  precedent,
         submit to a court of appropriate jurisdiction the question whether such
         indemnification  by it is against public policy as expressed in the Act
         and will be governed by the final adjudication of such issue.


                                      IV-4
<PAGE>


                                   SIGNATURES

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

                               IONICS, INCORPORATED
                               (Registrant)



                               By: /s/Arthur L. Goldstein
                                   ----------------------
                                    Arthur L. Goldstein,
                                    Chairman of the Board,
                                    President and Chief Executive Officer

                                    Date: March 27, 2001



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.

Date: March 27, 2001         By: /s/Arthur L. Goldstein
                                 ----------------------
                                  Arthur L. Goldstein,
                                  Chairman of the Board,
                                  President and Chief Executive Officer
                                  (principal executive officer) and Director


Date: March 27, 2001          By: /s/Daniel M. Kuzmak
                                  -------------------
                                   Daniel M. Kuzmak
                                   Vice President, Finance
                                   and Chief Financial Officer
                                   (principal financial officer)

Date: March 27, 2001          By: /s/Anthony Di Paola
                                  -------------------
                                  Anthony Di Paola
                                  Vice President and Corporate Controller
                                  (principal accounting officer)


                                      IV-5
<PAGE>



Date:  March 27, 2001           By:   /s/Douglas R. Brown
                                     --------------------------
                                     Douglas R. Brown, Director


Date:  March 27, 2001           By:  /s/Stephen L. Brown
                                     --------------------------
                                     Stephen L. Brown, Director


Date:  March 27, 2001           By:   /s/William L. Brown
                                     ---------------------------
                                     William L. Brown, Director


Date:  March 27, 2001           By:   /s/Arnaud de Vitry d'Avaucourt
                                      ------------------------------------
                                     Arnaud de Vitry d'Avaucourt, Director

Date:  March 27, 2001           By:   /s/Kathleen F. Feldstein
                                     -------------------------------
                                     Kathleen F. Feldstein, Director


Date:  March 27, 2001           By:   /s/William E. Katz
                                     -------------------------
                                     William E. Katz, Director


Date:  March 27, 2001           By:   /s/William K. Reilly
                                     ---------------------------
                                     William K. Reilly, Director



                                By:  --------------------------
                                     John J. Shields, Director


Date:  March 27, 2001           By:   /s/Carl S. Sloane
                                     ------------------------
                                     Carl S. Sloane, Director


Date:  March 27, 2001           By:   /s/Daniel I. C. Wang
                                     ---------------------------
                                     Daniel I. C. Wang, Director


Date:  March 27, 2001           By:   /s/Mark S. Wrighton
                                     --------------------------
                                     Mark S. Wrighton, Director


Date:  March 27, 2001           By:   /s/Allen S. Wyett
                                     ------------------------
                                     Allen S. Wyett, Director


                                      IV-6
<PAGE>




                              IONICS, INCORPORATED

                          INDEX TO FINANCIAL STATEMENTS

                        AND FINANCIAL STATEMENT SCHEDULES


                                                                PAGES

Report of Independent Accountants                                6*

Financial Statements:

       Consolidated Statements of Operations for the
       Years Ended December 31, 2000, 1999 and 1998              8*

       Consolidated Balance Sheets as of
       December 31, 2000 and 1999                                9*

       Consolidated Statements of Cash Flows for the
       Years Ended December 31, 2000, 1999 and 1998             10*

       Consolidated Statements of Stockholders' Equity for
       the Years Ended December 31, 2000, 1999 and 1998         11*

       Notes to Consolidated Financial Statements            12-28*


Supporting  Financial Statement Schedules for the years ended December 31, 2000,
1999 and 1998:

       Schedule II - Valuation and Qualifying Accounts        IV-8


Report of Independent Accountants on Financial
Statement Schedule                                            IV-9


------------------

All other  schedules  are  omitted  because  the  amounts  are  immaterial,  the
schedules  are not  applicable,  or the  required  information  is  shown in the
financial statements or the notes thereto.

*Page references are to the portions of the Company's Annual Report for the year
ended  December 31, 2000 that are  contained in Exhibit 13 to this Annual Report
on Form 10-K, which pages are incorporated in this Report by reference.


                                      IV-7
<PAGE>

<TABLE>
<CAPTION>


                              IONICS, INCORPORATED

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                            Additions         Additions
                           Balance at       Charged to        Due to
                           End of           Costs and         Acquired                           Balance at
                           Prior Year       Expenses          Businesses        Deductions(A)    End of Year
                           ----------       --------          ----------        ----------       -----------
<S>                       <C>               <C>              <C>               <C>               <C>
Allowance for doubtful accounts
and uncollectible notes receivable:

Years ended:


December 31, 2000         $3,620,000        $4,605,000       $599,000          $3,574,000        $5,250,000
                          ==========        ==========       ========          ==========        ==========

December 31, 1999         $2,891,000        $2,643,000       $  6,000          $1,920,000        $3,620,000
                          ==========        ==========       ========          ==========        ==========

December 31, 1998         $2,289,000        $1,319,000       $      0          $  717,000        $2,891,000
                          ==========        ==========       =========         ==========        ==========

</TABLE>

(A) Deductions result primarily from the write-off of accounts.


                                      IV-8
<PAGE>



                      Report of Independent Accountants on
                          Financial Statement Schedules



To the Board of Directors of Ionics, Incorporated:

Our audits of the consolidated  financial  statements  referred to in our report
dated  March  19,  2001,  which  appears  in  Exhibit  13 to this Form 10-K also
included an audit of the financial statement schedule listed in Item 14(a)(2) of
this Form 10-K.  In our opinion,  this  financial  statement  schedule  presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
March 19, 2001


                                      IV-9
<PAGE>





                                  EXHIBIT INDEX

Exhibit No.  Description                              Sequentially Numbered Page
-----------  -----------                              --------------------------
3.0          Articles of Organization and By-Laws


                    3.1    Restated Articles of Organization  filed          *
                           April 16,  1986  (filed  as Exhibit 3.1
                           to the  Company's  Annual Report on Form
                           10-K for the  year  ended  December  31,
                           1997).


                    3.1(a) Amendment   to   Restated   Articles  of          *
                           Organization   filed  June  19,    1987
                           (filed   as   Exhibit   3.1(a)   to  the
                           Company's Annual Report on Form 10-K for
                           the year ended December 31, 1997).


                    3.1(b) Amendment to Restated Articles of Organization    *
                           filed May 13,  1988 (filed as Exhibit 3.1(b) to
                           Registration Statement No.  33-38290 on Form S-2
                           effective  January 24, 1991).

                    3.1(c) Amendment   to   Restated   Articles  of          *
                           Organization  filed May 8,  1992 (filed
                           as   Exhibit   3.1  to   the   Company's
                           Quarterly  Report  on Form  10-Q for the
                           quarterly period ending June 30, 1996.


                    3.1(d) Amendment   to   Restated   Articles  of          *
                           Organization  filed May 8,  1998 (filed
                           as   Exhibit   3.1  to   the   Company's
                           Quarterly  Report  on Form  10-Q for the
                           quarterly period ending March 31, 1998).


                    3.2  By-Laws,  as  amended  through  May 2,  2000        *
                         (filed as Exhibit 3.2 to the Company's Quarterly
                         Report on Form 10-Q for the quarterly period
                         ended March 31, 2000).

         4.0        Instruments defining the rights of security holders,
                    including indentures

                    4.1  Renewed Rights  Agreement,  dated as of August      *
                         19, 1997 between Registrant and BankBoston N.A.
                         (filed as Exhibit 1 to the Company's Current
                         Report on Form 8-K dated August 27, 1997).

                    4.2  Form of Common Stock Certificate (filed as          *
                         Exhibit 4.2 to the Company's Annual Report
                         on Form 10-K for the year ended December 31, 1997).




                                     IV-10
<PAGE>



         10.0      Material Contracts

                   10.1   1979  Stock  Option  Plan,  as amended             *
                          through  February 22, 1996  (filed as
                          Exhibit 10.1 to the  Company's  Annual
                          Report on Form 10-K for the year ended
                          December 31, 1995).

                   10.2   1986    Stock    Option    Plan    for             *
                          Non-Employee  Directors,  as amended
                          through  February  19,  1997 (filed as
                          Exhibit 10.2 to the  Company's  Annual
                          Report on Form 10-K for the year ended
                          December 31, 1996).

                   10.3   Second  Amended  and  Restated  Credit             *
                          Agreement dated as of July 28, 2000,
                          among the Company, Fleet National Bank
                          and  Fleet   National  Bank  as  agent
                          (filed   as   Exhibit   10.1   to  the
                          Company's  Quarterly  Report  on  Form
                          10-Q for the  quarterly  period  ended
                          June 30, 2000.)

                  10.3(1) Amended Agreement No. 1 to Second Amended
                          and Restated Credit Agreement among the
                          Company, Fleet National Bank and Fleet
                          National Bank as Agent dated March 1, 2001.

                  10.3(2) Security  Agreement  dated as of March
                          1,  2001  by and  among  the  Company,
                          certain of its domestic  subsidiaries,
                          and Fleet National Bank as agent.

                  10.3(3) Escrow  Agreement dated as of March 1,
                          2001  by  and   among   the   Company,
                          Hutchins, Wheeler & Dittmar, and Fleet
                          National Bank as agent.

                  10.3(4) Seventh Amended and Restated Revolving Credit
                          Note dated March 1, 2001.

                  10.4    Operating   Agreement   dated   as  of            *
                          September   27,  1989  between  the
                          Company  and  Aqua  Cool  Enterprises,
                          Inc.  (filed  as  Exhibit  10.4 to the
                          Company's  Annual  Report on Form 10-K
                          for the year ended December 31, 1997).

                  10.5    Term Lease Master  Agreement  dated as            *
                          of  September  27,  1989  between the
                          Company  and  Aqua  Cool  Enterprises,
                          Inc.  (filed  as  Exhibit  10.5 to the
                          Company's  Annual  Report on Form 10-K
                          for the year ended December 31, 1997).

                  10.6    Option Agreement dated as of September 27,        *
                          1989 among the Company, Aqua Cool Enterprises,
                          Inc. and the other parties named therein
                          (filed as Exhibit to the Company's registration
                          statement on Form S-2, No. 33-38290, effective
                          January 24, 1991).

                  10.7    1994 Restricted Stock Plan (filed as Exhibit      *
                          10.12 to the Company's Annual Report on Form
                          10-K dated March 30, 1995).



                                     IV-11
<PAGE>




                  10.8   1997 Stock Incentive Plan (filed as Exhibit        *
                         10.12 to the Company's Annual Report on Form
                         10-K dated December 31, 1996).

                  10.9   Ionics,    Incorporated   Supplemental             *
                         Executive  Retirement Plan  effective
                         as  of  January  1,  1996   (filed  as
                         Exhibit 10.9 to the  Company's  Annual
                         Report on Form 10-K dated December 31,
                         1997).

                  10.10  Form of Employee  Retention  Agreement             *
                         dated  February 24, 1998 between the
                         Company  and  certain  officers of the
                         Company and its subsidiaries (filed as
                         Exhibit 10.10 to the Company's  Annual
                         Report on Form 10-K dated December 31,
                         1997).

                  10.11  1998  Non-Employee  Directors Fee Plan             *
                         (filed  as  Exhibit   10.1  to    the
                         Company's  Quarterly  Report  on  Form
                         10-Q for the  quarterly  period ending
                         September 30, 1998).

                  10.12  Shareholders'  Agreement  dated  as of             *
                         May  12,  2000,  by  and  among  the
                         Company,  Hafeez Karamath  Engineering
                         Services  Limited,   and  Desalination
                         Company of Trinidad  and Tobago  Ltd.,
                         as amended on June 16,  2000 (filed as
                         Exhibit   10.2   to   the    Company's
                         Quarterly  Report on Form 10-Q for the
                         quarterly period ended June 30, 2000.)

                  10.13  Loan Agreement dated as of October 25,
                         2000  between  the  Company and Hafeez
                         Karamath Engineering Services Limited.

         13.0     Annual Report to  Stockholders  for the year ended
                  December 31, 2000  (furnished for the  information
                  of the  Commission and not to be deemed "filed" as
                  part of this  Report  except  to the  extent  that
                  portions thereof are expressly incorporated herein
                  by reference).

         21.0     Subsidiaries of the Registrant.

         23.0     Consents

                  23.1        Consent of PricewaterhouseCoopers  LLP
                              to  incorporation by reference of that
                              firm's  report  dated March 19,  2001,
                              which is contained in the Registrant's
                              Annual Report to Stockholders  for the
                              year ended  December 31, 2000,  and is
                              included  on page 6 of  Exhibit  13 to
                              this Form 10-K.

         24.0     Power of Attorney.

         --------------------------
         *    incorporated herein by reference


                                     IV-12


                                 Exhibit 10.3(1)

                            AMENDMENT AGREEMENT NO. 1

                                       TO

                  SECOND AMENDED AND RESTATED CREDIT AGREEMENT

         This AMENDMENT AGREEMENT NO. 1 (this "Amendment"),  is made as of March
1, 2001, by and among IONICS,  INCORPORATED  (the  "Borrower"),  a Massachusetts
corporation  having  its  principal  place  of  business  at  65  Grove  Street,
Watertown,  Massachusetts  02472,  FLEET  NATIONAL  BANK  (referred to herein as
"FNB"), with offices at 100 Federal Street, Boston, Massachusetts 02110, and the
other  banking  institutions  listed on Schedule 1 to the Credit  Agreement  (as
hereinafter defined) (FNB and such other banking institutions being collectively
referred  to herein as the  "Banks"  and each a "Bank") and FNB as agent for the
Banks (the "Agent").

         WHEREAS,  the  Borrower,  the Banks and the Agent are  parties  to that
certain Second Amended and Restated Credit Agreement,  dated as of July 28, 2000
(as amended and in effect from time to time, the "Credit  Agreement"),  pursuant
to which the Banks,  upon certain terms and  conditions,  have made loans to the
Borrower; and

         WHEREAS, the Agent and the Borrower are parties to a certain fee letter
agreement,  dated July 28, 2000 (the "Fee  Letter"),  pursuant to which  certain
fees have and are to be paid by the Borrower to the Agent;

         WHEREAS,  the Borrower has  requested  and the Banks and the Agent have
agreed,  on the terms and subject to the conditions  set forth herein,  to amend
the Credit Agreement and the Fee Letter;

         NOW, THEREFORE, the parties hereto hereby agree as follows:

     ss.1.  Defined  Terms.  Capitalized  terms  which are used  herein  without
definition  and which are  defined in the Credit  Agreement  shall
have the same meanings herein as in the Credit Agreement.

     ss.2. Amendment of Credit Agreement. The Credit Agreement is hereby amended
as follows:

                  (a) Section 1.1 of the Credit Agreement is amended by deleting
         the table and the text following the table  contained in the definition
         of Applicable Margin and restating it in its entirety as follows:


<PAGE>
<TABLE>
<CAPTION>



 ---------- -------------------------------- -------------- -------------- ------------ -------------------
                                                                            Letter
                                                 Prime          LIBOR          of
                                                 Rate           Rate         Credit         Commitment
   Level            Leverage Ratio               Loans          Loans          Fee           Fee Rate
 ---------- -------------------------------- -------------- -------------- ------------ -------------------
 ---------- -------------------------------- -------------- -------------- ------------ -------------------
<S>            <C>                               <C>            <C>          <C>              <C>
     I         Greater than or equal to          0.25%          2.25%        2.25.%           0.375%
                       3.00:1.00

 ---------- -------------------------------- -------------- -------------- ------------ -------------------
 ---------- -------------------------------- -------------- -------------- ------------ -------------------
    II          Less than 3.00:1.00 but          0.25%          2.00%         2.00%           0.375%
               greater than or equal to
                       2.50:1.00

 ---------- -------------------------------- -------------- -------------- ------------ -------------------
 ---------- -------------------------------- -------------- -------------- ------------ -------------------
    III         Less than 2.50:1.00 but          0.25%          1.75%         1.75%           0.375%
               greater than or equal to
                       2.00:1.00

 ---------- -------------------------------- -------------- -------------- ------------ -------------------
 ---------- -------------------------------- -------------- -------------- ------------ -------------------
    IV          Less than 2.00:1.00 but          0.25%          1.50%         1.50%           0.250%
               greater than or equal to
                       1.50:1.00

 ---------- -------------------------------- -------------- -------------- ------------ -------------------
 ---------- -------------------------------- -------------- -------------- ------------ -------------------
     V          Less than 1.50:1.00 but          0.25%          1.25%         1.25%           0.250%
               greater than or equal to
                       1.00:1.00

 ---------- -------------------------------- -------------- -------------- ------------ -------------------
 ---------- -------------------------------- -------------- -------------- ------------ -------------------
    VI            Less than 1.00:1.00            0.25%          1.00%         1.00%           0.150%
 ---------- -------------------------------- -------------- -------------- ------------ -------------------

</TABLE>

                  Notwithstanding  the foregoing,  (a) until the delivery by the
                  Borrower to the Agent of the Compliance  Certificate  pursuant
                  to ss.8.4(c)  for the period  ending  December  31, 2000,  the
                  Applicable  Margin  shall be the  Applicable  Margin set forth
                  above in Level I, and (b) if the Borrower fails to deliver any
                  Compliance  Certificate pursuant to ss.8.4(c) hereof then, for
                  the period  commencing  on the next  Adjustment  Date to occur
                  subsequent  to  such  failure  through  the  date  immediately
                  following  the date on which such  Compliance  Certificate  is
                  delivered,   the  Applicable   Margin  shall  be  the  highest
                  Applicable Margin set forth above.

          (b)  Section 1.1 of the Credit  Agreement is further amended by adding
               the following new - definitions in the  appropriate  alphabetical
               order:


                  EBIT:  With respect to any fiscal  period,  an amount equal to
                  the sum of (a)  Consolidated  Net Income (or  Deficit)  of the
                  Borrower and its Subsidiaries for such fiscal period, plus (b)
                  in each case to the extent deducted in the calculation of such
                  Person's Consolidated Net Income and without duplication,  (i)
                  income tax expense  for such  period,  plus (ii)  Consolidated
                  Total  Interest  Expense  paid or accrued  during such period,
                  minus,  (c) to the extent added in computing  Consolidated Net
                  Income, and without duplication,  all noncash gains (including
                  income tax  benefits)  for such period,  all as  determined in
                  accordance with generally accepted accounting principles.

                  Escrow Agent:  Hutchins,  Wheeler & Dittmar,  A Professional
                  Corporation.
<PAGE>

                  Escrow  Agreement.  The  Escrow  Agreement,  dated as of March
                  1,  2001,  among the Agent, the Borrower and the Escrow Agent.

                  Security Agreement: The Security Agreement,  dated as of March
                  1, 2001, among the Borrower, its domestic Subsidiaries (except
                  Inactive  Subsidiaries)  and the Agent,  in form and substance
                  satisfactory to the Agent.

                  Security Documents:  The Security  Agreement,  UCC-1 financing
                  statements  and other security  documents  among the Borrower,
                  its   domestic   Subsidiaries   (other   than   the   Inactive
                  Subsidiaries)  and the Agent  entered  into after the  Closing
                  Date,   pursuant  to  which  the  Borrower  and  its  domestic
                  Subsidiaries (other than the Inactive Subsidiaries) shall have
                  granted  to the  Agent  for the  benefit  of the Banks and the
                  Agent a perfected first priority security interest in and lien
                  on all  of  their  assets  other  than  real  property,  motor
                  vehicles, boats and other property subject to a certificate of
                  title or other registration  statute of the United States, any
                  state or  jurisdiction  and the stock of any of the Borrower's
                  Subsidiaries.

                  Triggering Event:  The occurrence of an Event of Default.


                    (c)  Section  2.3 of the  Credit  Agreement  is  amended  by
               deleting the date "March 31, 2001" and substituting the date "May
               15, 2001" therefor.

                    (d) Section 6 of the Credit Agreement is amended by deleting
               suchss.6 and restating it in - its entirety as follows:

                  6.       COLLATERAL SECURITY AND GUARANTIES.

                  6.1 Security of Borrower and its Subsidiaries.  On or prior to
                  March  1,  2001,   the  Borrower  and  each  of  its  domestic
                  Subsidiaries (other than the Inactive Subsidiaries) shall have
                  executed  and  delivered  into  escrow  pursuant to the Escrow
                  Agreement the Security Agreement,  a UCC-1 financing statement
                  for each  jurisdiction  in which the Borrower and its domestic
                  Subsidiaries (other than the Inactive Subsidiaries)  maintains
                  Collateral  (as  hereinafter  defined) and such other Security
                  Documents  as the  Agent  may  reasonably  request.  Upon  the
                  occurrence of a Triggering Event, the Security Documents shall
                  be delivered by the Escrow Agent to the Agent  pursuant to the
                  Escrow  Agreement and all filings and other actions  necessary
                  to perfect the security  interest  granted by the Borrower and
                  such  domestic  Subsidiaries  to  the  Agent  pursuant  to the
                  Security  Documents  shall  be made or  taken,  whereupon  the
                  Obligations  shall be secured by a  perfected  first  priority
                  security interest (subject only to Permitted Liens entitled to
                  priority  under  applicable  law) in all of the Borrower's and
                  such domestic  Subsidiaries' assets (other than real property,
                  motor  vehicles,  boats,  and  other  property  subject  to  a
                  certificate  of  title or other  registration  statute  of the
                  United States,  any state or jurisdiction and the stock of any
                  of  the  Borrower's   Subsidiaries),   whether  now  owned  or
                  hereafter acquired (the  "Collateral"),  pursuant to the terms
                  of the  Security  Documents  to which the Borrower or any such
                  domestic Subsidiary is a party.
<PAGE>

                  6.2  Guaranties.  The  Obligations  shall  also be  guaranteed
                  pursuant to the terms of the Guaranty.  Upon the occurrence of
                  a Triggering Event, the obligations of the Borrower's domestic
                  Subsidiaries  under the Guaranty shall be in turn secured by a
                  perfected  first priority  security  interest in the assets of
                  the Borrower's domestic Subsidiaries described in ss.6.1.

                  6.3 Release of Security Interest. Upon the earlier to occur of
                  (a) May 16,  2001 so long as no  Default  or Event of  Default
                  shall have occurred and be  continuing  and (b) the first date
                  thereafter  on which all Defaults and Events of Default  shall
                  have  been  cured  or  waived,   all  existing  liens  on  the
                  Collateral  in  favor  of the  Agent  and the  Banks  shall be
                  automatically  terminated and the Agent will promptly  deliver
                  to the Borrower, at the sole cost and expense of the Borrower,
                  UCC-3  termination  statements and all such other documents as
                  the Borrower may reasonably request to evidence termination of
                  such liens.  If no Triggering  Event shall have occurred on or
                  prior  to May  15,  2001,  the  Security  Documents  shall  be
                  canceled and  delivered by the Escrow Agent to the Borrower in
                  accordance with the terms of the Escrow Agreement.

                    (e)  Section  10.1 of the  Credit  Agreement  is  amended by
               deleting  suchss.10.1  and  restating  - it in  its  entirety  as
               follows:

                  10.1.  Leverage Ratio. The Borrower will not, as of the end of
                  any  Reference  Period  ending  on the last day of any  fiscal
                  quarter  described  in the table set forth  below,  permit the
                  Leverage Ratio for such  Reference  Period to exceed the ratio
                  set forth opposite such fiscal quarter in such table:

 ------------------------------------- -------------------------------------
         Fiscal Quarter                              Ratio
 ------------------------------------- -------------------------------------
 ------------------------------------- -------------------------------------
               FQ4 2000                             3.25:1.00
 ------------------------------------- -------------------------------------
 ------------------------------------- -------------------------------------
               FQ1 2001                             3.00:1.00
 ------------------------------------- -------------------------------------
 ------------------------------------- -------------------------------------
               FQ2 2001                             3.00:1.00
 ------------------------------------- -------------------------------------
 ------------------------------------- -------------------------------------
               FQ3 2001                             2.75:1.00
 ------------------------------------- -------------------------------------
 ------------------------------------- -------------------------------------
       FQ4 2001 and thereafter                      2.50:1.00
 ------------------------------------- -------------------------------------


                    (f)  Section  10.2 of the  Credit  Agreement  is  amended by
               deleting  suchss.10.2  and  restating  - it in  its  entirety  as
               follows:

                  10.2.  Minimum EBITDA. The Borrower will not, as of the end of
                  any  Reference  Period  ending  on the last day of any  fiscal
                  quarter  described  in  the  table  set  forth  below,  permit
                  Consolidated  EBITDA  of the  Borrower  and  its  Consolidated
                  Subsidiaries  for such  Reference  Period  to be less than the
                  amount set forth opposite such fiscal quarter in such table:
<PAGE>

 ------------------------------------- -------------------------------------
              Date                                  Amount
 ------------------------------------- -------------------------------------
 ------------------------------------- -------------------------------------
               FQ4 2000                            $33,000,000
 ------------------------------------- -------------------------------------
 ------------------------------------- -------------------------------------
               FQ1 2001                            $34,000,000
 ------------------------------------- -------------------------------------
 ------------------------------------- -------------------------------------
               FQ2 2001                            $38,000,000
 ------------------------------------- -------------------------------------
 ------------------------------------- -------------------------------------
               FQ3 2001                            $41,000,000
 ------------------------------------- -------------------------------------
 ------------------------------------- -------------------------------------
       FQ4 2001 and thereafter                     $50,000,000
 ------------------------------------- -------------------------------------

                    (g)  Section  10.4 of the  Credit  Agreement  is  amended by
               deleting  suchss.10.4  and  restating  - it in  its  entirety  as
               follows:

                  10.4  Capital  Expenditures.  The Borrower  will not make,  or
                  permit   any   Consolidated   Subsidiary   to  make,   Capital
                  Expenditures during any fiscal year described in the table set
                  forth below, that exceed in the aggregate the amount set forth
                  opposite such fiscal year in such table:

 --------------------------------------- -----------------------------------
            Fiscal Year                               Amount
 --------------------------------------- -----------------------------------
 --------------------------------------- -----------------------------------
                  2000                              $60,000,000
 --------------------------------------- -----------------------------------
 --------------------------------------- -----------------------------------
          2001 and thereafter                       $40,000,000
 --------------------------------------- -----------------------------------


                    (h) Section 10 of the Credit Agreement is further amended by
               adding the following new - ss.10.5:

                  10.5 Ratio of EBIT to Interest Expense. The Borrower will not,
                  as of the end of any  Reference  Period ending on the last day
                  of any fiscal quarter  described in the table set forth below,
                  permit  the  ratio  of EBIT  to  Consolidated  Total  Interest
                  Expense  for such  Reference  Period to be less than the ratio
                  set forth opposite such fiscal quarter in such table:

--------------------------------------- -----------------------------------
          Fiscal Quarter                             Ratio
--------------------------------------- -----------------------------------
--------------------------------------- -----------------------------------
               Q1 2001                              3.00:1.00
--------------------------------------- -----------------------------------
--------------------------------------- -----------------------------------
               Q2 2001                              3.00:1.00
--------------------------------------- -----------------------------------
--------------------------------------- -----------------------------------
               Q3 2001                              3.00:1.00
--------------------------------------- -----------------------------------
--------------------------------------- -----------------------------------
        Q4 2001 and thereafter                      3.00:1.00
--------------------------------------- -----------------------------------

         Solely for the purpose of this ss.10.5, (a) Reference Period shall mean
         (i) for Q1 2001,  the  period  commencing  on  01/01/01  and  ending on
         03/31/01,  (ii) for Q2 2001,  the period  commencing  on  01/01/01  and
         ending  on  06/30/01,  (iii)  for Q3 2001,  the  period  commencing  on
         01/01/01  and ending on  09/30/01,  and (b) for Q4 2001 and each fiscal
         quarter  thereafter,  Reference Period shall have the meaning set forth
         in ss.1.1 for such term.
<PAGE>

     ss.3. Amendment of Schedules to Credit Agreement.

                  (a) Schedule 1 of the Credit  Agreement is amended by deleting
         the  reference to (i) the amount  "$70,000,000"  and  substituting  the
         amount   "$80,000,000"   therefor  and  (ii)  the  date  "3/31/01"  and
         substituting the date "5/15/01" therefor.

                  (b) Schedules  7.7,  7.17,  7.18(a),  7.18(b) and 9.5.2 of the
         Credit  Agreement  are  amended by  deleting  such  Schedules  in their
         entirety and  substituting the attached  Schedules 7.7, 7.17,  7.18(a),
         7.18(b) and 9.5.2 therefor.

     ss.4.  Amendment to Fee Letter. The Fee Letter is hereby amended by
deletingeach reference to the date "March 31, 2001" in the second paragraph of
such Letter  and  substituting  the date  "May 15,  2001" therefor.

     ss.5.  Effectiveness.  This  Amendment  shall be effective as of 12:01 a.m.
December 31, 2000, except with respect toss.2(a) of this Amendment
in which  case the  effective  date  shall be  March  1,  2001,  subject  to the
satisfaction of the following conditions:

          (a)  Delivery.  The  Borrower,  the  Banks and the  Agent  shall  have
               executed and delivered to the Agent this Amendment.

          (b)  Loan Note.  The Borrower shall have executed and delivered to the
               Agent an amended and restated  Revolving  Credit Note
               (the "New Note") payable to FNB in the original  principal amount
               of $80,000,000.

          (c)  Security  Documents  and Escrow  Agreement.  The Borrower and its
               Subsidiaries shall have  executed and  delivered
               (i) to the  Agent the  Escrow  Agreement  and (ii) to the  Escrow
               Agent the Security Documents.

          (d)  Updated Lien Searches. The Agent shall have received updated lien
               searches   with  respect   to  each jurisdiction  in which a
               UCC-1 is to be filed upon the occurrence of a Triggering Event.

          (e)  Opinion. The Agent shall have received a draft opinion of counsel
               to the  Borrower  and  its  domestic  Subsidiaries  in  form  and
               substance  reasonably  satisfactory  to the Agent and its counsel
               with respect to the Security Documents (the "Opinion").

          (f)  Resolutions.  The  Borrower  shall  have  delivered  to the Agent
               resolutions of the Board of Directors of the Borrower  evidencing
               its  authorization  of the  Borrower's  execution and delivery of
               this  Amendment,  the New  Note,  the  Escrow  Agreement  and the
               Security  Documents  to which it is a party  and the  obligations
               contemplated  therein  along with an officer's  certificate  with
               respect thereto.

