UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 02549

                                    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, 2001

                                       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                                     4-2068530
 (State of incorporation)                   (IRS Employer Identification Number)

      65 Grove Street                                   02472-2882
   Watertown, Massachusetts                             (Zip Code)
 (Address of principal executive offices)

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

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

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. [X]

The  aggregate  market  value  of the  Common  Stock of the  registrant  held by
non-affiliates  as of March  22,  2002 was  $530,069,032  (17,093,487  shares at
$31.01 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).  As of March 22, 2002,  17,533,242  shares of Common
Stock, $1 par value, were issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

The  Registrant  intends  to  file a  definitive  proxy  statement  pursuant  to
Regulation  14A within 120 days of the end of the fiscal year ended December 31,
2001.  Portions of such proxy statement are  incorporated by reference into Part
III of this Annual Report on Form 10-K.


                                       1
<PAGE>



<TABLE>
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                              IONICS, INCORPORATED

                           ANNUAL REPORT ON FORM 10-K
                        FOR YEAR ENDED DECEMBER 31, 2001

                                TABLE OF CONTENTS

PART I..............................................................................................................3
<S><C>                  <C>                                                                                        <C>
   ITEM 1.              BUSINESS....................................................................................3
   ITEM 2.              PROPERTIES.................................................................................13
   ITEM 3.              LEGAL PROCEEDINGS..........................................................................15
   ITEM 4.              SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................15

PART II............................................................................................................15
   ITEM 5.              MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................
                                                                                                                   15
   ITEM 6.              SELECTED CONSOLIDATED FINANCIAL DATA.......................................................15
   ITEM 7.              MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........
                                                                                                                   16
   ITEM 8.              CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................30
   ITEM 9.              CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.........
                                                                                                                   56

PART III...........................................................................................................56
   ITEM 10.             DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................................56
   ITEM 11.             EXECUTIVE COMPENSATION.....................................................................56
   ITEM 12.             SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................
                                                                                                                   56
   ITEM 13.             CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................56

PART IV............................................................................................................56
   ITEM 14.             EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...........................56


SIGNATURES.........................................................................................................61

</TABLE>



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                                     PART I

Except for historical  information,  the matters discussed in this Annual Report
on  Form  10-K  are   forward-looking   statements   that   involve   risks  and
uncertainties.  The  Company  makes such  forward-looking  statements  under the
provision  of the "Safe  Harbor"  section of the Private  Securities  Litigation
Reform  Act of 1995.  Actual  future  results  may vary  materially  from  those
projected,  anticipated,  or indicated in any  forward-looking  statements  as a
result of certain risk factors.  Readers should pay particular  attention to the
considerations  described in the section of this report  entitled  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations"-
"Risks and Uncertainties" and "Forward Looking Information." Readers should also
carefully review the risk factors  described in the other documents that we file
from time to time with the  Securities and Exchange  Commission.  In this Annual
Report on Form 10-K, the words "anticipates,"  "believes," "expects," "intends,"
"future,"  "could," and similar words or expressions  (as well as other words or
expressions  referencing  future events,  conditions or circumstances)  identify
forward-looking statements.

ITEM 1.       BUSINESS

General

Ionics,   Incorporated   ("Ionics,"  or  the   "Company")  is  a  leading  water
purification  company  engaged  worldwide  in the  supply of water  and  related
services  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 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.

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,   ozonation,  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's business  activities are reported in four business group segments.
The current reporting reflects this 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 2001, these segments  accounted for  approximately  44%, 23%,
27% and 6%, respectively, of the Company's total revenues. On December 31, 2001,
the Company sold its Aqua Cool Pure Bottled  Water  division,  constituting  the
major portion of the assets of the Consumer  Water Group.  Approximately  44% of
the Company's 2001 revenues were derived from foreign sales or operations.

Within the  existing  business  group  structure,  the Company has  instituted a
matrix-type organization which became effective at the beginning of 2002. Within
each  business  group,  a number  of  product  and  service  lines  (centers  of
excellence) have been identified, including desalination,  reuse, surface water,
microelectronics,  pharmaceuticals  and  instruments,  among other  products and
services.  The Company  will  continue  to report its results  under the current
"business  group"  segment  structure.  Starting in 2002,  as part of the matrix
organization,  the lease of trailers for the production of ultrapure  water will
be  included  in the  results of the  Ultrapure  Water  Group,  rather  than the
Equipment  Business Group, where such results had been included through 2001. In
addition,  the Company's  non-consumer  bleach-based  chemical supply  business,
which through 2001 had been  included in the results of the  Equipment  Business
Group,  will be included in the results of the Ultrapure Water Group starting in
2002. The discussion  and financial  results  contained in this Annual Report on
Form 10-K do not reflect these changes.

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


                                       3
<PAGE>





Information about Business Segments

Equipment Business Group

The Equipment  Business  Group  accounted for  approximately  44% of revenues in
2001. This segment  provides  technologies,  treatment  systems and services for
seawater  desalination,  surface water treatment,  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 and Processes

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,
operator training and field service.

As examples of the Company's activities in this market,  during 2001 the Company
began construction of a one million  gallon-per-day  seawater desalination plant
in  the  United  Arab  Emirates   utilizing  RO  and  UF  membrane   technology;
commissioned a 7.5 million  gallon per day RO facility in Santa Ana,  California
for color removal to produce clean drinking water;  and received an order from a
customer  for  additional  EDR units to expand  brewing  operations  capacity in
Mexico.

The Company has also been  participating  in a growing  market for surface water
treatment  equipment as  municipalities  are being required to meet increasingly
stringent  regulations for ensuring safe drinking water quality. For example, in
late 2001 the Company booked an order from the City of Minneapolis  for the sale
of UF-based  water  treatment  equipment to treat surface water used by the City
for drinking water. This award is expected to generate approximately $17 million
in revenues to the Company.

Wastewater Treatment Equipment and Processes

The  market  for the  treatment,  recycle  and  reuse of  wastewater  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  "Ionics  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" (ZLD) industrial uses. Such systems may
also  incorporate  EDR membrane  systems as  preconcentrators,  and EDI membrane
systems for further treatment. A representative example in 2001 was the award to
the  Company  of a  contract  to design  and supply a ZLD system for a new 2,250
megawatt  natural  gas-fueled power plant near Gila Bend,  Arizona.  This system
will be  designed  to operate at a flow rate of nearly 3.5  million  gallons per
day.



                                       4
<PAGE>

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.

As  an  example  of  the  Company's  activities  in  membrane-based   wastewater
treatment,  during 2001, the Company  completed a waste  treatment  system which
included a comprehensive  integrated membrane system incorporating MF and RO for
the Luggage Point municipal sewage plant in Brisbane, Australia. Also in 2001, a
Kuwaiti project company, in which the Company has a 25% equity interest, entered
into a  concession  agreement  in Kuwait  under  which the  project  company has
entered into a contract to construct, own and operate the largest membrane-based
water reuse facility in the world (see "Foreign Operations" under this Item I).


Water Supply for Drinking and Industrial Use

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  under  which  the  Company  will  own and  operate  the  water
purification  facility. In these situations,  the Company is responsible for the
financing,  construction,  operation  and  maintenance  of the  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.

During 2001, the Company signed an agreement  with the  government-owned  public
utility in Curacao to expand the size of the Company's  existing  membrane-based
seawater desalination plant from 2.6 million gallons per day to over 4.5 million
gallons  per day.  This  expansion  will  permit the  utility  to provide  fresh
drinking water to up to one-third of the island's  population.  On the island of
Anguilla, Ionics completed the expansion of an existing desalination plant owned
by the Company by 50% to 900,000 gallons per day in 2001.

Construction  has been nearly completed in Trinidad for what will be the largest
seawater  desalination plant in the Western Hemisphere and the second largest in
the world. The seawater reverse osmosis (SWRO)  desalination  plant will provide
the  Water  and  Sewerage  Authority  of  Trinidad  and  Tobago  (WASA)  and the
industries of the Point Lisas Industrial Estate with a high quality water supply
for  industrial  requirements.  This $120  million  project is owned and will be
operated by a joint venture  between the Company and its local  partner,  Hafeez
Karamath Engineering Services Ltd. The plant began to produce water in the first
quarter of 2002 and will be phased in to its  design  capacity  of 26.4  million
gallons per day. It is anticipated that the plant will begin water deliveries by
mid-2002.  When  requested  by WASA,  the plant can be expanded to a capacity of
28.8 million gallons per day.

The Company also owns and operates more than 35 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 7.9 million  gallon per day  brackish  water RO plant
which started up  successfully  in the first quarter of 2000, 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
partner, Williams Industries.

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


                                       5
<PAGE>

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,  Massachusetts  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 at these plants are its  Electromat(R)
electrodialysis systems.

Fabricated Products

At  its  Bridgeville  and  Canonsburg,   Pennsylvania  facilities,  the  Company
fabricates  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.  The Company
has entered into  contracts for the  fabrication  of storage  systems to contain
spent nuclear fuel from U.S. nuclear power plants.

Ultrapure Water Group

The Ultrapure Water Group accounted for  approximately 23% of the Company's 2001
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.  The  microelectronics  industry has
been a  significant  source of the revenues of the  Ultrapure  Water Group,  and
softness in the microelectronics industry negatively affected the performance of
the Ultrapure Water Group in 2001.

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 and as such  requirements  have
grown more stringent.  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.

The Company  has been  pursuing  customers  in the  developing  microelectronics
market in the Far East.  For example,  during 2001,  six Ionics EDI systems were
started up in Taiwan and in China for printed  circuit  board and  semiconductor
manufacturing operations.

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.   In  2001,  among  its  other
activities,  this division was awarded a contract to provide a turnkey ultrapure
water  system  for a  validated  water-for-injection  system to a  Florida-based
leader in the orthobiologics industry.



                                       6
<PAGE>




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 (until 2002,  this activity had been  included in the  Equipment  Business
Group).

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 2001,  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.  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. locations
and one foreign location.  The Company conducts  regeneration  activities in the
U.S. 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  27% of the Company's
2001 revenues.  The Company's  consumer water products  currently serve the home
water purification and consumer  bleach-based  product market areas. On December
31,  2001,  the Company  completed  the sale of its  five-gallon  bottled  water
production and delivery business conducted in the United States, United Kingdom,
and France,  to affiliates  of Perrier  Vittel S.A., a subsidiary of Nestle S.A.
The  Company  received  total  proceeds  of  approximately  $220  million in the
transaction,  of which $10 million is being held in escrow pursuant to the terms
of the divestiture agreement.  The purchase price is subject to final adjustment
based on the number of customers and working capital  levels,  as defined in the
agreement.  The Company retains equity ownership  interests in joint ventures in
Bahrain, Kuwait and Saudi Arabia engaged in the bottled water business.

Home Water Purification Systems

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.

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,


                                       7
<PAGE>



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.

The  Company  expanded  its  bacteriostatic   home  water  conditioning   system
distribution  activities  to Ireland in 1999 and Portugal in 2000.  In the first
quarter of 2002,  the Company  made a decision  to  restructure  these  European
distribution activities.

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% of the
Company's 2001 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
(TOC)  across the water  "spectrum"  from  ultrapure  water to  wastewater.  The
Sievers(R)  Model 400 TOC analyzer is designed  specifically  to comply with new
United States  Pharmacopoeia (USP) requirements for determining water quality in
the  pharmaceutical  industry.  Ionics'  Instrument  Business  Group  offers TOC
analyzers sensitive to the  parts-per-trillion  range, designed specifically for
ultrapure  water   measurement  in  the   semiconductor   and  power  generation
industries.  In 2001,  the Company  introduced  the first on-line boron analyzer
designed specifically for continuous measurement of trace boron contamination, a
capability particularly important in the semiconductor and the power 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.

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 MF, UF and RO processes are at
times 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 membrane modules
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.  (TMA).  In 2001,  TMA  commenced  the
manufacture  of RO  membrane  modules  in  space  leased  from  the  Company  in
Watertown, MA.



                                       8
<PAGE>




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 75 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.  Bleach products for
swimming pool use tend to increase during the summer months,  while 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  accounted for 10% or more of the revenues of
any business  segment 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  $258,936,000 at December 31, 2001 and
$270,622,000  at  December  31,  2000.  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 55% of its December 31, 2001 backlog during 2002.
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 2001 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 $6,420,000 in 2001, $7,980,000 in 2000, and $7,066,000 in 1999.

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.



                                       9
<PAGE>




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, some of which are larger than the Company, manufacture both
membranes  and   equipment.   The  Company  has  numerous   competitors  in  its
conventional water treatment, instrument 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 an  international,  national and
regional basis, and with other manufacturers of membrane-related equipment.

With respect to the Company's Consumer Water Group business segment, 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 expenditures,  earnings or the competitive  position of the
Company or any of its subsidiaries.

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 and administrative costs totals approximately  $71,000. The United
States  Environmental  Protection  Agency  ("EPA") has not yet issued 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.  In April  2001,  the  Company  and other PRPs
entered into a settlement  agreement with respect to the Angelillo  Site,  under
which the Company made a final settlement payment of approximately $3,300.

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 2,100 persons
on a full-time basis. 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 and certain  employees of the
Company's  Spanish  subsidiary.  The Company  considers its  relations  with its
employees to be good.

                                       10
<PAGE>

Executive Officers of the Registrant

The names, ages and positions of the Company's Executive Officers are as
follows:

                        Age as of Positions
     Name                 March 1, 2002           Presently Held
     ----                 -------------           --------------

Arthur L. Goldstein*           66      President, Chief Executive Officer
                                       and Director since 1971; Chairman
                                       of the Board since 1990
William E. Katz                77      Executive Vice President since 1983;
                                       Director since 1961
Edward J. Cichon               47      Vice President, Equipment Business
                                       Group since July 1998
Alan M. Crosby                 49      Vice President, Consumer Water
                                       Group since March 2000
Anthony Di Paola               35      Vice President and Corporate
                                       Controller since May 2000
Gary W. Groom                  51      Vice President, Project Finance and
                                       Treasurer since December 2000
Stephen Korn                   56      Vice President, General Counsel and
                                       Clerk since 1989
Daniel M. Kuzmak               49      Vice President, Finance and Chief
                                       Financial Officer since January 2001
William J. McMahon             46      Vice President, Ultrapure Water Group
                                       since November 2000
Theodore G. Papastavros        68      Vice President since 1975; Vice
                                       President, Strategic Planning since 1990
Michael W. Routh               54      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.

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.

                                       11
<PAGE>

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.

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  obtained,  the  Company,  where
appropriate,  enters into  foreign  exchange  contracts.  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 $(555,000) in 2001, $(782,000) in 2000, and $11,000 in
1999.

The Company engages in certain foreign  operations both directly and through the
following  wholly  owned   subsidiaries:   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
Ventures Ltd.  (U.K.);  Ionics Watertec Pty. Ltd.;  Resources  Conservation  Co.
International;  and Separatech  Ltd. In early 2002,  the Company  entered into a
letter of intent  providing  for the sale by its Spanish  subsidiary  of its 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  in Agrinord  S.r.l.,  an Italian  company  engaged in waste
treatment  operations.  In 1999, the Company acquired a controlling 50% 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.

In 2001,  the  Company  acquired a 25%  interest in a Kuwaiti  project  company,
Utilities  Development Company W.L.L. (UDC), which has been awarded a concession
agreement by an agency of the Kuwaiti government for the


                                       12
<PAGE>



construction,  ownership  and  operation of a major  membrane-based  water reuse
facility in Kuwait.  The Company will participate in the project as the membrane
system supplier and as a partner in operating the plant, in addition to being an
equity participant the Company and its Kuwaiti partner,  which owns the majority
interest in UDC, anticipate that project financing will be obtained by mid-2002.

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 this  Annual  Report  on Form  10-K,
starting at page 30.

Financial Information about Geographical Areas

Information  with  respect  to this  item is  contained  in Note 16 of  Notes to
Consolidated Financial Statements at page 51 of this Annual Report on Form 10-K.

ITEM 2.       PROPERTIES

The Company's  executive  offices are located in a Company-owned  facility at 65
Grove Street, Watertown, Massachusetts. Manufacturing, assembly, engineering and
other  operations  are  carried out in a number of  domestic  and  international
locations.  The following table provides certain information as to the Company's
principal general offices and manufacturing facilities:



                                       13
<PAGE>
<TABLE>
<CAPTION>




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

           --------                    ----------------------           -----------------
<S>                             <C>                                           <C>                     <C>
Watertown, MA                   Equipment Business Group                      Owned                   134,000
(headquarters)                  Instrument Business Group
                                Consumer Water Group
                                Ultrapure Water Group

Watertown, MA                   Equipment Business Group                      Owned                   127,000


Bridgeville, PA                 Equipment Business Group                      Owned                   77,000
                                Consumer Water Group

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

Pico Rivera, CA                 Ultrapure Water Group                         Owned                   68,000

Bellevue, WA                    Equipment Business Group                      Leased                  21,000

Sydney, Australia**             Equipment Business Group                      Owned                   140,000

Brisbane, Australia             Equipment Business Group                      Owned                   38,000

Brisbane, Australia             Ultrapure Water Group                         Leased                  62,000

Milan, Italy                    Equipment Business Group                      Leased                  18,000

Dallas, Texas                   Ultrapure Water Group                         Owned                   12,000

Dallas, Texas                   Ultrapure Water Group                         Leased                   9,000

Singapore                       Ultrapure Water Group                         Leased                   9,000
</TABLE>
--------------------
*  This facility is not presently utilized by the Company for its operations.
** This facility presently is partially utilized by the Company for its
   operations, and the balance is leased to a third party.

The  Company  also  owns or leases  smaller  facilities  in which  its  business
segments conduct business. The Company considers the business facilities that it
utilizes to be adequate for the uses to which they are being put.



                                       14
<PAGE>




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 that none of the pending matters will have an outcome material
to the financial condition or business of the Company.

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 and administrative costs totals approximately  $71,000. The United
States  Environmental  Protection  Agency  ("EPA") has not yet issued 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.  In April 2001,  the Company and certain other
PRPs  entered  into a  Settlement  Agreement  with the EPA with  respect  to the
Angelillo  site,   under  which  the  Company  made  a  settlement   payment  of
approximately $3,300.

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.

                                     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 22, 2002, there were approximately 1,100 shareholders of
record.  No cash  dividends  were paid in either  2001 or 2000  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, 2000 to December 31,  2001,  the range of high and
low sales prices of the common stock for each quarterly period was as follows:

                             2001                             2000
               -----------------------------     ---------------------------
                   High            Low               High          Low
               -------------- --------------     ------------- -------------
First Quarter         $30.94         $23.98            $37.69        $24.50
Second Quarter         31.57          23.40             30.63         20.63
Third Quarter          31.50          19.27             34.06         20.81
Fourth Quarter         31.85          21.44             29.44         18.19

ITEM 6.       SELECTED CONSOLIDATED FINANCIAL DATA

The following  selected  consolidated  financial data for each of the five years
ended  December  31,  2001,  2000,  1999,  1998 and 1997,  are derived  from the
Company's  Consolidated  Financial  Statements.  This  data  should  be  read in
conjunction with the Company's audited  financial  statements and related notes,
and with the Item entitled  "Management's  Discussion  and Analysis of Financial
Condition and Results of Operations."


                                       15
<PAGE>
<TABLE>
<CAPTION>

Consolidated Statement of Operations Data

                                                                   For the Years Ended December 31,
                                     -----------------------------------------------------------------------------------------------

Dollars in Thousands
Except Per Share Amounts                    2001        %        2000      %       1999      %        1998     %        1997      %
------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>        <C>       <C>       <C>     <C>       <C>      <C>      <C>      <C>       <C>
Revenues                                $466,732   $100.0    $474,551  100.0   $358,217  100.0    $351,326 100.0    $352,469  100.0
(Loss) income before income taxes,
    minority interest, and gain on
    sale of business                     (16,631)    (3.6)     (2,224)  (0.5)    29,731    8.3      32,883   9.4      43,222   12.3
Net income (loss)                         44,701      9.6      (1,870)  (0.4)    19,361    5.4      21,386   6.1      28,329    8.0
Earnings (loss) per basic share             2.61                (0.12)             1.20               1.33              1.78
Earnings (loss) per diluted share           2.59                (0.12)             1.18               1.31              1.73
</TABLE>

<TABLE>
<CAPTION>

Consolidated Balance Sheet Data

                                                                 For the Years Ended December 31,
                                         -------------------------------------------------------------------------------
Dollars in Thousands                            2001             2000            1999             1998             1997
------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>              <C>             <C>              <C>              <C>
Current assets                               378,791          252,862         193,802          187,093          165,850
Current liabilities                          158,326          173,363          99,475           85,934           66,012
------------------------------------------------------------------------------------------------------------------------
Working capital                              220,465           79,499          94,327          101,159           99,838
Total assets                                 633,313          585,813         500,906          452,123          406,736
Long-term debt and notes payable              10,126           10,911           8,351            1,519              804
Stockholders' equity                         423,353          356,861         361,852          345,598          319,659
</TABLE>


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


The Company is a leading water  purification  company  engaged  worldwide in the
supply of water and related  services and of water treatment  equipment  through
the use of  proprietary  separations  technologies  and systems.  The  Company's
products  and  services  are used by the  Company  or its  customers  to  desalt
brackish  water and  seawater,  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.  The following discussion and analysis of financial condition and
results of operations  refers to the  activities of the Company's  four business
groups, which comprise the Company's reportable operating segments. These groups
are the Equipment  Business Group (EBG),  Ultrapure Water Group (UWG),  Consumer
Water  Group  (CWG) and  Instrument  Business  Group  (IBG).  See Note 16 to the
consolidated  financial statements for additional information regarding our four
business segments.

The EBG segment  provides  products and services for seawater and brackish water
desalination,  water reuse and recycle,  surface  water  treatment,  zero liquid
discharge  and  fabricated   products.   Significant   trends   influencing  the
desalination  market include  worldwide  water shortages and the need for better
quality  water  in many  parts  of the  world,  as well as the  reduced  cost of
operation of modern desalination  facilities.  These factors have driven a trend
toward larger plants,  and toward the purchase of services  including  operating
and maintenance  contracts.  Trends impacting the water reuse and recycle market
are similar,  with  membrane  technology  becoming  more  prevalent in reuse and
recycling  applications.  The  surface  water  market  has  been  influenced  by
increased  consumer awareness of and demand for higher quality water, as well as
regulatory  pressures  to  reduce  contaminants  in  water  supplies.   Membrane
technology is also becoming more  prevalent in surface water  applications.  The
zero liquid  discharge  market has been  influenced by  regulatory  pressures on
utilities to eliminate  discharge of process water, and the fabricated  products
market  served  by  the  Company  includes  demand  for  the  storage  of  spent
nuclear-fuel rods as spent fuel pools at many nuclear facilities reach capacity.
The Company is positioned to be able to compete  successfully  in these markets,
although it faces substantially larger competitors in many of them.



                                       16
<PAGE>




The UWG segment provides equipment and services for the microelectronics, power,
and  pharmaceutical  industries,  where high quality ultrapure water is required
for use in production processes, and is critical to ultimate product quality and
yield. The UWG segment has been heavily reliant upon microelectronics  equipment
revenues,  and the recent  downturn in that sector has  adversely  impacted both
revenue and profitability in the UWG segment.

The CWG segment provides home water units for the treatment of water, and, until
the  divestiture of the Aqua Cool Pure Bottled Water business in the U.S.,  U.K.
and France on December 31,  2001,  the home office  delivery  market for bottled
water.  CWG  also  produces   bleach-based   cleaning  products  and  automobile
windshield  wash solution.  Trends in the home water market in which the Company
continues  to operate  include  increased  customer  awareness of and demand for
higher quality water,  along with reduced confidence in the quality of their own
water supplies.

The IBG segment serves microelectronics,  power and pharmaceutical markets where
the measurement of water quality,  including levels and types of contaminants in
process water, is critical to production  processes.  Similar to that of the UWG
segment, the performance of the IBG segment has been impacted by the downturn in
the microelectronics industry, although to a lesser extent than the UWG segment.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's  discussion and analysis of its financial condition and results of
operations is based on the Company's  consolidated  financial statements,  which
have been prepared in accordance with accounting  principles  generally accepted
in the United States.  The  preparation  of  consolidated  financial  statements
requires the Company to make  estimates and  judgments  that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent  liabilities.   On  an  ongoing  basis,  the  Company  evaluates  its
estimates,  including those related to revenues, reserves for doubtful accounts,
income taxes,  pensions,  intangible assets,  contingencies and litigation.  The
Company bases its  estimates on historical  experience  and on  appropriate  and
customary   assumptions   that  are   believed  to  be   reasonable   under  the
circumstances,  the results of which form the basis for making  judgments  about
the carrying values of assets and liabilities that are not readily apparent from
other sources.  Actual results may differ from these  estimates  under different
assumptions or conditions.  The Company's  significant  accounting  policies are
described in Note 1 to the consolidated  financial statements included in Item 8
of this Annual  Report on Form 10-K.  The Company has  identified  the  policies
discussed  below as critical to  understanding  its  business and its results of
operations.

Revenue Recognition

For certain  contracts  involving  customized  equipment  eligible  for contract
accounting under American  Institute of Certified Public  Accountants  ("AICPA")
Statement of Position No. 81-1, "Accounting for Performance of Construction-Type
and Certain Construction-Type Contracts" (SOP 81-1), revenue is recognized using
the percentage of completion  accounting  method based upon an  efforts-expended
method.  The nature of these  contracts  and the types of products  and services
provided  are  considered  in  determining  the  proper  accounting  for a given
contract.  Long-term,  fixed-price  contracts  are recorded on a  percentage  of
completion  basis using the  cost-to-cost  method of accounting where revenue is
recognized  based on the ratio of costs  incurred  to  estimated  total costs at
completion.   The  Company  follows  this  method  since  reasonably  dependable
estimates  of the costs of the total  contract can be made.  As a general  rule,
sales and  profits  are  recognized  earlier  under the  cost-to-cost  method of
percentage of completion  accounting  compared to the completed contract method.
Contract accounting requires  significant  judgment relative to assessing risks,
estimating contract costs and making related assumptions regarding schedules and
technical  issues.  Due to the  size  and  nature  of  the  Company's  long-term
contracts,  the estimation of cost at completion is  complicated  and subject to
numerous variables.  Contract costs include material, labor,  subcontracting and
other related costs.  Assumptions must be made relative to the length of time to
complete the contract. With respect to contract change orders, claims or similar
items,  judgment  must be used in estimating  related  amounts and assessing the
potential for realization.  Such amounts are only included in the contract value
when they can be reliably  estimated  and  realization  is  reasonably  assured,
generally  upon  receipt  of  a   customer-approved   change  order.  Given  the
significance of the judgments and estimation  processes  described  above, it is
likely  that  materially  different  amounts  could  be  recorded  if  different
assumptions were used or if underlying circumstances were to change. The Company
closely  monitors  compliance  and  consistency  of  application of its critical
accounting policies related to contract accounting. In addition,  reviews of the
status  of  contracts  are  performed   through  periodic  contract  status  and
performance  reviews.  In all  cases,  changes  to  total  estimated  costs  and
anticipated losses, if any, are recognized in the period in which determined.

                                       17
<PAGE>

For  contracts  involving  the sale of  equipment  to a joint  venture  or other
affiliated  entities in which the Company has an equity interest,  the extent of
revenue and profit  recognized  during  contract  execution  varies based on the
level of equity  interest  held by the Company.  Generally,  when the  Company's
equity  ownership  in the  affiliated  customer  is less than 20%, no revenue or
profit is  deferred as the  contract  is  executed.  When the  Company's  equity
ownership is between 20% and 50%, provided that the Company does not control the
affiliated  entity,  the Company  recognizes revenue as the contract is executed
but defers a portion  of the  profit  equal to the  Company's  equity  ownership
percentage  in the  entity.  Upon  completion  of the  contract,  the  resulting
deferred profit is amortized into revenue over the estimated  useful life of the
equipment.  When the  Company's  equity  ownership  exceeds 50%, or in instances
where the Company  effectively  controls the  affiliated  entity,  no revenue or
profit is recognized as the contract is executed, and all profit on the contract
is deferred and  amortized  over the  estimated  useful life of  equipment  upon
completion  of the  contract.  Regarding  the  Company's  sale of  equipment  to
Desalcott  (the  project  company)  in  connection  with  the  Trinidad  project
(discussed in this Item under "Financial Condition"), where the Company is a 40%
equity owner of Desalcott,  since the Company is considered to have provided all
of the equity funding for the project  either  directly or through a loan to the
Company's  local  majority  partner,  the full amount of the  equipment  revenue
earned has been  recognized  as the  contract is executed;  however,  all of the
profit has been deferred,  and will be amortized over the estimated  useful life
of the equipment upon completion of construction.

In  addition  to the  construction  and  sale  of  customized  equipment  to its
customers,  the Company also enters into  contracts  for  desalination  or water
treatment  facilities  which it "owns and operates" on behalf of its  customers.
Under these  contracts,  where the Company  remains the owner of the  equipment,
revenue and profit is recognized as water  quantities  are sold to the customer.
The equipment  constructed is capitalized by the Company,  included in property,
plant and  equipment,  and  amortized  to cost of sales over the  shorter of the
estimated useful life of the equipment or the contract term.

For sales of standard  products and equipment not governed by SOP 81-1,  such as
the sale of instruments  and consumer water  products,  the Company  follows the
guidance provided by the Securities and Exchange  Commission's  Staff Accounting
Bulletin No. 101, "Revenue  Recognition in Financial  Statements" (SAB 101). The
Company does not recognize  revenue  unless there is  persuasive  evidence of an
arrangement,  title and risk of loss has passed to the  customer,  delivery  has
occurred  or the  services  have  been  rendered,  the  sales  price is fixed or
determinable and collection of the related receivable is reasonably  assured. It
is the Company's policy to require an arrangement with its customers,  either in
the form of a written contract or purchase order containing all of the terms and
conditions governing the arrangement, prior to the recognition of revenue. Title
and risk of loss generally passes to the customer at the time of delivery of the
product  to a  common  carrier.  At the  time of the  transaction,  the  Company
assesses  whether  the sale price is fixed or  determinable  and  whether or not
collection is reasonably assured. The Company assesses whether the sale price is
fixed or determinable  based upon the payment terms of the  arrangement.  If the
sales  price is not deemed to be fixed,  revenue is  recognized  as the  amounts
become due from the customer.  The Company does not  generally  offer a right of
return on its products and the  products are  generally  not subject to customer
acceptance  rights.  The Company  assesses  collectibility  based on a number of
factors,  including past transaction and collection  history with a customer and
the  credit-worthiness  of the customer.  The Company  performs  ongoing  credit
evaluations of its customers' financial condition but generally does not require
collateral from its customers.  If the Company determines that collectibility of
the sales price is not reasonably  assured,  revenue is deferred until such time
as collection  becomes  reasonably  assured,  which is generally upon receipt of
payment from the  customer.  The  Company's  products are  generally  subject to
warranty, and related costs are provided for in cost of revenues when revenue is
recognized.  While the Company engages in extensive product quality programs and
processes,  the Company's  warranty  obligation is based upon historical product
failure  rates and costs  incurred in  correcting a product  failure.  If actual
product  failure rates or the costs  associated with fixing failures differ from
historical rates,  adjustments to the warranty  liability may be required in the
period in which determined.

The Company  provides  lease  financing to consumers for the purchase of certain
home water treatment  systems.  Prior to entering into the lease agreement,  the
Company   evaluates   the   creditworthiness   of  its  customer  and  generally
collateralizes  the lease receivable with a security  interest in the customer's
personal  residence.  At the time the  lease  transaction  is  consummated,  the
Company  recognizes  revenue  for the  full  amount  of the  sales  value of the
equipment and records a lease  receivable on its balance sheet.  Interest income
is  recognized  by the Company  over the term of the lease based on the interest
rate stated in the lease. The Company evaluates the  collectibility of its lease
receivables   based  on  its  historical   loss  experience  and  assessment  of
prospective  risk,  and  does so  through  ongoing  reviews  of its  receivables
portfolio.

The Company  provides support  services to customers  primarily  through service
contracts, and the Company recognizes support service revenue primarily over the
term of the service contract or as services are rendered.

                                       18
<PAGE>

The  Company  also  rents  equipment  to  customers  under   short-term   rental
agreements.  The Company  generally  invoices  customers  monthly and recognizes
revenue over the rental period based on amounts billed.  The rental equipment is
capitalized and depreciated to cost of revenues over its estimated useful life.

Reserve for Doubtful Accounts

The Company  evaluates  the adequacy of its reserve for doubtful  accounts on an
ongoing basis through detailed reviews of its receivables  portfolio.  Estimates
are used in determining  the Company's  allowance for bad debts and are based on
historical collection  experience,  current trends including prevailing economic
conditions  and adverse  events that may affect a  customer's  ability to repay,
percentage of accounts  receivable by aging category,  and other factors such as
the financial condition of large customers. The Company makes adjustments to its
reserve  if the  evaluation  of  reserve  requirements  differs  from the actual
aggregate  reserve.  This evaluation is inherently  subjective because estimates
may be revised as more  information  becomes  available.  Reserves  for doubtful
accounts are  established  through a charge to  operations  included in selling,
general and administrative expenses.

Accounting for Income Taxes

As part of the  process of  preparing  consolidated  financial  statements,  the
Company is required to estimate  income  taxes in each of the  jurisdictions  in
which it operates.  This process involves the estimation of the Company's actual
tax  liability in each  jurisdiction  together  with an  assessment of temporary
differences  resulting  from  differing  treatment  of  items  for tax and  book
accounting  purposes.  These  differences  result in  deferred  tax  assets  and
liabilities,  which are included  within the  consolidated  balance  sheet.  The
Company  must also  assess  the  likelihood  that any  deferred  assets  will be
recovered,  and must  establish  a  valuation  allowance  to the extent  that it
believes any recovery to be unlikely.  To the extent the Company  establishes  a
valuation allowance, an expense will be recorded within the provision for income
taxes line in the statement of operations.  At any time, the Company's provision
for income taxes could be impacted by changes in tax laws, or by  administrative
actions or court rulings.

Testing for the Impairment of Goodwill and Long-Lived Assets

The Company  assesses the  impairment of  identifiable  intangibles,  long-lived
assets and related goodwill whenever events or changes in circumstances indicate
that the carrying value may not be  recoverable.  Factors the Company  considers
important   which   could   indicate   an   impairment    include    significant
underperformance  relative to historical or projected future operating  results,
significant  changes in the manner of the Company's use of the acquired asset or
the  strategy  for its overall  business and  significant  negative  industry or
economic  trends.  When  the  Company  determines  that  the  carrying  value of
intangibles, long-lived assets and related goodwill may not be recoverable based
upon the  existence of one or more of the above  indicators of  impairment,  the
Company measures any impairment based on a projected discounted cash flow method
using a discount rate determined by Company management. Any resulting impairment
loss  could  have  a  material  adverse  impact  on  the  Company's  results  of
operations, depending on the magnitude of the impairment. In 2001, as summarized
in Note 6 to the  Consolidated  Financial  Statements,  the  Company  recognized
impairment losses of approximately $13.1 million,  which included  approximately
$9.2 million to reduce the  carrying  value of assets held for sale in Malaysia,
$3.1 million of goodwill associated with previous acquisitions, and $0.7 million
associated with the residual value of bleach manufacturing equipment. On January
1, 2002,  the Company  adopted  SFAS No.  142,  "Goodwill  and Other  Intangible
Assets"(FAS  142) that  requires,  among other  things,  the  discontinuance  of
goodwill  amortization.  At December 31, 2001,  the Company had $19.3 million of
goodwill that will cease to be amortized.  The Company is required to complete a
transitional goodwill impairment test by June 30, 2002.



                                       19
<PAGE>




Principles of Consolidation

The Company  consolidates  the balance  sheet and results of  operations  of all
wholly and majority owned  subsidiaries and controlled  affiliates.  The Company
also  holds  minority   investments   in  certain   private   companies   having
complementary or strategic operations in different geographical locations around
the world.  These  investments  are included in  investments  in affiliates  and
include investments  accounted for under the equity method of accounting.  Under
the equity method of accounting,  which  generally  applies to investments  that
represent a 20% to 50% ownership of the equity securities of the affiliates, the
Company's  proportionate  share of the earnings or losses of the  affiliates  is
included in equity income.  Realization  of the Company's  investments in equity
securities may be affected by the affiliate's ability to obtain adequate funding
and  execute  its  business   plans,   general   market   conditions,   industry
considerations  specific to the  affiliate's  business,  and other factors.  The
inability of an affiliate to obtain future funding or  successfully  execute its
business  plan could  adversely  affect the  Company's  earnings  in the periods
affected by those events.  Future adverse  changes in market  conditions or poor
operating  results of  underlying  investments  could  result in losses or in an
inability  to recover  the  carrying  value of the  investments  that may not be
reflected in an investment's  current carrying value, thereby possibly requiring
an impairment  charge in the future.  The Company  records an impairment  charge
when it believes an investment has  experienced a decline in value that is other
than temporary.

RESULTS OF OPERATIONS

Income from Operations - 2001 Compared to 2000

The Company reported  consolidated  revenues of $466.7 million and net income of
$44.7 million in 2001, compared to consolidated revenues of $474.6 million and a
net loss of $1.9 million in 2000. The increase in net income resulted  primarily
from a pre-tax gain of $102.8  million on the sale of the Aqua Cool Pure Bottled
Water  business in the U.S.,  U.K.  and  France.  The results for 2001 were also
impacted by numerous  other  factors,  which are further  described  by business
segment below.

In the EBG segment, income from operations was $6.0 million in 2001, compared to
$8.3 million in 2000. The decrease in earnings was primarily  attributable to an
increase in  completion  cost  estimates on several  equipment  contracts in the
Company's Ionics RCC division that had substantial civil construction scope. The
Company subsequently made a decision to minimize civil construction scope on new
contracts.