          (g)  Proceedings and Documents. All proceedings in connection with the
               transactions  contemplated  by this  Amendment  and all documents
               incident  thereto shall be reasonably  satisfactory  in substance
               and form to the Banks and the  Agent,  and the Agent  shall  have
               received  all  information  and  such  counterpart  originals  or
               certified  or other  copies  of such  documents  as the Agent may
               reasonably request.
<PAGE>

          (h)  Upfront Fee.  The  Borrower  shall have paid to the Agent for the
               Agent's  account an  upfront fee in the amount of
               $150,000,  $50,000  of which has been paid to the Agent  prior to
               the date hereof.

         ss.6. Conditions Subsequent.  The domestic Subsidiaries of the Borrower
         (other than  Inactive  Subsidiaries)  shall deliver to the Agent (a) no
         later than March 6, 2001, resolutions of the Board of Directors of each
         of the domestic  Subsidiaries  of the Borrower (other than the Inactive
         Subsidiaries)   evidencing  its   authorization  of  such  Subsidiary's
         execution and delivery of the Security Documents to which it is a party
         and the  obligations  contemplated  therein  along  with  an  officer's
         certificate with respect thereto,  and (b) the date on which clause (a)
         above shall have been satisfied,  the Agent shall have received a final
         executed copy of the Opinion. The Borrower hereby agrees with the Agent
         and the Banks that  failure to provide the  aforementioned  items on or
         prior to the date specified herein shall constitute an Event of Default
         under the Credit Agreement.

         ss.7. Representations  and  Warranties.  The  Borrower  represents  and
               warrants  to the Banks  and the  Agent as follows:

                  (a)  Representations  and Warranties in Credit Agreement.  The
         representations  and warranties of the Borrower contained in the Credit
         Agreement,  (i) were true and  correct in all  material  respects  when
         made, and (ii) except to the extent such representations and warranties
         by their terms are made solely as of a prior date,  continue to be true
         and correct in all material respects on the date hereof.

                  (b) Authority, Etc. The execution and delivery by the Borrower
         of this  Amendment  and the  performance  by the Borrower of all of its
         agreements  and  obligations  under this  Amendment  (i) are within the
         corporate authority of the Borrower,  (ii) have been duly authorized by
         all  necessary  corporate  proceedings  by the  Borrower,  (iii) do not
         conflict with or result in any breach or contravention of any provision
         of law, statute, rule or regulation to which the Borrower is subject or
         any judgment, order, writ, injunction,  license or permit applicable to
         the  Borrower,  and  (iv) do not  conflict  with any  provision  of the
         corporate  charter or by-laws of, or any agreement or other  instrument
         binding upon, the Borrower.

                  (c)  Enforceability  of Obligations.  This Amendment,  and the
         Credit  Agreement as amended  hereby,  constitute the legal,  valid and
         binding  obligations of the Borrower  enforceable against in accordance
         with their  respective  terms.  Immediately  prior to and after  giving
         effect to this  Amendment,  no Default or Event of Default exists under
         the Credit Agreement or any other Loan Document.
<PAGE>

         ss.8.  No Waiver.  Except as otherwise  expressly  provided for in this
Amendment, nothing in this Amendment shall extend to or affect in any way any of
the Borrower's obligations or any of the rights and remedies of the Banks or the
Agent in respect of the Credit Agreement arising on account of the occurrence of
any Event of Default, all of which are expressly preserved.

         ss.9.  Miscellaneous  Provisions.  (a)  Except as  otherwise  expressly
provided by this Amendment,  all of the terms,  conditions and provisions of the
Credit Agreement shall remain the same. It is declared and agreed by each of the
parties hereto that the Credit Agreement,  as amended hereby,  shall continue in
full force and effect, and that this Amendment and the Credit Agreement shall be
read and construed as one instrument.

         (b) THIS  AMENDMENT  IS INTENDED TO TAKE EFFECT AS AN  AGREEMENT  UNDER
SEAL  AND  SHALL  BE  CONSTRUED  ACCORDING  TO AND  GOVERNED  BY THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS.

         (c) This Amendment may be executed in any number of  counterparts,  but
all such counterparts  shall together  constitute but one instrument.  In making
proof of this Amendment it shall not be necessary to produce or account for more
than  one  counterpart  signed  by  each  party  hereto  by  and  against  which
enforcement hereof is sought.

         (d) The Borrower  hereby  agrees to pay to the Agent,  on demand by the
Agent, all reasonable  out-of-pocket costs and expenses incurred or sustained in
connection with the preparation of this Amendment  (including  reasonable  legal
fees).

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]



<PAGE>


         IN WITNESS WHEREOF,  the parties hereto have executed this Amendment as
an agreement under seal of the date first written above.

                              IONICS, INCORPORATED

                              By:/s/ Daniel M. Kuzmak
                                 ---------------------------------------------
                                 Name: Daniel M. Kuzmak
                                 Title:   Vice President, Finance and
                                          Chief Financial Officer


                              FLEET NATIONAL BANK, individually and as Agent

                              By: /s/John C. Dunne
                                  --------------------------------------------
                                  John C. Dunne, Senior Vice President


                            RATIFICATION OF GUARANTY

         Each of the undersigned  Guarantors hereby acknowledges and consents to
the  foregoing  Amendment  No.  1 as of  March  1,  2001,  and  agrees  that the
applicable Guaranty from such Guarantor in favor of the Agent for the benefit of
the  Agent  and the Banks and all  other  Loan  Documents  to which  each of the
Guarantors  are a party  remain  in  full  force  and  effect,  and  each of the
Guarantors confirms and ratifies all of its obligations thereunder.

                              AQUA COOL ENTERPRISES, INC.

                              By: /s/ Theodore G. Papastavros
                                  --------------------------------
                                     Name: Theodore G. Papastavros
                                     Title:   Treasurer



                              AQUA DESIGN, INC.

                              By: /s/ Edward J. Cichon
                                  --------------------------------
                                     Name: Edward J. Cichon
                                     Title:   President


                              FIDELITY PUREWATER, INC.

                              By: /s/ Anthony DiPaola
                                 ----------------------------------
                                     Name: Anthony DiPaola
                                     Title:   Treasurer


                              FIDELITY WATER SYSTEMS, INC.

                              By: /s/ Anthony DiPaola
                                 -----------------------------------
                                     Name: Anthony DiPaola
                                     Title:   Treasurer


                              IONICS KOREA, INC.

                              By: /s/ Arthur L. Goldstein
                                 -------------------------------------
                                     Name: Arthur L. Goldstein
                                     Title:   President


                              IONICS LIFE SCIENCES, INC.

                              By: /s/ Theodore G. Papastavros
                                 ------------------------------------
                                     Name: Theodore G. Papastavros
                                     Title:   Treasurer


                              IONICS  ULTRAPURE  WATER CORPORATION

                              By: /s/ Stephen Korn
                                 -------------------------------------
                                     Name: Stephen Korn
                                     Title:   Secretary


                              RESOURCES  CONSERVATION  CO. INTERNATIONAL

                              By: /s/ Stephen Korn
                                 -------------------------------------
                                     Name: Stephen Korn
                                     Title:   Secretary


                              SEPARATION TECHNOLOGY INC.

                              By: /s/ Ark W. Pang
                                 --------------------------------------
                                     Name: Ark W. Pang
                                     Title:   President


                              SIEVERS INSTRUMENTS, INC.

                              By: /s/ Stephen Korn
                                 -------------------------------------
                                     Name: Stephen Korn
                                     Title:   Secretary
<PAGE>

<TABLE>
<CAPTION>

                                  Schedule 7.7
                                   Litigation

A.  PENDING LITIGATION

---------------------------------------------- ------------ ---------------------------------------- -------------------------------
                                                  Date
                  Litigants                      Served                     Counsel                                Court
---------------------------------------------- ------------ ---------------------------------------- -------------------------------
<S>                                            <C>          <C>                                      <C>
Bernard Andrieu v. Ionics France and           9/2000       Alex Blumrosen                           Le Tribunal de Commerce
Ionics, Incorporated                                        Nicola Kompf                             de Creteil
                                                            Bernard-Hertz-Bejot

(employment termination in violation of                     Societe d'Avocats
agreement)                                                  8, rue Murillo
                                                            75008 Paris, France
                                                            33-1-43-1880 80 (tel)
                                                            33-1-43-1880 90 (fax)

---------------------------------------------- ------------ ---------------------------------------- -------------------------------
*Baggaley & Anor; Batson; Thompson; Wilson;    3/2000       Paul Cantwell, Partner                   Superior Court of New South
and White vs. Stidym Distributors Pty. Ltd.                 Craig Terrill & Associates               Wales, Northern Rivers Registry
and Elite Chemicals Pty. Ltd.                               Level 6, 231 George Street               Queensland, Australia
(economic loss due to negligence)                           Brisbane, QLD 4000
                                                            Australia
                                                            011-61-7-3211-0011 (tel)
                                                            011-61-7 3211-0022 (fax)
---------------------------------------------- ------------ ---------------------------------------- -------------------------------

*Deborah Brandes v. Ionics, Inc. et al         4/10/98      Keith A. Guarnuccio, Esq.                Supreme Court of the
 (personal injury)                                          Ahmuty, Demers & McManus                 State of New York
                                                            200 I.U. Willets Road                    County of Nassau
                                                            Albertson, NJ 11507
                                                            516-294-5433 (tel)
                                                            516-294-5387 (fax)

---------------------------------------------- ------------ ---------------------------------------- -------------------------------
Hynes v. Ionics Ultrapure Water Corporation    4/99         Peter A. Viano, Esq.                     Workers' Comp
                                                            Haworth, Bradshaw, Stallknecht & Barber  Appeals Board
                                                            333 West San Carlos Street, Suite 1150   California
                                                            San Jose, CA 95103
                                                            (408) 293-9393 (tel)

---------------------------------------------- ------------ ---------------------------------------- -------------------------------
Ionics, Incorporated v. Namibia Water Corp.    2/16/01      William A. McCormack, Esq.               U.S. District Court, District
Ltd; FirstRand Bank Ltd. and State Street                   Bingham Dana LLP                         of MA, Boston
Bank and Trust Company                                      150 Federal Street
                                                            Boston, MA 02110
(suit to prevent drawdown of bid bond and                   (617) 951-8335 (tel)
recoup bidding expenses)                                    (617) 951-8736 (fax)

---------------------------------------------- ------------ ---------------------------------------- -------------------------------
Alex Long and Arthur Wilson                    3/7/97       Jonathan D. Wolf, Esq.                   U.S. District Court
v. Fidelity Water Systems, Inc.,                            Berliner Cohen                           Northern District of California
Fidelity Purewater, Inc., Scott Batiste,                    Ten Almaden Boulevard
Household Retail Service, Inc. and                          Eleventh Floor
Household Bank (Nevada), N.A.                               San Jose, CA  95113-2233
(class action lawsuit for violation of                      408-998-5388 (tel)
  state and federal regulation)                             408-286-5600 (fax)
---------------------------------------------- ------------ ---------------------------------------- -------------------------------
*Insurance Co.-appointed Counsel

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

A.  PENDING LITIGATION (Continued)

---------------------------------------------- ------------ ---------------------------------------- -------------------------------
                                                  Date
                  Litigants                      Served                     Counsel                                Court
---------------------------------------------- ------------ ---------------------------------------- -------------------------------
<S>                                            <C>          <C>                                      <C>
Dee Miller v. Fidelity Purewater, Inc.,        6/7/2000     Jonathan D. Wolf                         California Supreme Court
Scott Batiste and Does 1-50                                 Berliner Cohen
                                                            Ten Almaden Boulevard - 11th Floor
(wrongful sales practices)                                  San Jose, CA  95113
                                                            408-998-5388 (tel)
                                                            408-286-5600 (fax)

---------------------------------------------- ------------ ---------------------------------------- -------------------------------
Primera Foods Corporation v. Separation        6/21/00      Daniel J. Boivin, Esq.                   American Arbitration
Technology, Inc. and Ionics, Incorporated                   Meshbesher & Spence                      Association, Minneapolis, MN
(breach of contract and warranty)                           1616 Park Avenue
                                                            Minneapolis, MN 55404
                                                            612-544-5959 (tel)
                                                            612-339-9188

---------------------------------------------- ------------ ---------------------------------------- -------------------------------
Teresa Readnower v. General Ionics             1/18/01      Charles E. Boyle, Esq.                   U.S. EEOC
                                                            Diefenderfer, Hoover, Boyle & Wood       Cincinnati Office
(sex discrimination, harassment, retaliation)               1420 Grant Building
                                                            Pittsburgh, PA 15219
                                                            412-471-1100 (tel)
                                                            412-471-5125 (fax)

---------------------------------------------- ------------ ---------------------------------------- -------------------------------
Robelle Industries, Inc. v.                    3/8/95       Marie F. Mercier, Esq.                   Superior Court
Ionics, Incorporated                                        Kotin, Crabtree & Strong                 Norfolk County, MA
(breach of contract, tortious interference)                 One Bowdoin Square
                                                            Boston, MA  02114-2919
                                                            617-227-7031 (tel)
                                                            617-367-2988 (fax)

---------------------------------------------- ------------ ---------------------------------------- -------------------------------
Eduardo E. Rojas v. Ionics, Incorporated et    12/13/00      Marie F. Mercier, Esq.                  U.S. District Court
al                                             on Ionics -   Kotin, Crabtree & Strong                District of Massachusetts
                                                             One Bowdoin Square                      Boston
(breach of contract and breach of fiduciary                  Boston, MA  02114-2925
duty)                                                        617-227-7031 (tel)
                                                             617-367-2988 (fax)

---------------------------------------------- ------------- --------------------------------------- -------------------------------
Salas v. Apollo Ultrapure Water Systems, Inc.  12/30/96     Rex Altman, Esq.                         Workers Compensation
 (wrongful termination claim)                               Altman & Schoemaker                      Appeals Board
                                                            16255 Ventura Blvd., Suite 1110          State of California
                                                            Encino, CA 91436
                                                            818-995-0080 (tel)
                                                            818-995-3419 (fax)

---------------------------------------------- ------------ ---------------------------------------- -------------------------------
*Insurance Co.-appointed Counsel

</TABLE>

<PAGE>
<TABLE>
<CAPTION>


A.  PENDING LITIGATION (Continued)

--------------------------------------------- ------------- -------------------------------------- --------------------------------
                 Litigants                        Date
                                                 Served                    Counsel                                Court
--------------------------------------------- ------------- -------------------------------------- ---------------------------------
<S>                                           <C>           <C>                                    <C>
Samsung Austin Semiconductor L.P. v.          Suit          Marshall Searcy, Esq.                  District Court for Travis County,
Nomura Micro Science, U.S.A., Inc.,           brought       Kelly, Hart & Hallman                  Texas, 98th Judicial District
Ionics Pure Solutions and Ionics,             12/28/00;     201 Main Street, Suite 2500
Incorporated                                  Ionics not    Fort Worth, TX 76102
                                              yet served.   817-332-2500 (tel)
                                                            817-878-9280 (fax)

--------------------------------------------- ------------- -------------------------------------- ---------------------------------
*Zelia and Manuel Santos v.                   9/13/99       Cindy Newman, Esq.                     Superior Court of New Jersey
Edwin J. Petruzzi and Ionics,                               Stevens & Minter                       Law Division
Incorporated/Aqua Cool                                      One Harmon Plaza                       Union County
                                                            Secaucus, New Jersey  07094
                                                            201-319-5700 (tel)
                                                            201-319-0151 (fax)

--------------------------------------------- ------------- -------------------------------------- ---------------------------------
                                              3/27/98       James S. Dittmar, Esq.                 U.S. District Court
United States Filter Corporation and                        Hutchins, Wheeler & Dittmar            Boston
IP Holdings v. Ionics                                       101 Federal Street
(patent infringement)                                       Boston, MA 02110
(3 cases pending)                                           617-951-6600 (tel)
                                                            617-951-1295 (fax)

                                                            Stanley L. Amberg, Esq.
                                                            Orrick Herrington & Sutcliffe LLP
                                                            666 Fifth Avenue
                                                            New York, NY  10103
                                                            212-506-5285 (tel)
                                                            212-506-5151 (fax)

                                                            Anthony J. Fitzpatrick, Esq.
                                                            Duane. Morris & Heckscher, LLP
                                                            One International Place, 14th Floor
                                                            Boston, MA  02110-2600
                                                            617-598-3120 (tel)
                                                            617-598-3101 (fax)


--------------------------------------------- ------------- -------------------------------------- ---------------------------------
*Insurance Co.-appointed Counsel

</TABLE>

<PAGE>
<TABLE>
<CAPTION>



A.  PENDING LITIGATION (Continued)

                                                 Date
                 Litigants                      Served                    Counsel                                 Court
--------------------------------------------- ----------- ---------------------------------------- ---------------------------------
<S>                                           <C>         <C>                                      <C>
                                              8/21/00     Brian Yakura, Esq.                       Superior Court for the State of
*Cynthia Walker et al v. Ionics,                          Brown & Boland                           California
Incorporated                                              Ten Rincon Center                        Solano County
and Agustin Sanchez                                       121 Spear Street, Suite 410              Vallejo, CA  94590
                                                          San Francisco, CA 94105
(auto accident)                                           415-836-2626 (tel)
                                                          415-836-3104 (fax)

--------------------------------------------- ----------- ---------------------------------------- ---------------------------------
                                              11/29/00    Linda Taylor, Esq.                       California Dept. of Fair
Chris Wells v. Ionics Ultrapure Water                                                              Employment and Housing and EEOC
(discrimination complaint - disability)


--------------------------------------------- ----------- ---------------------------------------- ---------------------------------
                                              5/11/99     Mitchell E. Pak, Esq.                    Supreme Court
Elsa Zegelstein and Joseph Zegelstein v.                  Jacobowitz, Garfinkel & Lesman           State of New York
Ionics, Incorporated and Igor Makhnin                     110 William Street                       County of Kings
(automobile accident)                                     New York, NY  10038-3901
                                                          212-809-8000 (tel)
                                                          212-344-8263 (fax)

--------------------------------------------- ----------- ---------------------------------------- ---------------------------------
*Insurance Co.-appointed Counsel
</TABLE>

B.       THREATENED LITIGATION

1. By letter dated December 6, 2000,  counsel for Bond  Properties LLC, owner of
property  adjacent  to the  Silresim  superfund  site in Lowell,  Massachusetts,
notified  Ionics  and  20  other   potentially   responsible   parties  who  had
participated in the 1992 Silresim consent decree arrangement,  that its property
has become  contaminated  by groundwater  pollution  migrating from the Silresim
site. The owner is seeking payment of $1,576,000 to cover environmental response
costs plus  diminution  of the  property's  fair market  value,  and in addition
attorney's fees,  consulting fees and expert fees. Ionics' volumetric percentage
among the  notified  group  (which  does not  include  all  participants  in the
Silresim  settlement) is approximately  1.9%. It is Ionics' current intention to
participate in a group defense against the owner's claims.

2. In July, 1999 SeparaTech  Limited  ("SeparaTech"),  an English  subsidiary of
Separation Technology, Inc., a U.S. subsidiary of Ionics, Incorporated, received
a  letter  from  Glanbia  Ingredients  ("Glanbia")  of  Ireland  threatening  to
institute legal proceedings unless it received compensation for losses allegedly
resulting  from a  breach  of  contract.  Glanbia  claims  that  ultrafiltration
equipment sold by SeparaTech in 1997 to Avonmore Foods,  Glanbia's  predecessor,
to upgrade its whey  processing  plant  failed to perform  according to contract
specifications,   resulting   in  losses  of   IR(pound)560,000   (approximately
US$670,000). Corporate Counsel to Ionics responded to Glanbia in September, 1999
asserting  that  SeparaTech  had  met  its  contractual   obligations.   Glanbia
reasserted  its  claims  in a letter  dated  July  20,  2000,  to which  Ionics'
Corporate  Counsel  responded in August,  2000,  again asserting that SeparaTech
Limited met its contractual obligations. There have been no further developments
in this matter.

3. Ionics was  contacted in September  2000 by an attorney  representing  Mahaan
Proteins  Limited  ("Mahaan"),  formerly  known as Lacto  Protein India Ltd., an
Indian company that purchased a reverse  osmosis system for whey processing from
SeparaTech Limited ("SeparaTech") in 1995.  SeparaTech,  an English company, and
its U.S. parent, Separation Technology, Inc. ("STI"), were acquired by Ionics in
1996.  Mahaan  claims  that  SeparaTech  breached  its  contract  by  delivering
equipment that did not conform to contract specifications and did not perform as
warranted.  Mahaan is claiming  damages  against  SeparaTech,  STI and Ionics in
excess of $20 million. Ionics and its affiliates believe that SeparaTech met its
contractual and warranty obligations to Mahaan and that they have valid defenses
to the claims,  and intend to vigorously  defend  themselves in the event Mahaan
institutes litigation.

<PAGE>


                                  Schedule 7.17
                              Environmental Matters

Portions of the Real Estate used by Borrower or by its domestic Subsidiaries are
used for the  generation,  handling,  processing,  transportation  and  storage,
including underground tank storage, of Hazardous Substances. Such activities are
conducted in accordance with the applicable Environmental Laws and in compliance
with applicable  valid permits.  No disposal of Hazardous  Substances  occurs on
Real Estate used by Borrower or by its  domestic  Subsidiaries  and there are no
known ongoing sources of release or threats of release to the  environment  with
respect to such Real Estate. To the best of the Borrower's knowledge:  (i) there
have been no past  releases  that would have a  material  adverse  effect on the
value  of  the  Real  Estate;  and  (ii)  Neither  the  Borrower,  its  domestic
Subsidiaries, nor any of the Real Estate used by the Borrower or by its domestic
Subsidiaries  is  subject  to  any  applicable  environment  law  requiring  the
performance  of  Hazardous  Substances  site  assessments,  or  the  removal  or
remediation of Hazardous Substances.

The  Borrower was notified in 1992 that it is a  potentially  responsible  party
(PRP) at a Superfund  Site,  Solvent  Recovery  Services  (SRS) in  Southington,
Connecticut.  Borrower's  share of  assessments  to date for  site  work  totals
approximately $65,000. The ultimate site clean-up cost is currently not expected
to exceed $59 million,  of which the Borrower's share would not exceed $308,000,
including the amounts that have already been assessed.

The Borrower was notified in March,  2000 that it is a  potentially  responsible
party (PRP) in a related  Superfund  Site, the Angelillo  Property  Site.  These
sites are related in that materials from the SRS site were allegedly transported
to the Angelillo site. The EPA has spent approximately $1,155,000 to date at the
Angelillo  site, and is seeking  recovery of those costs from the SRS PRP group.
Ionics'  proportion of those costs is expected to be similar to the SRS site, on
the order of 0.5%.

An  investigation  conducted  by the  Attorney  General of the  Commonwealth  of
Massachusetts  into  certain  former  operations  of a division of the  Borrower
during  portions of the years 1991 through 1995 was  concluded in August,  2000.
Pursuant to a settlement  agreement entered in civil proceedings,  Ionics paid a
civil penalty of $425,000 to the Commonwealth of  Massachusetts  and contributed
$110,000 to fund a watershed protection plan for the Connecticut River Basin.

By letter dated  December 6, 2000,  counsel for Bond  Properties  LLC,  owner of
property  adjacent  to the  Silresim  Superfund  site in Lowell,  Massachusetts,
notified  Ionics  and 20  other  participants  in the  Silresim  Consent  Decree
arrangement,  that its property has become contaminated by groundwater pollution
migrating from the Silresim site. The owner is seeking  payment of $1,576,000 to
cover environmental response costs plus diminution of the property's fair market
value, and in addition attorneys' fees, consulting fees and expert fees. Ionics'
volumetric  percentage  among the  notified  group  (which  does not include all
participants  in the  Silresim  settlement)  is  approximately  1.9%.  Ionics is
participating in a group defense against the owner's claims.

<PAGE>

<TABLE>
<CAPTION>

                                Schedule 7.18(a)
                            Subsidiaries of Borrower

<S>       <C>                                           <C>                                                   <C>
                                                                                                              Jurisdiction of
          Name                                            Address                                             Incorporation
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
1.       Agrinord S.R.L. (75%)                        Isola della Scala, Verona, Italy                      Italy
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
2.       Aqua Cool Enterprises, Inc.                  65 Grove Street, Watertown, MA  02472                 MA
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
3.       Aqua Cool France, S.A..                      3 Grand Rue, 60240 Liantcourt St. Pierre, France      France
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
4.       Aqua Design Anguilla Limited                 P. O. Box 1336, The Valley, Anguilla, B.W.I.          Anguilla
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
5.       Aqua Design (Antigua) Limited                P.O. Box W-1012, St. Johns, Antigua, W.I.             Antigua & Barbuda
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
6.       Aqua Design Bahamas Limited                  The Pilot House, Suite #10, East Bay Street,          Bahamas
                                                      Nassau, Bahamas N-1836-A040
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
7.       Aqua Design (BVI) Ltd.                       Road Reef Marina, Road Town, Tortola, B.W.I.          British Virgin Islands
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
8.       Aqua Design (Curacao) N.V.                   Gosieweg 113, Curacao, Neth. Antilles                 Curacao, Neth. Antilles
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
9.       Aqua Design, Inc.                            4710 Eisenhower Blvd., Tampa, FL 33634                California
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
10.      Aqua Design International Limited            P.O. Box 1336, The Valley, Anguilla, B.W.I.           Anguilla
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
11.      Aqua Design (Netherlands Antilles) N.V.      85 Wells Road, Unit #26, Cole Bay, St. Maarten        Netherlands Antilles
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
12.      Aqua Design (Saba) N.V.                      Fort Bay, The Bottom, Saba, Neth. Antilles,           Saba, Neth. Antilles
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
13.      Aqua Design V.I., Inc.                       St. Thomas, US VI 00802                               U. S. Virgin Islands
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
14.      Condado Holding Limited  (Inactive)          ------                                                Anguilla, B.W.I.
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
15.      David Holding Limited   (Inactive)           ------                                                Anguilla, B.W.I.
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
16.      Elite Chemicals Pty. Ltd.                    1873 Lytton Road, Lytton, Brisbane, Queensland        Australia
                                                      4178, Australia
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
17.      Favourable Trading Limited  D/B/A Ionics,    Units #19 & #20, 20 Royal Rock Buildings, Royal       Republic Of Ireland
         Ireland                                      Rock Industrial Estate, Ballybane, Galway, Ireland
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
18.      Fidelity Purewater, Inc.                     5900 Silver Creek Valley Road,                        California
                                                      San Jose, CA 95138-1009
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
19.      Fidelity Water Systems, Inc.                 5900 Silver Creek Valley Road,                        California
                                                      San Jose, CA 95138-1009
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
20.      Global Water Services, S.A.                  12 Waterside Way, London  SW17 0XH, England           Panama
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
21.      Ionics Acapulco, S. A. de C.V.               Margarita Maza de Juarez #1-A,                        Mexico
                                                      Col. Jose Lopez Portillo, Acapulco GRO, Mexico
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
22.      Ionics Agar  Environmental Ltd.              Glil Yam, Herzlia, P.O. Box 434,                      Israel
                                                      Herzlia B 46103, Israel
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
23.      Ionics Aqua Design Bonaire N.V.              Kaya Carlos Nicholas 3, P.O. Box 381, Karlendijk,     Bonaire, Neth. Antilles
                                                      Bonaire, Neth. Antilles
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
24.      Ionics Asia Pacific Pte Ltd.                 59 Lorong 23 Geylang, Singapore 388383                Singapore
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
25.      Ionics (Bermuda) Ltd.                        P. O. Box DV560, Devonshire, Bermuda                  Bermuda
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- -----------------------
26.      Ionics Constructors Trinidad Ltd.            Building D, Second Floor, Grand Bazaar, Valsayn,      Trinidad
                                                      Trinidad, W.I.
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
27.      Ionics Enersave Engineering Sdn. Bhd. (55%)  Lot 4, Jalan Kemajuan Satu 16/17A                     Malaysia
                                                      40000 Shah Alam, Selangor, Malaysia
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
28.      Ionics Foreign Sales Corporation Limited     65 Grove Street, Watertown, MA  02472                 Jamaica
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
29.      Ionics France S.A.                           121 Av. De 8 Mai 1945, 94170 LePerreu, France         France
----------------------------------------------------- ----------------------------------------------------- ------------------------
----------------------------------------------------- ----------------------------------------------------- ------------------------
30.      Ionics Iberica, S.A.                         Edificio Mercurio, Torre 2050B, 35100 Playa del       Spain
                                                      Ingles, Gran Canaria, Spain
----------------------------------------------------- ----------------------------------------------------- ------------------------
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                Schedule 7.18(a)
                      Subsidiaries of Borrower (Continued)

---------------------------------------------------- -------------------------------------------------- ----------------------------
                                                                                                              Jurisdiction of
                       Name                                               Address                              Incorporation
---------------------------------------------------- -------------------------------------------------- ----------------------------
<S>      <C>                                         <C>                                                <C>
---------------------------------------------------- -------------------------------------------------- ----------------------------
31.      Ionics Italba, S.p.A.                       Via Livraghi 1/B, Milano 20126, Italy              Italy
---------------------------------------------------- -------------------------------------------------- ----------------------------
---------------------------------------------------- ------------------------------------------------- -----------------------------
32.      Ionics Korea, Inc.                          Rm. 516, Sung Gee Officetel, 702-13                Delaware
                                                     Yoksam-Dong, Kangnam-Ku, Seoul 135-080, Korea
---------------------------------------------------- ------------------------------------------------- -----------------------------
---------------------------------------------------- ------------------------------------------------- -----------------------------
33.      Ionics Life Sciences, Inc.                  113 Dickinson Road, Suite A5,                      NJ
                                                     North Wales, PA 19454-2534
---------------------------------------------------- ------------------------------------------------- -----------------------------
---------------------------------------------------- -------------------------------------------------- ----------------------------
34.      Ionics-Mega a.s. (80%) (Inactive)           -----                                              Czech Republic
---------------------------------------------------- -------------------------------------------------- ----------------------------
---------------------------------------------------- -------------------------------------------------- ----------------------------
35.      Ionics Nederland, B.V.  (Inactive)          -----                                              Netherlands
---------------------------------------------------- -------------------------------------------------- ----------------------------
---------------------------------------------------- -------------------------------------------------- ----------------------------
36.      Ionics Securities Corporation               -----                                              MA
         (Inactive)
---------------------------------------------------- -------------------------------------------------- ----------------------------
---------------------------------------------------- -------------------------------------------------- ----------------------------
37.      Ionics Taiwan, Inc.                         20F-2, No. 130, Juang Jing Road                    Taiwan
                                                     His Chih, Taipei County, Taiwan, ROC
---------------------------------------------------- -------------------------------------------------- ----------------------------
---------------------------------------------------- -------------------------------------------------- ----------------------------
38.      Ionics Tampa Bay, Inc. (Inactive)           -----                                              Florida
---------------------------------------------------- -------------------------------------------------- ----------------------------
---------------------------------------------------- -------------------------------------------------- ----------------------------
39.      Ionics (UK) Ltd.                            12 Waterside Way, London SW 17 0XH, England        England
---------------------------------------------------- -------------------------------------------------- ----------------------------
---------------------------------------------------- -------------------------------------------------- ----------------------------
40.      Ionics Ultrapure Water Corporation          5900 Silver Creek Valley Road,                     California
                                                     San Jose, CA 95138-1009
---------------------------------------------------- -------------------------------------------------- ----------------------------
---------------------------------------------------- -------------------------------------------------- ----------------------------
41.      Ionics Water Resources Ltd.                 c/o Baratz Gilat, Bar-Nathan & Co.                 Israel
         (stock not yet issued)                      8 Shaul Hamelech Blvd.
                                                     Tel Aviv 64733, Israel
---------------------------------------------------- -------------------------------------------------- ----------------------------
---------------------------------------------------- -------------------------------------------------- ----------------------------
42.      Ionics Watertec Pty. Ltd.                   5 Perivale Street, Darra,                          Australia
                                                     Brisbane 4076, Australia
---------------------------------------------------- -------------------------------------------------- ----------------------------
---------------------------------------------------- -------------------------------------------------- ----------------------------
43.      Miller Holding Limited  (Inactive)          -----                                              Anguilla, B.W.I.
---------------------------------------------------- -------------------------------------------------- ----------------------------
---------------------------------------------------- -------------------------------------------------- ----------------------------
44.      Resources Conservation Co. International    3006 Northrup Way, Bellevue, WA 98004-1407         Delaware
---------------------------------------------------- -------------------------------------------------- ----------------------------
---------------------------------------------------- -------------------------------------------------- ----------------------------
45.      Separatech Ltd.                             12 Waterside Way, London SW 17 OXH, England        England
---------------------------------------------------- -------------------------------------------------- ----------------------------
---------------------------------------------------- -------------------------------------------------- ----------------------------
46.      Separation Technology, Inc.                 65 Grove Street, Watertown, MA 02472               Minnesota
---------------------------------------------------- -------------------------------------------------- ----------------------------
47.      Sievers Instruments, Inc.                   6060 Spine Road, Boulder, Colorado  80301          Colorado
---------------------------------------------------- -------------------------------------------------- ----------------------------
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                Schedule 7.18(b)

                         Joint Ventures and Partnerships
                        Of Borrower and Its Subsidiaries

<S>                                                                                     <C>       <C>
--------------------------------------------------------------------------------------- --------- --------------------------
Aqua Cool - Kuwait                                                                      49%       Kuwait
--------------------------------------------------------------------------------------- --------- --------------------------
--------------------------------------------------------------------------------------- --------- --------------------------
Aqua Cool - Saudi Arabia                                                                40%       Saudi Arabia
--------------------------------------------------------------------------------------- --------- --------------------------
--------------------------------------------------------------------------------------- --------- --------------------------
Aqua Design Ltd.                                                                        39%       Cayman Islands
--------------------------------------------------------------------------------------- --------- --------------------------
--------------------------------------------------------------------------------------- --------- --------------------------
Desalination Company of Trinidad and Tobago Ltd.                                        40%       Trinidad
--------------------------------------------------------------------------------------- --------- --------------------------
--------------------------------------------------------------------------------------- --------- --------------------------
Grupo Empresarial de Mejoramiento Ambiental, S. de R. L. de C.V.                        20%       Mexico
--------------------------------------------------------------------------------------- --------- --------------------------
--------------------------------------------------------------------------------------- --------- --------------------------
Ionics Freshwater Ltd.                                                                  50%       Barbados
--------------------------------------------------------------------------------------- --------- --------------------------
--------------------------------------------------------------------------------------- --------- --------------------------
Ionics Water Solutions Lda.                                                             51%       Portugal
--------------------------------------------------------------------------------------- --------- --------------------------
--------------------------------------------------------------------------------------- --------- --------------------------
Ionics-Mega a.s.                                                                        80%       Czech Republic
--------------------------------------------------------------------------------------- --------- --------------------------
--------------------------------------------------------------------------------------- --------- --------------------------
Jalal-Ionics Ltd.                                                                       40%       Bahrain
--------------------------------------------------------------------------------------- --------- --------------------------
--------------------------------------------------------------------------------------- --------- --------------------------
Toray Membrane America, Inc.                                                            43%       MA
--------------------------------------------------------------------------------------- --------- --------------------------
--------------------------------------------------------------------------------------- --------- --------------------------
Watlington Waterworks Ltd.                                                              26%       Bermuda
--------------------------------------------------------------------------------------- --------- --------------------------
--------------------------------------------------------------------------------------- --------- --------------------------
Yuasa-Ionics Co. Ltd.                                                                   50%       Japan
--------------------------------------------------------------------------------------- --------- --------------------------
</TABLE>


In  addition,  there are  proposed  joint  venture  project  companies in Egypt,
Israel, Kuwait and Jamaica.


<PAGE>


                                 Schedule 9.5.2

         In  December  2000,   Borrower  sold  certain  membrane   manufacturing
equipment to Toray Membrane America, Inc. for a purchase price of $8,500,000.

<PAGE>

                                 Exhibit 10.3(2)

                               SECURITY AGREEMENT

         SECURITY  AGREEMENT,  dated as of  March 1,  2001,  among  (i)  IONICS,
INCORPORATED,  a  Massachusetts  corporation  (the  "Borrower"),  (ii) AQUA COOL
ENTERPRISES,  INC., a Massachusetts corporation, AQUA DESIGN, INC., a California
corporation,  FIDELITY PUREWATER, INC., a California corporation, FIDELITY WATER
SYSTEMS,  INC.,  a  California  corporation,  IONICS  KOREA,  INC.,  a  Delaware
corporation,  IONICS  LIFE  SCIENCES,  INC.,  a New Jersey  corporation,  IONICS
ULTRAPURE WATER CORPORATION,  a California  corporation,  RESOURCES CONSERVATION
CO.  INTERNATIONAL,  a  Delaware  corporation,  SEPARATION  TECHNOLOGY,  INC,  a
Minnesota  corporation,  and SIEVERS  INSTRUMENTS,  INC., a Colorado corporation
(collectively,   the   "Guarantors"   and  together  with  the   Borrower,   the
"Companies"),  and (iii) FLEET NATIONAL BANK, a national banking association, as
agent (hereinafter,  in such capacity, the "Agent") for itself and other banking
institutions  (hereinafter,  collectively,  the "Banks") which are or may become
parties to a Second Amended and Restated Revolving Credit Agreement, dated as of
July 28,  2000July  28, 2000 (as  amended  and in effect from time to time,  the
"Credit Agreement"), among the Borrower, the Banks and the Agent.

         WHEREAS,  pursuant to that certain Guaranty, dated as of July 28, 2000,
each of the Guarantors has guaranteed the  Obligations of the Borrower under the
Credit Agreement;

         WHEREAS,  the  Borrower  and the  Guarantors  are members of a group of
related  corporations,  the success of any one of which is  dependent in part on
the success of the other members of such group;

         WHEREAS,  the  Guarantors  expect to  receive  substantial  direct  and
indirect  benefits  from the  extensions  of credit to the Borrower by the Banks
pursuant to the Credit Agreement (which benefits are hereby acknowledged);

         WHEREAS,  it is a condition  precedent to the Banks' making any further
loans or otherwise  extending  credit to the Borrower under the Credit Agreement
that the  Companies  execute  and  deliver to the Agent,  for the benefit of the
Banks and the Agent, a security agreement in substantially the form hereof; and

         WHEREAS,  each of the Companies  wishes to grant security  interests in
favor of the  Agent,  for the  benefit  of the  Banks and the  Agent,  as herein
provided;

         NOW,  THEREFORE,  in consideration of the promises contained herein and
for other good and valuable consideration,  the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
<PAGE>

         1. Definitions.  All capitalized terms used herein without  definitions
shall have the respective  meanings  provided  therefor in the Credit Agreement.
All terms  defined in the Uniform  Commercial  Code of the The  Commonwealth  of
Massachusetts  and  used  herein  shall  have  the same  definitions  herein  as
specified therein;  provided,  however, that the term "instrument" shall be such
term as defined in Article 9 of the Uniform Commercial Code of such jurisdiction
rather than Article 3.

         2.  Grant of Security Interest.

                  2.1. Collateral  Granted.  Each of the Companies hereby grants
         to the Agent, for the benefit of the Banks and the Agent, to secure the
         payment and performance in full of all of the  Obligations,  a security
         interest in and so pledges and assigns to the Agent, for the benefit of
         the Banks and the Agent, the following properties, assets and rights of
         each such  Company,  wherever  located,  whether now owned or hereafter
         acquired or arising,  and all proceeds and products thereof (all of the
         same being hereinafter called the "Collateral"):

                           All personal  and fixture  property of every kind and
                  nature including without  limitation all furniture,  fixtures,
                  equipment,  raw materials,  inventory,  other goods, accounts,
                  contract  rights,  rights to the  payment of money,  insurance
                  refund  claims and all other  insurance  claims and  proceeds,
                  tort claims, chattel paper, documents, instruments, securities
                  and other investment  property,  deposit  accounts,  rights to
                  proceeds  of  letters of credit  and all  general  intangibles
                  including,  without limitation, all tax refund claims, license
                  fees,  patents,  patent  applications,  trademarks,  trademark
                  applications, trade names, copyrights, copyright applications,
                  rights to sue and  recover for past  infringement  of patents,
                  trademarks  and  copyrights,   computer   programs,   computer
                  software, engineering drawings, service marks, customer lists,
                  goodwill, and all licenses, permits, agreements of any kind or
                  nature pursuant to which such Company  possesses,  uses or has
                  authority  to possess or use  property  (whether  tangible  or
                  intangible) of others or others possess, use or have authority
                  to possess or use property (whether tangible or intangible) of
                  such  Company,  and all  recorded  data of any kind or nature,
                  regardless  of the  medium  of  recording  including,  without
                  limitation, all software,  writings, plans, specifications and
                  schematics.

                  2.2.  Delivery of Instruments, etc.

                           (a)  Pursuant  to  the  terms  hereof,  each  of  the
                  Companies  has  endorsed,  assigned and delivered to the Agent
                  all  negotiable or  non-negotiable  instruments,  certificated
                  securities and chattel paper pledged by it hereunder, together
                  with  instruments  of transfer or assignment  duly executed in
                  blank as the Agent may have  specified.  In the event that any
                  Company shall,  after the date of this Agreement,  acquire any
                  other negotiable or non-negotiable  instruments,  certificated
                  securities  or chattel  paper to be  pledged by it  hereunder,
                  such Company shall forthwith  endorse,  assign and deliver the
                  same to the Agent, accompanied by such instruments of transfer
                  or  assignment  duly  executed  in blank as the Agent may from
                  time to time specify.
<PAGE>

                           (b)  To  the  extent  that  any   securities  now  or
                  hereafter  acquired by any Company are  uncertificated and are
                  issued to such  Company or its nominee  directly by the issuer
                  thereof,  such  Company  shall cause the issuer to note on its
                  books the  security  interest of the Agent in such  securities
                  and shall cause the issuer,  pursuant to an  agreement in form
                  and substance  satisfactory  to the Agent,  to agree to comply
                  with  instructions  from  the  Agent  as to  such  securities,
                  without  further  consent of such Company or such nominee.  To
                  the  extent  that  any  securities,  whether  certificated  or
                  uncertificated,  or other investment property now or hereafter
                  acquired  by any  Company  are  held  by such  Company  or its
                  nominee   through  a  securities   intermediary  or  commodity
                  intermediary, such Company shall, at the request of the Agent,
                  cause  such  securities  intermediary  or (as the case may be)
                  commodity  intermediary,  pursuant to an agreement in form and
                  substance  satisfactory  to the Agent, to agree to comply with
                  entitlement  orders  or other  instructions  from the Agent to
                  such  securities  intermediary  as to such securities or other
                  investment  property,  or (as the case  may be) to  apply  any
                  value  distributed  on account of any  commodity  contract  as
                  directed by the Agent to such commodity intermediary,  without
                  further  consent of such  Company or such  nominee.  The Agent
                  agrees  with each such  Company  that the Agent shall not give
                  any such  entitlement  orders or instructions or directions to
                  any  such  issuer,   securities   intermediary   or  commodity
                  intermediary  unless an Event of Default has  occurred  and is
                  continuing  and the Agent has elected to  exercise  its rights
                  and remedies as contemplated by ss.14.

                           (c) To the extent that any  Company is a  beneficiary
                  under any written letter of credit now or hereafter  issued in
                  favor of such Company,  such Company shall deliver such letter
                  of credit to the Agent.  The Agent shall from time to time, at
                  the   request  and   expense  of  such   Company,   make  such
                  arrangements   with  such   Company  as  are  in  the  Agent's
                  reasonable  judgment  necessary and  appropriate  so that such
                  Company may make any drawing to which such Company is entitled
                  under such letter of credit, without impairment of the Agent's
                  perfected  security  interest  in  such  Company's  rights  to
                  proceeds of such letter of credit or in the actual proceeds of
                  such drawing. At the Agent's request,  such Company shall, for
                  any letter of credit, whether or not written, now or hereafter
                  issued in favor of such  Company as  beneficiary,  execute and
                  deliver  to the  issuer and any  confirmer  of such  letter of
                  credit an assignment  of proceeds  form, in favor of the Agent
                  and  satisfactory to the Agent and such issuer or (as the case
                  may be) such confirmer,  requiring the proceeds of any drawing
                  under such  letter of credit to be paid  directly to the Agent
                  during the continuance of any Event of Default for application
                  as provided in the Credit Agreement.
<PAGE>

                  2.3.  Excluded   Collateral.   Notwithstanding  the  foregoing
         provisions of this ss.2,  such grant of security  interest,  pledge and
         assignment  shall not extend to,  and the term  "Collateral"  shall not
         include,  (a) real property,  motor vehicles,  boats and other property
         subject to a certificate of title or other registration  statute of the
         United  States,  any state or  jurisdiction  or the stock of any of the
         Guarantors and (b) any chattel paper and general  intangibles which are
         now or hereafter held by any Company as licensee,  lessee or otherwise,
         to the extent that (i) such chattel paper and general  intangibles  are
         not  assignable  or capable of being  encumbered  as a matter of law or
         under the terms of the  license,  lease or other  agreement  applicable
         thereto  (but solely to the extent that any such  restriction  shall be
         enforceable under applicable law),  without the consent of the licensor
         or lessor  thereof  or other  applicable  party  thereto  and (ii) such
         consent has not been obtained;  provided,  however,  that the foregoing
         grant of security  interest shall extend to, and the term  "Collateral"
         shall  include,  (A) any and all  proceeds  of such  chattel  paper and
         general intangibles to the extent that the assignment or encumbering of
         such  proceeds  is not so  restricted  and (B) upon any such  licensor,
         lessor or other  applicable  party  consent  with  respect  to any such
         otherwise excluded chattel paper or general intangibles being obtained,
         thereafter such chattel paper or general intangibles as well as any and
         all proceeds  thereof that might have  theretofore  have been  excluded
         from such grant of a security interest and the term "Collateral".

         3. Title to Collateral,  etc. Each of the Companies is the owner of the
Collateral pledged by such Company free from any adverse lien, security interest
or other encumbrance, except for the security interest created by this Agreement
and other  liens  permitted  by the  Credit  Agreement.  None of the  Collateral
constitutes, or is the proceeds of, "farm products" as defined in ss.9-109(3) of
the Uniform Commercial Code of the The Commonweath of Massachusetts. None of the
account debtors in respect of any accounts, chattel paper or general intangibles
and  none  of the  obligors  in  respect  of  any  instruments  included  in the
Collateral  is a  governmental  authority  subject to the Federal  Assignment of
Claims Act.

         4. Continuous Perfection.  Each Company's place of business or, if more
than one,  chief  executive  office is indicated on the  Perfection  Certificate
delivered to the Agent by such Company (each a "Perfection  Certificate").  None
of the  Companies  will  change the same,  or the name,  identity  or  corporate
structure of such Company in any manner,  without providing at least thirty (30)
days prior written notice to the Agent. The Collateral (other than inventory and
obsolete assets sold or otherwise disposed of in the ordinary course of business
consistent  with past  practices),  to the  extent  not  delivered  to the Agent
pursuant to ss.2.2,  will be kept at those  locations  listed on the  Perfection
Certificates  and the  Companies  will  not  remove  the  Collateral  from  such
locations,  without  providing at least thirty (30) days prior written notice to
the Agent.
<PAGE>

         5. No Liens.  Except for the security interest herein granted and liens
permitted  by the  Credit  Agreement,  each  Company  shall be the  owner of its
Collateral free from any lien, security interest or other encumbrance,  and such
Company  shall  defend the same against all claims and demands of all persons at
any time claiming the same or any interests  therein adverse to the Agent or any
of the Banks. No Company shall pledge,  mortgage or create, or suffer to exist a
security interest in the Collateral in favor of any person other than the Agent,
for the benefit of the Banks and the Agent,  except for liens  permitted  by the
Credit Agreement.

         6. No  Transfers.  No Company  will sell or offer to sell or  otherwise
transfer the Collateral or any interest  therein except for (i) sales and leases
of  inventory  in the  ordinary  course  of  business  and  (ii)  sales or other
dispositions  of  obsolescent  items of  equipment  in the  ordinary  course  of
business consistent with past practices.

         7.  Insurance.

                  7.1.  Maintenance  of Insurance.  Each of the  Companies  will
         maintain with financially sound and reputable  insurers  insurance with
         respect to its  properties  and business  against such  casualties  and
         contingencies  as shall be in  accordance  with  general  practices  of
         businesses  engaged in similar  activities in similar geographic areas.
         Such insurance  shall be in such minimum amounts that such Company will
         not be deemed a co-insurer under applicable insurance laws, regulations
         and  policies  and  otherwise  shall be in such  amounts,  contain such
         terms,  be in such forms and be for such  periods as may be  reasonably
         satisfactory  to the Agent.  In addition,  all such insurance  shall be
         payable to the Agent as loss  payee  under a  "standard"  or "New York"
         loss payee  clause for the benefit of the Banks and the Agent.  Without
         limiting the foregoing,  such Company will (i) keep all of its physical
         property  insured with casualty or physical hazard insurance on an "all
         risks"  basis,  with  broad  form flood and  earthquake  coverages  and
         electronic  data  processing  coverage,  with a full  replacement  cost
         endorsement and an "agreed amount" clause in an amount equal to 100% of
         the full  replacement  cost of such  property,  (ii)  maintain all such
         workers'  compensation  or similar  insurance as may be required by law
         and (iii) maintain,  in amounts equal to those generally  maintained by
         businesses  engaged in similar  activities in similar geographic areas,
         general  public  liability  insurance  against claims of bodily injury,
         death or property damage  occurring,  on, in or about the properties of
         such Company;  business interruption  insurance;  and product liability
         insurance.
<PAGE>

                  7.2.  Insurance   Proceeds.   The  proceeds  of  any  casualty
         insurance  in respect  of any  casualty  loss of any of the  Collateral
         shall,  subject to the rights,  if any, of other  parties  with a prior
         interest in the property  covered  thereby,  (i) so long as no Event of
         Default  has  occurred  and is  continuing  and to the extent  that the
         amount of such  proceeds is less than  $500,000,  be  disbursed  to the
         Company  which has  suffered  the loss for direct  application  by such
         Company solely to the repair or replacement of such Company's  property
         so damaged or destroyed and (ii) in all other circumstances, be held by
         the Agent as cash collateral for the Obligations. The Agent may, at its
         sole  option,  disburse  from  time  to  time  all or any  part of such
         proceeds so held as cash collateral,  upon such terms and conditions as
         the Agent may  reasonably  prescribe,  for direct  application  by such
         Company solely to the repair or replacement of such Company's  property
         so damaged or destroyed, or the Agent may apply all or any part of such
         proceeds  to the  Obligations  with the Total  Commitment  (if not then
         terminated) being reduced by the amount so applied to the Obligations.

                  7.3.  Notice of  Cancellation,  etc. All policies of insurance
         shall provide for at least thirty (30) days prior written  cancellation
         notice to the Agent.  In the event of failure by any Company to provide
         and  maintain  insurance  as herein  provided,  the Agent  may,  at its
         option,  provide such  insurance  and charge the amount  thereof to the
         Borrower.  Each Company  shall furnish the Agent with  certificates  of
         insurance  and  policies  evidencing   compliance  with  the  foregoing
         insurance provision.

         8.  Maintenance  of  Collateral;  Compliance  with  Law.  Each  of  the
Companies will keep the  Collateral in good order and repair  (ordinary wear and
tear and insured casualties  excepted) and will not use the same in violation of
law or any policy of insurance thereon. The Agent, or its designee,  may inspect
the Collateral at any reasonable  time during normal business hours and, so long
as no Default or Event of Default  shall have occurred and be  continuing,  upon
prior notice to the applicable Company,  wherever located.  The Company will pay
promptly when due all taxes,  assessments,  governmental charges and levies upon
the  Collateral  or incurred in  connection  with the use or  operation  of such
Collateral  or incurred in  connection  with this  Agreement  unless such taxes,
assessments, governmental charges or levies are being contested in good faith by
any of the Companies and for which adequate  reserves have been set aside on the
books of such Company. Each of the Companies has at all times operated, and such
Company will continue to operate,  its business in material  compliance with all
applicable  provisions of the federal Fair Labor Standards Act, as amended,  and
with all  applicable  provisions  of  federal,  state  and  local  statutes  and
ordinances dealing with the control,  shipment, storage or disposal of hazardous
materials or substances.
<PAGE>

         9.  Collateral Protection Expenses; Preservation of Collateral.

                  9.1. Expenses Incurred by Agent. In its discretion,  the Agent
         may discharge taxes and other encumbrances at any time levied or placed
         on any of the Collateral  (unless such taxes or other  encumbrances are
         being  contested  in good faith by any of the  Companies  and for which
         adequate  reserves  have been set aside on the books of such  Company),
         make repairs  thereto during the  continuance of an Event of Default or
         any time if the Agent reasonably believes such repairs are necessary to
         prevent  the  loss or  deterioration  of such  Collateral,  and pay any
         necessary  filing fees.  The Companies  agree to reimburse the Agent on
         demand for any and all  expenditures  so made.  The Agent shall have no
         obligation to any Company to make any such expenditures,  nor shall the
         making thereof relieve any Company of any default.

                  9.2.  Agent's  Obligations and Duties.  Anything herein to the
         contrary  notwithstanding,  each of the  Companies  shall remain liable
         under each  contract or  agreement  comprised in the  Collateral  to be
         observed or performed by such Company thereunder. Neither the Agent nor
         any Bank shall have any obligation or liability under any such contract
         or  agreement  by reason of or  arising  out of this  Agreement  or the
         receipt by the Agent or any Bank of any payment  relating to any of the
         Collateral,  nor shall the Agent or any Bank be obligated in any manner
         to perform any of the  obligations of such Company under or pursuant to
         any such  contract or  agreement,  to make  inquiry as to the nature or
         sufficiency of any payment received by the Agent or any Bank in respect
         of the Collateral or as to the  sufficiency  of any  performance by any
         party  under any such  contract  or  agreement,  to present or file any
         claim,  to take any action to enforce any performance or to collect the
         payment of any amounts  which may have been assigned to the Agent or to
         which the Agent or any Bank may be entitled  at any time or times.  The
         Agent's  sole  duty with  respect  to the  custody,  safe  keeping  and
         physical  preservation  of  the  Collateral  in its  possession,  under
         ss.9-207  of the Uniform  Commercial  Code of the The  Commonwealth  of
         Massachusetts  or otherwise,  shall be to deal with such  Collateral in
         the same manner as the Agent deals with  similar  property  for its own
         account.

         10. Securities and Deposits.  The Agent may at any time, at its option,
transfer to itself or any nominee any securities constituting Collateral, and if
an Event of Default  shall have occurred and be  continuing,  receive any income
thereon  and  hold  such  income  as  additional  Collateral  or apply it to the
Obligations.  If an Event of Default  shall  have  occurred  and be  continuing,
whether or not any Obligations are due, the Agent may demand,  sue for, collect,
or make any  settlement or compromise  which it deems  desirable with respect to
the  Collateral.  If an Event of Default shall have occurred and be  continuing,
regardless  of  the  adequacy  of  Collateral  or any  other  security  for  the
Obligations,  any deposits or other sums at any time credited by or due from the
Agent or any Bank to any of the  Companies  may at any time be applied to or set
off against any of the Obligations.
<PAGE>

         11. Notification to Account Debtors and Other Obligors.  If an Event of
Default shall have occurred and be continuing,  each of the Companies  shall, at
the request of the Agent, notify account debtors on accounts,  chattel paper and
general  intangibles of such Company and obligors on instruments  for which such
Company is an  obligee of the  security  interest  of the Agent in any  account,
chattel paper,  general  intangible or instrument and that payment thereof is to
be made directly to the Agent or to any financial institution  designated by the
Agent as the Agent's agent  therefor,  and the Agent may itself,  if an Event of
Default shall have occurred and be continuing,  without notice to or demand upon
any Company, so notify account debtors and obligors.  After the making of such a
request or the giving of any such notification, each such Company shall hold any
proceeds of collection  of accounts,  chattel  paper,  general  intangibles  and
instruments  received by such Company as trustee for the Agent,  for the benefit
of the Banks and the Agent,  without  commingling  the same with other  funds of
such  Company  and shall turn the same over to the Agent in the  identical  form
received,  together with any necessary  endorsements or  assignments.  The Agent
shall apply the proceeds of  collection  of  accounts,  chattel  paper,  general
intangibles  and  instruments  received  by the Agent to the  Obligations,  such
proceeds  to be  immediately  entered  after  final  payment  in cash or solvent
credits of the items giving rise to them.

         12.  Further  Assurances.  Each of the  Companies,  at its own expense,
shall do,  make,  execute  and  deliver all such  additional  and further  acts,
things,  deeds,  assurances and instruments as the Agent may reasonably  require
more  completely  to  vest in and  assure  to the  Agent  and  the  Banks  their
respective  rights  hereunder or in any of the  Collateral,  including,  without
limitation, (i) executing,  delivering and, where appropriate,  filing financing
statements and continuation  statements under the Uniform  Commercial Code, (ii)
obtaining  governmental and other third party consents and approvals,  including
without limitation any consent of any licensor, lessor or other applicable party
referred to in ss.2.3, (iii) using its reasonable best efforts to obtain waivers
from  mortgagees and landlords and (iv) taking all actions  required by Sections
8-313 and 8-321 of the Uniform  Commercial  Code  (1990) or  Sections  8-106 and
9-115 of the Uniform  Commercial  Code (1994),  as  applicable  in each relevant
jurisdiction, with respect to certificated and uncertificated securities.

         13.  Power of Attorney.

                  13.1.  Appointment and Powers of Agent.  Each of the Companies
         hereby  irrevocably  constitutes and appoints the Agent and any officer
         or agent  thereof,  with full  power of  substitution,  as its true and
         lawful  attorneys-in-fact  with full irrevocable power and authority in
         the place and stead of such Company or in the Agent's own name, for the
         purpose of carrying  out the terms of this  Agreement,  to take any and
         all  appropriate  action  and to  execute  any  and all  documents  and
         instruments  that may be  necessary  or  desirable  to  accomplish  the
         purposes of this Agreement and,  without limiting the generality of the
         foregoing,  hereby gives said attorneys the power and right,  on behalf
         of such Company, without notice to or assent by such Company, to do the
         following:
<PAGE>

                           (a) upon the occurrence and during the continuance of
                  an Event of Default, generally to sell, transfer, pledge, make
                  any  agreement  with respect to or otherwise  deal with any of
                  the  Collateral  in such  manner  as is  consistent  with  the
                  Uniform   Commercial   Code   of  the  The   Commonwealth   of
                  Massachusetts  and as fully and completely as though the Agent
                  were the absolute owner thereof for all purposes, and to do at
                  such Company's expense, at any time, or from time to time, all
                  acts and things  which the Agent deems  necessary  to protect,
                  preserve  or  realize  upon  the  Collateral  and the  Agent's
                  security  interest  therein,  in order to effect the intent of
                  this  Agreement,  all as fully and effectively as such Company
                  might do, including,  without  limitation,  (i) the filing and
                  prosecuting of registration and transfer applications with the
                  appropriate  federal or local  agencies  or  authorities  with
                  respect to trademarks,  copyrights  and patentable  inventions
                  and processes,  (ii) upon written notice to such Company,  the
                  exercise of voting  rights with respect to voting  securities,
                  which rights may be exercised,  if the Agent so elects, with a
                  view to causing the  liquidation in a commercially  reasonable
                  manner  of assets of the  issuer  of any such  securities  and
                  (iii) the  execution,  delivery and  recording,  in connection
                  with any sale or other  disposition of any Collateral,  of the
                  endorsements,  assignments or other  instruments of conveyance
                  or transfer with respect to such Collateral; and

                           (b) to file such  financing  statements  with respect
                  hereto,  with  or  without  such  Company's  signature,  or  a
                  photocopy of this  Agreement in  substitution  for a financing
                  statement, as the Agent may deem appropriate and to execute in
                  such Company's  name such financing  statements and amendments
                  thereto and  continuation  statements  which may require  such
                  Company's signature.

                  13.2. Ratification by Company. To the extent permitted by law,
         each of the Companies  hereby  ratifies all that said  attorneys  shall
         lawfully  do or  cause  to be done by  virtue  hereof.  This  power  of
         attorney is a power coupled with an interest and shall be irrevocable.