The UWG segment reported a loss of $8.8 million in 2001, compared to income from
operations of $3.2 million in 2000. The loss in 2001 was primarily  attributable
to  the  operating  losses  of  certain  foreign  subsidiaries  and  affiliates,
including our Malaysian  affiliate (which is currently being held for sale), and
one of our Australian  subsidiaries,  which incurred operating losses as well as
impairment charges relating to goodwill of approximately  $1.4 million.  The UWG
segment  was  also  significantly  impacted  by the  continued  downturn  of the
microelectronics industry.

The CWG  segment  reported a loss from  operations  of $1.5  million in 2001 and
2000.  The CWG segment  includes the results of operations of the Aqua Cool Pure
Bottled  Water  business,  which  accounted for  approximately  $76.2 million in
revenues  in 2001,  and was sold by the  Company  to  affiliates  of  Perrier on
December  31,  2001  (with the  exception  of the  Company's  interest  in joint
ventures  in Saudia  Arabia,  Kuwait  and  Bahrain).  CWG  results  in 2001 were
impacted  by  losses  incurred  in the Aqua  Cool  business,  in part due to the
efforts  to ready that  business  for sale,  losses in two home water  locations
which the Company plans to restructure  during 2002, and an impairment charge of
$0.7 million relating to the residual value of bleach  manufacturing  equipment.
These  losses  were  partially  offset by a gain on the sale of certain  bottled
water assets earlier in the year.

The IBG  segment  reported  income  from  operations  of $0.9  million  in 2001,
compared to $2.6 million in 2000.  The decrease in income is primarily  due to a
charge  recorded for the  impairment  of goodwill of $1.7 million  related to an
acquisition made in 1999.



                                       20
<PAGE>




The Company also recorded charges of  approximately  $9.2 million related to the
planned divestiture of its majority interest in its Malaysian  affiliate.  These
charges  relate to the  impairment  of assets  and the  recognition  of  certain
obligations that the Company will retain after the divestiture is completed. The
Company expects the divestiture to be completed in the first half of 2002.

The Company's effective tax rate for 2001 was 49.0%,  compared to 34.0% in 2000.
The increase in the effective tax rate for 2001 was caused primarily by the gain
on the sale of the  Aqua  Cool  Pure  Bottled  Water  business,  which  included
non-deductible  goodwill,  and by foreign losses,  most significantly the losses
incurred by the Company's  Malaysian  affiliate,  that were not benefited  since
realization of those benefits was not likely.

Revenues - 2001 Compared to 2000

Consolidated revenues were $466.7 million in 2001, compared to $474.6 million in
2000. Revenues increased in both the EBG and the CWG segments,  and decreased in
the UWG and IBG segments.  EBG revenues of $207.9 million increased by 1.3% over
2000 revenues of $205.2 million.  Total equipment revenues  decreased  slightly,
while  supply  business  revenues  increased  over 2000.  UWG revenues of $107.8
million  decreased by 18.5% from 2000 revenues of $132.2 million.  This decrease
is  primarily  the result of  continued  deterioration,  both  domestically  and
internationally,  in the Company's  microelectronics  equipment business,  which
declined  substantially  from  2000  levels.  CWG  revenues  of  $124.0  million
increased by 14.4% over 2000 revenues of $108.3 million, reflecting increases in
the bottled water, home water and the bleach-based  consumer product businesses.
IBG  revenues of $27.0  million  decreased  by 6.1% from 2000  revenues of $28.8
million,  also  reflecting  the further  deterioration  of the  microelectronics
sector, which is an important customer for IBG products.

Revenues - 2000 Compared to 1999

Consolidated  revenues were $474.6 million in 2000, compared with $358.2 million
in 1999. The increased  revenues resulted from revenue growth across all four of
the Company's  business  segments.  EBG revenues of $205.2 million  increased by
45.9%  over  1999  revenues  of $140.7  million,  reflecting  increased  capital
equipment revenues  (including the desalination  plant project in Trinidad,  and
revenues  on a large spent  nuclear-fuel  container  contract  in the  Company's
fabricated products business). UWG revenues of $132.2 million increased by 41.3%
over 1999 revenues of $93.6  million,  reflecting  increased  capital  equipment
sales to the  microelectronics  industry,  predominantly  in the Far  East.  CWG
revenues  of $108.3  million  increased  by 12.2%  over 1999  revenues  of $96.6
million, reflecting growth in both the domestic and European operations for Aqua
Cool and home water.  IBG revenues of $28.8 million  increased by 5.0% over 1999
revenues of $27.4  million,  resulting  primarily  from  increased  sales to the
microelectronics industry.

Cost of Sales and Operating Expenses

2001 Compared to 2000

Cost of sales as a percentage  of revenues was 73.1% and 73.8% in 2001 and 2000,
respectively,  and overall  Company gross margin was 26.9% and 26.2% in 2001 and
2000, respectively. Cost of sales as a percentage of revenue remained relatively
flat in the EBG segment, decreased in the CWG segment, and increased UWG and IBG
segments.

Cost of sales as a  percentage  of revenue for the EBG segment was 79.8% in 2001
compared  to 80.2% in 2000,  reflecting  a  continued  high  level of  equipment
revenues  which have lower  gross  margins  than  service  revenues.  The losses
incurred on several equipment contracts with civil construction scope previously
mentioned had an adverse impact the EBG cost of sales as a percentage of revenue
in 2001.

Cost of sales as a  percentage  of revenues  for UWG  increased to 82.0% in 2001
from 80.5% in 2000,  reflecting cost increases  incurred on projects executed by
the  Company's  Malaysian   affiliate  and  one  of  the  Company's   Australian
subsidiaries.  The continued downturn of the microelectronics  industry also had
an adverse impact on both sales volume and profitability,  as the utilization of
capacity  decreased with reduced sales volume while certain  components of costs
of revenues remained fixed.

Cost of sales as a percentage of revenue for CWG decreased to 59.7% in 2001 from
61.2% in 2000.  Numerous  factors  impacted the CWG cost of sales  percentage in
2001,  including the gain on the sale of certain  bottled water assets  realized
earlier in the year offset by costs  associated  with  readying the business for
sale in the second half of the year.

                                       21
<PAGE>

IBG cost of sales as a  percentage  of revenues  increased to 48.0% in 2001 from
44.4% in 2000,  primarily as a result of reduced  sales volume  levels caused by
the further deterioration of the microelectronics sector.

Operating  expenses as a percentage  of revenue  increased to 29.9% in 2001 from
26.3% in 2000. The increase in 2001 reflects a significant  shift in mix between
UWG,  which  has a lower  operating  expense  component,  and CWG,  which  has a
significantly  higher operating expense  component.  Also, the operating expense
percentage was impacted by the asset impairment  charges  previously  mentioned,
which include  approximately $9.2 million relating to the planned divestiture of
the Company's  majority  interest in its Malaysian  subsidiary,  $3.1 million of
goodwill associated with previous acquisitions, and $0.7 million associated with
the residual value of bleach manufacturing equipment.

2000 Compared to 1999

Cost of sales as a percentage  of revenues was 73.8% and 66.4% in 2000 and 1999,
respectively.  Correspondingly, overall Company gross margin was 26.2% and 33.6%
in 2000 and 1999, respectively. The increase in cost of sales as a percentage of
revenues  from  1999 to 2000  included  increases  in all  four of the  business
groups, and is attributable to several factors.

Cost of sales as a  percentage  of revenues  for EBG  increased to 80.2% in 2000
from 72.3% in 1999,  reflecting a shift in business mix to lower margin  capital
equipment,   increased  costs  on  certain  long-term  contracts,   as  well  as
inventory-related   charges  and  unrecoverable  business  development  expenses
primarily relating to the Trinidad project.

Cost of sales as a  percentage  of revenues  for UWG  increased to 80.5% in 2000
from 75.5% in 1999,  reflecting  the continued  competitive  environment  in the
microelectronics  industry for ultrapure water capital  equipment,  as well as a
higher level of capital equipment sales than in 1999.

Cost of sales as a percentage of revenue for CWG increased to 61.2% in 2000 from
56.0% in 1999.  Factors  affecting this increase were primarily  attributable to
increased fuel and labor costs  associated  with the bottled water group as well
as inventory-related charges that occurred late in 2000.

IBG cost of sales as a  percentage  of revenues  increased to 44.4% in 2000 from
41.9% in 1999. The increase in cost of sales in 2000 was primarily  attributable
to  inventory  charges  incurred  in 2000,  relating  to the  relocation  of the
Watertown, Massachusetts-based instrument group to Boulder, CO.

Operating  expenses  as a  percentage  of  revenues  increased  to 26.3% in 2000
compared  to  25.7%  in  1999.  The  increase  in  2000  compared  to  1999  was
attributable  to  increased  legal  costs  related  primarily  to the  Company's
involvement  in patent  infringement  lawsuits,  as well as  additional  charges
relating to accounts  receivable.  Also, the Company recognized asset impairment
charges  attributable  to the  Company's  decision to abandon  plans to commence
bleach-manufacturing  operations in Elkton, Maryland and to write down the value
of goodwill associated with an acquisition made in 1996.

Interest,  Equity Income, Gain on Sale of Aqua Cool Pure Bottled Water Business,
and Taxes

Interest  income was $1.0 million in 2001, $1.3 million in 2000 and $1.0 million
in 1999. Interest expense, net of capitalized  interest,  was $5.2 million, $4.9
million and $0.7  million in 2001,  2000 and 1999,  respectively.  The  interest
expense  in  2001  reflected  higher  average  borrowings   (although  at  lower
prevailing  rates)  compared  to 2000 and  1999.  Borrowing  levels in 2001 were
primarily   attributable  to  continued   investment  in,  and  working  capital
requirements of, the Trinidad project, as well as other working capital needs.

Equity  income  was $1.4  million in 2001,  compared  to $1.6  million  and $1.1
million in 2000 and 1999, respectively.  Equity income in 2001 related primarily
to two  projects  located  in  Mexico  in which  the  Company  has a 20%  equity
interest.

The Company's  effective tax rate was 49.0% in 2001,  34.0% in 2000 and 32.0% in
1999.  The increase in the  Company's  effective  tax rate in 2001 was primarily
attributable  to the  gain on the  sale of the  Aqua  Cool  Pure  Bottled  Water
business,  which included  non-deductible  goodwill, and also to foreign losses,
most  significantly  the losses incurred by the Company's  Malaysian  affiliate,
that were not benefited since realization of those benefits was not likely.

Net income in 2001 of $44.7  million  compares to a net loss of $1.9  million in
2000,  and to net income of $19.4 million in 1999. Net income in 2001 included a
pre-tax gain of $102.8  million  resulting from the sale of CWG's Aqua Cool Pure
Bottled Water businesses in the U.S., U.K. and France. (See Note 15.)

                                       22
<PAGE>

FINANCIAL CONDITION

At December 31, 2001, the Company had total assets of $633.3  million,  compared
to total assets of $585.8  million at December 31, 2000.  The increase in assets
reflects an increase in cash and cash  equivalents of $152.8 million,  primarily
attributable  to the gain of $102.8  million  on the  receipt  of  approximately
$210.5  million in proceeds  relating to the  divestiture  of the Aqua Cool Pure
Bottled  Water  business (an  additional  $10.0  million is being held in escrow
under the terms of the divestiture agreement).  Accounts receivable decreased by
$28.4 million,  inventories  decreased by $1.9 million, and other current assets
decreased by $5.4  million from 2000 to 2001,  primarily as a result of the Aqua
Cool  divestiture  and the  treatment of the  Malaysian  subsidiary as "held for
sale." Deferred  income taxes,  increased by $9.4 million  primarily  because of
deferred  tax benefits  associated  with the  divestiture  of the Aqua Cool Pure
Bottled Water business,  and the planned divestiture of the Malaysian affiliate.
Notes  receivable,  long-term and current  investments  in affiliated  companies
increased from 2000 to 2001 by $5.7 million and $5.5 million, respectively. This
was  primarily   attributable  to  the  Company's  investment  in  the  Trinidad
desalination  project  and a  loan  to  the  majority  equity  participant.  Net
property,  plant and equipment decreased by $55.8, million primarily as a result
of the Aqua Cool  divestiture,  and the  planned  divestiture  of the  Malaysian
subsidiary  held for sale.  Capital  expenditures  during  the year  were  $39.6
million. Other assets decreased by $32.2 million,  primarily because of goodwill
associated with the divested Aqua Cool business,  as well as goodwill impairment
charges for investments made in Malaysia, Australia and Israel.

At December  31, 2001 the Company had total  liabilities  of $210.0  million and
stockholders'  equity of $423.4  million.  Notes payable and current  portion of
long-term debt decreased by $60.8 million,  reflecting the pay-down of bank debt
upon receipt of the proceeds  from the Aqua Cool sale,  as well as the treatment
of the Malaysian  subsidiary  as held for sale.  Accounts  payable  decreased by
$21.4 million, primarily as a result of the Trinidad project nearing completion,
and also the  treatment  of the  Malaysian  subsidiary  as held for sale.  Other
current  liabilities  increased by $67.1  million,  reflecting  accruals for tax
payments and sale price  reserves  relating to the Aqua Cool Pure Bottled  Water
sale.

Working capital increased to $220.5 million at the end of 2001 compared to $79.5
million at the end of 2000,  reflecting the proceeds from the divestiture of the
Aqua Cool business. The Company's current ratio correspondingly increased to 2.4
in 2001 from 1.5 in 2000.

Net cash provided by operating activities was $13.5 million in 2001, compared to
net cash provided by operating  activities of $4.3 million in 2000.  Compared to
2000, cash provided by operating activities increased by $9.3 million, despite a
reduction in net income after exclusion of the gain on the sale of the Aqua Cool
business and despite a reduction in accounts  payable from the level at December
31, 2000. These impacts were offset by substantially smaller accounts receivable
growth  in 2001  than  occurred  in 2000,  and by  additional  non-cash  charges
impacting net income compared to 2000 related to asset impairment and income tax
liabilities.  Net cash  provided  by  operating  activities  decreased  by $26.2
million in 2000  compared to 1999,  primarily due to a net loss in 2000, as well
as  increased  accounts  receivable  offset by  increased  accounts  payable and
accrued expenses.  Accounts receivable  increases were attributable to increased
sales  revenues,  while the increases in accounts  payable and accrued  expenses
were primarily related to litigation-related charges accrued late in 2000.

Net cash provided by investing activities was $168.0 million in 2001 compared to
a use of cash of $44.8  million  in  2000.  The  increase  in cash  provided  by
investing  activities  in 2001  compared to 2000  reflects the proceeds from the
sale of the Aqua Cool Pure Bottled Water business, of $210.5 million,  offset by
capital expenditures made during the year. Net cash used by investing activities
of  $44.8  million  in 2000  reflected  capital  expenditures  and  acquisitions
completed  in  2000,   offset  by  cash   received  from  the  sale  of  certain
manufacturing  equipment to Toray  Membrane  America,  Inc.  (TMA),  a 43% owned
affiliate  of  the  Company.   The  Company  spent  $4.5  million  in  2000  for
acquisitions, primarily in the bottled water segment. Net cash used by investing
activities of $71.3 million in 1999 was attributable to capital expenditures and
acquisitions  completed  in 1999.  The  Company  spent  $8.5  million in 1999 in
certain  acquisitions.  Capital  expenditures  in 1999  of  $61.5  million  were
generally made to expand the Company's bottled water  operations,  and to expand
or build additional  manufacturing and "own and operate"  facilities.  Cash from
operations,  borrowings  of current and  long-term  debt and proceeds from stock
option exercises provided funds for these expenditures.

In 2001, net cash used by financing  activities  was $28.2 million,  a change of
$81.3 million from the $53.2  million that was provided by financing  activities
in 2000.  This change  resulted  from the pay-down of  short-term  borrowings at
year-end utilizing the proceeds from the sale of the Aqua Cool Pure Bottled


                                       23
<PAGE>

Water  business,  which was  partially  offset by proceeds  from the issuance of
stock of $21.8  million  associated  with a private  placement of public  equity
completed  earlier  in the  year.  In  2000,  net  cash  provided  by  financing
activities was $53.2  million,  a change of $27.1 million from the $26.1 million
that was provided by financing activities in 1999. The change resulted primarily
from the  higher  level of  short-term  borrowings  at  December  31,  2000 from
December 31, 1999. In 1999, net cash provided by financing  activities was $26.1
million, which resulted primarily from increased short and long-term borrowings.

The Company  maintains several domestic and foreign lines of credit. On June 29,
2001 the Company entered into a third amended and restated credit agreement with
Fleet  National  Bank (as lender and agent),  Bank of America,  N.A.,  the Chase
Manhattan Bank, and Mellon Bank, N.A. (the "Credit Agreement").  Under the terms
of the Credit  Agreement,  which  supercedes the prior loan agreement with Fleet
National Bank,  the Company was able to borrow up to $90.0  million,  subject to
certain financial covenants, including a prohibition against the payment of cash
dividends.  On December 21, 2001, the Credit Agreement was amended in connection
with  obtaining a waiver  from the  lenders to permit the sale of the  Company's
bottled water assets.  Under the amended Credit  Agreement,  the borrowing limit
was reduced to $50 million and the maturity  date was changed from  December 31,
2004 to April 30,  2002.  On March 27, 2002,  the Company  paid all  outstanding
borrowings under the Credit  Agreement.  On March 28, 2002, the Credit Agreement
was further amended to reduce maximum borrowings to $30 million, extend its term
for a period of 364 days from the date of the  amendment,  eliminate  and revise
certain of the financial and other covenants  contained therein,  and make Fleet
National Bank the sole lender.

Outstanding  amounts under foreign lines of credit  outstanding  at December 31,
2001 were $7.7 million,  excluding  those for specific  project  financing.  The
Company  also  has  several   facilities  to   accommodate   its  foreign  trade
requirements.  At December 31, 2001, the Company's controlled Barbados affiliate
had outstanding borrowings of $8.3 million in connection with the financing of a
Barbados desalination facility. (See Note 8.)

The Company  believes  that its cash on hand,  lines of credit and foreign trade
facilities  are adequate to meet its currently  anticipated  operational  needs.
Significant expenditures in 2002 are anticipated to include capital expenditures
and investments in additional "own and operate" facilities.

Also during  2002,  construction  is expected to be  completed  on the  Trinidad
desalination  facility owned by Desalination Company of Trinidad and Tobago Ltd.
(Desalcott),  in which the  Company has a 40% equity  interest.  The Company has
loaned $10 million to the 60% equity owner, Hafeez Karamath Engineering Services
Ltd. (HKES), as the source of HKES' equity contribution,  in addition to the $10
million  contributed  by the  Company  for its 40%  equity  interest.  In  2000,
Desalcott  entered into a "bridge loan" agreement with a Trinidad bank providing
$60 million in  construction  financing.  Effective  November 8, 2001,  the loan
agreement was amended to increase maximum borrowings to $79.9 million.  However,
the bridge  loan plus the $20 million  equity  provided  to  Desalcott  will not
provide  sufficient  funds to complete  construction  and  commissioning  of the
project.  The Company has  committed  to lend up to $10 million to  Desalcott to
complete the project once all bridge loan proceeds have been expended.  Although
Desalcott has received  proposals,  including a term sheet,  for long-term  debt
financing,  there is no assurance  that such financing will be obtained on terms
acceptable to Desalcott.