                  13.3.  No Duty on Agent.  The  powers  conferred  on the Agent
         hereunder  are solely to  protect  the  interests  of the Agent and the
         Banks in the Collateral and shall not impose any duty upon the Agent to
         exercise any such powers.  The Agent shall be accountable  only for the
         amounts  that it actually  receives as a result of the exercise of such
         powers and neither it nor any of its officers, directors,  employees or
         agents shall be  responsible  to such Company for any act or failure to
         act, except for the Agent's own gross negligence or willful misconduct.
<PAGE>

         14.  Remedies.  If an Event  of  Default  shall  have  occurred  and be
continuing, the Agent may, without notice to or demand upon any Company, declare
this  Agreement  to be in default,  and the Agent shall  thereafter  have in any
jurisdiction  in which  enforcement  hereof is sought,  in addition to all other
rights and  remedies,  the  rights and  remedies  of a secured  party  under the
Uniform  Commercial  Code,  including,  without  limitation,  the  right to take
possession of the Collateral, and for that purpose the Agent may, so far as such
Company  can give  authority  therefor,  enter  upon any  premises  on which the
Collateral may be situated and remove the same  therefrom.  The Agent may in its
discretion require such Company to assemble all or any part of the Collateral at
such  location or  locations  within the  state(s) of such  Company's  principal
office(s)  or at such other  locations  as the Agent may  designate.  Unless the
Collateral is  perishable  or threatens to decline  speedily in value or is of a
type  customarily  sold on a  recognized  market,  the Agent  shall give to such
Company at least seven (7) Business  Days prior  written  notice of the time and
place of any public  sale of  Collateral  or of the time after which any private
sale or any other  intended  disposition  is to be made.  Each of the  Companies
hereby  acknowledges  that seven (7) Business Days prior written  notice of such
sale or sales shall be  reasonable  notice.  In addition,  each of the Companies
waives any and all rights  that it may have to a judicial  hearing in advance of
the  enforcement  of any of the Agent's  rights  hereunder,  including,  without
limitation, its right following an Event of Default to take immediate possession
of the Collateral and to exercise its rights with respect thereto. To the extent
that any of the  Obligations  are to be paid or performed by a person other than
one of the Companies,  each of the Companies waives and agrees not to assert any
rights or privileges which it may have under ss.9-112 of the Uniform  Commercial
Code of the The Commonwealth of Massachusetts.

         15. No Waiver,  etc. Except for notices required hereunder or under the
Credit Agreement,  each of the Companies waives demand, notice,  protest, notice
of  acceptance  of this  Agreement,  notice  of  loans  made,  credit  extended,
Collateral  received or delivered  or other action taken in reliance  hereon and
all other  demands  and  notices of any  description.  With  respect to both the
Obligations and the Collateral,  each of the Companies  assents to any extension
or  postponement  of the  time  of  payment  or  any  other  indulgence,  to any
substitution, exchange or release of or failure to perfect any security interest
in any Collateral,  to the addition or release of any party or person  primarily
or  secondarily  liable,  to the acceptance of partial  payment  thereon and the
settlement,  compromising or adjusting of any thereof, all in such manner and at
such time or times as the Agent may deem advisable. The Agent shall have no duty
as to the collection or protection of the Collateral or any income thereon,  nor
as to  the  preservation  of  rights  against  prior  parties,  nor  as  to  the
preservation of any rights pertaining thereto beyond the safe custody thereof as
set forth in  ss.9.2.  The Agent  shall not be deemed to have  waived any of its
rights upon or under the Obligations or the Collateral  unless such waiver shall
be in writing and signed by the Agent with the consent of the Majority Banks. No
delay or omission on the part of the Agent in exercising any right shall operate
as a waiver of such right or any other right. A waiver on any one occasion shall
not be construed as a bar to or waiver of any right on any future occasion.  All
rights  and  remedies  of the  Agent  with  respect  to the  Obligations  or the
Collateral, whether evidenced hereby or by any other instrument or papers, shall
be cumulative and may be exercised  singularly,  alternatively,  successively or
concurrently at such time or at such times as the Agent deems expedient.
<PAGE>

         16.  Marshalling.  Neither  the Agent nor any Bank shall be required to
marshal any present or future collateral  security (including but not limited to
this Agreement and the Collateral)  for, or other  assurances of payment of, the
Obligations  or any of them or to resort to such  collateral  security  or other
assurances  of payment  in any  particular  order,  and all of the rights of the
Agent  hereunder  and of the  Agent or any Bank in  respect  of such  collateral
security and other  assurances of payment shall be cumulative and in addition to
all other rights,  however  existing or arising.  To the extent that it lawfully
may,  each of the  Companies  hereby  agrees  that it will  not  invoke  any law
relating to the  marshalling of collateral  which might cause delay in or impede
the  enforcement  of the Agent's  rights under this Agreement or under any other
instrument  creating or evidencing any of the  Obligations or under which any of
the  Obligations is outstanding or by which any of the Obligations is secured or
payment thereof is otherwise  assured,  and, to the extent that it lawfully may,
each of the Companies hereby irrevocably waives the benefits of all such laws.

         17. Proceeds of Dispositions; Expenses. Each of the Companies shall pay
to the Agent on demand any and all  expenses,  including  reasonable  attorneys'
fees and disbursements,  incurred or paid by the Agent in protecting, preserving
or enforcing the Agent's rights under or in respect of any of the Obligations or
any of the Collateral.  After deducting all of said expenses, the residue of any
proceeds of collection or sale of the  Obligations or Collateral  shall,  to the
extent  actually  received in cash, be applied to the payment of the Obligations
in such  order  or  preference  as the Bank may  determine  or in such  order or
preference  as is  provided  in  the  Credit  Agreement,  proper  allowance  and
provision  being made for any  Obligations  not then due. Upon the final payment
and satisfaction in full of all of the Obligations and after making any payments
required  by  Section  9-504(1)(c)  of the  Uniform  Commercial  Code of the The
Commonwealth  of  Massachusetts,  any excess shall be returned to the applicable
Company,  and such Company shall remain liable for any deficiency in the payment
of the Obligations.

         18.  Overdue  Amounts.  Until paid,  all amounts due and payable by the
Companies  hereunder  shall be a debt secured by the  Collateral and shall bear,
whether before or after  judgment,  interest at the rate of interest for overdue
principal set forth in the Credit Agreement.

         19. Governing Law; Consent to Jurisdiction.  THIS AGREEMENT IS INTENDED
TO TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE THE COMMONWEALTH OF MASSACHUSETTS.  Each of the
Companies  agrees that any suit for the  enforcement  of this  Agreement  may be
brought in the courts of the The  Commonwealth of  Massachusetts  or any federal
court sitting  therein and consents to the  non-exclusive  jurisdiction  of such
court and to service of process in any such suit being made upon such Company by
mail at the address specified under its signature on the signature pages hereto.
Each of the Companies  hereby waives any objection  that it may now or hereafter
have to the  venue of any  such  suit or any such  court  or that  such  suit is
brought in an inconvenient court.
<PAGE>

         20.  Waiver of Jury  Trial.  EACH OF THE  COMPANIES,  THE AGENT AND THE
BANKS  WAIVES  ITS RIGHT TO A JURY  TRIAL  WITH  RESPECT  TO ANY ACTION OR CLAIM
ARISING  OUT OF ANY DISPUTE IN  CONNECTION  WITH THIS  AGREEMENT,  ANY RIGHTS OR
OBLIGATIONS  HEREUNDER  OR THE  PERFORMANCE  OF ANY SUCH RIGHTS OR  OBLIGATIONS.
Except as prohibited by law, each of the Companies waives any right which it may
have to claim or recover in any litigation referred to in the preceding sentence
any special,  exemplary,  punitive or consequential damages or any damages other
than,  or in addition to,  actual  damages.  Each of the Companies (i) certifies
that neither the Agent or any Bank nor any representative,  agent or attorney of
the Agent or any Bank has represented, expressly or otherwise, that the Agent or
any Bank would not, in the event of  litigation,  seek to enforce the  foregoing
waivers and (ii)  acknowledges  that, in entering into the Credit  Agreement and
the other Loan  Documents  to which the Agent or any Bank is a party,  the Agent
and  the  Banks  are  relying  upon,   among  other  things,   the  waivers  and
certifications contained in this ss.20.

         21.  Concerning  Revised Article 9 of the Uniform  Commercial Code. The
parties  acknowledge and agree to the following  provisions of this Agreement in
anticipation of the possible  application,  in one or more  jurisdictions to the
transactions  contemplated  hereby,  of the  revised  Article  9 of the  Uniform
Commercial  Code in the  form  or  substantially  in the  form  approved  by the
American Law Institute and the National  Conference of  Commissioners on Uniform
State Law and contained in the 1999 official text of Revised Article 9 ("Revised
Article 9").

                  21.1.  Attachment.  In applying the law of any jurisdiction in
         which  Revised  Article 9 is in  effect,  the  Collateral  (other  than
         Collateral  excluded  by the  terms of  ss.2.3)  is all  assets  of the
         Companies,  whether or not  within the scope of Revised  Article 9. The
         Collateral shall include, without limitation,  the following categories
         of assets as defined in Revised Article 9: goods (including  inventory,
         equipment  and  any   accessions   thereto),   instruments   (including
         promissory notes), documents, accounts (including health-care-insurance
         receivables),  chattel paper (whether tangible or electronic),  deposit
         accounts,  letter-of-credit rights (whether or not the letter of credit
         is evidenced by a writing),  commercial tort claims, securities and all
         other  investment  property,  general  intangibles  (including  payment
         intangibles  and  software),  supporting  obligations  and  any and all
         proceeds  of any  thereof,  wherever  located,  whether  now  owned and
         hereafter  acquired.  If any Company shall at any time,  whether or not
         Revised Article 9 is in effect in any particular jurisdiction,  acquire
         a commercial  tort claim, as defined in Revised Article 9, such Company
         shall immediately  notify the Agent in a writing signed by such Company
         of the brief  details  thereof and grant to the Agent in such writing a
         security  interest  therein and in the proceeds  thereof,  all upon the
         terms of this Agreement,  with such writing to be in form and substance
         satisfactory to the Agent.
<PAGE>

                  21.2. Perfection by Filing. The Agent may at any time and from
         time to time,  pursuant  to the  provisions  of ss.13,  file  financing
         statements,   continuation   statements  and  amendments  thereto  that
         describe  the  Collateral  as all assets of the  applicable  Company or
         words of  similar  effect  and  which  contain  any  other  information
         required by Part 5 of Revised  Article 9 for the  sufficiency or filing
         office acceptance of any financing statement, continuation statement or
         amendment,  including whether such Company is an organization, the type
         of organization  and any organization  identification  number issued to
         such  Company.  Each  of the  Companies  agrees  to  furnish  any  such
         information  to the Agent  promptly  upon request.  Any such  financing
         statements,  continuation statements or amendments may be signed by the
         Agent on behalf of such Company, as provided in ss.13, and may be filed
         at any time in any  jurisdiction  whether or not  Revised  Article 9 is
         then in effect in that jurisdiction.

                  21.3.  Other  Perfection,  etc. Each of the Companies shall at
         any time and from time to time,  whether or not Revised Article 9 is in
         effect in any particular jurisdiction, take such steps as the Agent may
         reasonably request for the Agent (a) to obtain an  acknowledgement,  in
         form and  substance  satisfactory  to the Agent,  of any bailee  having
         possession  of  any  of the  Collateral  that  the  bailee  holds  such
         Collateral  for the Agent,  (b) to obtain  "control" of any  investment
         property,  deposit  accounts,  letter-of-credit  rights  or  electronic
         chattel  paper (as such terms are  defined  in  Revised  Article 9 with
         corresponding  provisions in Rev. ss.ss.  9-104, 9-105, 9-106 and 9-107
         relating to what  constitutes  "control" for such items of Collateral),
         with any  agreements  establishing  control to be in form and substance
         satisfactory  to the Agent,  and (c)  otherwise to insure the continued
         perfection and priority of the Agent's security  interest in any of the
         Collateral and of the  preservation of its rights  therein,  whether in
         anticipation  and following the  effectiveness  of Revised Article 9 in
         any jurisdiction.

                  21.4.   Other   Provisions.   In  applying   the  law  of  any
         jurisdiction  in which  Revised  Article 9 is in effect,  the following
         references to sections in this Agreement to existing  Article 9 of that
         jurisdiction  shall  be to  the  Revised  Article  9  Section  of  that
         jurisdiction indicated below:
<TABLE>
<CAPTION>

@@      <S>                                 <C>                                   <C>
        ------------------------------------- ----------------------------------- -----------------------------------
        Agreement Section                     Existing Article 9                  Revised Article 9
        ------------------------------------- ----------------------------------- -----------------------------------
        3                                   ss. 9-109(3)                          Rev.ss.9-102(a)(34)
        ------------------------------------- ----------------------------------- -----------------------------------
        ------------------------------------- ----------------------------------- -----------------------------------
        9.2                                 ss. 9-207                             Rev.ss.9-207
        ------------------------------------- ----------------------------------- -----------------------------------
        ------------------------------------- ----------------------------------- -----------------------------------
        12                                  ss.ss.8-106 and 9-115 (1994)           Rev.ss.ss.8-106 and 9-106
        ------------------------------------- ----------------------------------- -----------------------------------
        ------------------------------------- ----------------------------------- -----------------------------------
        17                                  ss. 9-504(1)(c)                       Rev.ss.ss.9-608(a)(1)(C) and
                                                                                  9-615(a)(3)
        ------------------------------------- ----------------------------------- -----------------------------------
@@
</TABLE>

                  21.5. Savings Clause. Nothing contained in this ss.21 shall be
         construed to narrow the scope of the Agent's  security  interest in any
         of the Collateral or the perfection or priority thereof or to impair or
         otherwise  limit any of the rights,  powers,  privileges or remedies of
         the Agent or any Bank  hereunder  except  (and then only to the extent)
         mandated by Revised Article 9 to the extent then applicable.

         22.  Miscellaneous.  The headings of each section of this Agreement are
for convenience only and shall not define or limit the provisions thereof.  This
Agreement and all rights and obligations hereunder shall be binding upon each of
the Companies and its respective  successors and assigns, and shall inure to the
benefit of the Agent, the Banks and their respective  successors and assigns. If
any  term  of  this  Agreement   shall  be  held  to  be  invalid,   illegal  or
unenforceable,  the  validity  of all  other  terms  hereof  shall  in no way be
affected thereby, and this Agreement shall be construed and be enforceable as if
such invalid,  illegal or unenforceable term had not been included herein.  Each
of the Companies acknowledges receipt of a copy of this Agreement.


<PAGE>


         IN  WITNESS  WHEREOF,  intending  to be  legally  bound,  each  of  the
Companies  has caused this  Agreement  to be duly  executed as of the date first
above written.

                                 IONICS, INCORPORATED

                                 By: /s/ Daniel M. Kuzmak
                                    ---------------------------------
                                    Name: Daniel M. Kuzmak
                                    Title:    Vice President, Finance and
                                              Chief Financial officer

                                    Address:
                                    65 Grove Street
                                    Watertown, MA  02472



                                 AQUA COOL ENTERPRISES, INC.

                                 By: /s/ Theodore G. Papastavros
                                    -----------------------------------
                                    Name: Theodore G. Papastavros
                                    Title:   Treasurer

                                    Address:
                                    65 Grove Street
                                    Watertown, MA  02472



                                 AQUA DESIGN, INC.

                                 By: /s/ Edward J. Cichon
                                    --------------------------------------
                                     Name: Edward J. Cichon
                                     Title:   President

                                     Address:
                                     4710 Eisenhower Boulevard
                                     Tampa, FL  33634



                                 FIDELITY PUREWATER, INC.

                                 By: /s/ Anthony DiPaola
                                    ---------------------------------------
                                     Name: Anthony DiPaloa
                                     Title:   Treasurer

                                     Address:
                                     5900 Silver Creek Valley Road
                                     San Jose, CA 95138-1009


                                 FIDELITY WATER SYSTEMS, INC.

                                 By: /s/ Anthony DiPaola
                                    -----------------------------------------
                                     Name: Anthony DiPaola
                                     Title:   Treasurer

                                     Address:
                                     5900 Silver Creek Valley Road
                                     San Jose, CA 95138-1009


                                 IONICS KOREA, INC.

                                 By: /s/ Arthur L. Goldstein
                                    ----------------------------------------
                                     Name: Arthur L. Goldstein
                                     Title:   President

                                     Address:
                                     Rm. 516, Sung Gee Officetel
                                     702-13 Yonksam-Dong
                                     Kangnam-Ku, Seoul 135-080, Korea


<PAGE>


                                     IONICS LIFE SCIENCES, INC.

                                     By: /s/ Theodore G. Papastavros
                                        -----------------------------------
                                         Name: Theodore G. Papastavros
                                         Title:    Treasurer

                                         Address:
                                         113 Dickinson Road, Suite A-5
                                         North Wales, PA 19454-2534


                                     IONICS ULTRAPURE WATER CORPORATION

                                     By: /s/ Stephen Korn
                                        ---------------------------------------
                                         Name: Stephen Korn
                                         Title:   Secretary

                                         Address:
                                         5900 Silver Creek Valley Road
                                         San Jose, CA 95138-1009


                                     RESOURCES CONSERVATION CO. INTERNATIONAL

                                     By: /s/ Stephen Korn
                                        ---------------------------------------
                                        Name: Stephen Korn
                                        Title:   Secretary

                                        Address:
                                        3006 Northrup Way
                                        Bellevue, WA 98004-1407


                                     SEPARATION TECHNOLOGY INC.

                                     By: /s/ Ark W. Pang
                                        ---------------------------------------
                                        Name: Ark W. Pang
                                        Title:   President

                                        Address:
                                        1983 Sloan Place
                                        St. Paul, MN  55117




                                     SIEVERS INSTRUMENTS, INC.

                                     By: /s/ Stephen Korn
                                        ---------------------------------------
                                         Name: Stephen Korn
                                         Title:   Secretary

                                         Address:
                                         6060 Spine Road
                                         Boulder, CO  80301


Accepted:

FLEET NATIONAL BANK, as Agent

By: /s/ John C. Dunne
   --------------------------
      John C. Dunne,
      Senior Vice President

<PAGE>

                          CERTIFICATE OF ACKNOWLEDGMENT

COMMONWEALTH OF MASSACHUSETTS                                          )
                                                                       )  ss.
COUNTY OF SUFFOLK                                                      )

         Before  me,  the  undersigned,  a Notary  Public in and for the  county
aforesaid,  on this 1st day of March, 2001, personally appeared Daniel M. Kuzmak
to me known personally,  and who, being by me duly sworn,  deposes and says that
he is the Vice  President,  Finance  and  Chief  Financial  Officer  of  Ionics,
Incorporated,  and that said  instrument was signed and sealed on behalf of said
corporation  by authority of its Board of  Directors,  and said Daniel M. Kuzmak
acknowledged said instrument to be the free act and deed of said corporation.

                                   /s/ Stephen Korn
                                   -------------------------------------
                                      Notary Public
                                      My commission expires:  9/9/2005



                          CERTIFICATE OF ACKNOWLEDGMENT

COMMONWEALTH OF MASSACHUSETTS                                          )
                                                                       )  ss.
COUNTY OF SUFFOLK                                                      )

         Before  me,  the  undersigned,  a Notary  Public in and for the  county
aforesaid,  on this 1st day of March,  2001,  personally  appeared  Theodore  G.
Papastavros to me known personally, and who, being by me duly sworn, deposes and
says that he is the  Treasurer  of Aqua Cool  Enterprises,  Inc.,  and that said
instrument  was signed and sealed on behalf of said  corporation by authority of
its Board of  Directors,  and said  Theodore G.  Papastavros  acknowledged  said
instrument to be the free act and deed of said corporation.

                                      /s/ Stephen Korn
                                      -------------------------------------
                                         Notary Public
                                         My commission expires:  9/9/2005


<PAGE>

                          CERTIFICATE OF ACKNOWLEDGMENT

COMMONWEALTH OF MASSACHUSETTS                                          )
                                                                       )  ss.
COUNTY OF SUFFOLK                                                      )

         Before  me,  the  undersigned,  a Notary  Public in and for the  county
aforesaid,  on this 1st day of March, 2001, personally appeared Edward J. Cichon
to me known personally,  and who, being by me duly sworn,  deposes and says that
he is the President of Aqua Design,  Inc.,  and that said  instrument was signed
and sealed on behalf of said corporation by authority of its Board of Directors,
and said Edward J. Cichon  acknowledged  said  instrument to be the free act and
deed of said corporation.

                                      /s/ Stephen Korn
                                      -------------------------------------
                                         Notary Public
                                         My commission expires:  9/9/2005



                          CERTIFICATE OF ACKNOWLEDGMENT

COMMONWEALTH OF MASSACHUSETTS                                          )
                                                                       )  ss.
COUNTY OF SUFFOLK                                                      )

         Before  me,  the  undersigned,  a Notary  Public in and for the  county
aforesaid,  on this 1st day of March, 2001,  personally appeared Anthony DiPaola
to me known personally,  and who, being by me duly sworn,  deposes and says that
he is the Treasurer of Fidelity  Purewater,  Inc., and that said  instrument was
signed and sealed on behalf of said  corporation  by  authority  of its Board of
Directors,  and said Anthony DiPaola acknowledged said instrument to be the free
act and deed of said corporation.

                                      /s/ Stephen Korn
                                      -------------------------------------
                                         Notary Public
                                         My commission expires:  9/9/2005


<PAGE>

                          CERTIFICATE OF ACKNOWLEDGMENT

COMMONWEALTH OF MASSACHUSETTS                                          )
                                                                       )  ss.
COUNTY OF SUFFOLK                                                      )

         Before  me,  the  undersigned,  a Notary  Public in and for the  county
aforesaid,  on this 1st day of March, 2001,  personally appeared Anthony DiPaola
to me known personally,  and who, being by me duly sworn,  deposes and says that
he is the Treasurer of Fidelity  Water Systems,  Inc., and that said  instrument
was signed and sealed on behalf of said corporation by authority of its Board of
Directors,  and said Anthony DiPaola acknowledged said instrument to be the free
act and deed of said corporation.

                                        /s/ Stephen Korn
                                        -------------------------------------
                                            Notary Public
                                            My commission expires:  9/9/2005



                          CERTIFICATE OF ACKNOWLEDGMENT

COMMONWEALTH OF MASSACHUSETTS                                          )
                                                                       )  ss.
COUNTY OF SUFFOLK                                                      )

         Before  me,  the  undersigned,  a Notary  Public in and for the  county
aforesaid,  on this  1st day of  March,  2001,  personally  appeared  Arthur  L.
Goldstein to me known personally,  and who, being by me duly sworn,  deposes and
says that he is the President of Ionics Korea,  Inc.,  and that said  instrument
was signed and sealed on behalf of said corporation by authority of its Board of
Directors,  and said Arthur L. Goldstein  acknowledged said instrument to be the
free act and deed of said corporation.

                                         /s/ Stephen Korn
                                         -------------------------------------
                                            Notary Public
                                            My commission expires:  9/9/2005


<PAGE>

                          CERTIFICATE OF ACKNOWLEDGMENT

COMMONWEALTH OF MASSACHUSETTS                                          )
                                                                       )  ss.
COUNTY OF SUFFOLK                                                      )

         Before  me,  the  undersigned,  a Notary  Public in and for the  county
aforesaid,  on this 1st day of March,  2001,  personally  appeared  Theodore  G.
Papastavros to me known personally, and who, being by me duly sworn, deposes and
says that he is the  Treasurer  of Ionics  Life  Sciences,  Inc.,  and that said
instrument  was signed and sealed on behalf of said  corporation by authority of
its Board of  Directors,  and said  Theodore G.  Papastavros  acknowledged  said
instrument to be the free act and deed of said corporation.

                                         /s/ Stephen Korn
                                         -------------------------------------
                                             Notary Public
                                             My commission expires:  9/9/2005



                          CERTIFICATE OF ACKNOWLEDGMENT

COMMONWEALTH OF MASSACHUSETTS                                          )
                                                                       )  ss.
COUNTY OF SUFFOLK                                                      )

         Before  me,  the  undersigned,  a Notary  Public in and for the  county
aforesaid,  on this 1st day of March, 2001,  personally appeared Stephen Korn to
me known personally,  and who, being by me duly sworn,  deposes and says that he
is the Secretary of Ionics Ultrapure Water Corporation, and that said instrument
was signed and sealed on behalf of said corporation by authority of its Board of
Directors, and said Stephen Korn acknowledged said instrument to be the free act
and deed of said corporation.


                             /s/ S. Peter Mosgofian
                             ---------------------------------------
                                 Notary Public
                                 My commission expires:  May 7, 2004


<PAGE>

                          CERTIFICATE OF ACKNOWLEDGMENT

COMMONWEALTH OF MASSACHUSETTS                                          )
                                                                       )  ss.
COUNTY OF SUFFOLK                                                      )

         Before  me,  the  undersigned,  a Notary  Public in and for the  county
aforesaid,  on this 1st day of March, 2001,  personally appeared Stephen Korn to
me known personally,  and who, being by me duly sworn,  deposes and says that he
is the  Secretary of Resources  Conservation  Co.  International,  and that said
instrument  was signed and sealed on behalf of said  corporation by authority of
its Board of Directors, and said Stephen Korn acknowledged said instrument to be
the free act and deed of said corporation.

                             /s/ S. Peter Mosgofian
                             ---------------------------------------
                                 Notary Public
                                 My commission expires:  May 7, 2004



                          CERTIFICATE OF ACKNOWLEDGMENT

COMMONWEALTH OF MASSACHUSETTS                                          )
                                                                       )  ss.
COUNTY OF SUFFOLK                                                      )

         Before  me,  the  undersigned,  a Notary  Public in and for the  county
aforesaid, on this 1st day of March, 2001, personally appeared Ark W. Pang to me
known personally,  and who, being by me duly sworn,  deposes and says that he is
the President of Separation Technology Inc., and that said instrument was signed
and sealed on behalf of said corporation by authority of its Board of Directors,
and said Ark W. Pang acknowledged said instrument to be the free act and deed of
said corporation.

                                     /s/ Stephen Korn
                                     ---------------------------------------
                                         Notary Public
                                         My commission expires:  9/9/2005


<PAGE>


                          CERTIFICATE OF ACKNOWLEDGMENT

COMMONWEALTH OF MASSACHUSETTS                                          )
                                                                       )  ss.
COUNTY OF SUFFOLK                                                      )

         Before  me,  the  undersigned,  a Notary  Public in and for the  county
aforesaid,  on this 1st day of March, 2001,  personally appeared Stephen Korn to
me known personally,  and who, being by me duly sworn,  deposes and says that he
is the Secretary of Sievers  Instruments,  Inc.,  and that said  instrument  was
signed and sealed on behalf of said  corporation  by  authority  of its Board of
Directors, and said Stephen Korn acknowledged said instrument to be the free act
and deed of said corporation.

                                     /s/ S. Peter Mosgofian
                                     ---------------------------------------
                                         Notary Public
                                         My commission expires:  May 7, 2004

<PAGE>

                                 Exhibit 10.3(3)

                                ESCROW AGREEMENT

         THIS ESCROW AGREEMENT, entered into as of the 1st day of March, 2001 by
and among Ionics,  Incorporated,  a Massachusetts  corporation  (the "Company"),
Fleet  National Bank as agent (the "Agent") for itself and such other  financial
institutions that are or may become parties to that certain Credit Agreement (as
defined  below)  from time to time in  accordance  with the  provisions  thereof
(collectively  referred  to  herein  as the  "Banks")  and  Hutchins,  Wheeler &
Dittmar, A Professional Corporation, as the escrow agent (the "Escrow Agent").

         WHEREAS,  the  Company,  the Banks and the Agent  have  entered  into a
Second Amended and Restated  Revolving Credit Agreement (as amended from time to
time and in effect, the "Credit Agreement"), dated as of July 28, 2000, pursuant
to which the Banks have agreed to make certain loans to the Company;

         WHEREAS, the Company and its domestic Subsidiaries have agreed to grant
to Agent on behalf of the Banks  and the  Agent a  security  interest  in all of
their personal  property  subject to and in accordance with the terms of ss.6 of
the Credit  Agreement and the Security  Agreement,  dated as of the date hereof,
among the  Company,  its  domestic  Subsidiaries  and the Agent  (the  "Security
Agreement");

         WHEREAS, pursuant to the terms of the Credit Agreement, the Company and
each of its domestic Subsidiaries, shall execute and deliver to the Escrow Agent
on or  prior  to  March  1,  2001,  the  Security  Agreement  and the  Financing
Statements  to be filed in each of the  jurisdictions  specified  on  Schedule I
hereto (collectively, the "Security Documents"); and

         WHEREAS,  pursuant  to the terms of this  Agreement,  the Escrow  Agent
shall  deliver  to  Agent or the  Company,  as the  case  may be,  the  Security
Documents upon the conditions and at such times as provided for herein;

         NOW,  THEREFORE,  in consideration of the foregoing,  and of the mutual
covenants and agreements  hereinafter  set forth,  the parties,  intending to be
bound legally, agree as follows:

          ss.1.  Definitions.  All capitalized  terms used in this Agreement and
     not otherwise defined herein shall have the respective meanings
     ascribed to them in the Credit Agreement.

       ss.2.      Security Documents.
                  -------- ---------

                  (a)  Delivery to Escrow  Agent.  On or prior to March 1, 2001,
the Company shall, and shall cause each of its domestic Subsidiaries to, execute
and deliver to the Escrow Agent the Security Documents to which they are a party
to be held in escrow by the Escrow Agent.
<PAGE>

                  (b)  Receipt  by  Escrow   Agent.   The  Escrow  Agent  hereby
acknowledges  receipt of and accepts the Security Documents in escrow and agrees
to hold and keep same in accordance with the terms and conditions hereof, and to
deliver the Security Documents upon the occurrence of the conditions hereinafter
set forth.

                  (c)  Delivery to Agent.  The Escrow  Agent  shall  deliver the
Security  Documents to the Agent immediately upon receipt by the Escrow Agent of
a  written  notice  from the Agent  (with a copy to the  Company),  including  a
certificate from the Agent, stating that an Event of Default has occurred and is
continuing (hereinafter referred to as a "Triggering Event").