During 2001, the Company acquired a 25% equity  ownership  interest in a Kuwaiti
project  company,  Utilities  Development  Company  W.L.L.,  that was  awarded a
concession   agreement  by  an  agency  of  the  Kuwaiti   government   for  the
construction, ownership and operation of wastewater reuse facility in Kuwait. At
December 31, 2001, the Company had deferred costs of approximately  $1.0 million
relating primarily to preliminary project management and



                                       24
<PAGE>



initial design work on the project, and had invested $1.5 million in the project
company.  Although the Company  anticipates  that  long-term  financing  for the
project  should  be  obtained  by  mid-2002,  there is no  assurance  that  such
financing will be obtained, and the Company would expense the deferred costs and
investment  in the event  financing  is not  obtained.  Also in such event,  the
Company could incur its 25% proportionate share of liability under a $28 million
performance bond issued on behalf of the project company.

Inflationary  increases in material and labor costs remained moderate during the
last three years.  The Company has been working to offset such cost increases by
redesigning  its  equipment  to reduce  costs.  To the extent  permitted  by the
competitive environment, the Company has raised prices where appropriate.

Net  periodic  pension  cost  amounted to $1.3  million and $0.7 million for the
years ended December 31, 2001 and 2000, respectively.  Related projected benefit
obligation  amounted to $19.5 million and $15.8 million at December 31, 2001 and
2000, respectively. The increase in projected benefit obligation of $3.7 million
primarily  reflects the decrease in the discount rate from 7.5% to 7.0%, as well
as the lower-than-expected return on plan assets in 2001 compared to 2000.

ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial  Accounting  Standards  Board (FASB) issued SFAS No.
142,  "Goodwill and Other Intangible  Assets." SFAS No. 142 addresses  financial
accounting and reporting for intangible  assets acquired  individually or with a
group  of  assets  (but  not  those  acquired  in  a  business  combination)  at
acquisition.  This Statement also addresses  financial  accounting and reporting
for goodwill and other intangible  assets subsequent to their  acquisition.  The
provisions  of this  Statement  are  required to be applied  with  fiscal  years
beginning  after December 15, 2001.  This Statement is required to be applied at
the  beginning of an entity's  fiscal year and to be applied to all goodwill and
other  intangible  assets  recognized in its financial  statements at that date.
Impairment losses for goodwill and indefinite-lived intangible assets that arise
due to the initial application of this Statement are to be reported as resulting
from a change in accounting  principle.  The Company has not yet determined what
effect,  if any,  the  adoption  of SFAS  No.  142  will  have on the  Company's
financial position or results of operations.

In August  2001,  the FASB  issued  SFAS No. 143,  "Accounting  for  Obligations
Associated with the Retirement of Long-Lived  Assets." SFAS No. 143 provides the
accounting  requirements  for retirement  obligations  associated  with tangible
long-lived assets. SFAS No. 143 is effective for financial statements for fiscal
years beginning after June 15, 2002. The Company is currently assessing SFAS No.
143 but does  not  believe  it will  have a  material  impact  on its  financial
position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets." This accounting standard, which is effective for
fiscal years beginning after December 31, 2001,  requires that long-lived assets
that are to be  disposed  of by sale be  measured  at the lower of book value or
fair value less cost to sell.  Additionally,  SFAS No. 144  expands the scope of
discontinued  operations to include all components of an entity with  operations
that can be  distinguished  from the rest of the entity  and will be  eliminated
from the ongoing operations of the entity in a disposal transaction.  The effect
of  adopting  SFAS No.  144 is not  expected  to have a  material  impact on the
Company's financial position or results of operations.

RISKS AND UNCERTAINTIES

The Company may face significant risks from its international operations

The Company  derives a significant  portion of its revenues  from  international
operations, which involve a number of additional risks, including the following:

o impact of possible recessionary environments in economies outside the
  United States;
o longer receivables collection periods and greater difficulty in
  accounts receivable collection;
o exposure to foreign taxation;
o tariffs and other trade barriers;
o transportation delays;
o foreign currency exchange rate fluctuations;
o difficulties in staffing and managing foreign operations;
o unexpected changes in regulatory requirements;
o the burdens of complying with a variety of foreign laws and
  regulations; and
o political and economic instability

                                       25
<PAGE>

The  Company may face  significant  risks from  participating  in large "own and
operate" projects

There has been a worldwide trend in the desalination and water treatment markets
towards  large-scale  own and operate  projects.  The Company has made bids on a
number of  large-scale  desalination  and other  water  treatment  projects in a
number of countries,  under a business  structure in which the Company  (usually
through a subsidiary) will be an equity  participant,  together with one or more
local  partners,  in a project  company  which  will own and  operate  the water
treatment  facility that is the subject of the bid. The project company,  if its
bid is  successful,  typically  will enter into a  concession  agreement  with a
government  entity or  utility  for the  provision  of water or water  treatment
services over a defined long period at a defined  price,  subject to escalation.
The  project  company is usually  responsible  for  obtaining  construction  and
long-term  financing for the project,  and bears the risk of being able to do so
once the  concession  agreement is awarded.  Under this project  structure,  the
Company may also sell water  treatment  equipment to the project  company and in
addition may provide certain  operation and  maintenance  services in connection
with the long-term  operation of the facility.  When these  projects are located
overseas, such as the Trinidad desalination project, the Company either directly
or as a result of its equity interest in the project company,  is exposed to the
risks inherent in international  operations,  described above. In addition,  the
Company's equity  investment in such projects is subject to risk that the entity
purchasing  the water or the services  being  rendered  will have the  necessary
financial wherewithal over the term of the contract to continue to make payments
to the project  company,  and the risk that the project  company's  bid properly
reflected long-term operating costs so as to be able to operate at a profit over
the term of the concession agreement.

The Company has only limited protection for its proprietary technology

The Company relies on a combination  of patent,  trademark and trade secret laws
and restrictions on disclosure to protect its intellectual  property rights. The
Company's  success  depends in part on its  ability to obtain  new  patents  and
licenses  and to  preserve  other  intellectual  property  rights  covering  its
products. The Company intends to continue to seek patents on its inventions when
appropriate.  The process of seeking patent protection can be time-consuming and
expensive,  and there is no assurance that any new patent  applications  will be
approved,   that  any  patents  that  may  issue  will  protect  the   Company's
intellectual property or that any issued patents will not be challenged by third
parties  or will be  sufficient  in  scope or  strength  to  provide  meaningful
protection  or any  commercial  advantage  to the  Company.  Other  parties  may
independently  develop  similar or  competing  technology  or design  around any
patents  that may be issued to the Company.  The Company  cannot be certain that
the steps it has taken will  prevent the  misappropriation  of its  intellectual
property,  particularly  in  foreign  countries  where the laws may not  protect
proprietary rights as fully as in the United States.

The Company may become subject to infringement claims

Although the Company does not believe that its products infringe the proprietary
rights  of any third  parties,  the  Company  has in the past  been  subject  to
infringement  claims and third parties might assert  infringement claims against
the  Company or its  customers  in the  future.  Furthermore,  the  Company  may
initiate  claims or litigation  against third  parties for  infringement  of its
proprietary  rights or to  establish  the  validity of its  proprietary  rights.
Litigation,  either as plaintiff or defendant,  would cause the Company to incur
substantial costs and divert management resources. Any litigation, regardless of
the outcome, could harm the Company's business.

The Company has many competitors and may not be able to compete effectively

The Company  experiences  competition  from a variety of sources with respect to
virtually all of its products and  services,  although the Company does not know
of any  single  entity  that  competes  with it  across  the  full  range of its
products, systems and services. Competition in the markets served by the Company
is based on a number  of  factors,  including  price,  technology,  applications
experience, know-how, availability of financing, reputation, product warranties,
reliability,  service  and  distribution.  Many  of the  Company's  current  and
potential  competitors have greater name recognition and  substantially  greater
financial,  marketing and other  resources than does the Company.  These greater
resources  could,  for  example,  allow the  Company's  competitors  to  develop
technology, products and services superior to those of the Company. As a result,
the  Company  may not be able to  compete  effectively  with  current  or future
competitors.

The Company may not be able to develop the new products or acquire the rights to
new products necessary to remain competitive

                                       26
<PAGE>

The water  purification  industry  is  characterized  by  ongoing  technological
developments  and changing  customer  requirements.  As a result,  the Company's
success  and  continued  growth  depend,  in part,  on its ability to develop or
acquire rights to, and successfully introduce into the marketplace, enhancements
of existing  products or new products that incorporate  technological  advances,
meet customer  requirements  and respond to products  developed by  competitors.
There can be no assurance  that the Company will be  successful in developing or
acquiring  such rights to products on a timely basis or that such  products will
adequately address the changing needs of the marketplace.

The Company  may not be able to adapt to changes in  technology  and  government
regulation fast enough to remain competitive

The  water  purification  industry  is  characterized  by  changing  technology,
competitively  imposed process  standards and regulatory  requirements,  each of
which influences the demand for the Company's products and services.  Changes in
legislative,  regulatory or industrial  requirements  may render  certain of the
Company's  purification  products  and  processes  obsolete.  Acceptance  of new
products  may also be affected by the  adoption  of new  government  regulations
requiring  stricter  standards.  The Company's ability to anticipate  changes in
technology  and  regulatory  standards  and to  develop  and  introduce  new and
enhanced products successfully on a timely basis will be a significant factor in
its ability to grow and to remain  competitive.  There can be no assurance  that
the  Company  will be able to achieve  the  technological  advances  that may be
necessary to remain  competitive or that certain of the Company's  products will
not become obsolete. In addition,  the Company is subject to the risks generally
associated with new product  introductions and  applications,  including lack of
market  acceptance,  delays in  development  or failure of  products  to operate
properly.

A portion of the  Company's  sales is  dependent  upon its  customers'  spending
cycles for capital equipment

The sale of capital equipment within the water purification industry is cyclical
and influenced by various economic factors including  interest rates and general
fluctuations of the business cycle.  The Equipment  Business Group and Ultrapure
Water Group each derive a  significant  portion of its revenue  from the sale of
capital  equipment.  While the Company sells  capital  equipment to customers in
diverse  industries and in domestic and  international  markets,  cyclicality of
capital  equipment sales and general  economic  conditions could have an adverse
effect on the Company's  revenues and  profitability.  For example,  in the past
several  years,  conditions in the  microelectronics  industry  have  negatively
affected  sales of equipment by the  Ultrapure  Water Group to customers in that
industry.

The Company must comply with significant environmental regulations, which can be
difficult and expensive

The  Company is subject to a variety of  federal,  state and local  governmental
regulations  related to the use,  storage,  discharge  and disposal of hazardous
materials used in certain of its manufacturing  processes.  Although the Company
believes  that its  activities  conform to  presently  applicable  environmental
regulations,  the failure to comply  with  present or future  regulations  could
result in fines being  imposed,  suspension  of  production  or a  cessation  of
operations.  Any  failure  to control  the use of, or  adequately  restrict  the
discharge  of,  hazardous  substances,  or otherwise  comply with  environmental
regulations,  could subject the Company to significant  future  liabilities.  In
addition,  there is no  assurance  that past use or disposal of  environmentally
sensitive  materials in  conformity  with then existing  environmental  laws and
regulations  will not result in  remediation  or other  significant  liabilities
under current or future environmental laws or regulations.

The Company relies significantly upon certain key individuals, and its business
may suffer if it is unable to retain them.

The Company has been and is presently  dependent  upon the continued  efforts of
our senior management team, including Arthur L. Goldstein,  Chairman,  President
and Chief Executive  Officer.  The loss of the services of Mr.  Goldstein or any
other members of the senior management team could have a material adverse effect
on the Company's ability to achieve its objectives.

Higher interest rates may hurt the Company financially

The Company  engages in  short-term  and long-term  borrowing,  some of which is
subject to interest  rates that float with U.S.  prime  rates or foreign  rates.
This borrowing subjects the Company to the risk that interest rates may increase
significantly and increase the cost of such borrowing.

                                       27
<PAGE>

If the Company is unable to continue to hire and retain skilled technical and
scientific personnel, it will have trouble developing products

The  Company's  success  depends  largely  upon  the  continued  service  of its
management and scientific staff and its ability to attract,  retain and motivate
highly skilled scientific, management and marketing personnel. The Company faces
significant  competition for such personnel from other  companies,  research and
academic  institutions,  government and other  organizations which may better be
able to attract  such  personnel.  The loss of key  personnel  or the  Company's
inability  to hire and  retain  personnel  who  have  technical  and  scientific
backgrounds could materially  adversely affect its product  development  efforts
and business.

FORWARD-LOOKING INFORMATION

Derivative Instruments

In  2001,   the  Company's   Italian   subsidiary   entered  into  a  series  of
U.S.dollar/euro  options  contracts  with the intent of  offsetting  the foreign
exchange  risk  associated  with  forecasted  cash  flows  related to an ongoing
project.  These options contracts were not entered into for trading purposes. In
accordance  with the  restrictions  set forth in SFAS 133, the  contracts do not
qualify for hedge accounting  treatment.  The fair market value of the contracts
is recorded  as a liability  of $1.2  million in the other  current  liabilities
section of the Consolidated Balance Sheet.  End-of-period  changes in the market
value of the contracts are reflected in the selling,  general and administrative
expenses in the Consolidated  Statement of Operations.  A hypothetical weakening
of the euro by 10% against the U.S. dollar would result in an additional loss in
fair market value of $1.5 million. In addition,  the Company periodically enters
into foreign exchange  contracts to hedge certain  operational and balance sheet
exposures against changes in foreign currency exchange rates. With the exception
of the options  contracts  described  above, the Company had no foreign exchange
contracts outstanding at December 31, 2001 and 2000.

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, 2001,  the Company had $14.3 million of short-term
debt and $10.1 million of long-term debt outstanding.  The major portion of this
debt has variable  interest  rates and,  therefore  is subject to interest  rate
risk.  However,  a  hypothetical  increase of 10% in these  interest rates for a
one-year  period would result in additional  interest  expense that would not be
material in the aggregate.  The Company's net foreign currency exchange loss was
$0.6  million in 2001  compared to a loss of $0.8  million in 2000 and 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.

Safe Harbor Statement under Private Securities Litigation Reform Act of 1995

The Company's future results of operations and certain  statements  contained in
this  report,  including,  without  limitation,   "Management's  Discussion  and
Analysis  of  Results  of  Operations  and  Financial   Condition,"   constitute
forward-looking  statements.  Such statements are based on management's  current
views and  assumptions and involve risks,  uncertainties  and other factors that
could  cause  actual  results to differ  materially  from  management's  current
expectations.  Among these  factors are the matters  described  under "Risks and
Uncertainties"  in this  Item,  business  conditions  and the  general  economy;
competitive factors,  such as acceptance of new products and price pressures and
competition  from  companies  larger than the  Company;  risk of  nonpayment  of
accounts receivable; risks associated with foreign operations; risks involved in
litigation;  regulations  and laws  affecting  business in each of the Company's
markets; market risk factors, as described above under "Derivative  Instruments"
and "Market Risk;" and other risks and uncertainties described from time to time
in the Company's filings with the Securities and Exchange Commission.

ITEM 7a.      QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Derivative Instruments

In  2001,   the  Company's   Italian   subsidiary   entered  into  a  series  of
U.S.dollar/euro  options  contracts  with the intent of  offsetting  the foreign
exchange  risk  associated  with  forecasted  cash  flows  related to an ongoing
project.  These options contracts were not entered into for trading purposes. In
accordance  with the  restrictions  set forth in SFAS 133, the  contracts do not
qualify for hedge accounting  treatment.  The fair market value of the contracts
is recorded  as a liability  of $1.2  million in the other  current  liabilities
section of the Consolidated Balance Sheet. End-of-period changes in the market


                                       28
<PAGE>

value of the contracts are reflected in the selling,  general and administrative
expenses in the Consolidated  Statement of Operations.  A hypothetical weakening
of the euro by 10% against the U.S. dollar would result in an additional loss in
fair market value of $1.5 million. In addition,  the Company periodically enters
into foreign exchange  contracts to hedge certain  operational and balance sheet
exposures against changes in foreign currency exchange rates. With the exception
of the options  contracts  described  above, the Company had no foreign exchange
contracts outstanding at December 31, 2001 and 2000.

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, 2001,  the Company had $14.3 million of short-term
debt and $10.1 million of long-term debt outstanding.  The major portion of this
debt has variable  interest  rates and,  therefore  is subject to interest  rate
risk.  However,  a  hypothetical  increase of 10% in these  interest rates for a
one-year  period would result in additional  interest  expense that would not be
material in the aggregate.  The Company's net foreign currency exchange loss was
$0.6  million in 2001  compared to a loss of $0.8  million in 2000 and 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.




                                       29
<PAGE>


<TABLE>
<CAPTION>


ITEM 8.       CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                              IONICS, INCORPORATED

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE


                                                                                                      Page
<S>    <C>                                                                                             <C>
Report of Independent Accountants.............................................................         31

Financial Statements:

       Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000,
       and 1999...............................................................................         32

       Consolidated Balance Sheets as of December 31, 2001 and 2000............................        33

       Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000,
       and 1999................................................................................        34

       Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
       2001, 2000, and 1999....................................................................        35

       Notes to Consolidated Financial Statements..............................................        36

Supporting Financial Statement Schedule:

       Schedule II - Valuation and Qualifying Accounts.........................................        55

</TABLE>




                                       30
<PAGE>




REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Ionics, Incorporated:

In our opinion, the consolidated financial statements listed in the accompanying
index  present  fairly,  in all material  respects,  the  financial  position of
Ionics, Incorporated and its subsidiaries at December 31, 2001 and 2000, and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31, 2001 in  conformity  with  accounting  principles
generally accepted in the United States of America. In addition, in our opinion,
the financial  statement  schedule  listed in the  accompanying  index  presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.  These financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Company's  management;  our  responsibility  is to  express  an opinion on these
financial  statements and financial  statement  schedule based on our audits. We
conducted our audits of these  statements in accordance with auditing  standards
generally  accepted in the United States of America,  which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
March 20, 2002, except for the first
paragraph of Note 8, as to which the
date is March 28, 2002




                                       31
<PAGE>
<TABLE>
<CAPTION>

Consolidated Statements of Operations
--------------------------------------------------------------------------------------------------------------------
For the years ended December 31
--------------------------------------------------------------------------------------------------------------------
Amounts in Thousands, Except per Share Amounts                               2001             2000             1999
--------------------------------------------------------------------------------------------------------------------
Revenues:
<S>                                                                     <C>              <C>               <C>
     Equipment Business Group                                           $ 207,927        $ 205,181         $140,655
     Ultrapure Water Group                                                107,814          132,236           93,562
     Consumer Water Group                                                 123,951          108,324           96,569
     Instrument Business Group                                             27,040           28,810           27,431
--------------------------------------------------------------------------------------------------------------------
                                                                          466,732          474,551          358,217
                                                                  --------------------------------------------------

Costs and expenses:
     Cost of sales of Equipment Business Group                            165,850          164,556          101,744
     Cost of sales of Ultrapure Water Group                                88,407          106,498           70,636
     Cost of sales of Consumer Water Group                                 74,044           66,327           54,052
     Cost of sales of Instrument Business Group                            12,979           12,794           11,500
     Research and development                                               6,420            7,980            7,066
     Selling, general and administrative                                  119,837          113,222           84,892
     Impairment of long-lived assets                                       13,069            3,398                -
--------------------------------------------------------------------------------------------------------------------
                                                                          480,606          474,775          329,890
                                                                  --------------------------------------------------

(Loss) income from operations                                             (13,874)            (224)          28,327
Interest income                                                             1,013            1,286              961
Interest expense                                                           (5,166)          (4,909)            (668)
Equity income                                                               1,396            1,623            1,111
--------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes, minority interest,
     and gain on sale of business                                         (16,631)          (2,224)          29,731

Gain on sale of Aqua Cool business                                        102,834                -                -

(Provision) benefit for income taxes                                      (42,239)             756           (9,522)
--------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest                                     43,964           (1,468)          20,209
Minority interest in (losses) earnings                                       (737)             402              848

Net income (loss)                                                        $ 44,701         $ (1,870)        $ 19,361
====================================================================================================================
Earnings (loss) per basic share                                            $ 2.61          $ (0.12)          $ 1.20
====================================================================================================================
Earnings (loss) per diluted share                                          $ 2.59          $ (0.12)          $ 1.18
====================================================================================================================
Shares used in basic earnings per share calculations                       17,106           16,243           16,148
Shares used in diluted earnings per share calculations                     17,246           16,243           16,388

</TABLE>

The accompanying notes are an integral part of these financial statements.