                  (d) Delivery to Company. On May 16, 2001, unless prior to such
date the Escrow Agent has received a written notice from the Agent in accordance
with ss.2(c)  above  stating that a Triggering  Event has  occurred,  the Escrow
Agent shall deliver the Security Documents to the Company.

         ss.3.1. Duties. The Escrow Agent undertakes to perform all duties which
are expressly set forth in this Agreement.

         ss.3.2. Expenses. If the Escrow Agent's duties and responsibilities are
increased beyond that contemplated  within this Agreement,  compensation will be
allowed as agreed  upon in writing by all of the parties  hereto.  Such fees and
expenses shall be borne by the Company.

         ss.3.3.  Indemnification.  The  Company  agrees to  indemnify  and hold
harmless the Escrow Agent, its officers,  partners, employees and agents against
any and all costs, losses, claims, damages,  liabilities and expenses (including
reasonable costs of investigation, court costs and attorney's fees) which may be
imposed upon the Escrow Agent in connection  with its  acceptance of appointment
as Escrow  Agent  hereunder  (except  those  arising  out of the Escrow  Agent's
failure to comply with the provisions of this Agreement or the gross  negligence
or willful  misconduct of the Escrow Agent),  including any  litigation  arising
from this Agreement or involving the subject  matter hereof,  and all such costs
and  expenses  shall be for the  account  of and  shall be borne and said by the
Company as a condition to termination of this Agreement.

         ss.3.4.  Dispute.  In the  event of any  disagreement  among any of the
parties to this Agreement, the Escrow Agent shall refuse to comply with any such
claims  or  demands  as long  as  such  disagreements  may  continue,  and in so
refusing,  the Escrow Agent shall make no delivery or other  disposition  of any
property  then held by it under this  Agreement and in so doing the Escrow Agent
may continue to refrain  from acting  until (a) the rights of adverse  claimants
shall have been finally  adjudicated in a court assuming and having jurisdiction
over the property involved herein or affected hereby and all appeal periods with
respect  thereto  have  expired  with no appeal  having been  taken,  or (b) all
differences shall have been settled by agreement and the Escrow Agent shall have
been notified in writing of such agreement  signed by the Company and the Agent.
In the  event of a final  adjudication  of the  rights  and  obligations  of the
parties by a court of competent jurisdiction, the Escrow Agent shall comply with
the instructions of such court. In the event differences between the Company and
the Agent shall be settled by agreement,  the Escrow Agent shall comply with the
instructions signed by the Company and the Agent.
<PAGE>

         ss.3.5.  Resignation.  The Escrow Agent reserves the right to resign as
Escrow Agent at any time,  provided  thirty (30) days' prior  written  notice is
given to the other parties hereto. The other parties hereto reserve the right to
remove the Escrow Agent at any time,  provided  thirty (30) days' prior  written
notice is given to the Escrow  Agent.  The Escrow  Agent  neither  approves  nor
disapproves of this transaction,  nor does it recommend for or against, nor does
it have an opinion as to the legality or validity of this transaction.

       ss.4.  Liabilities of Escrow Agent; Etc.
              ----------- -- ------ -----  ---

         4.1. Limitations. The Escrow Agent shall be liable only to accept, hold
and deliver the  Security  Documents  as may be delivered to the Escrow Agent in
accordance  with the  provisions of this  Agreement and any  amendments  hereto,
provided,  however,  that the Escrow  Agent shall not incur any  liability  with
respect to (a) any action  taken or omitted in good faith upon the advice of its
counsel  given  with  respect  to  any  questions  relating  to the  duties  and
responsibilities  of the Escrow  Agent under this  Agreement,  or (b) any action
taken or omitted in reliance upon any instrument  (including the execution,  the
identity or authority of any person executing such instrument,  its validity and
effectiveness,  and the truth and accuracy of any information contained therein)
which the Escrow Agent shall in good faith  believe to be genuine,  to have been
signed by a proper  person or persons and to conform to the  provisions  of this
Agreement.

         ss.4.2.  Collateral Agreements.  The Escrow Agent shall not be bound in
any way by any contract or agreement  between the other parties hereto,  whether
or not it has  knowledge  of any such  contract or  agreement or of its terms or
conditions.

         ss.4.3.   Escrow  Agent  as  Counsel  to  Company.   The  Agent  hereby
acknowledges  that (a) as of the date hereof the Escrow  Agent is counsel to the
Company  and (b) in the event of a dispute  between the Company and the Agent or
any of the Banks,  the Escrow  Agent in its  capacity  as counsel to the Company
shall not be prohibited  from  representing  the Company in connection with such
dispute.  Notwithstanding  the  foregoing,  the Escrow  Agent shall at all times
strictly comply with its obligations under this Agreement.

         ss.5.  Termination.  This Agreement  shall terminate on the earliest of
(a) the date the Escrow Agent  delivers  the Security  Documents to the Agent in
accordance with the terms of this Agreement and (b) the date on which the Escrow
Agent receives from the Agent and the Company a written notice stating that this
Agreement has been terminated. This Agreement shall not be otherwise terminated.


<PAGE>


       ss.6.  Other Provisions.
              ----- ----------

         6.1.  Notices.  All  notices  and  other  communications   required  or
permitted to be given under or by reason of this  Agreement  shall be in writing
and shall be deemed to have been duly given on the date of personal  delivery to
or on the date of receipt at the  addresses  set forth in this ss.6.1 or at such
other  address as may be  specified in writing by the party to whom notice is to
be given. If mailed by first-class,  postage prepaid,  registered  mail,  return
receipt requested, such written notices shall be deemed to have been received as
of  the  date  set  forth  on  the  return  receipt.   Notices,   demands,   and
communications  will, unless another address is specified in writing, be sent to
the persons and at the addresses indicated below:

         To Company:
         ----------

                  Ionics, Incorporated
                  65 Grove Street
                  Watertown, MA 02472
                  Attention:  General Counsel

         Copy      (which shall not constitute notice) to:

                  Hutchins, Wheeler & Dittmar, A Professional Corporation
                  101 Federal Street
                  Boston, Massachusetts  02110
                  Attention:  Jack H. Fainberg, Esq.

         To Agent:

                  Fleet National Bank
                  100 Federal Street
                  Boston, Massachusetts  02110
                  Attention:  John C. Dunne, Senior Vice President

         Copy      (which shall not constitute notice) to:

                  Bingham Dana LLP
                  150 Federal Street
                  Boston, Massachusetts  02110
                  Attention:  Linda J. Groves, Esq.

         To Escrow Agent:
         ---------------

                  Hutchins, Wheeler & Dittmar,A Professional Corporation
                  101 Federal St.
                  Boston, Massachusetts 02110
                  Attention:  Jack H. Fainberg, Esq.
<PAGE>

         6.2.  Benefit and Assignment.  This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns as permitted  hereunder.  No person or entity other than the parties
hereto is or shall be entitled to bring any action to enforce any  provision  of
this  Agreement  against  any of the  parties  hereto,  and  the  covenants  and
agreements set forth in this  Agreement  shall be solely for the benefit of, and
shall be enforceable only by, the parties hereto or their respective  successors
and assigns as permitted  hereunder.  No party to this Agreement may assign this
Agreement  or any rights  hereunder  without  the prior  written  consent of the
parties hereto.

         6.3. Entire  Agreement;  Amendment.  This Agreement,  together with the
Credit Agreement and the Security Agreement,  contains all the terms agreed upon
by the parties  with respect to the subject  matter  hereof and  supersedes  all
prior oral or written agreements,  commitments or understandings with respect to
such matters.  This Agreement may be amended only by a written instrument signed
by the party  against  whom  enforcement  or any waiver,  change,  modification,
extension or discharge is sought.

     6.4.  Headings.  The  headings  of the  sections  and  subsections  of this
Agreement are for purposes of reference  only and do not evidence the intentions
of the parties.

         6.5.  Governing Law. This Agreement shall be governed by, and construed
according to, the laws of The Commonwealth of  Massachusetts  (without regard to
the choice of law provisions thereof).

         6.6.  Counterparts.  This  Agreement  may be signed  upon any number of
counterparts  with the same effect as if the signatures on all  counterparts are
upon the same instrument.

               THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK


<PAGE>


         IN WITNESS  WHEREOF,  the  parties  hereto  have  executed  this ESCROW
AGREEMENT as of the date set forth above.

                                            IONICS, INCORPORATED

                                            By:/s/ Daniel M. Kuzmak
                                            ------------------------------------
                                            Name: Daniel M. Kuzmak
                                            Title:   Vice President, Finance and
                                                     Chief Financial Officer

                                            FLEET NATIONAL BANK, AS AGENT

                                            By:/s/ John C Dunne
                                            ------------------------------------
                                            John C. Dunne, Senior Vice President

                                            HUTCHINS, WHEELER & DITTMAR,
                                            as Escrow Agent

                                            By:/s/ Jack Fainberg
                                            ------------------------------------
                                            Name: Jack Fainberg
                                            Title: Shareholder
<PAGE>

                                 Exhibit 10.3(4)

               SEVENTH AMENDED AND RESTATED REVOLVING CREDIT NOTE

$80,000,000                                                       March 1, 2001


         FOR  VALUE  RECEIVED,   the  undersigned   IONICS,   INCORPORATED  (the
"Borrower"),  hereby  promises  to pay to the order of FLEET  NATIONAL  BANK,  a
national  banking  association  (the  "Bank") at the Agent's  head office at 100
Federal Street, Boston, Massachusetts, 02110.

                  (a) prior to or on December 31, 2004, the principal  amount of
         Eighty Million Dollars  ($80,000,000) or, if less, the aggregate unpaid
         principal  amount of the Revolving Credit Loans advanced by the Bank to
         the  Borrower  pursuant  to the  Second  Amended  and  Restated  Credit
         Agreement,  dated as of July 28,  2000 (as  amended  and in effect from
         time to time, the "Credit Agreement"), among the Borrower, the Bank and
         the other parties thereto;

               (b) the principal  outstanding hereunder from time to time at the
          times provided in the Credit Agreement; and

                  (c) interest on the principal balance hereof from time to time
         outstanding  from the Closing Date under the Credit  Agreement  through
         and  including  the  maturity  date hereof at the times and at the rate
         provided in the Credit Agreement.

         This Note is an amendment and  restatement in its entirety of the Sixth
Amended  and  Restated  Loan  Note  issued  by the  Borrower  to the Bank in the
original  principal  amount of  $70,000,000,  dated July 28, 2000 (the  "Amended
Note").  The Note is issued in  substitution  for,  and not in  payment  of, the
Amended Note.

         This  Note  evidences  borrowings  under  and has  been  issued  by the
Borrower in accordance with the terms of the Credit Agreement.  The Bank and any
holder hereof is entitled to the benefits of the Credit  Agreement and the other
Loan  Documents,  and may  enforce  the  agreements  of the  Borrower  contained
therein, and any holder hereof may exercise the respective remedies provided for
thereby or otherwise  available in respect  thereof,  all in accordance with the
respective  terms  thereof.  All  capitalized  terms  used in this  Note and not
otherwise  defined  herein shall have the same meanings  herein as in the Credit
Agreement.

         The  Borrower  irrevocably  authorizes  the Bank to make or cause to be
made,  at or about the time of the  drawdown  date of any Loan or at the time of
receipt of any payment of principal of this Note, an appropriate notation on the
grid  attached  to this Note,  or the  continuation  of such grid,  or any other
similar record,  including computer records,  reflecting the making of such Loan
or (as the case may be) the receipt of such payment.  The outstanding  amount of
the  Revolving  Credit Loans set forth on the grid attached to this Note, or the
continuation  of such grid,  or any other  similar  record,  including  computer
records, maintained by the Bank with respect to any Revolving Credit Loans shall
be prima facie evidence of the principal  amount thereof owing and unpaid to the
Bank, but the failure to record,  or any error in so recording,  any such amount
on any such grid,  continuation  or other  record  shall not limit or  otherwise
affect the obligation of the Borrower hereunder or under the Credit Agreement to
make payments of principal of and interest on this Note when due.
<PAGE>

         The Borrower has the right in certain  circumstances and the obligation
under certain other  circumstances  to prepay the whole or part of the principal
of this Note on the terms and conditions specified in the Credit Agreement.

         If any one or more of the Events of  Default  shall  occur,  the entire
unpaid  principal  amount of this Note and all of the  unpaid  interest  accrued
thereon  may become or be  declared  due and  payable in the manner and with the
effect provided in the Credit Agreement.

         No delay or  omission  on the part of the Bank or any holder  hereof in
exercising any right hereunder shall operate as a waiver of such right or of any
other rights of the Bank or such holder, nor shall any delay, omission or waiver
on any one  occasion be deemed a bar or waiver of the same or any other right on
any further occasion.

         The  Borrower  and every  endorser  and  guarantor  of this Note or the
obligation  represented hereby waives presentment,  demand,  notice, protest and
all other  demands  and notices in  connection  with the  delivery,  acceptance,
performance,  default or  enforcement of this Note, and assents to any extension
or  postponement  of the  time  of  payment  or  any  other  indulgence,  to any
substitution,  exchange or release of collateral  and to the addition or release
of any other party or person primarily or secondarily liable.

         THIS NOTE AND THE  OBLIGATIONS OF THE BORROWER  HEREUNDER SHALL FOR ALL
PURPOSES  BE  GOVERNED  BY AND  CONSTRUED  IN  ACCORDANCE  WITH  THE  LAW OF THE
COMMONWEALTH  OF  MASSACHUSETTS  (EXCLUDING THE LAWS  APPLICABLE TO CONFLICTS OR
CHOICE OF LAW).  THE BORROWER  AGREES THAT ANY SUIT FOR THE  ENFORCEMENT OF THIS
NOTE MAY BE BROUGHT IN THE COURTS OF THE  COMMONWEALTH OF  MASSACHUSETTS  OR ANY
FEDERAL COURT SITTING THEREIN AND THE CONSENT TO THE  NONEXCLUSIVE  JURISDICTION
OF SUCH  COURT AND THE  SERVICE  OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE
BORROWER BY MAIL AT THE ADDRESS SPECIFIED IN ss.20 OF THE CREDIT AGREEMENT.  THE
BORROWER  HEREBY WAIVES ANY OBJECTION  THAT IT MAY NOW OR HEREAFTER  HAVE TO THE
VENUE OF ANY SUCH  SUIT OR ANY SUCH  COURT OR THAT SUCH  SUIT IS  BROUGHT  IN AN
INCONVENIENT COURT.

         This Note shall be deemed to take effect as a sealed  instrument  under
the laws of the Commonwealth of Massachusetts

         IN WITNESS  WHEREOF,  the undersigned has caused this Note to be signed
in its corporate name and its corporate seal to be impressed thereon by its duly
authorized officer as of the day and year first above written.

[Corporate Seal]

                                     IONICS, INCORPORATED

                                     By:/s/ Daniel M. Kuzmak
                                     ---------------------------------
                                     Name: Daniel M. Kuzmak
                                     Title:Vice President, Finance and
                                           Chief Financial Officer


<PAGE>

<TABLE>
<CAPTION>


------------------- -------------------- ------------------------ -------------------- --------------------
<S>                 <C>                  <C>                      <C>                  <C>
                                                Amount of             Balance of
                          Amount             Principal Paid            Principal            Notation
       Date               of Loan              or Prepaid               Unpaid              Made By:
------------------- -------------------- ------------------------ -------------------- --------------------

------------------- -------------------- ------------------------ -------------------- --------------------
------------------- -------------------- ------------------------ -------------------- --------------------

------------------- -------------------- ------------------------ -------------------- --------------------
------------------- -------------------- ------------------------ -------------------- --------------------
</TABLE>

<PAGE>
                                 EXHIBIT 10.13

                                 LOAN AGREEMENT

         THIS LOAN  AGREEMENT,  dated as of October 25, 2000, is entered into by
and between HAFEEZ KARAMATH ENGINEERING SERVICES LIMITED ("HKES"), a corporation
duly  organized and existing under the laws of Trinidad,  West Indies,  with its
principal place of business at 56 Cyrus Trace, El Sorocco  Extension,  San Juan,
Trinidad,  W.I.  executed in trust for an affiliate of HKES,  organized or to be
organized  under the laws of Saint  Lucia,  and which will assume all rights and
obligations of HKES hereunder,  as if it were the original named party hereto in
full substitution for HKES (the  "Borrower"),  with the agreement by the parties
that until the affiliate  assumes all rights and  obligations of HKES hereunder,
HKES will continue to be liable for the  performance  of all  obligations of the
Borrower  under this  Agreement  and entitled to the benefits of this  Agreement
(the  "Borrower"),  and IONICS,  INCORPORATED,  a corporation duly organized and
existing under the laws of the Commonwealth of  Massachusetts,  United States of
America,  with its principal  place of business at 65 Grove  Street,  Watertown,
Massachusetts,  U.S.A. ("Ionics"), executed in trust for an affiliate of Ionics,
organized  or to be  organized  under the laws of Saint  Lucia,  and which  will
assume  all  rights  and  obligations  of  Ionics  hereunder,  as if it were the
original named party hereto in full substitution for Ionics (the "Lender"), with
the  agreement  by the parties that until the  affiliate  assumes all rights and
obligations  of Ionics  hereunder,  Ionics  will  continue  to be liable for the
performance  of all  obligations of the Lender under this Agreement and entitled
to the benefits of this Agreement.

                                   WITNESSETH:

         WHEREAS,  Borrower, Lender and The Desalination Company of Trinidad and
Tobago Limited,  a limited  liability  company duly organized and existing under
the laws of Trinidad,  West Indies,  with its principal  place of business at 56
Cyrus Trace, El Sorocco Extension, San Juan, Trinidad, W.I. ("Desalcott"),  have
entered into a Shareholder's  Agreement  dated May 12, 2000 (the  "Shareholders'
Agreement"),  providing,  among other things,  for the purchase and ownership by
Lender and Borrower of shares in Desalcott;

         WHEREAS, in connection with the Shareholders'  Agreement,  the Borrower
has  requested  that the Lender make a term loan to the Borrower in the original
principal amount of U.S.$10,000,000.00 for the purpose of financing the purchase
by the Borrower of 200 ordinary shares in Desalcott; and

         WHEREAS, the Lender is willing to make the term loan to the Borrower in
the  original  principal  amount of  U.S.$10,000,000.00  for such purpose on the
terms and subject to the conditions of this Agreement.

         NOW,  THEREFORE,  in consideration of the premises and covenants herein
contained, the parties hereto agree as follows:
<PAGE>

              SECTION 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION

     1.01.  Defined Terms.  The following  terms (except as otherwise  expressly
provided  or unless the context  otherwise  requires)  for all  purposes of this
Agreement shall have the respective meanings hereinafter specified:

         "Affiliate" shall mean, a body corporate,  limited  liability  company,
limited  partnership  or other legal entity which is a subsidiary  of another or
both are  subsidiaries  of the same body corporate or each of them is controlled
by the same person. For this purpose,  "control" or "controlled" has the meaning
described in Section 4 of the  Companies  Act of 1995,  as in effect on the date
this Agreement is executed.

         "Agreement"  shall mean this Loan  Agreement,  including  any Schedule,
Annex,  Exhibit  or any  other  attachment  hereto,  as  amended,  supplemented,
extended or otherwise modified from time to time.

     "Alternate  Rate" shall mean the rate per annum equal to the Base Rate plus
two percent (2.00%) per annum.

         "Applicable Margin" shall mean two percent (2.00%) per annum.

         "Base Rate" shall mean,  as of the date of any  determination  thereof,
the interest  rate  announced by Citibank,  N.A.  from time to time as its prime
rate, which prime rate may be adjusted on a daily basis. Accordingly, any change
in the Base Rate due to a change in the prime rate shall be  effective as of the
date of any change in the prime rate.

         "Borrower's Country" shall mean the Republic of Trinidad and Tobago.

         "Borrower  Documents"  shall mean this Agreement,  the Pledge Agreement
and all other  documents  and  instruments  to be executed and  delivered by the
Borrower under this Agreement.

         "Borrower's  Shares"  shall mean all of the shares owned at any time by
Borrower in Desalcott.

         "Business  Day"  shall  mean any day on which  commercial  banks in New
York,  New York,  and Port of Spain,  Trinidad are open for domestic and foreign
exchange business.

         "Closing Date" shall mean the date on which occurs the  "Capitalization
Date" (as such term is defined in the  Shareholders'  Agreement) and closing for
the purchase of shares under the  Shareholders'  Agreement and each of the other
conditions  precedent to the effectiveness of this Agreement shall have been met
or performed to the satisfaction of the Lender.

         "Collateral"   includes  the  two  hundred  (200)  ordinary  Shares  in
Desalcott which will be purchased by the Borrower with the proceeds of the Loan,
plus all dividends and other  distributions  paid or payable with respect to the
Pledged  Shares,  subject to the  provisions  of clause 2.06 of this  Agreement,
together with all other  property and assets now or from time to time  hereafter
pledged  to  secure  the Loan or any other  obligation  or  indebtedness  of the
Borrower to the Lender.
<PAGE>

         "Default"  shall  mean an event  which with the giving of notice or the
lapse of time, or both, would become an Event of Default.

         "Default Rate" shall mean, as of the date of and determination thereof,
the rate per annum equal to the sum of (x) the rate then  applicable to the Loan
and (y) four percent (4.00%) per annum, but in no event in excess of the maximum
rate permitted by applicable law.

         "Determination  Date" has the meaning given to it in the  definition of
Libo Rate.

         "Dollars" or "$" shall mean the lawful currency of the United States of
America.

         "Eurodollar Rate" shall mean, at the time any determination  thereof is
to be made,  an interest  rate per annum  (computed on the actual number of days
elapsed over a 360-day year equal to the sum of (i) the Applicable Margin,  plus
(ii) the Libo Rate.

         "Event of Default"  shall have the  meaning  set forth in Section  7.01
hereof.

         "First  Priority  Security  Interest"  shall  mean any  first  priority
security  interest in  Borrower's  Shares,  whether now existing or  hereinafter
arising,  granted by the Borrower to any of (i) Republic Bank Limited,  Republic
Finance  and  Merchant  Bank  Limited,  or  the  other  financial   institutions
(collectively,  the "Bank") which become lenders  pursuant to Clause 29.2 of the
Project Loan Agreement  dated July 13, 2000 between  Desalcott and the Bank (the
"Project Loan  Agreement"),  pursuant to a charge of shares agreement entered or
to be  entered  into among  Pledgor,  Pledgee,  Desalcott  and the Bank (ii) any
bridge,  construction or short-term lenders providing  financing for the design,
engineering,   construction  and  operation  of  the  desalination  plant  being
constructed  by Desalcott  in Point Lisas,  Republic of Trinidad and Tobago (the
"Project");  and (iii) the Overseas Private Investment  Corporation and/or other
permanent project finance lender providing financing for the Project.

         "Governmental  Authority" shall mean, as to any Person,  any government
(or any political subdivision or jurisdiction thereof), court, bureau, agency or
other governmental authority having jurisdiction over such Person, or any of its
business, operations or properties.

         "Guaranty" shall mean, as to any Person, all liabilities or obligations
of such Person in respect of any  Indebtedness  or other  obligations  of others
guaranteed,  directly or indirectly,  in any manner by such Person, or in effect
guaranteed,  directly  or  indirectly,  by such  Person  through  an  agreement,
contingent or otherwise,  to purchase such  Indebtedness  or  obligation,  or to
purchase or sell property,  or to purchase or sell  services,  primarily for the
purpose  of  enabling  the  debtor  to  make  payment  of such  Indebtedness  or
obligation or to assure the owner of such  Indebtedness  or  obligation  against
loss, or to supply funds to or in any manner invest in the debtor, or otherwise.
<PAGE>

         "Indebtedness"  of any  Person  shall  mean  (a) all  indebtedness  for
borrowed money or for the deferred  purchase  price of any property  (other than
accounts  payable to trade  creditors  under  customary  trade credit  terms) or
services  for which the  Person is  liable as  principal,  (b) all  indebtedness
(excluding  unaccrued  finance  charges)  secured by a Lien on property owned or
being purchased by the Person,  whether or not such indebtedness shall have been
assumed  by  the  Person,  (c)  all  Capitalized  Lease  Obligations  (excluding
unaccrued  finance  charges)  of  the  Person,  (d)  any  arrangement  (commonly
described as a sale-and-leaseback transaction) with any financial institution or
other  lender or  investor  providing  for the leasing to the Person of property
which at the time has been or is to be sold or  transferred by the Person to the
lender or investor,  or which has been or is being  acquired from another Person
by the lender or investor for the purpose of leasing the property to the Person,
(e) all  obligations of  partnerships  or joint ventures in respect of which the
Person is  primarily  or  secondarily  liable as a partner or joint  venturer or
otherwise  (provided that in any event for purposes of determining the amount of
the Indebtedness, the full amount of such obligations,  without giving effect to
the  contingent   liability  or  contributions  of  other  participants  in  the
partnership or joint venture,  shall be included),  (f) all redeemable preferred
stock of such Person  (valued at the  greater of its  voluntary  or  involuntary
liquidation  preference plus accrued and unpaid dividends),  (g) all obligations
of such Person in respect of letters of credit,  bankers' acceptances or similar
obligations  issued or  created  for the  account  of such  Person,  and (h) all
liabilities  of such  Person in  respect of foreign  currency  or other  hedging
arrangements and in respect of interest rate protection or hedging  arrangements
entered into by such Person to fix the floating  interest rate,  float the fixed
interest  rate or  otherwise  cap or limit the interest  rate,  exposure of such
Person.

         "Interest Payment Date" shall mean the date which is twenty-four months
after the Closing Date and the same day of each sixth (6th) month thereafter and
at maturity;  provided that if any such day is not a Business Day, such Interest
Payment Date will be the immediately following Business Day.

         "Investments"  shall mean,  with respect to any Person,  all  advances,
loans or extensions of credit to any other Person,  all purchases or commitments
to purchase any stock, bonds, notes, debentures or other securities of any other
Person, and any other investment in any other Person,  including partnerships or
joint ventures,  whether by capital  contribution or otherwise,  the Guaranty of
any  Indebtedness of any other Person or the  subordination of any claim against
any other Person to other Indebtedness of such Person.

         "Lender's  Office"  shall  mean  Lender's  office  located  at 65 Grove
Street, Watertown, MA 02472-2882.

         "Libo Rate" shall mean,  as of the date of any  determination  thereof,
the rate of interest equal to the six (6) month London interbank offered rate as
published in the "Money Rates" section of The Wall Street Journal (or such other
periodical  or service  reasonably  selected by the Lender in the event that The
Wall Street Journal is no longer  published or no longer publishes six (6) month
Libo  Rates) on the date  that is two (2)  Business  Days  prior to such date of
determination.  The Libo Rate shall be  determined as of the Closing Date and as
of the same day of each sixth  (6th)  month  thereafter  (each such date being a
"Determination  Date"),  with any  change  in the Libo Rate  resulting  from any
change in such published rate to be effective as of the applicable Determination
Date for which such determination is being made.
<PAGE>

         "Lien" shall mean a mortgage,  pledge, lien, security interest or other
charge  or  encumbrance  or any  segregation  of  assets  or  revenues  or other
preferential  arrangement  (whether  or not  constituting  a security  interest)
whether  voluntary or  involuntary,  whether  granted by  agreement,  statute or
otherwise,  with respect to any present or future  assets,  including  fixtures,
revenues  or rights or the  receipt of income of the Person  referred  to in the
context in which the term is used.

         "Loan"  shall have the meaning set forth in Section  2.02  hereof,  or,
where the  context so requires or permits,  the  outstanding  principal  balance
thereof.

         "Maturity  Date"  shall mean the date which is one  hundred  twenty six
(126) months following the Closing Date, or, if such date in not a Business Day,
on the immediately following Business Day.

         "Other Taxes" shall have the meaning set forth in Section 4.01.

         "Principal  Payment  Date" shall mean the date which is forty-two  (42)
months  after  the  Closing  Date,  and the same  day of each  sixth  (6)  month
thereafter,  provided that if any such day is not a Business Day, such Principal
Payment Date will be the immediately following Business Day.

         "Person"  shall mean any natural  person,  corporation,  unincorporated
organization,  trust, joint-stock company, joint venture, association,  company,
partnership  or  government,  or any  agency  or  political  subdivision  of any
government.

         "Pledge  Agreement" shall mean that certain Pledge Agreement,  dated as
of the Closing  Date,  from the  Borrower  in favor of the  Lender,  in form and
substance satisfactory to the Lender and the Lender's counsel, together with all
modifications, amendments, supplements and extensions thereof.

         "Pledged  Shares" shall mean the two hundred (200)  ordinary  shares in
Desalcott which will be purchased by Borrower with the proceeds of the Loan.

         "Project Loan  Agreement" has the meaning given to it in the definition
of First Priority Security Interest.

         "Subsidiary"  shall  mean any  Person  in which the  Borrower  may own,
directly  or  indirectly,  an equity  interest  of more  than 50%,  or which may
effectively be controlled by the Borrower, during the term of this Agreement, as
well as all  Subsidiaries  and other  Persons from time to time  included in the
consolidated financial statements of the Borrower.  For this purpose,  "control"
or "controlled"  has the meaning  described in Section 4 of the Companies Act of
1995, as in effect on the date this Agreement is executed.
<PAGE>

         "TT  Dollars" or "TT$" shall mean  lawful  currency of the  Republic of
Trinidad and Tobago.

         "Taxes" shall have the meaning set forth in Section 4.01.

         "Transaction Documents" shall mean the Borrower Documents and all other
documents,  statements  and opinions now or at any time  hereafter  executed and
delivered  in  conjunction  herewith  or  therewith,  and all  other  documents,
statements and opinions  described in the Closing  Document List attached hereto
as Exhibit C.

         "U.S." or "United States" shall mean the United States of America.

          "U.S.  Dollars",  or "U.S.$"  shall mean the  lawful  currency  of the
          United States of America.

         1.02.  Principles of Construction.
                --------------------------

                  (a)  The  words  "herein",   "hereof",   "hereby",   "hereto",
"hereunder"  and words of similar  import refer to this Agreement as a whole and
not to any particular article,  section,  paragraph or other subdivision of this
Agreement.

                  (b) The meanings  set forth for defined  terms in Section 1.01
of this  Agreement  shall be equally  applicable to both the singular and plural
forms of the defined terms.

                  (c) The headings of the sections  and  subsections  herein are
for  convenience  only and shall not affect the meaning or  construction  of any
provision of this Agreement.

                  (d)  Unless  specified  otherwise,  all  references  to  "this
Agreement" and to Sections,  Annexes,  Exhibits,  and Schedules are to Sections,
Annexes,  Exhibits, and Schedules of this Agreement, as the same may be amended,
modified or supplemented from time to time.

                  (e) All  capitalized  terms  used  herein  and  not  otherwise
defined herein will have the meaning assigned to them in the Pledge Agreement.