                                       32
<PAGE>
<TABLE>
<CAPTION>


Consolidated Balance Sheets
---------------------------------------------------------------------------------------------------------------
At December 31
---------------------------------------------------------------------------------------------------------------
Dollars in Thousands, Except Share Amounts                                            2001                2000
---------------------------------------------------------------------------------------------------------------
Assets
Current assets:
<S>                                                                              <C>                  <C>
     Cash and cash equivalents                                                   $ 178,283            $ 25,497
     Short-term investments                                                             21               1,105
     Notes receivable, current                                                       4,892               4,741
     Accounts receivable                                                           134,270             162,711
     Receivables from affiliated companies                                           1,184                 792
     Inventories                                                                    32,813              34,701
     Other current assets                                                           11,031              16,443
     Deferred income taxes, current                                                 16,297               6,872
---------------------------------------------------------------------------------------------------------------
         Total current assets                                                      378,791             252,862
---------------------------------------------------------------------------------------------------------------
Notes receivable, long-term                                                         23,210              17,502
Investments in affiliated companies                                                 23,798              18,310
Property, plant and equipment, net                                                 167,032             222,843
Deferred income taxes, long-term                                                    12,643              14,224
Other assets                                                                        27,839              60,072
---------------------------------------------------------------------------------------------------------------
         Total assets                                                            $ 633,313           $ 585,813
===============================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
     Notes payable and current portion of long-term debt                          $ 14,257            $ 75,045
     Accounts payable                                                               34,640              56,014
     Other current liabilities                                                     109,429              42,304
---------------------------------------------------------------------------------------------------------------
         Total current liabilities                                                 158,326             173,363
---------------------------------------------------------------------------------------------------------------
Long-term debt and notes payable                                                    10,126              10,911
Deferred income taxes                                                               34,199              38,681
Other liabilities                                                                    7,309               5,997
Commitments and contingencies (Note 7)
Stockholders' equity:
     Common stock, par value $1, authorized shares: 55,000,000
         in 2001 and 2000; issued and outstanding: 17,477,005 in
         2001 and 16,369,029 in 2000.                                               17,477              16,369
     Additional paid-in capital                                                    188,555             162,114
     Retained earnings                                                             242,317             197,616
     Accumulated other comprehensive loss                                          (24,996)            (19,238)
---------------------------------------------------------------------------------------------------------------
         Total stockholders' equity                                                423,353             356,861
---------------------------------------------------------------------------------------------------------------
         Total liabilities and stockholders' equity                              $ 633,313           $ 585,813
===============================================================================================================
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                       33
<PAGE>
<TABLE>
<CAPTION>


Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------
For the years ended December 31
-----------------------------------------------------------------------------------------------------
Dollars in Thousands                                                2001          2000          1999
-----------------------------------------------------------------------------------------------------
Operating activities:
<S>                                                             <C>           <C>            <C>
     Net income (loss)                                          $ 44,701      $ (1,870)      $19,361
     Adjustments to reconcile net income (loss)
       to net cash provided by operating activities:
       Depreciation and amortization                              33,152        30,948        26,464
       Amortization of intangibles                                 2,787         2,847         2,333
       Impairment of long-lived assets                            13,069         3,398             -
       Gain on sale of Aqua Cool business                       (102,834)            -             -
       Provision for losses on accounts and notes receivable       4,632         5,204         2,643
       Equity in earnings of affiliates                           (1,396)       (1,623)       (1,111)
       Deferred income tax provision (benefit)                         -        (2,092)        3,723
       Compensation expense on restricted stock awards                 -            36           108
       Changes in assets and liabilities,
         net of effects of businesses divested and acquired:
         Notes receivable                                         (6,538)       (7,913)       (3,539)
         Accounts receivable                                      (1,731)      (48,579)      (11,405)
         Inventories                                              (2,084)       (1,240)       (2,081)
         Other current assets                                      3,566          (905)       (6,837)
         Investments in affiliates                                 1,445         3,516           478
         Deferred income tax assets                               (7,844)      (16,366)       (4,729)
         Accounts payable and accrued expenses                    (9,516)       22,758        (1,640)
         Income taxes payable                                     45,735        15,260         5,234
         Other                                                    (3,636)          878         1,502
-----------------------------------------------------------------------------------------------------

           Net cash provided by operating activities              13,508         4,257        30,504
                                                             ----------------------------------------

Investing activities:
     Additions to property, plant and equipment                  (39,607)      (41,211)      (61,515)
     Disposals of property, plant and equipment                    2,137        11,464         2,177
     Additional investments in affiliates                         (5,462)       (9,588)       (3,599)
     Sale and maturity of short-term investments                       -             -           164
     Proceeds from sale of Aqua Cool                             210,476             -             -
     Purchase of short-term investments                              413          (931)            -
     Acquisitions, net of cash acquired                                -        (4,491)       (8,513)
-----------------------------------------------------------------------------------------------------

           Net cash provided (used) by investing activities      167,957       (44,757)      (71,286)
                                                             ----------------------------------------

Financing activities:
     Principal payments on current debt                         (171,343)      (97,891)      (10,393)
     Proceeds from borrowings of current debt                    116,476       145,508        28,762
     Principal payments on long-term debt                         (1,390)       (2,827)         (756)
     Proceeds from borrowings of long-term debt                    1,294         5,666         7,093
     Proceeds from issuance of common stock                       21,814             -             -
     Proceeds from stock option plans                              4,990         2,734         1,424
----------------------------------------------------------------------------------------------------

           Net cash (used) provided by financing activities      (28,159)       53,190        26,130
                                                             ----------------------------------------

Effect of exchange rate changes on cash                             (520)         (362)         (949)
                                                             ----------------------------------------
Net change in cash and cash equivalents                          152,786        12,328       (15,601)
Cash and cash equivalents at end of prior year                    25,497        13,169        28,770
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of current year               $ 178,283       $25,497       $13,169
=====================================================================================================
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       34
<PAGE>
<TABLE>
<CAPTION>


Consolidated Statements of Stockholders' Equity
----------------------------------------------------------------------------------------------------------------------------
                                                                                       Accumulated
                                              Common Stock      Additional                Other                    Total
                                                                  Paid-In    Retained  Comprehensive  Unearned   Stockholders'
Dollars in Thousands                        Shares    Par Value   Capital    Earnings      Loss     Compensation   Equity
----------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>         <C>        <C>        <C>          <C>            <C>      <C>

Balance December 31, 1998                  16,116,649  $ 16,117   $ 157,571  $ 179,943     $ (7,889)      $ (144) $ 345,598

Comprehensive income:
    Net income                                      -         -           -     19,361            -            -     19,361
    Translation adjustments, (tax $2,497)           -         -           -          -       (5,016)           -     (5,016)
                                                                                                                 -----------
                                                                                                                 -----------
Total comprehensive income                                                                                           14,345
                                                                                                                 -----------
                                                                                                                 -----------

Stock options exercised                        82,033        82       1,258          -            -            -      1,340
Tax benefit of stock option activity                -         -         377          -            -            -        377
Shares issued to directors                      2,801         2          82          -            -            -         84
Amortization of unearned compensation               -         -           -          -            -          108        108
----------------------------------------------------------------------------------------------------------------------------

Balance December 31, 1999                  16,201,483    16,201     159,288    199,304      (12,905)         (36)   361,852

Comprehensive income:
    Net loss                                        -         -           -     (1,870)           -            -     (1,870)
    Translation adjustments, (tax $2,227)           -         -           -          -       (6,333)           -     (6,333)
                                                                                                                 -----------
                                                                                                                 -----------
Total comprehensive loss                                                                                             (8,203)
                                                                                                                 -----------
                                                                                                                 -----------

Stock options exercised                       163,200       164       2,570          -            -            -      2,734
Tax benefit of stock option activity                -         -         156          -            -            -        156
Shares issued to directors                      4,346         4         100          -            -            -        104
Restricted stock shares issued                 17,937        18           -          -            -            -         18
Restricted stock shares forfeited             (17,937)      (18)          -          -            -            -        (18)
Adjustment of equity ownership                      -         -           -        182            -            -        182
Amortization of unearned compensation               -         -           -          -            -           36         36
----------------------------------------------------------------------------------------------------------------------------

Balance December 31, 2000                  16,369,029    16,369     162,114    197,616      (19,238)           -    356,861

Comprehensive income:
    Net income                                      -         -           -     44,701            -            -     44,701
    Other comprehensive income, net of tax;
      Translation adjustments (tax $974)            -         -           -          -       (4,112)           -     (4,112)
      Minimum pension liability
      adjustment (tax $1,009)                       -         -           -          -       (1,646)           -     (1,646)
                                                                                                                 -----------
                                                                                                                 -----------
Total comprehensive income                                                                                           38,943
                                                                                                                 -----------
                                                                                                                 -----------

Stock options exercised                       228,650       229       4,761          -            -            -      4,990
Tax benefit of stock option activity                                    641          -            -            -        641
Shares issued to directors                      4,326         4         100          -            -            -        104
Shares issued for private placement           875,000       875      20,939          -            -            -     21,814
----------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2001                  17,477,005  $ 17,477   $ 188,555  $ 242,317    $ (24,996)         $ -  $ 423,353
============================================================================================================================
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       35
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Significant Accounting Policies

Nature of Operations

The Company is involved  worldwide  in the  manufacture  and sale of  membranes,
equipment for the purification,  concentration,  treatment and analysis of water
and wastewater, in the supply of purified water, food and chemical products, and
in the sale of home water purification equipment.  Principal markets include the
United States, Europe and Asia, as well as other international markets.

Basis of  Presentation

Certain prior year amounts have been reclassified to conform to the current year
presentation with no impact on net income.

Principles of Consolidation

The Company  consolidates  the balance  sheet and results of  operations  of all
wholly and majority owned  subsidiaries and controlled  affiliates.  The Company
also  holds  minority   investments   in  certain   private   companies   having
complementary or strategic operations in different geographical locations around
the world.  These  investments  are included in  investments  in affiliates  and
include  investments  accounted  for at cost and  under  the  equity  method  of
accounting.  Under the equity method of accounting,  which generally  applies to
investments that represent a 20 to 50 percent ownership of the equity securities
of the affiliates,  the Company's  proportionate share of the earnings or losses
of the  affiliates is included in equity  income.  Realization  of the Company's
investments in equity  securities may be affected by the affiliate's  ability to
obtain  adequate  funding  and  execute  its  business  plans,   general  market
conditions,  industry  considerations  specific to the affiliate's business, and
other  factors.  The  inability  of an  affiliate  to obtain  future  funding or
successfully  execute its business  plan could  adversely  affect the  Company's
earnings in the periods  affected by those  events.  Future  adverse  changes in
market  conditions or poor  operating  results of underlying  investments  could
result  in  losses or in an  inability  to  recover  the  carrying  value of the
investments that may not be reflected in an investment's current carrying value,
thereby  possibly  requiring  an  impairment  charge in the future.  The Company
records an impairment  charge when it believes an investment  has  experienced a
decline in value that is other-than-temporary.

Revenue Recognition

For certain  contracts  involving  customized  equipment  eligible  for contract
accounting under American  Institute of Certified Public  Accountants  ("AICPA")
Statement of Position No. 81-1, "Accounting for Performance of Construction-Type
and Certain Construction-Type Contracts" (SOP 81-1), revenue is recognized using
the percentage of completion  accounting  method based upon an  efforts-expended
method.  The nature of these  contracts  and the types of products  and services
provided  are  considered  in  determining  the  proper  accounting  for a given
contract.  Long-term,  fixed-price  contracts  are recorded on a  percentage  of
completion  basis using the  cost-to-cost  method of accounting where revenue is
recognized  based on the ratio of costs  incurred  to  estimated  total costs at
completion.   The  Company  follows  this  method  since  reasonably  dependable
estimates  of the costs of the total  contract can be made.  As a general  rule,
sales and  profits  are  recognized  earlier  under the  cost-to-cost  method of
percentage of completion  accounting  compared to the completed contract method.
Contract accounting requires  significant  judgment relative to assessing risks,
estimating contract costs and making related assumptions regarding schedules and
technical  issues.  Due to the  size  and  nature  of  the  Company's  long-term
contracts,  the estimation of cost at completion is  complicated  and subject to
numerous variables.  Contract costs include material, labor,  subcontracting and
other related costs.  Assumptions must be made relative to the length of time to
complete the contract. With respect to contract change orders, claims or similar
items,  judgment  must be used in estimating  related  amounts and assessing the
potential for realization.  Such amounts are only included in the contract value
when they can be reliably  estimated  and  realization  is  reasonably  assured,
generally  upon  receipt  of  a   customer-approved   change  order.  Given  the
significance of the judgments and estimation  processes  described  above, it is
likely  that  materially  different  amounts  could  be  recorded  if  different
assumptions were used or if underlying circumstances were to change. The Company
closely  monitors  compliance  and  consistency  of  application of its critical
accounting policies related to contract accounting. In addition,  reviews of the
status  of  contracts  are  performed   through  periodic  contract  status  and
performance  reviews.  In all  cases,  changes  to  total  estimated  costs  and
anticipated losses, if any, are recognized in the period in which determined.



                                       36
<PAGE>



For  contracts  involving  the sale of  equipment  to a joint  venture  or other
affiliated  entities in which the Company has an equity interest,  the extent of
revenue and profit  recognized  during  contract  execution  varies based on the
level of equity  interest  held by the Company.  Generally,  when the  Company's
equity  ownership  in the  affiliated  customer  is less than 20%, no revenue or
profit is  deferred as the  contract  is  executed.  When the  Company's  equity
ownership is between 20% and 50%, provided that the Company does not control the
affiliated  entity,  the Company  recognizes revenue as the contract is executed
but defers a portion  of the  profit  equal to the  Company's  equity  ownership
percentage  in the  entity.  Upon  completion  of the  contract,  the  resulting
deferred profit is amortized into revenue over the estimated  useful life of the
equipment.  When the  Company's  equity  ownership  exceeds 50%, or in instances
where the Company  effectively  controls the  affiliated  entity,  no revenue or
profit is recognized as the contract is executed, and all profit on the contract
is deferred and  amortized  over the  estimated  useful life of  equipment  upon
completion  of the  contract.  Regarding  the  Company's  sale of  equipment  to
Desalcott (the project company) in connection with the Trinidad  project,  where
the Company is a 40% equity owner of Desalcott,  since the Company is considered
to have provided all of the equity  funding for the project  either  directly or
through a loan to the Company's local majority  partner,  the full amount of the
equipment  revenue  earned has been  recognized  as the  contract  is  executed;
however,  all of the profit has been  deferred,  and will be amortized  over the
estimated useful life of the equipment upon completion of construction.

In  addition  to the  construction  and  sale  of  customized  equipment  to its
customers,  the Company also enters into  contracts  for  desalination  or water
treatment  facilities  which it "owns and operates" on behalf of its  customers.
Under these  contracts,  where the Company  remains the owner of the  equipment,
revenue and profit is recognized as water  quantities  are sold to the customer.
The equipment  constructed is capitalized by the Company,  included in property,
plant and  equipment,  and  amortized  to cost of sales over the  shorter of the
estimated useful life of the equipment or the contract term.

For sales of standard  products and equipment not governed by SOP 81-1,  such as
the sale of instruments  and consumer water  products,  the Company  follows the
guidance provided by the Securities and Exchange  Commission's  Staff Accounting
Bulletin No. 101, "Revenue  Recognition in Financial  Statements" (SAB 101). The
Company does not recognize  revenue  unless there is  persuasive  evidence of an
arrangement,  title and risk of loss has passed to the  customer,  delivery  has
occurred  or the  services  have  been  rendered,  the  sales  price is fixed or
determinable and collection of the related receivable is reasonably  assured. It
is the Company's policy to require an arrangement with its customers,  either in
the form of a written contract or purchase order containing all of the terms and
conditions governing the arrangement, prior to the recognition of revenue. Title
and risk of loss generally passes to the customer at the time of delivery of the
product  to a  common  carrier.  At the  time of the  transaction,  the  Company
assesses  whether  the sale price is fixed or  determinable  and  whether or not
collection is reasonably assured. The Company assesses whether the sale price is
fixed or determinable  based upon the payment terms of the  arrangement.  If the
sales  price is not deemed to be fixed,  revenue is  recognized  as the  amounts
become due from the customer.  The Company does not  generally  offer a right of
return on its products and the  products are  generally  not subject to customer
acceptance  rights.  The Company  assesses  collectibility  based on a number of
factors,  including past transaction and collection  history with a customer and
the  credit-worthiness  of the customer.  The Company  performs  ongoing  credit
evaluations of its customers' financial condition but generally does not require
collateral from its customers.  If the Company determines that collectibility of
the sales price is not reasonably  assured,  revenue is deferred until such time
as collection  becomes  reasonably  assured,  which is generally upon receipt of
payment from the  customer.  The  Company's  products are  generally  subject to
warranty,  and related  costs are  provided for in cost of sales when revenue is
recognized.  While the Company engages in extensive product quality programs and
processes,  the Company's  warranty  obligation is based upon historical product
failure  rates and costs  incurred in  correcting a product  failure.  If actual
product  failure rates or the costs  associated with fixing failures differ from
historical rates,  adjustments to the warranty  liability may be required in the
period in which determined.

The Company  provides  lease  financing to consumers for the purchase of certain
home water treatment  systems.  Prior to entering into the lease agreement,  the
Company   evaluates   the   creditworthiness   of  its  customer  and  generally
collateralizes  the lease receivable with a security  interest in the customer's
personal  residence.  At the time the  lease  transaction  is  consummated,  the
Company  recognizes  revenue  for the  full  amount  of the  sales  value of the
equipment and records a lease  receivable on its balance sheet.  Interest income
is  recognized  by the Company  over the term of the lease based on the interest
rate stated in the lease. The Company evaluates the  collectibility of its lease
receivables   based  on  its  historical   loss  experience  and  assessment  of
prospective  risk,  and  does so  through  ongoing  reviews  of its  receivables
portfolio.