<PAGE>

                               SECTION 2. THE LOAN

         2.01.  Availability.  Subject  to the  terms  and  conditions  provided
herein,  the Lender agrees,  on the terms, and subject to the conditions of this
Agreement,  to make a term loan to or for the account of the Borrower to be paid
to Desalcott,  on behalf of the Borrower,  in the original  principal  amount of
U.S.$10,000,000.00 (the "Loan") on the Closing Date. Notwithstanding, the Lender
may make  advances  on account of the Loan to Borrower  (to be paid  directly to
Desalcott on behalf of the  Borrower)  prior to the Closing  Date,  all of which
advances  will be  governed  by the  terms of this  Agreement,  except  that for
purposes of determining  the interest rate to govern the advance,  the Libo Rate
as in effect on the date the advance is made shall be used, and  notwithstanding
any references to Lender's  rights being tied to the Closing Date as provided in
this  Agreement,  Lender shall be entitled to all rights of this  Agreement with
respect to any advance made prior to the Closing Date as of the date the advance
is made.

          2.02.  Purpose.  The  entire  proceeds  of the  Loan  shall be used by
     Desalcott,  on behalf of the Borrower,  solely for the purpose of financing
     the Borrower's  purchase from Desalcott of two hundred  ordinary  shares of
     Desalcott.

          2.03.  Loan.  The Loan shall be evidenced by, and repaid with interest
     in accordance with the provisions of this Agreement.

         2.04. Principal  Repayment.  The Borrower shall repay to the Lender the
aggregate principal amount of the Loan in fourteen (14) consecutive installments
as follows: in thirteen (13) equal semi-annual payments of U.S.$714,285.71 each,
commencing  on the date which is forty-two  (42) months after the Closing  Date,
and  continuing  semi-annually  on the same day of each sixth (6th) month period
thereafter,  together with a final  installment of principal equal to the entire
unpaid  principal  balance of the Loan,  together  with all  accrued  and unpaid
interest thereon,  due and payable in full on the Maturity Date,  provided that,
prior to the Maturity Date, accrued principal  obligations  (including principal
payments  due and payable in prior  periods but for the  limitations  on payment
contained in this Section  2.04) will be payable only to the extent of dividends
or other  distributions  payable by  Desalcott  on the Pledged  Shares.  Nothing
herein,  however,  shall be deemed or  construed  to, in any manner or  respect,
affect,  impair or diminish  the absolute and  unconditional  obligation  of the
Borrower  to  repay  the  Loan in  full by the  Maturity  Date,  whether  or not
sufficient dividends are paid or payable by Desalcott on the Pledged Shares.

2.05.  Interest  Payment.(a) The unpaid  principal amount of the Loan shall bear
interest from the date disbursed  until  maturity  (whether by  acceleration  or
otherwise) at a rate per annum equal to the applicable Eurodollar Rate from time
to time in effect.  Accrued  interest  shall be due and payable on each Interest
Payment  Date,  commencing  with the first such date to occur  subsequent to the
funding of the Loan,  and shall be calculated on the basis of a 360-day year for
the actual number of days elapsed (i.e.  1/360's of a full year's interest shall
accrue for each day any  portion  of the Loan is  outstanding),  provided  that,
prior to the Maturity Date,  accrued interest will only be payable to the extent
of dividends or other distributions  payable by Desalcott on the Pledged Shares,
subject to the  provisions  of clause 2.06 of this  Agreement.  Nothing  herein,
however,  shall be deemed or  construed  to, in any manner or  respect,  affect,
impair or diminish the absolute and unconditional  obligation of the Borrower to
repay all interest accrued on the Loan in full by the Maturity Date,  whether or
not sufficient dividends are paid or payable by Desalcott on the Pledged Shares.


<PAGE>

         (b) After the Maturity Date, any principal  amount of the Loan not paid
in full at  maturity  and any  accrued  and unpaid  interest on the Loan (to the
fullest  extent  permitted by applicable  law) shall bear interest until paid in
full, payable on demand, at a rate per annum equal to the Default Rate.

         (c) Prior to the Maturity Date,  any  installment of principal not paid
in full on the  applicable  Payment  Date (to the fullest  extent  permitted  by
applicable law) shall bear interest until paid in full,  payable on demand, at a
rate per annum equal to the  Default  Rate,  provided  that  Desalcott  has paid
dividends or other  distributions  on the Pledged Shares  sufficient to pay such
required principal installment. Prior to the Maturity Date, if Desalcott has not
paid dividends or other  distributions  on the Pledged Shares  sufficient to pay
such  principal  installment,  any principal not paid in full on the  applicable
Payment Date shall bear interest at the applicable  Eurodollar  Rate pursuant to
Section 2.05(a).

         (d) Prior to the Maturity Date, any accrued and unpaid  interest on the
Loan (to the fullest  extent  permitted by  applicable  law) shall bear interest
until paid in full,  payable on demand, at a rate per annum equal to the Default
Rate,  provided that Desalcott has paid dividends or other  distributions on the
Pledged  Shares  sufficient  to pay such  interest.  If  Desalcott  has not paid
dividends or other  distributions  on the Pledged Shares  sufficient to pay such
interest,  any such accrued and unpaid  interest on the Loan shall bear interest
at the applicable Eurodollar Rate pursuant to Section 2.05(a).

2.06.(a)  Dividends:  All dividends and other  distributions  arising out of the
     Pledged  Shares  shall be paid into an escrow term  account held jointly in
     the name of the  Borrower and the Lender and to be disbursed to satisfy the
     immediately  succeeding payment of principal and interest under clause 2.04
     and clause 2.05 of this  Agreement.  Any excess  thereof shall be paid into
     the escrow account described in paragraph (b) of this clause.

     (b)  Surplus dividends: In the event that the distribution of dividends and
          other  distributions  on the Pledged  Shares  exceed that required for
          debt  servicing  under clauses 2.04 and 2.05 of this  Agreement,  such
          surplus  distributions  will be placed in an interest  bearing  escrow
          term account held jointly in the name of the Borrower and the Lender a
          period  not to exceed  six  months  at a time.  Where the value of the
          escrow account is in excess of one installment of Interest  Payment as
          determined  by this  agreement,  any  such  excess  will  be  promptly
          returned free of encumbrance to the Borrower.
<PAGE>

2.07.    Prepayment.

     (a)  Prepayment. The Borrower has the right to prepay, without penalty, all
          or any part of the principal of the Loan on any Payment Date, provided
          that (a) Borrower must notify Lender at least five (5) days in advance
          that it intends to make such a pre-payment; (b) the Borrower shall pay
          all accrued and unpaid  interest on the amount  prepaid to the date of
          prepayment;  and (c) each partial  prepayment  shall be applied to the
          remaining  principal  installments  in  the  inverse  order  of  their
          maturities.

     (b)  Notwithstanding  anything  in  this  Agreement  to the  contrary,  the
          principal,  and interest  accrued on the Loan shall be immediately due
          and  payable  upon  the  sale by  Borrower  of any or all the  Pledged
          Shares.

2.08.    Eurodollar Rate.

     (a)  If prior to the  commencement of any Interest  Period,  the Lender has
          determined that adequate and fair means do not exist for  ascertaining
          the Libo Rate, then the Lender shall promptly  transmit notice thereof
          to the Borrower,  and the Loan shall instead be funded as, remain,  or
          be  converted  into a loan  bearing  interest at the  Alternate  Rate,
          payable on each Interest Payment Date thereafter,  commencing with the
          first such Interest Payment Date to occur thereafter.

     (b)  As soon as  practicable  after 11:00 A.M.,  New York time, on the date
          two (2) Business Days prior to the Closing Date and each Determination
          Date  thereafter,  the Lender shall  determine  (which  determination,
          absent manifest  error,  shall be final and conclusive) the Eurodollar
          Rate  which   shall  be   applicable   to  the  Loan  until  the  next
          Determination Date and shall promptly give notice thereof (in writing,
          by telex or by telephone confirmed in writing) to the Borrower.

     (c)  In the event that  after the  Closing  Date any  change  occurs in any
          applicable law, regulation,  treaty or directive within the Borrower's
          Country or  interpretation  thereof by any authority  charged with the
          administration or interpretation  thereof, or any condition is imposed
          by any authority or any change occurs in any condition  imposed by any
          authority  within  the  Borrower's  Country  on or  prior  to the date
          hereof, which:

                  (1) subjects  the Lender to any  additional  tax,  incremental
         duties or other additional and/or incremental  charges,  or changes the
         basis of taxation of payments to the Lender on account of  principal of
         or interest on the Loan or fees in respect of the  Lender's  obligation
         to make the Loan or other amounts payable to the Lender  hereunder with
         respect to the Loan; or

                  (2) imposes,  modifies or determines  applicable  any reserve,
         deposit or similar  requirements  against any assets held by,  deposits
         with or for the account of, or the Loan or  commitments  by, any office
         of any Lender in  connection  with the Loan to the extent the amount of
         which is in excess of, or was not applicable at the time of computation
         of, the amounts  provided for in the  definition of Eurodollar  Rate or
         Alternate Rate; or

          (3) imposes  upon the Lender any other  condition  with respect to the
          Loan, which, as a result thereof, (x) increases the cost to the Lender
          of making or  maintaining  the Loan,  or (y) reduces the net amount of
          any payment  received by the Lender in respect of the Loan (whether of
          principal,  interest,  commitment fees or otherwise),  or (z) requires
          the Lender to make any payment on or  calculated  by  reference to the
          gross amount of any sum received by it in respect of the Loan, in each
          case by an amount which the Lender in it's reasonable  judgement deems
          material;

then and in any such case the  Borrower  shall pay to the Lender  such amount or
amounts as will  compensate  the Lender for any  increased  cost,  deduction  or
payment  actually  incurred or made by the  Lender.  The Lender  shall  promptly
notify the Borrower of any event of which it has  knowledge,  which will entitle
the Lender to  compensation  in accordance  with this  subsection  (c) and shall
submit  satisfactory  documentary  evidence  supporting  any such claim for such
amount or  amounts.  The demand for payment  made by the Lender  shall state the
subjection  or change which has occurred or the reserve or deposit  requirements
or other  conditions  which  have been  imposed  on the  Lender or the  request,
direction or  requirement  with which it has  complied,  together  with the date
thereof, the amount of such cost, reduction or payment and the way in which such
amount has been  calculated.  The  statements of the Lender as to the additional
amounts  payable  pursuant  to this  subsection  (C)  shall,  in the  absence of
manifest error, be binding and conclusive.

                         SECTION 3. CONDITIONS PRECEDENT

         3.01.  Conditions  Precedent to the Effectiveness of this Agreement and
the making of the Loan.  This  Agreement  shall not be effective  and the Lender
shall have no obligation to fund all or any portion of the Loan hereunder  until
the following  conditions have been met to the satisfaction of the Lender in its
sole and absolute discretion:

     (a)  This Agreement has been executed by the Borrower and the Lender; and

     (b)  The Lender shall have  received such evidence as it may require of the
          authority  of the  Borrower to enter into this  Agreement,  the Pledge
          Agreement and each of the other Borrower  Documents,  and the specimen
          signatures  and evidences of authority of the persons who will execute
          this Agreement,  the Pledge Agreement and other documents  required by
          this Agreement; and

     (c)  (i) all  representations and warranties made by the Borrower herein or
          otherwise in writing in connection herewith, shall be true and correct
          in all material  respects,  (ii) no Default or Event of Default  shall
          have  occurred  and be  continuing,  and (iii) a  certificate  to this
          effect,  substantially  in the form of Exhibit B  attached  hereto and
          made a part hereof shall have been issued to the Lender; and

     (d)  The Pledge Agreement,  duly executed and completed by the Borrower, in
          form  and  substance  satisfactory  to the  Lender  and  the  Lender's
          counsel, shall have been delivered to the Lender; and

     (e)  The  Borrower   shall  have  complied  with  all  of  its   respective
          obligations  hereunder,  including without limitation,  the payment of
          all fees then due hereunder;
<PAGE>

     (f)  All of the conditions  precedent set forth in Sections  3.1(a) through
          3.1(d) and 3.1(f) through 3.1(h) of the  Shareholders'  Agreement will
          have been satisfied to Lender's reasonable satisfaction; and

     (g)  The Borrower shall have  delivered,  or caused to have been delivered,
          to the Lender each of the certificates  and other documents  described
          in the Closing  Document List attached  hereto as Exhibit C and made a
          part hereof and all additional  opinions,  certificates  and documents
          that the Lender or the Lender's  counsel may reasonably  require,  and
          all  such  opinions,  certificates  and  documents  specified  in this
          Section 3.01 shall be satisfactory in form and substance to the Lender
          and the Lender's counsel.

                          SECTION 4. FEES AND EXPENSES

         4.01     Taxes.
                  -----

         (a) All  payments  by the  Borrower  under this  Agreement,  the Pledge
Agreement  and each of the other  Transaction  Documents  shall be made  without
setoff,  deduction  or  counterclaim  and in such amounts as may be necessary in
order that all payments, after deduction or withholding for or on account of any
present or future taxes, levies,  imposts, duties or other charges of whatsoever
nature imposed by the Borrower's Country or any political  subdivision or taxing
authority  thereof  (collectively,  the  "Taxes"),  shall  not be less  than the
amounts  otherwise  specified  to be  paid  under  this  Agreement,  the  Pledge
Agreement and each of the other Transaction Documents.  Notwithstanding anything
contained in this Section 4.01 to the contrary, the Borrower shall not be liable
for the payment of any tax on or measured by net income  imposed upon the Lender
pursuant to the income tax laws of the United States or the Borrower's  Country,
or any political subdivision of either thereof.

         (b) The Borrower  shall pay any present or future stamp or  documentary
taxes or any other excise or property  taxes,  charges or similar levies imposed
by the  Borrower's  Country or any  political  subdivision  or taxing  authority
thereof which arise from any payment made hereunder,  under the Pledge Agreement
or under any of the other Transaction Documents or from the execution,  delivery
or  registration  of, or otherwise with respect to, this  Agreement,  the Pledge
Agreement  or any of the other  Transaction  Documents  (herein  referred  to as
"Other Taxes").

         (c) The  Borrower  shall pay all Taxes  and Other  Taxes  when due (and
indemnify the Lender against any liability  therefor) and shall promptly (and in
any  event  not  later  than 30  days  thereafter)  furnish  to the  Lender  any
certificates,  receipts  and  other  documents  which  may be  required  (in the
judgment of the Lender) to  establish  any tax credit to which the Lender may be
entitled.

(d) The  Borrower  shall  indemnify  the Lender for the full amount of Taxes and
Other Taxes (including, without limitation, Taxes and Other Taxes imposed by any
jurisdiction  on amounts  payable under this Section 4.01) paid by the Lender or
any  liability  (including  interest and  penalties)  arising  therefrom or with
respect  thereto,  whether or not such Taxes or Other  Taxes were  correctly  or
legally  assessed.  In the  event  that  the  Borrower  seeks to  challenge  the
assessment of such Taxes or Other Taxes, the Lender undertakes to cooperate with
the Borrower in this regard, and at the Borrower's  expense,  and further if the
Borrower is  successful  in such  challenge,  the result of which is to render a
refund of such Taxes or Other Taxes,  then the Lender would ensure that recovery
of such Taxes or Other Taxes would be credited to the account of the Borrower.
<PAGE>

         (e) If Ionics  receives the benefit of a credit  against its income tax
obligations  for the amount of any tax  withheld  by Borrower on payments to the
Lender,  to the  extent  Ionics  is able to  utilize  the  credit  to  achieve a
reduction in the United States income taxes that would  otherwise be owed by it,
Lender shall  notify  Borrower in writing and Borrower may set off the amount of
such credit utilized by Ionics against the next payment owed by it to Lender.

         (f) Without  prejudice  to the  survival of any other  agreement of the
Borrower  hereunder,  the  obligations  of the Borrower  under this Section 4.01
shall survive the termination of this Agreement and the repayment of the Loan.

         4.02 Expenses.  The Borrower  agrees,  whether or not the  transactions
hereby  contemplated are ever consummated or the Loan contemplated  hereunder is
funded,  to pay, or reimburse the Lender promptly upon demand for the payment of
all reasonable  costs and expenses  arising in connection with the  preparation,
negotiation, execution and delivery of, this Agreement, the Pledge Agreement and
the other Transaction  Documents,  including,  without limitation all reasonable
legal fees and costs and all stamp taxes (including  interest and penalties,  if
any) which may be payable under the laws of the Borrower's Country in respect of
the Transaction Documents.

                               SECTION 5. PAYMENTS

         5.01.    Method of Payment.
                  -----------------

         (a) All  payments to be made by the  Borrower to the Lender  under this
Agreement shall be made without set-off, counterclaim or deduction to the Lender
in Dollars in immediately available and freely transferable funds not later than
11:00 A.M. (Boston,  Massachusetts  time) on the date on which due at an account
of the Lender at an institution either in the United States or in Saint Lucia as
the Lender may specify in a written notice delivered to the Borrower.

         (b) Except as otherwise provided herein, whenever any payment falls due
on a day which is not a Business Day, the due date for payment shall be extended
to the next following  Business Day and interest shall be computed in accordance
with Section 2.05 hereof taking into account such additional day(s).

         5.02.  Application of Payments.  Prior to the occurrence of an Event of
Default,  the Lender shall apply payments received by it under this Agreement or
any of the other Transaction  Documents in the following order of priority:  (i)
to interest  due pursuant to Section  2.05(d),  (ii) to interest due pursuant to
Section  2.05(b),  (iii) to interest  due pursuant to Section  2.05(c),  (iv) to
interest due pursuant to Section  2.05(a),  (v) to all other amounts due and not
otherwise  provided  for in  this  Section  5.02,  (vi) to the  installments  of
principal  then  due  and  payable,   and  (vii)  to  the  remaining   principal
installments  in the inverse  order of maturity.  Following the  occurrence  and
during the  continuance  of any Event of  Default,  all such  payments  shall be
applied by the Lender in such order of application as the Lender in its sole and
absolute  discretion shall elect,  provided that such application relates to the
Loan,  interest  charges  and other  amounts  due in  connection  with this Loan
Agreement.
<PAGE>

         5.03.  Authorizations for Payments.  The Borrower shall promptly obtain
and maintain in full force and effect all authorizations, consents and approvals
and filings with any governmental  authority in the Borrower's Country which may
at any time be required under the laws of the Borrower's  Country (including all
laws and regulations  with respect to the  availability and transfer of Dollars)
to make payments as and when due under this Agreement,  the Pledge Agreement and
each of the other Transaction Documents.

              SECTION 6. REPRESENTATIONS, WARRANTIES AND COVENANTS

         6.01  Representations and Warranties.  In order to induce the Lender to
enter  into  this   Agreement   and  to  make  the  Loan  and  other   financial
accommodations  provided for herein, the Borrower represents and warrants to the
Lender that:

         (a) the Borrower is duly organized and validly  existing under the laws
of the Borrower's Country and is duly qualified or licensed to transact business
in all places  where such  qualification  or license is necessary in view of its
business operations and/or the ownership of its properties, and the Borrower has
the corporate power to make and perform this Agreement, the Pledge Agreement and
each of the other Borrower Documents;

         (b) the  execution,  delivery and  performance  by the Borrower of this
Agreement,  the Pledge Agreement,  each of the other Borrower  Documents and any
additional documents contemplated to be executed in connection herewith (i) have
been duly authorized by all necessary  corporate  action of the Borrower and the
Borrower has full  authority to request the Loan as provided in this  Agreement,
(ii) have been duly authorized,  if so required,  by all necessary  legislative,
administrative  and  other  governmental  action,  and (iii) do not and will not
contravene its charter or any treaty,  law,  rule,  regulation,  order,  decree,
judgment,  award,  injunction  or similar  legal  restriction  applicable to the
Borrower or any contractual  restriction binding on or affecting the Borrower or
by which it or any of its property may be bound;  and do not and will not,  with
the  passage  of time or the  giving  of  notice,  result  in a  breach  of,  or
constitute a default or require any consent under,  or result in the creation of
any Lien,  charge or encumbrance,  except that the Collateral will be subject to
the First Priority  Security  Interest and except for such consents  required by
the Project Loan Agreement, upon any property or assets of the Borrower pursuant
to, any instrument or agreement to which the Borrower is a party or by which the
Borrower  or its  properties  may be bound or  affected,  except in favor of the
Lender;

         (c) this Agreement, the Pledge Agreement and each of the other Borrower
Documents  constitute the legal,  valid and binding  obligations of the Borrower
enforceable  in  accordance  with  their   respective   terms  except  that  the
enforceability  thereof  may  be  subject  to  the  effects  of  any  applicable
bankruptcy, insolvency,  reorganization,  moratorium or other similar law now or
hereafter in effect relating to creditors'  rights and to general  principles of
equity (regardless of whether such  enforceability is considered in a proceeding
in equity or at law);

         (d) all consents, approvals and authorizations, if any, of governmental
authorities in the Borrower's Country necessary for the execution,  delivery and
performance by the Borrower of the Borrower Documents have been obtained and are
in full  force  and  effect,  and the  requirements  of any  and  all  laws  and
regulations  of the  Borrower's  Country  with respect to the  availability  and
transfer  of  Dollars  required  to make all  payments  on the Loan,  the Pledge
Agreement and all other  payments  contemplated  by the Borrower  Documents have
been met; and the Borrower is not in default  under any order,  decree,  ruling,
regulation,   closing   agreement  or  other   decision  or  instrument  of  any
governmental  commission,  bureau  or  other  administrative  agency  or  public
regulatory body having jurisdiction over the Borrower,  which default would have
a material adverse effect on the Borrower;

         (e) no legal  proceedings are pending or, to the best of the Borrower's
knowledge and belief,  threatened before any court or governmental  agency which
might (i) materially and adversely  affect the Borrower's  financial  condition,
business  or  operations,  (ii)  restrain  or  enjoin  or  have  the  effect  of
restraining or enjoining the  Borrower's  performance or observance of the terms
and  conditions  of this  Agreement,  the Pledge  Agreement  or any of the other
Transaction  Documents  or (iii) in any  other  manner  question  the  validity,
binding effect or enforceability of this Agreement,  the Pledge Agreement or any
of the other Transaction Documents;
<PAGE>

         (f) this Agreement and the transactions  contemplated hereby constitute
commercial  activities of the  Borrower,  and the Borrower is subject to private
commercial  law with  respect  thereto.  The  Borrower  is not  entitled  to any
immunity whether on grounds of sovereign immunity or otherwise,  from set-off or
from any legal  proceedings  in Republic  of  Trinidad  and Tobago to enforce or
collect upon the Loan, the Pledge Agreement or any other liability or obligation
of the Borrower  relating to or arising from the  transactions  contemplated  by
this Agreement (including, without limitation, immunity from service of process,
immunity from  jurisdiction or judgment of any court or tribunal,  immunity from
execution of a judgment,  and immunity of any of the Collateral  from attachment
prior to any entry of judgment,  or from  attachment in aid of execution  upon a
judgment); in respect of any matter arising under this Agreement;

         (g) the  Borrower  has filed or caused  to be  filed,  or has  obtained
extensions  to file all federal,  state and local tax returns which are required
to be filed,  and has paid or caused to be paid,  or has  reserved  on its books
amounts  sufficient for the payment of, all taxes as shown on said returns or on
any  assessment  received  by it, to the extent  that the taxes have become due,
except as otherwise  permitted by the provisions  hereof. No tax liens have been
filed nor has the Borrower  been notified of, or otherwise has knowledge of, any
claim being asserted with respect to any such taxes, fees or other charges which
could have a material  adverse effect on the business or financial  condition of
the Borrower.  The Borrower has set up reserves which are reasonably believed by
the  officers of the  Borrower to be adequate  for the payment of said taxes for
the years that have not been audited by the  respective  tax  authorities or for
which a return has not,  as of the date  hereof,  been  required  to be filed by
applicable law.

         (h) The  Borrower  is not a party to any  agreement  or  instrument  or
subject to any court order or judgment,  governmental  decree,  charter or other
corporate  restriction  adversely affecting its business,  properties or assets,
operations or condition (financial or otherwise). The Borrower is not in default
in the  performance,  observance  or  fulfillment  of  any  of the  obligations,
covenants or conditions  contained in any agreement or instrument to which it is
a party  or by  which  the  Borrower  or any of its  properties  may be bound or
affected, or under any law, regulation, decree, order or the like, which default
has or may in the  future  have a material  adverse  effect on the  business  or
prospects of the Borrower; and

         (i) The principal office, chief executive office and principal place of
business of the Borrower is at the location set forth below its signature at the
end of this Agreement.
<PAGE>

         6.02 Affirmative Covenants of the Borrower.  The Borrower covenants and
agrees that, until all amounts owing under this Agreement,  the Pledge Agreement
and each of the other Transaction Documents have been paid in full, the Borrower
will, unless the Lender consents in writing:

         (a) Use the proceeds of the  financing  only for the purposes set forth
in Section 2.02 of this  Agreement  (as herein agreed to by the Borrower and the
Lender) and furnish the Lender with all evidence that it may reasonably  require
with respect to such use;

         (b) Do or cause to be done all things  necessary to maintain,  preserve
and keep in full force and  effect  its  existence  in the  jurisdiction  of its
incorporation,  and  qualify and remain  qualified  in each  jurisdiction  where
qualification  is necessary or desirable in view of its business  operations  or
the ownership of its properties;

         (c) Pay and discharge or cause to be paid and  discharged  promptly all
taxes,  assessments and  governmental  charges or levies imposed upon it or upon
its property or upon any part thereof,  before the same shall become in default,
as well as all lawful  claims for labor,  materials  and  supplies or  otherwise
which, if unpaid,  might become a Lien upon such properties or any part thereof;
provided,  however, that the Borrower shall not be required to pay and discharge
or to cause to be paid and discharged any tax, assessment, charge, levy or claim
so long as the Borrower shall have provided written notice to the Lender thereof
and the validity thereof shall be continuously and diligently  contested in good
faith by  appropriate  proceedings  and the Borrower shall have set aside on its
books adequate  reserves with respect to any tax,  assessment,  charge,  levy or
claim, so contested;

         (d)  Continue  to conduct and operate  its  business  substantially  as
conducted and operated  during the present and preceding  fiscal year (including
the preservation of the Borrower's  current management team or one of comparable
quality  and skill);  at all times  maintain,  preserve  and protect all rights,
privileges,  patents,  franchises and trade names  necessary or desirable in the
conduct of its business and preserve all the  remainder of its property  used or
useful in the conduct of its business and keep the same in good repair,  working
order  and  condition,  and from  time to time  make,  or cause to be made,  all
needful and proper repairs,  replacements,  betterments and improvements thereto
so that  the  business  carried  on in  connection  therewith  may be  conducted
properly and advantageously at all times;
<PAGE>

     (e)  Furnish  or  cause  to  be  furnished  to  the  Lender  all  financial
information and statements,  books,  records and other documents and information
which  Borrower  provides to Republic  Bank,  the  Overseas  Private  Investment
Corporation or any lender holding a First Priority  Security  Interests,  at the
same time or  promptly  after such  information,  financial  statements,  books,
records or other documents and information are furnished to any such lenders;

     (f) Furnish or caused to be furnished to the Lender promptly,  from time to
time, such other  information  regarding the operations,  business,  affairs and
financial condition of the Borrower as the Lender may reasonably request.

     (g) Promptly, but in no event later than five (5) days after the occurrence
of an Event of Default or a Default,  or of any event which otherwise has or may
have a  negative  effect  on the  Lender's  ability  to  collect  on  Borrower's
obligations  under  this  Agreement,  the Pledge  Agreement  or any of the other
Transaction  Documents,  notify  the  Lender by  telefax,  telex or cable of the
particulars of such  occurrence and the action taken and proposed to be taken by
the Borrower with respect thereto;

         (g)  Duly  observe,  conform  and  comply  with  all  laws,  decisions,
judgments,  rules,  regulations  and  orders  of  all  governmental  authorities
relative to the conduct of its  business,  its  properties,  and assets,  except
those  being  contested  in good  faith by  appropriate  proceedings  diligently
pursued; and obtain, maintain and keep in full force and effect all governmental
licenses,  authorizations,  consents,  approvals  and permits  necessary  to the
proper conduct of its business and the  observance and  performance of the terms
of this  Agreement,  the  Pledge  Agreement  and each of the  other  Transaction
Documents,  including,  without limitation,  all foreign exchange approvals with
respect to the availability of Dollars  necessary to make all required  payments
under this  Agreement,  the Pledge  Agreement and each of the other  Transaction
Documents, as the case may be; and from time to time, do and perform any and all
acts and execute  any and all  documents  that may be  necessary  or  reasonably
requested by the Lender in order to effect the purpose of this  Agreement and to
protect the interests of the Lender in this Agreement,  the Pledge Agreement and
each of the other Transaction Documents; and

         (h) Ensure that the Lender shall, at all times during which any portion
of  the  Loan  is  outstanding,   have  a  valid,  perfected  security  interest
(subordinate  only to any First  Priority  Security  Interest) in the Borrower's
Shares and in any other property and assets more  particularly  described in the
Pledge  Agreement,  whether now existing or hereafter  created or acquired,  and
wherever located.  The Borrower hereby covenants and agrees that it will execute
and  deliver,  and cause to be executed  and  delivered,  to the Lender all such
documents and  instruments as the Lender may reasonably  request,  together with
such financing  statements,  affidavits,  notices and other similar instruments,
all in form and substance reasonably satisfactory to the Lender and the Borrower
hereby  agrees to pay the cost of filing  the same in any public  office  deemed
advisable by the Lender and agrees to do such other acts and things,  all as the
Lender  may from time to time  reasonably  request  so as to  maintain  a valid,
perfected  security  interest  (subordinate  only to any First Priority Security
Interest) in favor of the Lender in the Collateral and in any other property and
assets  described  in  the  Pledge  Agreement,  whether  presently  existing  or
hereafter created or acquired.
<PAGE>

         6.03 Negative Covenants of the Borrower. The Borrower covenants that it
will not, without the prior written consent of the Lender, until payment in full
of all obligations and indebtedness of the Borrower hereunder,  under the Pledge
Agreement and under each of the other Transaction Documents:

         (a)  Dissolve  or  liquidate,  or  become  a  party  to any  merger  or
consolidation,  or acquire by purchase,  lease or otherwise all or substantially
all of the assets or capital stock of any Person other than Desalcott; or

         (b)  Declare  or pay  any  dividend  or  authorize  or make  any  other
distribution  on any capital  stock of the  Borrower,  whether now or  hereafter
outstanding,  or make any  payment  on  account  of the  purchase,  acquisition,
redemption or other retirement of any shares of such stock during the occurrence
of any Default or Event of Default or if, after giving effect thereto, a Default
or Event of Default  shall be  reasonably  likely to occur or will have occurred
and be continuing.