The Company  provides support  services to customers  primarily  through service
contracts, and the Company recognizes support service revenue primarily over the
term of the service contract or as services are rendered.

                                       37
<PAGE>

The  Company  also  rents  equipment  to  customers  under   short-term   rental
agreements.  The Company  generally  invoices  customers  monthly and recognizes
revenue over the rental period based on amounts billed.  The rental equipment is
capitalized and depreciated to cost of revenues over its estimated useful life.

Cash Equivalents

Short-term  investments  with an  original  maturity of 90 days or less from the
date of acquisition are classified as cash equivalents.

Investments

Management  determines the appropriate  classification of its investment in debt
securities at the time of purchase.  Debt  securities  which the Company has the
ability and positive  intent to hold to maturity are classified  accordingly and
carried at cost.  The Company is not involved in  activities  classified  as the
trading of investments.

Notes Receivable

Notes receivable have been reported at their estimated net realizable value. The
allowance for  uncollectible  notes receivable  totaled $561,000 and $186,000 at
December 31, 2001 and 2000, respectively.

Inventories

Inventories  are  carried  at the lower of cost or  market,  principally  on the
first-in, first-out basis.

Property, Plant and Equipment

Property,  plant and equipment is recorded at cost. Maintenance and repair costs
are expensed as incurred. Significant additions and improvements are capitalized
and depreciated. When an asset is retired or sold, any resulting gain or loss is
included in the results of operations.  Interest capitalized as property,  plant
and equipment amounted to $81,000, $320,000 and $957,000 in 2001, 2000 and 1999,
respectively. In general, depreciation is computed on a straight-line basis over
the expected useful lives of the assets, as follows:

Classification                                       Depreciation Lives
--------------                                       ------------------
Buildings and improvements                               10 - 40 years
Machinery and equipment, including supply equipment       3 - 25 years
Other                                                     3 - 12 years


In certain  situations  the units of  production  method is utilized in order to
achieve a more appropriate matching of revenues and expenses.


The  Company's  policy is to  depreciate  processing  plants,  other than leased
equipment,  over  the  shorter  of  their  useful  lives  or  the  term  of  the
corresponding supply contracts.

Asset Impairment

The Company  assesses the  impairment of  identifiable  intangibles,  long-lived
assets and related goodwill whenever events or changes in circumstances indicate
that the carrying value may not be  recoverable.  Factors the Company  considers
important   which   could   indicate   an   impairment    include    significant
underperformance  relative to historical or projected future operating  results,
significant  changes in the manner of the Company's use of the acquired asset or
the  strategy  for its overall  business and  significant  negative  industry or
economic  trends.  When  the  Company  determines  that  the  carrying  value of
intangibles, long-lived assets and related goodwill may not be recoverable based
upon the  existence of one or more of the above  indicators of  impairment,  the
Company measures any impairment based on a projected discounted cash flow method
using a discount rate determined by Company management. Any resulting impairment
loss  could  have  a  material  adverse  impact  on  the  Company's  results  of
operations,  depending on the magnitude of the  impairment.  In 2001 the Company
recognized  impairment  losses of  approximately  $13.1 million,  which included
approximately  $9.2 million to reduce the carrying value of assets held for sale
in Malaysia, $3.1 million of goodwill associated with previous acquisitions, and
$0.7 million associated with the residual value of bleach



                                       38
<PAGE>



manufacturing  equipment.  On January 1, 2002, the Company adopted SFAS No. 142,
"Goodwill  and Other  Intangible  Assets"(FAS  142) that  requires,  among other
things, the discontinuance of goodwill  amortization.  At December 31, 2001, the
Company  had $19.3  million of  goodwill  that will cease to be  amortized.  The
Company is required to complete a transitional  goodwill impairment test by June
30, 2002. (See Note 6.)

Goodwill

Goodwill is included in other assets and  represents  the excess of  acquisition
cost over the fair  value of net  assets  acquired  in the  purchase  of various
entities.  Goodwill is amortized  on a  straight-line  basis over its  estimated
useful life, which generally is a period ranging from 10 to 40 years.  (See Note
6.)

Research and Development

All research and development costs are expensed as incurred.

Foreign Exchange

Assets and liabilities of foreign  affiliates and subsidiaries are translated at
year-end exchange rates, and the related statements of operations are translated
at average  exchange  rates  during the year.  Translation  gains and losses are
accumulated net of income tax as a separate component of stockholders' equity.


Some  transactions  of the Company and its  subsidiaries  are made in currencies
different from their own. Gains and losses from these  transactions are included
in  income  as they  occur.  Net  foreign  currency  transaction  (losses)/gains
included in income before income taxes and minority interest totaled $(555,000),
$(782,000) and $11,000 for 2001, 2000 and 1999, respectively.

Income Taxes

Income tax expense is based on pretax financial accounting income.  Deferred tax
assets and  liabilities  are  recognized  for the expected tax  consequences  of
temporary  differences between the tax basis of assets and liabilities and their
reported  amounts  using  enacted  rates in  effect  for the  year in which  the
differences are expected to reverse.

Earnings Per Share

Basic  earnings  per share is computed by dividing  income  available  to common
shareholders  by the  weighted-average  number  of shares  outstanding.  Diluted
earnings  per  share  is  computed  by  dividing  income   available  to  common
shareholders by the  weighted-average  number of common shares outstanding while
giving effect to all potentially  dilutive  common shares that were  outstanding
during the period.

Comprehensive Income (Loss)

The  Company   reports   comprehensive   income  (loss)  in  the  Statements  of
Stockholders' Equity. For 2001,  comprehensive income was equal to $38.9 million
and  consisted  of net income,  foreign  currency  translation  adjustments  and
minimum pension liability  adjustment.  In 2000 and 1999,  comprehensive  (loss)
income was $(8.2) million and $14.3 million, respectively,  consisting primarily
of net (loss) income and translation adjustments.

Use of Estimates

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

ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial  Accounting  Standards  Board (FASB) issued SFAS No.
142,  Goodwill and Other  Intangible  Assets.  SFAS No. 142 addresses  financial
accounting and reporting for intangible  assets acquired  individually or with a
group  of  assets  (but  not  those  acquired  in  a  business  combination)  at
acquisition.  This Statement also addresses  financial  accounting and reporting
for goodwill and other intangible  assets subsequent to their  acquisition.  The
provisions  of this  Statement  are  required to be applied  with  fiscal  years
beginning  after December 15, 2001.  This Statement is required to be applied at
the  beginning of an entity's  fiscal year and to be applied to all goodwill and
other  intangible  assets  recognized in its financial  statements at that date.
Impairment losses for goodwill and indefinite-lived intangible assets that arise
due to the initial application of this Statement are to be reported as resulting
from a change in accounting  principle.  The Company has not yet determined what
effect,  if any,  the  adoption  of SFAS  No.  142  will  have on the  Company's
financial position or results of operations.

                                       39
<PAGE>

In August  2001,  the FASB  issued  SFAS No. 143,  "Accounting  for  Obligations
Associated with the Retirement of Long-Lived  Assets." SFAS No. 143 provides the
accounting  requirements  for retirement  obligations  associated  with tangible
long-lived assets. SFAS No. 143 is effective for financial statements for fiscal
years beginning after June 15, 2002. The Company is currently assessing SFAS No.
143 but does  not  believe  it will  have a  material  impact  on its  financial
position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets." This accounting standard, which is effective for
fiscal years beginning after December 31, 2001,  requires that long-lived assets
that are to be  disposed  of by sale be  measured  at the lower of book value or
fair value less cost to sell.  Additionally,  SFAS No. 144  expands the scope of
discontinued  operations to include all components of an entity with  operations
that can be  distinguished  from the rest of the entity  and will be  eliminated
from the ongoing operations of the entity in a disposal transaction.  The effect
of  adopting  SFAS No.  144 is not  expected  to have a  material  impact on the
Company's financial position and results of operations.

Note 2. Consolidated Balance Sheet Details

Dollars in Thousands                     2001                      2000
------------------------------------------------------------------------
Raw materials                        $ 20,047                  $ 21,061
Work in process                         7,547                     8,264
Finished goods                          5,219                     5,376
------------------------------------------------------------------------
Inventories                          $ 32,813                  $ 34,701
========================================================================

Land                                  $ 6,288                   $ 8,738
Buildings                              41,272                    48,773
Machinery and equipment               243,964                   312,138
Other, including furniture,
    fixtures and vehicles              29,938                    48,470
------------------------------------------------------------------------
                                      321,462                   418,119
Accumulated depreciation             (154,430)                 (195,276)
------------------------------------------------------------------------
Property, plant and equipment, net   $167,032                  $222,843
========================================================================

Goodwill                             $ 34,734                  $ 64,829
Accumulated amortization              (15,437)                  (12,650)
Other long term assets                  8,542                     7,893
------------------------------------------------------------------------
Other assets                         $ 27,839                  $ 60,072
========================================================================

Customer deposits                     $ 2,159                   $ 4,883
Accrued commissions                     2,011                     2,002
Accrued expenses                       59,524                    35,419
Income taxes payable                   45,735                         -
------------------------------------------------------------------------
Other current liabilities            $109,429                  $ 42,304
========================================================================


                                       40
<PAGE>

Note 3. Supplemental Schedule of Cash Flow Information

Dollars in Thousands              2001                 2000               1999
-------------------------------------------------------------------------------
Cash payments for interest
     and income taxes:
     Interest                  $ 6,093              $ 4,662            $ 1,740
     Taxes                     $ 1,865              $ 6,974            $ 7,534


Note 4. Accounts Receivable

Dollars in Thousands                                 2001                 2000
-------------------------------------------------------------------------------
Billed receivables                               $ 93,993            $ 112,065
Unbilled receivables                               44,485               55,710
Allowance for doubtful accounts                    (4,208)              (5,064)
-------------------------------------------------------------------------------
Accounts receivable                              $134,270            $ 162,711
===============================================================================

Unbilled  receivables  represent the excess of revenues recognized on percentage
of completion  contracts over amounts billed. These amounts will become billable
as the Company achieves certain contractual milestones. Substantially all of the
unbilled amounts at December 31, 2001 are expected to be billed during 2002.

Billed  receivables  include  retainage  amounts of $5,581,000 and $6,007,000 at
December 31, 2001 and 2000,  respectively.  Substantially  all of the  retainage
amounts are collectible within one year.


Note 5. Investments in Affiliated Companies


The Company's  investments in the following foreign affiliates are accounted for
under the equity  method.  The  principal  business  activities of these foreign
affiliates  involve the production,  sale and distribution of bottled or treated
water, the sale of membranes, equipment and replacement parts, and the ownership
and operation of water treatment facilities.

                                                                     Ownership
Affiliate                                                            Percentage
-------------------------------------------------------------------------------
Aqua Cool Kuwait - Kuwait                                                 49%
Aqua Cool Saudi Arabia - Saudi Arabia                                     40%
Aqua Design Ltd. - Cayman Islands                                         39%
Desalination Company of Trinidad and Tobago Ltd. - Trinidad               40%
Grupo Empresarial de Mejoramiento Ambiental, S. de R.L.
  de C.V. - Mexico                                                        20%
Jalal-Ionics, Ltd. - Bahrain                                              40%
Mega a.s. - Czech Republic                                                20%
Toray Membrane America, Inc. - Massachusetts, USA                         43%
Utilities Development Company, W.L.L. - Kuwait                            25%
Watlington Waterworks, Ltd. - Bermuda                                     26%
Yuasa-Ionics Co., Ltd. - Japan                                            50%

The Company's percentage ownership interest in a foreign affiliate may vary from
its interest in the earnings of such affiliate.


                                       41
<PAGE>

Activity in investments in affiliated companies:

Dollars in Thousands                      2001         2000          1999
--------------------------------------------------------------------------
Investments at end
     of prior year                    $ 18,310     $ 10,752       $ 7,057
Equity in earnings                       1,396        1,623         1,111
Distributions received                  (1,511)      (2,092)         (475)
Cumulative translation
     adjustments                           141         (172)         (540)
Reclassification of Agrinord S.r.l.
     resulting from change in
     ownership interest                      -       (1,389)            -
Additional investments                   5,462        9,588         3,599
--------------------------------------------------------------------------
Investments at end of current year    $ 23,798     $ 18,310      $ 10,752
==========================================================================

At December  31,  2001,  the  Company's  equity in the total assets and in total
liabilities of its affiliates was $35,338,000 and $9,942,000,  respectively. The
Company's equity in the 2001 total revenues of these affiliates was $13,959,000.

Note 6. Impairment of Long-Lived Assets

During 2001 and 2000,  the Company  wrote down  approximately  $13.1 million and
$3.4  million,  respectively,  of  impaired  long-lived  assets.  In  2001,  the
write-downs included  approximately $9.2 million to reduce the carrying value of
assets  held for  sale,  $3.1  million  of  goodwill  associated  with  previous
acquisitions and $0.7 million reflecting the write-off of the remaining value of
bleach manufacturing equipment. The $9.2 million charge relates to the Company's
decision to sell its majority interest in its Malaysian  subsidiary (part of the
Company's  Ultrapure Water Group).  There is approximately $1.0 million included
in other current  assets  reflecting  the estimated  proceeds from the sale. The
Company  expects to sell these assets in 2002.  The $3.1 million  impairment  of
goodwill,  relating to two separate  acquisitions  made in previous  years,  was
determined by the recent  operating  results and expected future  performance of
the business units.

In 2000, the Company wrote down $2.0 million of bleach  manufacturing  equipment
attributable  to the  Company's  decision to abandon  plans to  commence  bleach
manufacturing operations in Elkton, Maryland. Additionally, in 2001, the Company
wrote off the residual  value of this  equipment  amounting to $0.7 million.  An
additional $0.8 million impairment of goodwill was recognized in 2000,  relating
to an acquisition made in 1996.

Fair value was  determined  based upon  future  discounted  cash flows  using an
appropriate risk-adjusted discount rate.

Note 7. Commitments and Contingencies

Litigation

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 that none of the pending matters will have an outcome material
to its financial condition or results of operations.

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 and administrative costs totals approximately  $71,000. The United
States  Environmental  Protection  Agency  ("EPA") has not yet issued 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's
financial position or results of operations.

                                       42
<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.  In August 2001,  the Company and certain other
PRPs  entered  into a  settlement  agreement  with the EPA with  respect  to the
Angelillo  site,   under  which  the  Company  made  a  settlement   payment  of
approximately $3,300.

Other

During  2002,  construction  will  be  completed  on the  Trinidad  desalination
facility owned by Desalination Company of Trinidad and Tobago Ltd.  (Desalcott),
in which the  Company  has a 40% equity  interest.  The  Company  has loaned $10
million to the 60% equity  owner,  Hafeez  Karamath  Engineering  Services  Ltd.
(HKES), as the source of HKES' equity contribution to Desalcott,  in addition to
the $10 million contributed by the Company for its 40% equity interest. In 2000,
Desalcott  entered into a "bridge loan" agreement with a Trinidad bank providing
$60 million in  construction  financing.  Effective  November 8, 2001,  the loan
agreement was amended to increase maximum borrowings to $79.9 million.  However,
the bridge  loan plus the $20 million  equity  provided  to  Desalcott  will not
provide  sufficient  funds to complete  construction  and  commissioning  of the
project.  The Company has  committed  to lend up to $10 million to  Desalcott to
complete the project once all bridge loan proceeds have been expended.  Although
Desalcott  has  received  proposals  for long term debt  financing,  there is no
assurance that such financing will be obtained on terms acceptable to Desalcott.

During 2001, the Company acquired a 25% equity  ownership  interest in a Kuwaiti
project  company,  Utilities  Development  Company  W.L.L.  that was  awarded  a
concession   agreement  by  an  agency  of  the  Kuwaiti   government   for  the
construction, ownership and operation of wastewater reuse facility in Kuwait. At
December 31, 2001, the Company had deferred costs of approximately  $1.0 million
relating primarily to preliminary  project management and initial design work on
the project, and had invested $1.5 million in the project company.  Although the
Company  anticipates that long-term financing for the project should be obtained
by mid-2002, there is no assurance that such financing will be obtained, and the
Company would expense the deferred costs and  investment in the event  financing
is  not  obtained.  Also  in  such  event,  the  Company  could  incur  its  25%
proportionate  share of liability under a $28 million performance bond issued on
behalf of the project company.

Note 8. Long-Term Debt and Notes Payable

Dollars in Thousands                         2001               2000
---------------------------------------------------------------------
Borrowings outstanding                   $ 24,383           $ 85,956
Less installments due within one year      14,257             75,045
---------------------------------------------------------------------
Long-term debt and notes payable         $ 10,126           $ 10,911
=====================================================================

The Company  maintains several domestic and foreign lines of credit. On June 29,
2001 the Company entered into a third amended and restated credit agreement with
Fleet  National Bank (as lender and agent) and Bank of America,  N.A., the Chase
Manhattan Bank, and Mellon Bank, N.A. (the "Credit Agreement").  Under the terms
of the Credit  Agreement,  which  supercedes the prior loan agreement with Fleet
National Bank, the Company had the right to borrow up to $90.0 million,  subject
to certain financial  covenants,  including a prohibition against the payment of
cash  dividends.  On December  21,  2001,  the Credit  Agreement  was amended in
connection  with  obtaining  a waiver from the lenders to permit the sale of the
Company's  bottled  water  assets.  Under  the  amended  Credit  Agreement,  the
borrowing  limit was reduced to $50 million  and the  maturity  date was changed
from  December 31, 2002 to April 30, 2002.  On March 27, 2002,  the Company paid
all outstanding  borrowings under the Credit  Agreement.  On March 28, 2002, the
Credit  Agreement  was  further  amended  to reduce  maximum  borrowings  to $30
million,  extend  its term for a period of 364 days from the date of  amendment,
eliminate  and revise  certain of the financial  and other  covenants  contained
therein  and make Fleet  National  Bank the sole  lender.  Borrowings  under the
Credit  Agreement as amended bear  interest at the prime rate or 1.25% above the
London Interbank Offered Rate (LIBOR), at the Company's option.

                                       43
<PAGE>

At December 31, 2001, the prime rate was 4.75% and LIBOR was 1.87%.  The Company
had outstanding  borrowings of $10,000,000 and $65,000,000  against its domestic
lines of credit at December 31, 2001 and 2000, respectively.

Maturities of borrowings outstanding for the five years ending December 31, 2002
through 2006 are approximately $14,257,000,  $1,217,000,  $1,266,000, $1,299,000
and $1,328,000, respectively.

Under  foreign  lines of credit,  excluding  those  related to specific  project
financing,  the Company had approximately  $10.2 million available for borrowing
at interest  rates  ranging from 5.3% to 9.0% at December 31, 2001.  The Company
had outstanding  borrowings of $7.7 million and $3.0 million against these lines
of credit at December 31, 2001 and 2000, respectively.

The  Company  has  arranged  lines of  credit  totaling  $10.0  million  for its
controlled affiliate in Barbados to provide project financing for a desalination
plant at LIBOR plus 2.0% (4.16% at December 31, 2001) for its $6.4 million line,
at a fixed rate of 8.0% for its $2.7  million  line and at a fixed rate of 8.75%
for its $0.9 million line.  These lines of credit are payable in equal quarterly
installments over a ten-year period beginning in 2000. The controlled  affiliate
had outstanding  borrowings of $8.3 million and $9.2 million against these lines
of credit at December 31, 2001 and 2000, respectively.

The Company  utilizes other  short-term  bank loans to finance  working  capital
requirements  for certain  business units.  The Company's  various loan and note
agreements contain certain financial covenants relating to working capital, cash
flow,   capital   expenditures   and   consolidated   tangible  net  worth.  The
weighted-average  interest rate on all  borrowings at December 31, 2001 and 2000
was 6% and 8%, respectively.

Although the Company believes that its cash from operations, lines of credit and
foreign  trade  facilities  are  adequate  to  meet  its  currently  anticipated
operational needs, the Company is currently investigating  additional sources of
financing to augment  current  funding  sources in order to pursue large project
development and to replace a portion of its domestic credit line.

Note 9. Income Taxes

The  components  of domestic and foreign  income  (loss) before income taxes and
minority interest were as follows:

Dollars in Thousands                    2001          2000         1999
------------------------------------------------------------------------
U.S.                                 $ 4,269      $(16,974)    $ 15,317
Non-U.S.                              81,934        14,750       14,414
------------------------------------------------------------------------
Income (loss) before income taxes
     and minority interest          $ 86,203       $(2,224)    $ 29,731
========================================================================

The provision for income taxes consisted of the following:

Dollars in Thousands                       2001        2000        1999
------------------------------------------------------------------------
Federal                                 $(7,963)    $ 3,264     $(1,353)
Foreign                                 (37,246)     (5,304)     (3,814)
State                                    (2,720)        704        (632)
------------------------------------------------------------------------
------------------------------------------------------------------------
Current provision                       (47,929)     (1,336)     (5,799)
------------------------------------------------------------------------
Federal                                    (605)        555      (4,176)
Foreign                                   6,316       1,546         318
State                                       (21)         (9)        135
------------------------------------------------------------------------
Deferred benefit (provision)              5,690       2,092      (3,723)
------------------------------------------------------------------------
(Provision) benefit for income taxes   $(42,239)      $ 756     $(9,522)
========================================================================

                                       44
<PAGE>

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. At December 31, 2001, the
tax effects of the temporary differences were:

                                                Deferred               Deferred
Dollars in Thousands                          Tax Assets        Tax Liabilities
-------------------------------------------------------------------------------
Depreciation                                      $    -                $14,235
Goodwill amortization                                  -                  1,346
Inventory valuation                                2,280                      -
Bad debt reserves                                    951                      -
Legal                                              1,419                      -
Accrued commissions                                  564                      -
Profit on sales to foreign subsidiaries              886                      -
Insurance accruals                                 1,026                      -
U.S. tax on unrepatriated earnings                     -                 11,568
Foreign withholding taxes on
     undistributed earnings                            -                  1,196
Foreign deferred taxes                             4,881                  1,089
Tax effect of currency translation loss            7,934                      -
Net operating loss carryforwards                   7,496                      -
Miscellaneous                                      9,243                  4,765
--------------------------------------------------------------------------------
                                                  36,680                 34,199
Valuation allowance for deferred tax assets       (4,619)                     -
--------------------------------------------------------------------------------
Deferred income taxes                            $32,061                $34,199
================================================================================

The United  States  statutory  corporate tax rate is reconciled to the Company's
effective tax rate as follows:

                                 2001        2000         1999
---------------------------------------------------------------
U.S. Federal statutory rate     35.0%       34.0%        35.0%
Foreign sales corporation        (0.7)      (33.9)        (2.1)
Goodwill                          6.6        34.3          1.0
State income taxes, net of
     federal tax benefit          2.1       (20.5)         1.7
Foreign income taxed at
     different rates              0.7         7.2         (3.8)
Valuation allowance               5.3           -            -
Non-deductible charges            0.2        13.9          0.4
Other, net                       (0.2)       (1.0)        (0.2)
---------------------------------------------------------------
Effective tax rate              49.0%       34.0%        32.0%
===============================================================

At December 31, 2001, the Company had unused tax loss  carryforward  benefits of
$7,496,000.  Domestic tax loss  carryforward  benefits of  $2,112,000  expire in
fiscal years 2004 to 2009. Foreign tax loss carryforward  benefits of $5,384,000
expire  beginning  in 2005.  The  domestic  tax loss  carryforward  benefits are
recorded  at  estimated  realizable  value.  Because of the  uncertainty  of the
realization  of  the  tax  benefits  of  losses   incurred  in  certain  foreign
jurisdictions,  the Company has established  $4,619,000 as a valuation allowance
at  December  31,  2001.  $2,112,000  of the net  unused  tax loss  carryforward
benefits and $1,009,000 of deferred tax benefit  related to the minimum  pension
liability  adjustment recorded in other comprehensive  income have been included
in other assets at December 31, 2001.

The Company has elected not to provide tax on certain undistributed  earnings of
its foreign  subsidiaries which it considers to be permanently  reinvested.  The
cumulative  amount  of  such  unprovided  taxes  was  approximately  $7,786,000,
$5,106,000 and $5,065,000 as of December 31, 2001, 2000 and 1999, respectively.

                                       45
<PAGE>

Note 10. Stockholders' Equity

The Company adopted the disclosure-only  provisions of SFAS No. 123, "Accounting
for Stock-Based  Compensation,"  in 1996. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the  following  assumptions  used for  grants in 2001,  2000 and 1999:  expected
volatility of 38.6% in 2001, 37.4% in 2000 and 30.5% in 1999;  weighted-average,
risk-free  interest  rates of 4.89%,  6.25%  and  5.27% in 2001,  2000 and 1999,
respectively;  and expected lives of five years.  No dividends are assumed.  The
weighted-average  fair value of options  granted during 2001,  2000 and 1999 was
$11.32, $9.65 and $11.07, respectively.


At  December  31,  2001,  the  Company had the  stock-based  compensation  plans
described below. The Company applies Accounting  Principles Board Opinion No. 25
in accounting  for its plans.  Accordingly,  any  difference  between the option
price and the fair market  value of the stock at the date of grant is charged to
operations over the expected period of benefit to the Company.  Had compensation
cost for the  Company's  plans  been  determined  based on the fair value of the
options at the grant  dates for awards  under those  plans  consistent  with the
method of SFAS No. 123,  the  Company's  net income and earnings per share would
have been  adjusted.  On a pro forma  basis,  net income as reported for 2001 of
$44.7  million would have been $42.1  million,  net loss as reported for 2000 of
$1.9 million would have been $4.9 million and net income as reported for 1999 of
$19.4  million  would have been $16.6  million.  Diluted  earnings  per share as
reported for 2001 of $2.59 would have been $2.44, 2000 diluted loss per share of
$(0.12)  would have been $(0.30),  and 1999 diluted  earnings per share of $1.18
would have been $1.01.  Basic  earnings  per share as reported for 2001 of $2.61
would have been  $2.46,  2000  basic  loss per share of $(0.12)  would have been
$(0.30) and 1999 basic  earnings  per share of $1.20 would have been $1.03.  The
effects of applying SFAS No. 123 in this pro forma disclosure are not indicative
of future awards,  which are anticipated.  SFAS No. 123 does not apply to awards
prior to 1995.

Under the 1979  Stock  Option  Plan  (the  "1979  Plan"),  stock  options  (only
non-qualified  stock options after  February  1989) were granted to officers and
other key  employees of the Company.  Options  granted  under the 1979 Plan were
immediately exercisable,  were subject to repurchase rights that lapse generally
over a five-year period, and have a term of ten years and one day. Effective May
8, 1997, the 1979 Plan was replaced by the 1997 Stock  Incentive Plan (the "1997
Plan"), and no additional options were granted under the 1979 Plan.

Under the 1997 Plan,  incentive stock options,  non-qualified stock options, and
long-term  performance awards may be awarded to officers and other key employees
and to consultants. The 1997 Plan contains an automatic addition provision under
which a number of shares equal to two percent (2%) of the Company's  outstanding
stock  were  added  to the  1997  Plan at the end of  each  of the  four  fiscal
year-ends  of the  Company  following  adoption  of the  1997  Plan,  commencing
December 31, 1997 and ending  December 31, 2000.  At December 31, 2001 and 2000,
there were 637,023 and 527,256  shares,  respectively,  reserved for issuance of
additional  options  under the 1997 Plan after  giving  effect to the  automatic
addition  provision.  Options  granted under the 1997 Plan vest over a five-year
period and have a term of ten years. Only non-qualified  stock options have been
granted under the 1997 Plan.

Under the 1986 Stock Option Plan for  Non-Employee  Directors (the "1986 Plan"),
options are granted at a price not less than the fair market  value of the stock
at the date of grant.  The options  become fully  exercisable  after a six-month
period, are exercisable only during certain "window" periods, and have a term of
ten years and one day.  As of  December  31,  2001 and 2000,  29,000  and 36,000
shares, respectively, were reserved for issuance of additional options under the
1986 Plan.  The 1986 Plan will  terminate on December  31, 2002,  pursuant to an
amendment adopted by the Company's Board of Directors on February 26, 2002.

The Company has adopted a  restricted  stock plan (the "1994  Plan") under which
shares of common stock may be granted to officers and other key employees of the
Company.  Restrictions  on the sale of such common stock  typically lapse over a
five-year vesting period. No shares were granted under the 1994 Plan in 2001. In
2000, 17,937 shares were granted under the restricted stock plan to an executive
officer. The executive officer  subsequently  terminated his employment with the
Company in 2000,  and the  restricted  stock was forfeited  pursuant to the 1994
Plan.  As of December 31, 2001, a total of 280,178  shares  remain  reserved for
issuance under the 1994 Plan.

On August 19, 1998,  the Company  adopted the 1998  Non-Employee  Directors' Fee
Plan ("Fee  Plan").  The Fee Plan  permits  non-employee  directors  to elect to
receive  payment of their annual  retainer fee in cash or in common  stock.  The
valuation of the common stock is based on the last  reported  sales price of the
common stock on the New York Stock  Exchange on the trading date next  preceding
the date of the Board  meeting at which  payment will be made.  Annual  retainer
fees are paid in two  equal  installments  during  the  year.  A total of 88,527
shares were reserved for issuance under the Fee Plan as of December 31, 2001.

                                       46
<PAGE>

The  Company  reserved  91,200  shares  for  options  granted in 1990 to certain
non-employees in exchange for a previously granted option to purchase 50% of the
shares of a Spanish  subsidiary  of the  Company  which was merged  with  Ionics
Iberica, S.A. in 1992. During 1995, an additional 30,000 options were granted to
the same  persons in  connection  with an increase in  production  capacity  and
projected  increases in the sale of water under a long-term water sale agreement
between  Ionics  Iberica,  S.A. and the local water  utility.  The fair value of
these options is being charged to operations  over the 10-year  vesting  period.
During 2000, the original 91,200 options granted in 1990 were exercised.

A summary of the status of the  Company's  stock option plans as of December 31,
2001,  2000 and 1999 and  changes  during  the years  ending  on those  dates is
presented below:

<TABLE>
<CAPTION>
                                                            2001                       2000                       1999
-----------------------------------------------------------------------------------------------------------------------
                                                        Weighted                   Weighted                   Weighted
                                                         Average                    Average                    Average
                                                        Exercise                   Exercise                   Exercise
Options in Thousands                         Options       Price        Options       Price        Options       Price
-----------------------------------------------------------------------------------------------------------------------
<S>                                            <C>       <C>              <C>       <C>              <C>       <C>
Outstanding at end of prior year               3,226     $ 28.38          2,734     $ 30.04          2,796     $ 29.70
Granted                                           65       26.94            941       22.28             80       30.27
Exercised                                       (229)      21.84           (163)      16.74            (82)      16.31
Cancelled                                       (173)      30.22           (286)      30.70            (60)      33.25
-----------------------------------------------------------------------------------------------------------------------
Outstanding at end of current year             2,889     $ 28.77          3,226     $ 28.38          2,734     $ 30.04
Options exercisable at year-end                1,873     $ 30.88          1,835     $ 30.86          1,918     $ 30.29
</TABLE>

<TABLE>
<CAPTION>

The following table summarizes the information about stock options outstanding at December 31, 2001:

Options in Thousands                                  Options Outstanding          Options Exercisable
-------------------------------------------------------------------------------------------------------
                                                  Weighted
                                                   Average       Weighted                     Weighted
                                   Number        Remaining        Average        Number        Average
Range of                      Outstanding         Contract       Exercise      Exercisable    Exercise
Exercise Prices               at 12/31/01            Years          Price      at 12/31/01       Price
-------------------------------------------------------------------------------------------------------
<C>      <C>                        <C>                <C>        <C>               <C>        <C>
$19.75 - $26.50                     1,417              5.7        $ 22.21           785        $ 22.28
$27.00 - $29.88                       854              6.6        $ 29.33           482        $ 29.35
$30.00 - $33.81                        29              7.2        $ 32.24            21        $ 33.04
$42.38 - $48.25                       589              4.8        $ 43.50           585        $ 43.51
-------------------------------------------------------------------------------------------------------
$19.75 - $48.25                     2,889              5.8        $ 28.77         1,873        $ 30.88

</TABLE>

                                       47
<PAGE>

The Company has a Section  401(k) stock savings plan under which 150,000  shares
have been registered with the Securities and Exchange Commission for purchase on
behalf of  employees.  Shares  are  normally  acquired  for the plan in the open
market. Through December 31, 2001, no shares had been issued under the plan.

The Company has adopted a Renewed  Stockholder  Rights Plan  designed to protect
stockholders  against abusive takeover  tactics.  Each share of common stock now
carries one right.  Each right  entitles the holder to purchase from the Company
one share of  common  stock  (or in  certain  circumstances,  to  receive  cash,
property or other securities of the Company) at a purchase price of $175 subject
to adjustment.  In certain  circumstances,  rights become exercisable for common
stock (or a combination  of cash,  property or other  securities of the Company)
worth  twice the  exercise  price of the right.  The rights are not  exercisable
until the  occurrence  of certain  events as defined in the Renewed  Stockholder
Rights Plan.  The rights may be redeemed by the Company at $.01 per right at any
time unless certain events occur.  Unless redeemed  earlier,  the rights,  which
have no voting power, expire on August 19, 2007.

Note 11. Earnings Per Share Calculations (EPS)
<TABLE>
<CAPTION>

Dollars in Thousands,
Except Per Share Amounts                 For the Year Ended 2001          For the Year Ended 2000          For the Year Ended 1999
-----------------------------------------------------------------------------------------------------------------------------------
                                        Net            Per Share          Net           Per Share          Net           Per Share
                                     Income    Shares     Amount         Loss    Shares    Amount       Income    Shares    Amount
                                 --------------------------------------------------------------------------------------------------
<S>                                <C>         <C>        <C>        <C>         <C>      <C>         <C>         <C>       <C>
    Income (loss) available to
    common stockholders            $ 44,701    17,106     $ 2.61     $ (1,870)   16,243   $ (0.12)    $ 19,361    16,148    $ 1.20
    Effect of dilutive stock options      -       140      (0.02)           -         -         -            -       240     (0.02)
-----------------------------------------------------------------------------------------------------------------------------------
Diluted EPS                        $ 44,701    17,246     $ 2.59     $ (1,870)   16,243   $ (0.12)    $ 19,361    16,388    $ 1.18
===================================================================================================================================
</TABLE>

The effect of dilutive stock options  excludes those stock options for which the
impact would have been antidilutive  based on the exercise price of the options.
The number of options that were antidilutive at December 31, 2001, 2000 and 1999
were 608,750, 1,649,000, and 1,661,000, respectively. The number of options that
were  antidilutive  at December 31, 2000 include  175,000  shares whose dilutive
effect was included as a result of the Company's net loss.

Note 12. Operating Leases

The Company leases  equipment,  primarily for industrial water  purification and
bottled water coolers,  to customers through operating leases. The original cost
of this  equipment was  $95,260,000  and  $116,152,000  at December 31, 2001 and
2000,  respectively.   The  accumulated  depreciation  for  such  equipment  was
$42,679,000  and  $53,497,000 at December 31, 2001 and 2000,  respectively.  The
bottled  water coolers were sold in December 31, 2001 as part of the sale of the
Company's bottled water business assets.

At December 31, 2001,  future minimum  rentals  receivable  under  noncancelable
operating  leases in the years 2002  through  2006 and later were  approximately
$28,259,000, $25,684,000, $22,245,000, $19,179,000, $18,181,000 and $92,743,000,
respectively.

The Company  leases  facilities and personal  property  under various  operating
leases.  Future minimum  payments due under lease  arrangements  are as follows:
$4,692,000 in 2002,  $4,222,000 in 2003,  $3,455,000 in 2004, $2,368,000 in 2005
and  $6,937,000  in  2006  and  later.  Rent  expense  under  these  leases  was
approximately  $6,986,000,  $5,695,000 and  $4,368,000 for 2001,  2000 and 1999,
respectively.

Note 13. Profit-Sharing and Pension Plans

The Company has a contributory  profit-sharing plan (defined  contribution plan)
which covers employees of the Company who are members of the Fabricated Products
group  of  the  Bridgeville  Division.  Company  contributions  to  the  defined
contribution plan are made from the group's pretax profits,  may vary from 8% to
15% of participants'  compensation,  and are allocated to participants' accounts
in   proportion  to  each   participant's   respective   compensation.   Company
contributions  were  $375,000,  $300,000  and  $281,000 in 2001,  2000 and 1999,
respectively.

The Company also has a contributory  defined  benefit pension plan for all other
domestic  employees.  Benefits are based on years of service and the  employee's
average compensation.  The Company's funding policy is to contribute annually an
amount that can be deducted for federal  income tax purposes.  The plan's assets
are  comprised  of money  market  funds,  equity  funds,  short-term  bonds  and
intermediate-term bonds.