                          SECTION 7. EVENTS OF DEFAULT

          7.01.Events of Default.  Upon the  occurrence  of any of the following
               events or conditions (each an "Event of Default"):

         (a) The Borrower shall fail to pay, when due (whether by  acceleration,
maturity or  otherwise),  any principal of or interest on the Loan in accordance
with clauses 2.04, 2.05, and 2.06 of this Agreement, or any other sum payable to
the Lender under this Agreement,  the Pledge Agreement or any of the Transaction
Documents; or

         (b)  Any  representation  or  warranty  made  by the  Borrower  in this
Agreement or in any of the other Transaction Documents or in connection herewith
or therewith,  or any  statement  made in any  certificate,  report or financial
statement  furnished by the Borrower to the Lender has proven to have been false
or misleading in any material respect when made, provided that if Lender informs
Borrower that it has  committed  any of the actions  referred to in this section
7.01  (b),   Borrower   will  have  10  days  in  order  to  correct   any  such
misrepresentation  or warranty,  failing which the event will become an Event of
Default ; or
<PAGE>

          ( c ) Failure by the  Borrower  to  perform or comply  with any of the
covenants or  provisions  set forth in this  Agreement  (exclusive  of any event
specified as an Event of Default in any other  subsection of this Section 7.01),
which has a material effect on this Agreement, the Collateral, or the Borrower's
ability to perform under this Agreement, and which continues for a period of ten
(10) days following notice thereof from the Lender to the Borrower; or

         (d)There  shall  occur  any  default  (other  than a  default  which is
provided  for  elsewhere  in  this  Section  7.01)  in  the  due  observance  or
performance of any covenant,  condition or agreement on the part of the Borrower
to be observed  or  performed  pursuant  to the terms of any of the  Transaction
Documents which remains  uncured beyond any applicable  period of grace provided
therefor in any such Transaction Documents; or

         (e) Desalcott shall (1) default in the payment of principal or interest
on  any  Indebtedness  owed  to  the  Bank,  the  Overseas  Private   Investment
Corporation  or any other lender  holding a First  Priority  Security  Interest,
beyond the period of grace,  if any,  provided in the  instrument  or  agreement
under which such Indebtedness was created; or (2) or any other default occurs in
respect of such Indebtedness, the effect of which default is to cause, or permit
the holder or holders of such  Indebtedness  (or a trustee or agent on behalf of
such holder or holders)  to cause such  Indebtedness  to become due prior to its
stated  maturity;  provided  that such  occurrence  will cease to be an Event of
Default if the Bank or the Overseas Private  Investment  Corporation or any such
lender holding a First Priority Security Interest provides written notice to the
Lender that the  default has been cured or waived and that it is not  pursuing a
foreclosure or other action  against  Desalcott or the Collateral as a result of
the default and at the time of notice  there is no other Event of Default  under
this Section  7.01,  and  provided  further  that if  thereafter  there occurs a
further event described in this Section 7.01 (e), or if the Bank or the Overseas
Private Investment Corporation or any other such lender holding a First Priority
Security Interest thereafter re-initiates  foreclosure or other such action as a
result of the initial default,  an Event olf Default will be deemed to occur and
the  Lender may  proceed to fully  enforce  its rights in  accordance  with this
Agreement; or

         (f) The Borrower  shall fail to furnish to the Lender notice of default
in accordance  with Section  6.02(f) hereof  immediately  after any such default
becomes known to the Chief Executive  Officer or the Chief Financial  Officer of
the Borrower,  whether or not  notification  to the Borrower is furnished by the
Lender; or

         (g) any one of the documents  evidencing or securing all or any portion
of the obligations and indebtedness of the Borrower hereunder,  under the Pledge
Agreement and under each of the other Transaction Documents, or any Lien granted
thereunder,  shall  terminate,  cease to be effective or cease to be the legally
valid,  binding  and  enforceable   obligation  of  the  Borrower  hereunder  or
thereunder;  the Borrower shall,  directly or indirectly,  contest in any manner
such  effectiveness,  validity,  binding nature or  enforceability;  or any Lien
securing,  in whole or in part,  any  Indebtedness  of the Borrower  owed to the
Lender or pledged to the Lender as collateral security for any such Indebtedness
shall cease to be effective or have the priority purported to be given under any
document or instrument evidencing or creating such Lien; or

         (h)  The  Borrower  or  Desalcott  shall  (1)   voluntarily   terminate
operations  or apply for or  consent  to the  appointment  of, or the  taking of
possession by, a receiver,  custodian, trustee or liquidator of the Borrower, or
of all or a substantial part of the assets of the Borrower, (2) admit in writing
its inability, or be generally unable, to pay its debts as the debts become due,
(3) make a general  assignment for the benefit of its creditors,  (4) commence a
voluntary case under any law relating to bankruptcy, insolvency, reorganization,
winding-up,  or  composition  or  adjustment  of debts (as now or  hereafter  in
effect), (5) file a petition seeking to take advantage of any other law relating
to  bankruptcy,  insolvency,  reorganization,   winding-up,  or  composition  or
adjustment of debts, (6) fail to controvert in a timely and appropriate  manner,
or acquiesce in writing to, any petition filed against it in an involuntary case
under any law relating to bankruptcy, insolvency, reorganization, winding-up, or
composition  or  adjustment of debts,  or (7) take any corporate  action for the
purpose of effecting any of the foregoing; or
<PAGE>

         (i) Without its application, approval or consent, a proceeding shall be
commenced,  in any court of  competent  jurisdiction,  seeking in respect of the
Borrower or Desalcott: the liquidation, reorganization, dissolution, winding-up,
or composition or readjustment of debt, the appointment of a trustee,  receiver,
liquidator or the like of the Borrower or Desalcott or of all or any substantial
part of the assets of the Borrower or Desalcott, or other like relief in respect
of the Borrower or Desalcott  under any law relating to bankruptcy,  insolvency,
reorganization,  winding-up,  or  composition or adjustment of debts unless such
proceeding is contested in good faith by the Borrower or Desalcott;  and, if the
proceeding is being  contested in good faith by the Borrower or  Desalcott,  the
same shall continue  undismissed,  or unstayed and in effect,  for any period of
sixty (60)  consecutive  days,  or an order for relief  against the  Borrower or
Desalcott  shall be entered in any  involuntary  case under any law  relating to
bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment
of debts; or

         (j) If any other event occurs or any other circumstance arises which is
likely materially and adversely to affect the ability of the Borrower to perform
all or any of its obligations hereunder, under the Pledge Agreement or under any
of the other Transaction Documents Lender will provide written notice thereof to
Borrower together with a description of such event or  circumstances.  Within 10
days  thereafter,  Borrower  will in good  faith  prepare  and send to  Lender a
written  plan of the steps  Borrower  will take to avoid  any  material  adverse
affect to Lender or on Borrower's ability to perform its obligations  hereunder,
under the Pledge  Agreement  or under any other  Transaction  Documents.  In all
cases,  Borrower will respond to Lender's concerns and  recommendations  in this
respect in good faith.  If Borrower  fails to prepare and deliver  such  written
plan within such ten (10) day period or  thereafter to comply with such plan, an
Event of Default will be deemed to occur;

THEREUPON,  in the case of any such  event  other  than an  event  described  in
subsection (i) or subsection (j) of this Section 7.01, the Lender may by written
notice to the  Borrower  immediately  declare  the  principal  of, and  interest
accrued on, the Loan, forthwith due and payable, whereupon the same shall become
immediately due and payable; provided,  however, that upon the uccurrence of any
event  described in subsection  (i) or subsection  (j) of this section 7.01, the
principal of, and accrued interest on, of the Loan, shall become immediately due
and payable,  both as to principal and interest,  without  presentment,  demand,
protest,  or other notice of any kind, all of which are hereby expressly waived,
anything  contained herein, or in any of the other Transaction  Documents to the
contrary notwithstanding.

         Upon the happening and continuance of any Event of Default specified in
this Agreement,  the Lender shall be permitted to proceed to protect and enforce
its rights under this Agreement,  the Pledge Agreement and the other Transaction
Documents,  and each of them,  and any of the other  documents  and  instruments
executed and delivered in connection with this Agreement by such suits,  actions
or special  proceedings  in equity or at law, or by proceedings in the office of
any board or officer having jurisdiction, either for specific performance of any
covenant  or  agreement  contained  herein or in aid or  execution  of any power
herein  or  therein  granted  or for the  enforcement  of any  proper  legal  or
equitable remedy, as the Lender,  being advised by counsel chosen by the Lender,
shall deem most effectual to protect and enforce such rights.

         In the enforcement of any remedy  described  above, the Lender shall be
entitled to sue for,  enforce payment of and receive any and all amounts then or
during any Event of Default  becoming or  remaining  due from the  Borrower  for
principal,  interest or otherwise under any of the provisions of this Agreement,
the Pledge Agreement or any of the other Transaction Documents,  as the case may
be, together with interest on overdue payments at the Default Rate and all costs
and expenses of collection and of all proceedings hereunder.
<PAGE>

                    SECTION 8. GOVERNING LAW AND JURISDICTION

          8.01.GOVERNING  LAW. THIS  AGREEMENT  SHALL BE CONSTRUED IN ACCORDANCE
     WITH AND GOVERNED BY THE LAW OF THE REPUBLIC OF TRINIDAD AND TOBAGO WITHOUT
     REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREUNDER.

         8.02. Waiver of Immunity.  The Borrower hereby  irrevocably agrees that
to the  extent  that the  Borrower  or any of its assets  has or  hereafter  may
acquire  any right of  immunity  related  to or  arising  from the  transactions
contemplated  by  this  Agreement  or  any of the  Borrower  Documents,  whether
characterized as sovereign immunity or otherwise, from any legal proceedings, to
enforce or collect upon the Loan, the Pledge Agreement or any other liability or
obligation  of  the  Borrower  related  to  or  arising  from  the  transactions
contemplated  by this  Agreement  or any of the Borrower  Documents,  including,
without limitation, immunity from service of process, immunity from jurisdiction
or judgment of any court or tribunal, immunity from execution of a judgment, and
immunity of any of its property from attachment  prior to any entry of judgment,
or from attachment in aid of execution upon a judgment,  it hereby expressly and
irrevocably waives any such immunity.

8.03  Arbitration.  In the  event  of a  dispute  between  the  parties  to this
Agreement  in any  way  related  to or  arising  out of  this  Agreement  or the
transactions  contemplated herein ("Dispute"),  each party shall attempt in good
faith to resolve the dispute promptly through  negotiations.  If the dispute has
not been resolved through negotiation within five (5) days after the delivery of
a notice of dispute by either  party,  either  party may  institute  arbitration
proceedings at any time thereafter by delivering  written demand for arbitration
to the other party in the manner  described in Section  9.02.  The dispute shall
then be exclusively and finally  settled and resolved by binding  arbitration in
accordance with the  Arbitration Act of Trinidad and Tobago  supplemented by the
International  Rules of Arbitration of the  International  Chamber of Commerce .
Such  arbitration  proceedings  shall be held in  London,  England  and shall be
subject to the choice of law  provisions set forth in Section 8.01. For purposes
of this section 8.03,  the parties  hereby waive any and all objections to venue
that they may have under the laws of any state or  country,  including,  without
limitation, any argument that jurisdiction, situs, and/or venue are inconvenient
or otherwise  improper.  Any decision or award of the  arbitrator or arbitration
panel, as the case may be, shall be expressed in United States dollars and shall
be final and binding on the parties to the arbitration  proceeding.  The parties
hereby waive, to the extent permitted by law, any and all rights to appeal or to
review such award by any court or  tribunal.  The parties  hereto agree that the
arbitral award may be enforced against the parties to the arbitration proceeding
or their assets wherever they may be found and that a judgment upon the arbitral
award may be entered in any court having jurisdiction  therefor.  The procedures
established in this Section 8.03 shall be the sole, exclusive procedures for the
resolution of Disputes between the parties,  provided,  however, that either may
seek a preliminary  injunction or other  preliminary  judicial relief if, in its
reasonable,  good-faith judgment,  such action is necessary to avoid irreparable
damage.  Each party further agrees that process may be served upon such party in
any manner authorized under the laws of the Republic of Trinidad and Tobago, and
waives any objections that such party may otherwise have to such process.
<PAGE>

                            SECTION 9. MISCELLANEOUS

         9.01.  Computations.  Each  determination of an interest rate or fee by
the Lender pursuant to any provision of this Agreement,  the Pledge Agreement or
any of the other  Transaction  Documents  shall be conclusive and binding on the
Borrower in the absence of manifest error.  Except as otherwise provided herein,
all  computations of interest  hereunder shall be made on the basis of a year of
360 days and actual days elapsed.  All such calculations shall include the first
day and exclude the last day of the period of calculation.

         9.02. Notices.  Unless otherwise specified herein, all notices or other
communication  given  hereunder  shall  be in  writing  and  shall  be  given by
internationally recognized overnight courier, facsimile or personal delivery and
shall be  deemed  to be given or made for  purposes  of this  Agreement  two (2)
Business Days  following the date when the same is sent by overnight  courier or
on the day sent by facsimile or personally  delivered  (unless sent or delivered
after  5:00  P.M.  using the time in the  place to which  the  message  is being
delivered).  Unless  otherwise  specified  in a notice  delivered or received in
accordance with the foregoing provisions of this Section 9.02, all notices shall
be given to or made  upon the  respective  parties  hereto  at their  respective
addresses as indicated herein:

To the Borrower:                                   To the Lender:

Hafeez Karamath Engineering Services Ltd.          Ionics, Incorporated
Cyrus Trace, El Socorro Ext.                       65 Grove Street
San Juan, Trinidad, W.I.                           Watertown, MA 02472
Facsimile No: (868) 675-2679                       Facsimile No: (617) 926-9277

         9.03 Disposition of Indebtedness.  The Lender may, without the approval
or consent of the Borrower, sell, assign,  transfer,  pledge,  negotiate,  grant
participation in or otherwise  dispose of all or any part of the indebtedness of
the  Borrower  under this  Agreement,  the Pledge  Agreement or any of the other
Transaction  Documents  to any  party,  and any such party  shall  enjoy all the
rights and privileges of the Lender under this Agreement,  the Pledge  Agreement
and the other Transaction Documents.  The Borrower shall accord full recognition
to any such assignment,  and all rights and remedies of the Lender in connection
with the interest so assigned shall be as fully  enforceable by such assignee as
they were by the Lender before such  assignment.  The Lender may disclose to the
proposed  assignee or participant and to any Affiliate of the Lender (whether or
not a proposed  assignee or  participant),  any information that the Borrower is
required to deliver to the Lender  pursuant to this Agreement or that the Lender
may otherwise have with respect to the Borrower, its business and/or assets from
time to time. The Borrower  hereby agrees to cooperate  fully with the Lender in
providing any such information to any proposed assignee or participant.

         9.04.  Benefit of Agreement.  This Agreement  shall be binding upon and
inure to the benefit of and be  enforceable  by the  respective  successors  and
assigns of the parties  hereto,  provided that the Borrower  shall not assign or
transfer any of its interest,  rights or obligations hereunder without the prior
written consent of the Lender.

         9.05. No Waiver;  Remedies Cumulative.  No failure or delay on the part
of the Lender in exercising any right, power or privilege  hereunder,  under the
Pledge Agreement or under any of the other  Transaction  Documents and no course
of  dealing  between  the  Borrower  and the  Lender  shall  operate as a waiver
thereof;  nor  shall any  single  or  partial  exercise  of any  right  power or
privilege  hereunder,  under  the  Pledge  Agreement  or under  any of the other
Transaction  Documents preclude any other right, power or privilege hereunder or
thereunder. The rights and remedies herein expressly provided are cumulative and
not exclusive of any rights or remedies which the Lender would  otherwise  have.
No notice to or demand on the Borrower in any case shall entitle the Borrower to
any other or  further  notice or demand in  similar  or other  circumstances  or
constitute  a waiver of the rights of the Lender to any other or further  action
in any circumstances without notice or demand.

         9.06.  Amendment or Waiver. No course of dealing between the Lender and
the Borrower shall be effective to amend, modify or change any provision of this
Agreement.  This Agreement may not be amended,  discharged or terminated without
the written consent of the Lender and the Borrower,  and no provision hereof may
be waived without the written consent of the Lender.
<PAGE>

         9.07.  Judgment Currency.  All payments of principal,  interest or fees
due  hereunder,  under  the  Pledge  Agreement  and  under  each  of  the  other
Transaction  Documents  shall be made in Dollars,  regardless of any law,  rule,
regulation or statute, whether now or hereafter in existence or in effect in any
jurisdiction,  which  affects or  purports to affect  such  obligations.  To the
fullest  extent  permitted by applicable  law, the obligation of the Borrower in
respect  of any amount due under this  Agreement,  the Pledge  Agreement  or any
other  Transaction  Document  shall,  notwithstanding  any  payment in any other
currency  (whether  pursuant to a judgment or otherwise),  be discharged only to
the extent of the amount in Dollars  that the person  entitled  to receive  that
payment may, in accordance with normal banking procedures, purchase with the sum
paid in that other  currency  (after any premium and costs of  exchange)  on the
Business Day  immediately  following the day on which such person  receives such
payment.  If the amount in Dollars that may be so purchased for any reason falls
short of the amount  originally  due,  the  Borrower  shall pay such  additional
amounts,  in Dollars,  as may be necessary to compensate for the shortfall.  Any
obligation of the Borrower not discharged by such payment shall,  to the fullest
extent  permitted  by  applicable  law,  be due as a  separate  and  independent
obligation  and,  until  discharged as provided  herein,  shall continue in full
force and effect.

         9.08 Severability.  In the event that any one or more of the provisions
contained in this Agreement shall for any reason be held to be invalid,  illegal
or  unenforceable  in any respect,  this Agreement shall be construed as if such
illegal or unenforceable provision had never been contained herein.

         9.09. Prior Agreements Superseded. This Agreement, the Pledge Agreement
and each of the Transaction  Documents constitute the entire understanding among
the parties  hereto with respect to the subject  matter hereof and supersede all
prior agreements and understandings,  if any, and any  representations,  whether
verbal or written,  made by or on behalf of the Lender to the Borrower  relating
to the  subject  matter  hereof.  The  Lender  shall  have only such  duties and
obligations  as are  expressly  specified  in  this  Agreement  and  no  duties,
obligations or fiduciary  responsibilities  shall be implied to the Lender. Each
of the parties  hereto hereby  further agrees that the Lender shall be deemed to
have acted in good faith to the extent that the Lender  performs its obligations
in  accordance  with the terms of this  Agreement.  This  Agreement,  the Pledge
Agreement  and each of the other  Transaction  Documents  were  drafted with the
joint  participation  of the  Borrower  and the  Lender  and shall be  construed
neither  against nor in favor of either of them,  but rather in accordance  with
the fair meaning thereof.

         9.10. Survival of  Representations.  All representations and warranties
made herein shall survive the execution and  delivering of this  Agreement,  the
Pledge  Agreement and each of the Transaction  Documents,  and shall continue in
full force and effect so long as the Loan is outstanding and unpaid.

         9.11.   Limit   on   Interest.   Anything   herein   to  the   contrary
notwithstanding,  the  obligations  of the Borrower  under this  Agreement,  the
Pledge  Agreement and each of the Transaction  Documents shall be subject to the
limitation  that payments of interest to the Lender shall not be required to the
extent  that  receipt of any such  payment by the Lender  would be  contrary  to
provisions of law applicable to the Lender (if any) which limit the maximum rate
of interest which may be charged or collected by the Lender; provided,  however,
that nothing herein shall be construed to limit the Lender to presently existing
maximum rates of interest,  if an increased interest rate is hereafter permitted
by reason of  applicable  federal  or state  legislation.  In the event that the
Borrower  makes  any  payment  of  interest,  fees  or  other  charges,  however
denominated,  pursuant to this  Agreement,  the Pledge  Agreement  or any of the
Transaction  Documents,  which  payment  results  in the  interest  paid  by the
Borrower  to the Lender to exceed the  maximum  rate of  interest  permitted  by
applicable  law, any excess over such  maximum  shall be applied in reduction of
the principal  balance owed to the Lender as of the date of such payment,  or if
such excess exceeds the amount of principal owed to the Lender as of the date of
such payment, the difference shall be paid by the Lender to the Borrower.

         9.12.  Counterparts.  This  Agreement  may be executed in any number of
counterparts and by different parties hereto in separate  counterparts,  each of
which when so executed  and  delivered  shall be deemed an  original  and all of
which when taken together shall constitute but one and the same instrument.

         9.13.  Right of Setoff.  Upon the occurrence and during the continuance
of any Event of Default,  the Lender is hereby  authorized  at any time and from
time to time,  without  notice to the Borrower (any such notice being  expressly
waived by the Borrower),  to set off and apply any and all deposits  (general or
special,  time or demand,  provisional  or final) at any time held and any other
Indebtedness  owing by the Lender to or for the account of the Borrower  against
any and all of the  obligations of the Borrower now or hereafter  existing under
this Agreement,  the Pledge Agreement or any of the Transaction Documents as the
case may be, or any other instrument executed in connection with this Agreement,
the Pledge Agreement or any of the Transaction Documents, as the case may be, or
constituting security therefor,  irrespective of whether or not the Lender shall
have made  demand  under  this  Agreement,  the Pledge  Agreement  or any of the
Transaction Documents,  as the case may be, and although such obligations may be
unmatured.  The Lender  agrees  promptly to notify the  Borrower  after any such
setoff and application,  provided that the failure to give such notice shall not
affect the  validity  of such setoff and  application.  The rights of the Lender
under this Section 9.13 are in addition to other rights and remedies (including,
without limitation, other rights of setoff) which the Lender may have.
<PAGE>

         9.14.  Indemnification.  The Borrower hereby agrees to defend, protect,
indemnify,  and hold harmless the Lender and each of its  Affiliates,  officers,
directors,  employees,  attorneys and agents  (collectively,  the "Indemnitees")
from  and  against  any  and  all  liabilities,  obligations,  losses,  damages,
penalties,  actions, judgments, suits, claims, costs, expenses and disbursements
imposed on, incurred by, or asserted  against such  Indemnitees,  in proceedings
which may be taken by the Lender for the purpose of enforcing  or realizing  the
security granted (collectively, the "Indemnified Matters") in lawful exercise of
its powers as Lender under this Agreement; provided, however, the Borrower shall
not be obligated to indemnify and hold harmless any  Indemnitee  hereunder  with
respect to any  Indemnified  Matter to the extent any loss or damage suffered or
incurred by such Indemnitee is caused by or results from the willful  misconduct
or gross negligence of such Indemnitee, as determined by a final, non-appealable
order of a court of competent  jurisdiction.  To the extent that the undertaking
to indemnify,  pay and hold harmless set forth in the preceding  sentence may be
unenforceable  because it is violative of any law or public policy, the Borrower
shall  contribute  the maximum  portion which it is permitted to pay and satisfy
under applicable law, to the payment and satisfaction of all Indemnified Matters
incurred by the Indemnitees.

         9.15.   Collection  Costs.  The  Borrower  hereby  agrees  to  pay  all
reasonable  costs and  expenses  incurred  by the Lender,  including  reasonable
attorneys'  fees  (including  those  for  appellate  proceedings),  incurred  in
connection  with any Event of Default,  or in connection  with the collection or
attempted  collection  or  enforcement  of  Borrower's  obligations  under  this
Agreement,  or in  connection  with the  protection of any  collateral  given as
security for the payment of Borrower's obligations under this Agreement, whether
or not legal proceedings may have been instituted.

         9.16.  Rights of Third Parties.  All conditions of the Lender hereunder
are  imposed  solely  and  exclusively  for the  benefit  of the  Lender and its
successors  and  assigns,  and no other  person  shall have  standing to require
satisfaction  of such  conditions  or be entitled to assume that the Lender will
make  the Loan in the  absence  of  strict  compliance  with  any and all  other
provisions  thereof,  and no other person  shall,  under any  circumstances,  be
deemed to be a beneficiary of this Agreement, the Pledge Agreement or any of the
other Transaction  Documents,  any rights of which may be freely waived in whole
or in part by the  Lender  at any time if, in its sole  discretion,  it deems it
desirable to do so.

         9.17. The Borrower Not the Lender's  Agent.  Nothing in this Agreement,
the  Pledge  Agreement  or any of  the  other  Transaction  Documents  shall  be
construed to make the Borrower  the Lender's  agent for any purpose  whatsoever,
the  Borrower  and the  Lender  partners,  or  joint  or  co-venturers,  and the
relationship of the parties shall, at all times, be that of debtor and creditor.

         9.18.  Waiver of Defenses.  The Borrower hereby waives  presentment for
payment,  demand,  protest,  notice  of  dishonor,  notice  of  acceleration  of
maturity,  and all  defenses on the ground of  extension  of time for payment of
Borrower's  obligation under this Agreement  (except for such extensions of time
as may have been granted by the Lender in writing from time to time),  and agree
to continue  and remain  bound for the payment of  principal,  interest  and all
other sums payable  hereunder,  notwithstanding  any change or changes by way of
release, surrender,  exchange or substitution of any security for the Loan or by
way of any extension or extensions of time for payment of principal or interest.
The Borrower  further  hereby waives all and every kind of notice of such change
or changes and agrees that the same may be made without  notice to or consent of
the Borrower.
<PAGE>

IN WITNESS WHEREOF, each of the parties hereto has caused this Loan Agreement to
be  effective as of the date first above  written,  but have in fact caused this
Loan Agreement to be duly executed and delivered as of this 25th day of October,
2000.

Lender:                               Borrower:

IONICS, INCORPORATED                  HAFEEZ KARAMATH ENGINEERING SERVICES, LTD.


By: /s/ Edward J. Cichon              By: /s/ Hafeez Karamath
    --------------------------------  ----------------------------------------
        (Signature)                          (Signature)

Name: Edward J. Cichon                Name: Hafeez Karamath
    --------------------------------  ----------------------------------------
          (Print)                            (Print)
Title: Vice President                 Title: Exec. Chairman
     -------------------------------  ----------------------------------------
         (Print)                             (Print)

To the Lender:                        To the Borrower:

Ionics, Incorporated                  Hafeez Karamath Engineering Services Ltd.
65 Grove Street                       Cyrus Trace, El Socorro Ext.
Watertown, MA 02472                   San Juan, Trinidad, W.I.
Facsimile No: (617) 926-9277          Facsimile No: (868) 675-2679

Witness: Donne Denbow
Witness: Gary L. Podrabsky


<PAGE>
                                    EXHIBIT A
                            FORM OF PLEDGE AGREEMENT

                             STOCK PLEDGE AGREEMENT

         This Stock Pledge Agreement  ("Pledge  Agreement")  dated as of October
25, 2000, is entered into between Hafeez Karamath  Engineering  Services Limited
("HKES") a corporation  duly  organized and existing under the laws of Trinidad,
West Indies,  with its principal place of business at 56 Cyrus Trace, El Sorocco
Extension, San Juan, Trinidad, W.I., executed in trust for an affiliate of HKES,
organized  or to be  organized  under the laws of Saint  Lucia,  and which  will
assume all rights and obligations of HKES hereunder,  as if it were the original
named  party  hereto  in full  substitution  for HKES  (the  Pledgor),  with the
agreement  by the  parties  that  until the  affiliate  assumes  all  rights and
obligations  of  HKES  hereunder,  HKES  will  continue  to be  liable  for  the
performance  of all  obligations  of the Pledgor and entitled to the benefits of
this Pledge Agreement,  and Ionics,  Incorporated,  a corporation duly organized
and existing under the laws of the Commonwealth of Massachusetts,  United States
of America, with its principal place of business at 65 Grove Street,  Watertown,
Massachusetts,  U.S.A. ("Ionics"), executed in trust for an affiliate of Ionics,
organized  or to be  organized  under the laws of Saint  Lucia,  and which  will
assume  all  rights  and  obligations  of  Ionics  hereunder,  as if it were the
original named party hereto in full substitution for Ionics (the Pledgee),  with
the  agreement  by the parties that until the  affiliate  assumes all rights and
obligations  of Ionics  hereunder,  Ionics  will  continue  to be liable for the
performance  of all  obligations  of the Pledgee and entitled to the benefits of
this Pledge Agreement.

                                    Recitals

A.   Pursuant to a Loan  Agreement of even date herewith by and between  Pledgor
     and Pledgee ("Loan Agreement"),  Pledgee is making a loan to Pledgor in the
     principal  amount of  U.S.$10,000,000  (the  Loan) to be used by Pledgor to
     purchase 200 ordinary shares of common stock (the "Pledged  Shares") in The
     Desalination  Company of Trinidad and Tobago, a limited  liability  company
     duly organized and existing under the laws of Trinidad,  West Indies,  with
     its principal  place of business at 56 Cyrus Trace,  El Sorocco  Extension,
     San Juan, Trinidad, W.I. (Desalcott).

B.   As a material  inducement  to cause  Pledgee  to make the Loan to  Pledgor,
     Pledgor  has agreed to pledge to Pledgee as security  for all of  Pledgor's
     obligations under the Loan Agreement the Pledged Shares.
<PAGE>

C.   All  capitalized  terms used herein and not otherwise  defined  herein will
     have the meaning assigned to them in the Loan Agreement.

                                    Agreement

         1. The  Pledgor  hereby  grants,  pledges  and assigns to the Pledgee a
continuous  security  interest in the Pledged  Shares and in all  dividends  and
other  distributions,  cash or non-cash,  from time to time  distributed  on the
Pledged Shares,  as security for Pledgor's  obligations under the Loan Agreement
and the  performance  of Pledgor's  covenants  contained  herein and in the Loan
Agreement,  subject only to a First  Priority  Security  Interest in the Pledged
Shares,  whether now existing or hereinafter arising,  granted by Pledgor to any
of (i) Republic Bank Limited,  Republic  Finance and Merchant Bank Limited,  and
the other financial institutions which become lenders pursuant to Clause 26.2 of
the Project Loan  Agreement  dated July 13, 2000 between  Desalcott and the Bank
(in its various capacities) (collectively,  the "Bank"), pursuant to a charge of
shares agreement entered or to be entered into among Pledgor, Pledgee, Desalcott
and the Bank (the "Charge of Shares Agreement");  (ii) any bridge,  construction
or short-term  lenders  providing  financing to Desalcott in connection with the
engineering,  design, construction and operation of the desalination plant being
constructed  by Desalcott  in Point Lisas,  Republic of Trinidad and Tobago (the
"Project")  (together with the Bank, the  "Short-Term  Lenders");  and (iii) the
Overseas  Private  Investment  Corporation or other  permanent  project  finance
lender for the Project (collectively, the "Long-Term Lenders", and together with
the Bank and the Short-Term Lenders, the "First Priority Interest Holders", with
each being referred to individually as a "First Priority Interest Holder"). (The
first priority security interest granted by Pledgor to a First Priority Interest
Holder shall be referred to herein as the "First Priority  Security  Interest").
To the extent that all of the Pledged  Shares have not been purchased by Pledgor
at the time of execution of this Pledge Agreement, Pledgor agrees to execute all
documents  and do all things  required in order to grant and maintain  Pledgee's
perfected  security  interest in the Pledged  Shares and Pledgee's  other rights
contained in this Pledge Agreement with respect to the Pledged Shares,  and such
of the  Pledged  Shares as may be issued to Pledgor  from time to time after the
execution  of this  Agreement  and become  subject  to the terms of this  Pledge
Agreement under clause 13 hereof.

         2. The  Pledgee  hereby  accepts  the  Pledgor's  pledge of the Pledged
Shares as  security  for the  payment of  Pledgor's  obligations  under the Loan
Agreement and the performance of Pledgor's covenants contained herein and in the
Loan Agreement.

         3. Upon  execution of this Pledge  Agreement,  Pledgor shall deliver to
the Bank a written  notice in a form  prepared  by Pledgee  ("Notice of Pledge")
notifying the Bank of this Pledge Agreement and Pledgor's pledge to Pledgee of a
second  priority  security  interest the  Collateral.  Further,  upon any future
granting of a First  Priority  Security  Interest  in the Pledged  Shares by the
Pledgor to a First Priority  Interest Holder,  Pledgor shall deliver a Notice of
Pledge to such First Priority Interest Holder.
<PAGE>

         4. Upon execution of this Pledge Agreement,  Pledgor shall instruct the
Bank  to  (i)  hold  the   certificates   evidencing  the  Pledged  Shares  (the
Certificates) as Pledgee's agent to secure Pledgor's  obligations under the Loan
Agreement and perfect the pledge of the Pledged Shares contained herein pursuant
to a Collateral Sharing Agreement among the Bank, Pledgor and Pledgee and in the
form  attached  as  Exhibit A (the  "Collateral  Sharing  Agreement"),  and (ii)
transfer the Certificates  directly to Pledgee upon receipt of notification from
the Bank of termination of the Bank's First Priority Security  Interest,  unless
the Pledgee has sent written notice to the Bank prior to that date notifying the
Bank that this Pledge Agreement and Pledgee's second priority  security interest
in the  Pledged  Shares has  terminated,  in which case the  Collateral  Sharing
Agreement  shall  also  terminate.  If  upon  termination  of the  Project  Loan
Agreement,  Desalcott  re-finances  with  one  or  more  Long-Term  Lenders  the
obligations  secured  by the  Charge of Shares  Agreement  and a First  Priority
Security  Interest  in the  Pledged  Shares is to be granted  to such  Long-Term
Lender(s) under a pledge agreement  between Pledgor and the Long-Term  Lender(s)
("Long-Term Lender Pledge Agreement"),  the Pledgor agrees to provide equivalent
instructions to the collateral agent under the Long-Term Lender Pledge Agreement
("Collateral  Agent") as those  contained  in clauses (i) and (ii) above of this
Section  4, and to  require  the  Collateral  Agent to  execute  and  deliver  a
collateral  sharing agreement upon  substantially the same terms as contained in
the Collateral Sharing Agreement.

         5. Upon notice of termination of the First Priority  Security  Interest
having  been given by the Bank or the  Collateral  Agent to the  Pledgee,  and ,
after  delivery  by the  Bank or the  Collateral  Agent of the  Certificates  to
Pledgee,  the Pledgee will be entitled to hold the  Certificates and the undated
share tranfer until Pledgee  confirms in writing the  termination of this Pledge
Agreement.  The Bank or the Collateral  Agent entitled to hold the  Certificates
under a Collateral  Sharing  Agreement  shall be referred herein as a "Trustee".
Upon receipt of the Certificates by Pledgee, the Bank or the Collateral Trustee,
as the case may be, shall cease to be a Trustee and Pledgee shall be referred to
herein as a Trustee.

     6.  Pledgor  covenants  with  Pledgee  that  until  payment  in full of the
principal and interest on the Loan, it will not:

(a)  sell, lease, assign, transfer,  encumber or otherwise dispose of (Transfer)
     any of its assets or  revenues  whether  now owned or  hereafter  acquired,
     other than in the ordinary course of business;

(b)  Transfer  the  Pledged  Shares,  except  pursuant  to any  loan  or  pledge
     agreement between Pledgor and a First Priority Security Holder; or

(c)  make any payment on account of the  purchase,  acquisition,  redemption  or
     other retirement of any of its shares.

         7. Pledgor  further  covenants with Pledgee that it will not declare or
pay any  dividend or  authorize  or make any other  distribution  on its capital
stock, whether now or hereafter outstanding, unless:
<PAGE>

(a)  the dividend or other  distribution  is paid or distributed  within fifteen
     (15)  days  after  an  Interest  Payment  Date  (as  defined  in  the  Loan
     Agreement); and

(b)  whether or not  sufficient  dividends  have been paid by  Desalcott  on the
     Pledged  Shares,  on  the  date  of  declaration  of a  dividend  or  other
     distribution by the Pledgor:

     (i)  no amortized  principal  amount of the Loan is unpaid  (without taking
          into  account  whether  the  amortized  principal  is not yet  payable
          because Desalcott has not declared and paid sufficient dividends); and

     (ii) no accrued interest  (without taking into account whether the interest
          is not yet  payable  because  Desalcott  has  not  declared  and  paid
          sufficient dividends) on the Loan is unpaid.

         8. Upon an occurrence of an Event of Default permitting the enforcement
of the Loan Agreementin  accordance with clause 7.01 thereof, , Pledgee shall be
entitled to  foreclose  on its  security  interest in the Pledged  Shares and to
exercise all rights of a Pledgee  under the laws of the Republic of Trinidad and
Tobago for Pledgee to  effectively  foreclose  its  security  interest.  Without
limiting the generality of the foregoing,  Pledgee may, upon  occurrence of such
an Event of Default,  sell the Pledged Shares in the manner authorized by Clause
16 of this Pledge Agreement,  and may seek to foreclose its security interest in
the Pledged Shares immediately, or take other appropriate action either alone or
in conjunction with any First Priority  Security Holder in existence at the time
of Default.  Notice of any such sale given at least ten (10) days prior  thereto
shall  constitute  reasonable  notice  to  Pledgor.  Upon any sale of any of the
Pledged Shares hereunder (whether by virtue of the power of sale herein granted,
pursuant to judicial  process or  otherwise),  the receipt of the Pledgee or the
officer  making the sale shall be a  sufficient  discharge  to the  purchaser or
purchasers of the Pledged Shares so sold, and such purchaser or purchasers shall
not be obligated  to see to the  application  of any part of the purchase  money
paid over to the  Pledgee or such  officer or be  answerable  in any way for the
misapplication or non-application thereof. Each purchaser at any sale shall take
the Pledged  Shares  absolutely  free from any claim or right on the part of the
Pledgor subject to any First Priority  Security  Interest in the Pledged Shares,
and the Pledgor, upon any sale of the Pledged Shares pursuant to this Section 8,
hereby  waives  and  releases  (to the  extent  permitted  by law) all rights of
redemption  or stay which the  Pledgor  now has or may at any time in the future
have under any rule of law or statute now existing or hereafter enacted. Pledgor
agrees that nothing contained in the Shareholders'  Agreement dated May 12, 2000
among  Desalcott,  Pledgor and Pledgee  will be construed to prevent or restrict
Pledgee from  exercising any of its rights under this Pledge  Agreement upon the
occurrence of such an Event of Default, it being understood that the exercise of
Pledgee's rights is subject to any rights of the First Priority Interest Holders
to which Lender is subordinate.
<PAGE>

         9. Until an Event of Default occurs,  but not subsequent  thereto,  the
Pledgor is entitled,  subject to the Charge of Shares  Agreement  and any future
pledge agreement between the Pledgor and a First Priority Security Holder,  with
respect to the  Pledged  Shares to: (i) vote the  Pledged  Shares at meetings of
shareholders,  (ii)  execute  consents in respect of the Pledged  Shares,  (iii)
consent to, ratify or waive notice of meetings of stockholders  and (iv) receive
dividends  or  other  distributions,   cash  or  non-cash,  from  time  to  time
distributed  on the Pledged  Shares;  to be  disbursed  in the manner set out in
clause 2.06 of the Loan Agreement,  and pursuant to Section 2.05 or 2.07, as the
case may be,  and any  principal  payable  on the Loan due as of the date of the
next installment  payment  pursuant to Section 2.04 of the Loan Agreement.  Upon
declaration of a dividend or other distributions, Pledgor shall provide both the
Pledgee and the escrow  agent with a Dividend  Payout  Certificate,  in the form
attached  hereto as  Exhibit B,  stating  the  amount of any  dividend  or other
distribution  the  Pledgor  has  received  to  pursuant  to this  Section  9. If
necessary,  and upon the receipt of the written  request from the  Pledgor,  the
Pledgee  agrees to execute  and  deliver  appropriate  proxies  to the  Pledgor;
provided  that all such action taken or proposed to be taken by Pledgor shall be
consistent with the terms of this Pledge Agreement.

         10. The  Pledgor  hereby  represents  and  warrants  that (i) it is the
beneficial  owner of, and has good and marketable  title to, the Pledged Shares,
subject to no lien whatsoever,  except the liens and security  interests created
by this Pledge  Agreement  and by the Charge of Shares  Agreement  and the First
Priority  Security  Interest  granted on the  Pledged  Shares;  (ii) it has full
power,  authority and legal right to pledge the Pledged Shares  pursuant to this
Pledge  Agreement;  (iii) no  consent  of any other  party  (including,  without
limitation, any stockholder or creditor of the Pledgor) except consents required
from the First Priority  Interest Holders which will have been obtained prior to
or at the time of closing of the Loan Agreement, and no order, consent, license,
permit,  approval,  validation or  authorization  of, exemption by, notice to or
registration  with (other than as required by the Loan  Agreement or this Pledge
Agreement),  recording,  filing or declaration  with, any governmental or public
body or authority is required to be obtained by the Pledgor in  connection  with
the execution,  delivery or performance of this Pledge Agreement or consummation
of the transactions  contemplated  hereby,  including,  without limitation,  the
grant by Pledgor to Pledgee of a valid second priority  security interest in the
Pledged  Shares  and  the  exercise  by the  Pledgee  of the  voting  (upon  the
occurrence  of an Event of  Default  as  provided  in  Section 9 above) or other
rights  provided for in this Pledge  Agreement or the remedies in respect of the
Pledged Shares pursuant to this Pledge  Agreement  (except as may be required in
connection  with the  disposition  of the Pledged  Shares by laws  affecting the
offering and sale of securities generally);  (iv) all of the Pledged Shares have
been duly and validly issued, and are fully paid; (v) this Pledge Agreement, the
Collateral Sharing Agreement, or other collateral sharing agreement made between
the  Pledgor,  Pledgee,  and  any  other  holder  of a First  Priority  Security
Interest,  and the undated share transfers of the Pledged Shares are and will be
valid and legally  binding  obligations  of Pledgor,  enforceable  against it in
accordance with the terms hereof;  and (vi) the pledge by Pledgor and holding of
the  Pledged  Shares by the Bank  pursuant  to the Loan  Agreement,  this Pledge
Agreement and the Collateral  Sharing  Agreement creates a valid second priority
security  interest  in the  Pledged  Shares,  and the  proceeds  thereof,  which
security  interest is not subject to any prior lien or any agreement  purporting
to grant to any third  party a lien on the  property  or  assets of the  Pledgor
which would  include the Pledged  Shares,  except for the Bank's First  Priority
Security  Interest  granted pursuant to the Charge of Shares  Agreement,  or any
other First Priority Security Interest granted to the holder thereof.
<PAGE>

         11. The Pledgor  covenants  and agrees that the (i) Pledgor will defend
the Pledgee's  right,  title and security  interest in and to the Pledged Shares
and  the  proceeds  thereof  against  the  claims  and  demands  of all  persons
whomsoever;  (ii) Pledgor will not, with respect to the Pledged Shares,  without
the prior written consent of the Pledgee, enter into any shareholder agreements,
voting agreements,  voting trusts, trust deeds, irrevocable proxies or any other
similar agreements or instruments, provided that the Pledgee recognizes that the
Pledged  Shares are or may be subject to the First  Priority  Security  Interest
held by the First Priority Interest Holders.

         12. If an Event of Default shall have  occurred and be  continuing  and
the Pledgor shall have  received from the Pledgee a written  request or requests
that the Pledgor cause any  registration,  qualification or compliance under any
laws of the  Republic of Trinidad  and Tobago or laws thereof to be enacted with
respect to the Pledged  Shares,  the Pledgor as soon as practicable and will use
its  best  efforts  to  cause  the  registration  to be  effected  (and  be kept
effective)  and will use its  best  efforts  to  cause  such  qualification  and
compliance to be effected (and be kept  effective) as may be so requested and as
would grant a valid second priority  interest in the Pledged  Shares,  or if all
First Priority  Security  Interests  have been  released,  a valid and perfected
first priority  security  interest in the Pledged Shares or permit or facilitate
the sale and distribution of the Pledged Shares, including,  without limitation,
appropriate  compliance with all government  requirements,  and reasonably do or
cause to be done all such other acts and things as may be  necessary  to grant a
valid second priority  interest in the Pledged Shares,  or if all First Priority
Security  Interests  have been  released,  a valid and perfected  first priority
security  interest  so as to make a sale of the  Pledged  Shares by the  Pledgee
valid and binding in compliance with applicable laws.

         13.  During  the term of this  Pledge  Agreement,  if any  issue of new
shares or share  dividends  or other  change is  declared  with  respect  to the
Pledged Shares or made in the capital  structure of the Pledged  Shares,  or any
subscription,  warrant or other  option is issued  with  respect to the  Pledged
Shares, or any cash or property dividend is paid on the Pledged Shares, all new,
substituted,  or additional  shares or other securities issued by reason of such
issue, change or option or any cash or property  distributed as a result of such
dividend  shall be delivered to and held by the Trustee  under the terms of this
Pledge Agreement in the same manner as the Pledged Shares subject to clause 2.06
of the Loan  Agreement.  Thereafter,  the term  Pledged  Shares  in this  Pledge
Agreement  shall be deemed to  include  such  shares or  securities  and,  where
applicable,  such cash or  property  the  Pledgor  is not  entitled  to  receive
pursuant to Section 14.

         14. The  Pledgor  shall:  (i)  whether or not the  transactions  hereby
contemplated are consummated,  pay or reimburse the Pledgee promptly upon demand
for the payment of all  reasonable  costs and  expenses of the Pledgee  incurred
after the date hereof in connection with the  preservation of rights under,  and
enforcement  of,  and,  after  an  Event  of  Default,   the   renegotiation  or
restructuring  of this Pledge  Agreement  and any  amendment,  waiver or consent
relating  thereto  (including,  without  limitation,  the  reasonable  fees  and
disbursements of counsel for the Pledgee); (ii) excluding the initial stamp duty
due and payable with respect hereto,  pay and hold the Pledgee harmless from and
against any and all future stamp  duties or any other excise or property  taxes,
charges or similar  levies or recording  costs which arise from any payment made
hereunder or from the execution,  delivery or registration of, or otherwise with
respect to this Pledge  Agreement and hold the Pledgee harmless from and against
any and all liabilities  with respect to or resulting from any delay or omission
to pay any such  duties,  taxes,  charges or  levies;  and (iii)  indemnify  the
Pledgee, its officers, directors, employees, representatives and agents from and
hold  each of them  harmless  against  any and  all  reasonable  costs,  losses,
liabilities,  claims,  damages  or  expenses  actually  incurred  by any of them
(whether or not any of them is a designated  party thereto) arising out of or by
reason of any litigation or other proceeding  related to this Pledge  Agreement.
Notwithstanding  anything in this Pledge Agreement to the contrary,  the Pledgor
shall not be  responsible  to the Pledgee or any  officer,  director,  employee,
representative or agent of the Pledgee for any losses,  damages,  liabilities or
expenses which result from such person's gross negligence or willful misconduct.
The Pledgor's obligations under this Section 14 shall survive any termination of
this Pledge Agreement.
<PAGE>

         15. No delay on the part of the Pledgee in exercising  its rights under
this Pledge  Agreement  shall waive  these  rights,  nor shall the waiver of any
breach under this Pledge Agreement operate as a waiver of any subsequent breach.

         16. The Pledgee does not have any liability or obligation to take steps
to  preserve  the value of the Pledged  Shares,  or to collect or to enforce any
obligation  secured by the Pledged Shares,  whether by giving notice,  demanding
payment,  protesting or  instituting  suit or  otherwise.  The Pledgee shall not
incur any liability as a result of the sale of the Pledged  Shares,  or any part
thereof,  at  any  private  or  public  sale  conducted  in a  manner  which  is
commercially  reasonable  in  accordance  with the laws of  Trinidad  and Tobago
relating to sale by mortgagees . On a proposed sale of the Pledged  Shares,  the
Pledgee agrees to use commercially  reasonable  efforts to obtain the best price
available, and will, at Pledgor's expense, have an independent valuation made of
the Pledged Shares.  Provided the Pledgee  complies with the above,  the Pledgor
hereby waives any claims against the Pledgee  arising by reason of the fact that
the  price at which  the  Pledged  Shares  may have  been sold was less than the
aggregate  amount  of the  Loan or  less  than  the  amount  of the  independent
valuation.

         17. Upon payment of the Loan in full plus accrued and unpaid  interest,
including  payment of any default  interest or cost of  collection,  the Pledgee
shall  notify the  Trustee  of the  termination  of  Pledgee's  second  priority
security interest.  If the Pledgee is the Trustee,  the Pledgee shall return the
Certificates  and  blank  transfers  executed  by the  Pledgor,  and  all  other
collateral held pursuant to this Pledge  Agreement to the Pledgor within fifteen
(15)  business days after  Pledgee  receives such payment or payments,  and this
Pledge  Agreement and the  Collateral  Sharing  Agreement if in existence  shall
immediately terminate, except for Pledgor's obligations under Section 14 above.

     18. This Pledge  Agreement  may be  modified  only by a written  instrument
signed by the parties.

         19. Any notice or other communication  required or permitted under this
Pledge Agreement shall be in writing and shall be deemed to have been duly given
upon (i) hand delivery or  confirmation of receipt of facsimile or (ii) five (5)
days after  mailing,  if properly  addressed and sent by certified or registered
mail,  return receipt  requested,  postage prepaid,  or (iii) two (2) days after
delivery, properly addressed, to an internationally recognized overnight courier
service, delivery costs prepaid, addressed as follows:


<PAGE>


                  (i)      If to the Pledgor, to:

                           Hafeez Karamath Engineering Services, Ltd.
                           Cyrus Trace, El Socorro Ext.
                           San Juan, Trinidad, W.I.
                           Facsimile: 868-675-2679


                  (ii)     If to the Pledgee, to:

                           Ionics, Incorporated
                           65 Grove Street
                           Watertown, MA  02472
                           Facsimile: 617-926-9277

Each Party may designate  another address or person for receipt of notices under
this Pledge  Agreement by giving notice in  accordance  with this Section to the
other parties.

         20.  The  Pledgor  agrees  that it will do such  acts  and  things  and
promptly  execute  and  deliver  to the  Pledgee  such  additional  conveyances,
assignments, agreements and instruments as the Pledgee may reasonably require or
deem  advisable  to carry into effect the  purposes of this Pledge  Agreement to
perfect its second priority security interest, or after termination of all First
Priority Security  Interests,  a first priority security interest in the Pledged
Shares,  and to further  assure and confirm unto the Pledgee its rights,  powers
and  remedies  hereunder,  including,  without  limitation,  the  execution  and
delivery  of such  proxies  and other  documents  as may be  necessary  to allow
Pledgee to exercise its rights  (including,  without  limitation,  voting powers
vested in Pledgee upon an Event of Default in  accordance  with Section 9 above)
with respect to the Pledged  Shares and Pledgor  shall  deliver upon receipt all
dividends,  interest  and other cash  payments  and cash  proceeds  which it may
receive  with respect to the Pledged  Shares  subject to clause 2.06 of the Loan
Agreement to be held as additional security for Pledgor's  obligations under the
Loan  Agreement and this Pledge  Agreement in accordance  with the terms of this
Pledge Agreement.
<PAGE>

         21.  Upon  the  occurrence  of an  Event of  Default  resulting  in the
enforcement  of the Loan Agreement in accordance  with clause 7.01 thereof,  and
for the purposes  set out in clause 20 of this Pledge  Agreement ( in the latter
instance whether or not an Event of Default has occurred) but not otherwise, the
Pledgor hereby  absolutely and irrevocably  constitutes and appoints the Pledgee
as  the  Pledgor's  true  and  lawful  attorney-in-fact,   with  full  power  of
substitution,  in the  name  of the  Pledgor:  (a) to  execute  and do all  such
assurances,  acts and things which the Pledgor  ought to do but has failed to do
under the covenants and provisions  contained in this Pledge  Agreement;  (b) to
take  any and all such  action  as the  Pledgee  may,  in its  sole  discretion,
determine as necessary or advisable for the purpose of  maintaining,  preserving
or protecting the security  constituted  by this Pledge  Agreement or any of the
rights,  remedies,  powers  or  privileges  of the  Pledgee  under  this  Pledge
Agreement,  including the granting of any authority to the Bank deemed necessary
or  appropriate  by the Pledgee to perfect,  protect and  preserve  its security
interest in the Pledged Shares and rights hereunder;  and (c) generally,  in the
name  of the  Pledgor  exercise  all or any  of  the  powers,  authorities,  and
discretions  conferred  on or  reserved  to the  Pledgee by or  pursuant to this
Pledge  Agreement,  and  (without  prejudice  to  the  generality  of any of the
foregoing) to seal and deliver or otherwise  perfect any  instrument or document
of  conveyance,  agreement,  or act as the Pledgee may deem proper in or for the
purpose of  exercising  any of such  powers,  authorities  or  discretions.  The
Pledgor hereby  ratifies and confirms,  and hereby agrees to ratify and confirm,
whatever  lawful acts the Pledgee  shall do or purport to do in the  exercise of
the power of attorney  granted to the Pledgee pursuant to this Section 21, which
power of attorney,  being given for  security  and coupled with an interest,  is
irrevocable.

         22. This Pledge  Agreement  (together  with the Loan  Agreement and any
Collateral  Sharing  Agreement  between  Pledgor and the Bank)  constitutes  the
entire agreement with respect to the pledge of the Pledged Shares to the Pledgee
and supersedes all prior agreements and  understandings,  both written and oral,
between  the  parties   with   respect  to  the  pledge.   It  may  be  executed
simultaneously  in  several  counterparts,  each of  which  shall be  deemed  an
original,  and  all  of  which  together  shall  constitute  one  and  the  same
instrument.  Delivery  of  the  executed  signature  page  hereof  by  facsimile
transmission  shall  constitute  effective  and binding  execution  and delivery
hereof.  Any party  signifying  execution of this Pledge  Agreement by facsimile
agrees to provide the other party with an original  signed  Pledge  Agreement by
overnight courier (for delivery on the next business day).

         23. The  invalidity  or  unenforceability  of any one or more  phrases,
sentences,  clauses or sections in this  Pledge  Agreement  shall not affect the
validity or enforceability of the remaining portions of this Pledge Agreement or
any part thereof.

         24. The terms and provisions of this Pledge  Agreement shall be binding
upon the Pledgor and its successors, assigns and legal representatives and shall
inure to the  benefit  of the  Pledgee  and its  successors,  assigns  and legal
representatives.

     25. This Pledge  Agreement shall be governed by and construed in accordance
with the laws of the Republic of Trinidad and Tobago.
<PAGE>

         26. Pledgor hereby  irrevocably  agrees that to the extent that Pledgor
or its  respective  assets has or  hereafter  may  acquire any right of immunity
related to or arising from the  transactions  contemplated by the Loan Agreement
or this  Pledge  Agreement,  whether  characterized  as  sovereign  immunity  or
otherwise,  from any legal  proceedings  to  enforce  or  collect  upon the Loan
Agreement or this Pledge  Agreement  or any other  liability  or  obligation  of
Pledgor related to Pledgee, including, without limitation, immunity from service
of process,  immunity  from  jurisdiction  or judgment of any court or tribunal,
immunity from execution of a judgment,  and immunity of any of its property from
attachment  prior  to any  entry  of  judgment,  or  from  attachment  in aid of
execution upon a judgment,  Pledgor hereby expressly and irrevocably  waives any
such immunity.

         27.  In the event of a  dispute  between  the  parties  to this  Pledge
Agreement  in any way related to or arising out of this Pledge  Agreement or the
transactions  contemplated herein ("Dispute"),  each party shall attempt in good
faith to resolve the dispute promptly through  negotiations.  If the dispute has
not been resolved through negotiation within five (5) days after the delivery of
a notice of dispute by either  party,  either  party may  institute  arbitration
proceedings at any time thereafter by delivering  written demand for arbitration
to the other party in the manner described in Section 19. The dispute shall then
be  exclusively  and finally  settled and  resolved  by binding  arbitration  in
accordance with the  Arbitration act of Trinidad and Tobago  supplemented by the
International  Rules of Arbitration of the International  Chamber of Commerce ..
Such  arbitration  proceedings  shall be held in  London,  England  and shall be
subject to the choice of law provisions set forth in Section 25. For purposes of
this section 25, the parties  hereby waive any and all  objections to venue that
they may  have  under  the laws of any  state  or  country,  including,  without
limitation, any argument that jurisdiction, situs, and/or venue are inconvenient
or otherwise  improper.  Any decision or award of the  arbitrator or arbitration
panel, as the case may be, shall be expressed in United States dollars and shall
be final and binding on the parties to the arbitration  proceeding.  The parties
hereby waive, to the extent permitted by law, any and all rights to appeal or to
review such award by any court or  tribunal.  The parties  hereto agree that the
arbitral award may be enforced against the parties to the arbitration proceeding
or their assets wherever they may be found and that a judgment upon the arbitral
award may be entered in any court having jurisdiction  therefor.  The procedures
established in this Section 27 shall be the sole,  exclusive  procedures for the
resolution of Disputes between the parties,  provided,  however, that either may
seek a preliminary  injunction or other  preliminary  judicial relief if, in its
reasonable,  good-faith judgment,  such action is necessary to avoid irreparable
damage.  Each party further agrees that process may be served upon such party in
any manner authorized under the laws of the Republic of Trinidad and Tobago, and
waives any objections that such party may otherwise have to such process.

         28. In the event of any suit, action or arbitration or other proceeding
arising out of or based on this Pledge Agreement,  the prevailing Party shall be
entitled  to such  costs as may be  awarded  by the Court or the  Arbitrator  in
question.
<PAGE>

         In the presence of:          HAFEEZ KARAMATH ENGINEERING SERVICES, LTD.


         /s/ Andre LeBlanc            By: /s/ Hafeez Karamath
         -----------------            ---------------------------
         Name: Andre LeBlanc          Name:     Hafeez Karamath
                                      Title:    Executive Chairman

         /s/ Donne Denbow
         -----------------
         Name: Donne Denbow

                                      IONICS, INCORPORATED


         /s/ Gary L. Podrabsky        By:  /s/ Edward J. Cichon
         ---------------------        ---------------------
         Name: Gary L. Podrabsky      Name:  Edward J. Cichon
                                      Title:    Vice President

         /s/ John C. Kiernan
         --------------------
         Name:

                                      Witness: /s/ Donne Denbow
                                               -----------------





<PAGE>


                                    EXHIBIT B

                   FORM OF CERTIFICATE OF CHAIRMAN OF BORROWER

         The undersigned,  , Chairman of HAFEEZ KARAMATH  ENGINEERING  SERVICES,
LTD., a corporation  duly  organized and existing under the laws of the Republic
of Trinidad and Tobago (the "Company"), does hereby certify, pursuant to Section
3.01(c) of that certain Loan  Agreement  dated as of September , 2000 (the "Loan
Agreement")  between the Company and IONICS,  INCORPORATED,  a corporation  duly
organized and existing under the laws of Massachusetts,  U.S.A., as a Lender, as
follows on behalf of the Company  (capitalized  terms used herein shall have the
meanings given such terms in the Loan Agreement):

                  (i)  The   representations   and  warranties  of  the  Company
         contained  in Section 6 of the Loan  Agreement  are true and correct in
         all material respects on and as of the date hereof with the same effect
         as though  all such  representations  and  warranties  had been made or
         given on the date hereof; and

                  (ii) No Event of Default,  nor any event which, upon notice or
         lapse of time or both, would  constitute such an Event of Default,  has
         occurred or will have occurred after giving effect to the making of the
         Loan on the date hereof.

          IN WITNESS  WHEREOF,  the undersigned has executed this Certificate on
     this ___ day of September, 2000.


                   HAFEEZ   KARAMATH   ENGINEERING   SERVICES,    LTD.,   a
                   corporation  duly  organized and existing under the laws
                   of the Republic of Trinidad and Tobago



                   By:  ----------------------------------------------------
                        Chief Financial Officer


<PAGE>


                                    EXHIBIT C

                              CLOSING DOCUMENT LIST

         The  following  documents  shall be delivered in  connection  with that
certain Loan Agreement (the  "Agreement"),  dated as of September  _____,  2000,
between HAFEEZ KARAMATH  ENGINEERING  SERVICES LTD. (the "Borrower") and IONICS,
INCORPORATED (the "Lender").



A.       Basic Loan Documents.
         --------------------

1.       Agreement.

          2.   Stock Pledge Agreement dated as of Septemer __, 2000 (the "Pledge
               Agreement"), from the Borrower to the Lender. (Exhibit A)

          3.   Blank Share Transfer relating to Borrower's Shares

          4.   Share  Certificates  evidencing the  Borrower's  ownership of the
               Borrower's  shares.  (A copy will be delivered since the Original
               will be at the Bank)

          5.   Certificate of Chairman of the Borrower (Exhibit B).

          6.   Collateral  Sharing  Agreement with Republic Bank or other bridge
               lender to  Desalcott,  or Letter  of  Consent  issued by the Bank
               pending the finalization of the Collateral Sharing Agreement

          7.   Statement of Charge to be filed with the Registrar of Companies.


B.       Organizational Documents.
         ------------------------

          1.   Articles of Incorporation and By-laws.

          2.

          3.   Board Resolution authorizing the Transactions contemplated in the
               Agreement.

          4.   Shareholders resolution amending the Articles of Incorporation of
               Desalcott.

          5.   Opinion of Borrower's Counsel.