                                       48
<PAGE>

The  following  table sets forth the defined  benefit  plan's  funded status and
amounts  recognized  in the  Company's  balance  sheets at December 31, 2001 and
2000:

Dollars in Thousands                                 2001                 2000
-------------------------------------------------------------------------------

Change in Benefit Obligation
Benefit obligation as of prior year-end           $15,799              $14,464
Service cost                                        1,285                1,055
Interest cost                                       1,206                1,107
Spin-off of Aqua Cool participants                   (205)                   -
Assumption changes                                  1,500                1,932
Actuarial (gain) loss                                 660                 (907)
Benefits paid                                        (751)              (1,852)
-------------------------------------------------------------------------------
Projected benefit obligation as of year-end       $19,494              $15,799
===============================================================================

Change in Plan Assets
Fair value of plan assets as of prior year-end    $14,923              $16,258
Actual return on plan assets                          248                  632
Employer contributions                                  -                    -
Expenses paid                                        (123)                (115)
Benefits paid                                        (751)              (1,852)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Fair value of plan assets as of year-end          $14,297              $14,923
===============================================================================

Funded Status
Funded status as of year-end                     $ (5,197)              $ (876)
Unrecognized transition asset                         (97)                (150)
Unrecognized prior service cost                       299                  375
Unrecognized net actuarial loss                     5,822                2,824
Adjustment to recognize minimum liability          (2,917)                   -
-------------------------------------------------------------------------------
(Accrued)/prepaid benefit cost as of year-end    $ (2,090)              $2,173
===============================================================================

The expense of the defined benefit plan was as follows:

Dollars in Thousands                        2001        2000          1999
---------------------------------------------------------------------------

Components of Net Periodic Benefit Cost
Service cost                             $ 1,285      $1,055        $1,239
Interest cost                              1,206       1,107         1,186
Expected return on plan assets            (1,309)     (1,445)       (1,376)
Amortization of transition asset             (53)        (53)          (53)
Amortization of prior service cost            37          37            37
Recognized net actuarial loss                141           -           155
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net periodic benefit cost                $ 1,307       $ 701        $1,188
===========================================================================

                                       49
<PAGE>

The Company  determined  the defined  benefit  plan's  funded status and amounts
recognized in the Company's balance sheet and the expense of the defined benefit
plan using the following assumptions:  expected return on plan assets of 9.0% at
December  31,  2001,  2000 and 1999;  rate of  compensation  increase of 5.0% at
December 31, 2001 and 2000 and 4.75% at December 31, 1999;  and a discount  rate
of 7.00%, 7.50% and 8.25% at December 31, 2001, 2000 and 1999, respectively.

The Ionics Section 401(k) Stock Savings Plan is available to  substantially  all
U.S.  employees  of the  Company.  Employees  may  contribute  from 1% to 12% of
compensation  subject to certain  limits.  The  Company  matches 50% of employee
contributions  allocated to the Company's common stock up to 6% of their salary.
The Company recognized expense of $725,000,  $716,000 and $735,000 in 2001, 2000
and 1999, respectively, under this plan.

In 1996,  the  Company's  Board of Directors  adopted a  Supplemental  Executive
Retirement  Plan for officers and key  employees  of the Company  ("SERP").  The
purpose of the SERP is to permit  officers  and other key  employees  whose base
salary exceeds the maximum pay upon which retirement  benefits may be accrued in
any year to accrue retirement  benefits on base salary in excess of that amount,
equivalent  to the benefits  that would have been accrued  under the  Retirement
Plan if base  salary  levels  over that  amount  could be taken into  account in
calculating  benefits under the Retirement Plan. No expense relating to the plan
was necessary in 2001 and expenses of $50,000 and $100,000 were recorded in 2000
and 1999,  respectively.  The liability accrued as of December 31, 2001 and 2000
related to the plan was $406,000.  The SERP is administered by the  Compensation
Committee of the Board of Directors.

The Company generally does not provide  post-retirement  health care benefits to
its employees or any other  post-retirement  benefits other than those described
above.

Note 14. Financial Instruments

Off-Balance-Sheet Risk

The Company  issues  letters of credit and  performance  bonds as guarantees for
various  performance and bid obligations.  Approximately $77.3 million and $96.3
million of these  guarantees  were  outstanding  at December  31, 2001 and 2000,
respectively.  Approximately  42% of the guarantees  outstanding at December 31,
2001 are  scheduled to expire in 2002.  These  instruments  were  executed  with
creditworthy institutions.

In  2001,   the  Company's   Italian   subsidiary   entered  into  a  series  of
U.S.dollar/euro  options  contracts  with the intent of  offsetting  the foreign
exchange  risk  associated  with  forecasted  cash  flows  related to an ongoing
project.  These options contracts were not entered into for trading purposes. In
accordance  with the  restrictions  set forth in SFAS 133, the  contracts do not
qualify for hedge accounting  treatment.  The fair market value of the contracts
is recorded  as a liability  of $1.2  million in the other  current  liabilities
section of the Consolidated Balance Sheet.  End-of-period  changes in the market
value of the contracts are reflected in the selling,  general and administrative
expenses in the Consolidated  Statement of Operations.  In addition, the Company
periodically enters into foreign exchange contracts to hedge certain operational
and balance sheet exposures  against changes in foreign currency exchange rates.
With the exception of the options contracts  described above, the Company had no
foreign exchange contracts outstanding at December 31, 2001 or 2000.


Concentrations of Credit Risk

Financial  instruments  that  potentially  subject  the  Company to  significant
concentrations   of  credit  risk  consist   principally  of  cash  equivalents,
investments,  trade accounts receivable and notes receivable. The credit risk of
cash  equivalents and investments is low as the funds are primarily  invested in
U.S.  money  market  investments  and  in  Spanish  Government  securities.  The
Company's   concentrations  of  credit  risk  with  respect  to  trade  accounts
receivable and notes  receivable is considered low. The Company's  customer base
is spread across many  different  industries  and  geographies,  and the Company
obtains guaranteed letters of credit for many of its foreign orders.


                                       50
<PAGE>

Fair Value of Financial Instruments

The carrying  amounts of cash  equivalents and investments  closely  approximate
their fair values as these items have relatively short maturities and are highly
liquid.  Based on market  information,  the carrying amounts of notes receivable
and debt approximate their fair values.

Investments in Securities

Realized  gains and losses  from the sale of debt and equity  securities  during
fiscal 2001 and 2000 were not significant.

Long-term  investments,  maturing  in 2003,  2004 and 2005,  which  the  Company
intends to hold to maturity have been  recorded at a net cost of $2,116,000  and
$2,551,000 at December 31, 2001 and 2000, respectively. At December 31, 2001 and
2000,  the Company also had short-term  investments  of $21,000 and  $1,105,000,
respectively,  which the Company intends to hold to maturity.  The cost of these
investments approximates fair value.

Note 15. Acquisitions and Divestitures

2001 Divestitures

On  December  31,  2001,  the Company  completed  the sale of its Aqua Cool Pure
Bottled Water operations in the United States,  the United Kingdom and France to
affiliates  of   Perrier-Vittel,   S.A.,  a  subsidiary  of  Nestle,   S.A.  for
approximately  $220  million,  of which  $10  million  is being  held in  escrow
pursuant to the terms of the divestiture  agreement.  The amount of the purchase
price is  subject  to final  adjustment  based on the  number of  customers  and
working  capital  levels as defined in the  divestiture  agreement.  The Company
anticipates that the final determination of such purchase price adjustments will
be completed in the third quarter of 2002.  Including  reserves  established for
any purchase price adjustments,  the Company recorded a pre-tax gain on the sale
amounting to $102.8 million. The Aqua Cool Pure Bottled Water business had sales
of $76.2  million  in 2001,  $67.2  million  in 2000 and $60.1  million in 1999,
losses  before  taxes and  interest of $0.6  million in 2001 and $0.9 million in
2000,  and  income  before  taxes and  interest  of $6.9  million  in 1999.  The
consolidated  financial  statements and accompanying notes reflect the operating
results of the Aqua Cool Pure Bottled Water  business as a continuing  operation
in the Consumer Water Group segment.

2000 and 1999 Acquisitions

In 2000, the Company acquired three businesses in the CWG segment related to its
Aqua Cool business, for a total purchase price of $3.7 million. These businesses
were  integrated  into the Company's  bottled water business and sold as part of
the divestiture  referenced above. In 1999 the Company acquired three businesses
in the  CWG,  UWG and  IBG  business  segments  for a total  purchase  price  of
approximately $8.5 million.  The UWG and IBG businesses were integrated into the
Company's ongoing business segments. The CWG acquisition was integrated into the
Company's bottled water business and sold as part of the divestiture  referenced
above.

Note 16. Segment Information

In 1998,  the Company  adopted  SFAS No. 131.  Since 1998,  the Company has been
reporting four "business  group" segments  corresponding  to a "business  group"
structure  put  into  place  in the  latter  part of 1998.  These  segments  are
summarized as follows:

Equipment Business Group - The EBG engages in the following activities:

o    Manufacture and sale of water purification and treatment equipment and
     processes from components to turnkey plants, including:

       - membrane-based equipment for seawater or brackish water desalination
       - membrane-based equipment for surface water treatment
       - equipment for wastewater treatment, including membrane-based equipment;
         brine concentrators, crystallizers and evaporators (zero liquid
         discharge (ZLD) equipment); and traditional wastewater treatment
         equipment

o    Supply of water for drinking and industrial use through ownership and/or
     operation of desalination or other water treatment facilities.

o    Fabrication of specialty metal components for industrial and defense-
     related applications.

o    Production of sodium hypochlorite and related chlor-alkali chemicals for
     industrial, municipal, commercial and other non-consumer applications
     (starting in 2002, this activity will be part of the UWG).

o    Provision of food processing services through oversight for customers of
     whey-processing activities using the Company's membrane-based systems.

                                       51
<PAGE>

Ultrapure Water Group - The UWG engages in the following activities:

o    Manufacture and sale of equipment, from components to turnkey systems,
     utilizing various membrane-based and other technologies for the production
     of ultrapure (very highly purified) water to customers in various
     industries including microelectronics, pharmaceuticals and power
     generation.

o    Production and sale of ultrapure and high quality process water through
     ownership and/or operation of ultrapure water facilities.

o    Leasing of trailer-based ultrapure water equipment (prior to 2002, this
     activity was part of the EBG).

o    Manufacture and sale of ozone-generation equipment.

o    Regeneration of ion-exchange resin for industrial customers.

Consumer  Water Group - Until  December 31,  2001,  the largest  business  group
within the CWG was the Company's  Aqua Cool Pure Bottled Water  division,  which
engaged in the U.S.,  U.K.  and France in the  production  of purified  drinking
water and water  deliveries in  five-gallon  bottles to homes and offices.  This
business was sold on December 31, 2001 to subsidiaries of  Perrier-Vittel,  S.A.
(the Company retains equity ownership interests in joint ventures in the bottled
water business in Saudi Arabia, Kuwait and Bahrain). The CWG continues to engage
in the following activities:


o    Manufacture and sale of "point-of-entry" home water treatment equipment,
     including ion-exchange water conditioners to "soften" hard water and
     bacteriostatic treatment equipment, and related chemicals and media for
     filtration and treatment.

o    Manufacture and sale of "point-of-use" over- and under-the-sink water
     purifiers.

o    Provision of consumer finance services in connection with the sale of home
     water treatment equipment.

o    Manufacture, utilizing the Company's proprietary Cloromat(R) membrane-based
     technology, and sale of bleach-based products for the consumer market,
     under private label and the Company's own brands.

o    Production and sale of methanol-based automobile windshield wash solution.

Instrument Business Group - The IBG engages in the following activities:

o    Manufacture and sale of laboratory and on-line instruments for the
     measurement of impurities in water ranging in quality from ultrapure
     process water to wastewater, including:

       - total organic carbon (TOC) analyzers
       - on-line boron analyzers
       - instruments for the measurement of other water-borne contaminants,
       - including total carbon, sulfur, nitric oxide, chemical oxygen demand
          and total oxygen demand
       - instruments for the measurement of dissolved metals
       - specific analyzers for ammonia, phosphates, nitrates and chlorine
       - instruments for the detection of thin layers of oil on water

                                       52
<PAGE>

Geographic Areas

Revenues are reflected in the country from which the sales are made.  Long-lived
assets  include all  long-term  assets except for notes  receivable.  No foreign
country's revenues to unaffiliated customers or long-lived assets were material.

Included in the United States segment are export sales of approximately 19%, 15%
and 16% for 2001,  2000 and 1999,  respectively.  Including  these  U.S.  export
sales, the percentages of total revenues  attributable to activities outside the
U.S. were 44%, 42% and 44% in 2001, 2000 and 1999, respectively.

Information about the Company's operations by geographic area follows:


                                                      United
Dollars in Thousands                  States       International           Total
--------------------------------------------------------------------------------
2001
Revenue - unaffiliated customers    $320,522           $ 146,210        $466,732
Long-lived assets                    145,789              85,523         231,312
--------------------------------------------------------------------------------
2000
Revenue - unaffiliated customers    $323,071           $ 151,480        $474,551
Long-lived assets                    188,287             127,162         315,449
--------------------------------------------------------------------------------
1999
Revenue - unaffiliated customers    $239,591           $ 118,626        $358,217
Long-lived assets                    192,416             104,661         297,077
--------------------------------------------------------------------------------

Additional information about the Company's business segments is set forth in the
following table:

                                       53
<PAGE>
<TABLE>
<CAPTION>
                                                        Equipment      Ultrapure       Consumer  Instrument
                                                         Business          Water          Water    Business
Dollars in Thousands                                        Group          Group          Group       Group  Corporate        Total
------------------------------------------------------------------------------------------------------------------------------------
2001
<S>                                                     <C>            <C>            <C>           <C>            <C>     <C>
Revenue - unaffiliated customers                        $ 207,927      $ 107,814      $ 123,951     $27,040        $ -     $466,732
Inter-segment transfers                                     2,521          2,743              -       1,568     (6,832)           -
Income (loss) from operations                               5,981         (8,819)        (1,509)        942    (10,469)     (13,874)
Equity income (loss)                                        1,441             68            (57)          -        (56)       1,396
Earnings (loss) before interest, tax, minority interest,
         and gain on sale of business                       7,422         (8,751)        (1,566)        942    (10,525)     (12,478)
Interest income                                                 -              -              -           -          -        1,013
Interest expense                                                -              -              -           -          -       (5,166)
Loss before income taxes and minority interest
         and gain on sale of business                           -              -              -           -          -      (16,631)
Capital employed                                          223,586         96,887         63,493      31,062     32,708      447,736
Identifiable assets                                       323,545         92,443         49,453      25,641    118,433      609,515
Investments in affiliated companies                        20,983              -          2,815           -          -       23,798
Depreciation and amortization                              12,652          8,425         13,580         997        285       35,939
Capital expenditures                                       13,297         12,450         12,094       1,015        751       39,607
====================================================================================================================================
2000
Revenue - unaffiliated customers                        $ 205,181      $ 132,236      $ 108,324    $ 28,810        $ -    $ 474,551
Inter-segment transfers                                     6,087          3,444              -       3,088    (12,619)           -
Income (loss) from operations                               8,338          3,177         (1,541)      2,598    (12,796)        (224)
Equity income (loss)                                          976            (20)           667           -          -        1,623
Earnings before interest, tax and minority interest         9,314          3,157           (874)      2,598    (12,796)       1,399
Interest income                                                 -              -              -           -          -        1,286
Interest expense                                                -              -              -           -          -       (4,909)
Loss before income taxes and minority interest                  -              -              -           -          -       (2,224)
Capital employed                                          152,319        144,174        164,819      34,126    (52,621)     442,817
Identifiable assets                                       258,588        138,321        163,281      18,454    (11,141)     567,503
Investments in affiliated companies                        15,394             44          2,872           -          -       18,310
Depreciation and amortization                              11,688          7,595         13,270       1,098        144       33,795
Capital expenditures                                        8,924         12,800         17,034         766      1,687       41,211
====================================================================================================================================
1999
Revenue - unaffiliated customers                        $ 140,655       $ 93,562       $ 96,569    $ 27,431        $ -    $ 358,217
Inter-segment transfers                                     2,214            593              -       1,926     (4,733)           -
Income (loss) from operations                              14,507          3,842         10,869       2,148     (3,039)      28,327
Equity income                                                 444              -            667           -          -        1,111
Earnings before interest, tax and minority interest        14,951          3,842         11,536       2,148     (3,039)      29,438
Interest income                                                 -              -              -           -          -          961
Interest expense                                                -              -              -           -          -         (668)
Income before income taxes and minority interest                -              -              -           -          -       29,731
Capital employed                                          177,506        106,190        140,697      30,124    (58,800)     395,717
Identifiable assets                                       209,798        111,128        153,069      17,657     (1,498)     490,154
Investments in affiliated companies                         7,503              -          3,249           -          -       10,752
Depreciation and amortization                               9,889          6,532         11,088         931        357       28,797
Capital expenditures                                       28,327         14,213         17,059       1,389        527       61,515
====================================================================================================================================
</TABLE>

                                       54
<PAGE>
<TABLE>
<CAPTION>


Note 17. Selected Quarterly Financial Data (Unaudited)

                                                                                                                 Earnings  Earnings
                                                   Earnings Earnings                                                (Loss)    (Loss)
Dollars in Thousands                                    Per      Per                                         Net      Per       Per
Except per                         Gross      Net     Basic  Diluted                              Gross   Income    Basic   Diluted
Share Amounts         Revenues    Profit   Income     Share    Share                 Revenues    Profit    (Loss)   Share     Share
------------------------------------------------------------------------------------------------------------------------------------
2001                                                                 2000
<S>                   <C>        <C>      <C>        <C>      <C>                    <C>        <C>      <C>       <C>       <C>
First Quarter         $122,962   $35,839  $ 2,995    $ 0.18   $ 0.18 First Quarter   $102,795   $30,546  $ 3,562   $ 0.22    $ 0.22
Second Quarter         113,674    34,948    4,170      0.24     0.24 Second Quarter   102,804    32,687    4,215     0.26      0.26
Third Quarter          118,293    33,702    4,211      0.24     0.24 Third Quarter    124,886    33,938    2,926     0.18      0.18
Fourth Quarter*        111,803    20,963   33,325      1.91     1.90 Fourth Quarter   144,066    27,205  (12,573)   (0.77)    (0.77)
------------------------------------------------------------------------------------------------------------------------------------
                      $466,732  $125,452 $ 44,701    $ 2.61   $ 2.59                 $474,551  $124,376 $ (1,870) $ (0.12)  $ (0.12)
====================================================================================================================================
</TABLE>

*In the fourth  quarter of 2001,  the  Company  reported a pretax gain of $102.8
million on the sale of the Aqua Cool Pure  Bottled  Water  business in the U.S.,
U.K. and France. The other primary factors affecting the results for the quarter
were a  charge  of  $9.2  million  related  to the  planned  divestiture  of the
Company's  Malaysian  affiliate,  $3.8  million  in  other  asset  and  goodwill
impairment charges,  increases in completion cost estimates on several equipment
contracts with  substantial  civil  construction  scope,  losses in the Consumer
Water Group in part due to efforts to ready that  business  for sale,  and other
charges related primarily to an effective tax rate for the quarter of 52.6%. The
increase in the effective tax rate was caused  primarily by the gain on the sale
of the Aqua  Cool  business,  which  included  non-deductible  goodwill,  and by
foreign  losses,  most  significantly  the  losses  incurred  by  the  Company's
Malaysian affiliate, that were not benefited since realization of those benefits
was not likely.

<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
                              ----------          --------          ----------      -------------       -----------
Allowance for
doubtful accounts
and uncollectible
notes receivable:

Years ended:
<S>                               <C>                <C>                  <C>             <C>            <C>

December 31, 2001                 $5,250,000         $4,632,000               -           $5,113,000     $4,769,000
                                  ==========         ==========           ========        ==========     ==========

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
                                  ==========         ==========            =======         ==========     ==========
</TABLE>

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


                                       55
<PAGE>


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

This item is not applicable to the Company.

                                    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 8, 2002,  which will be filed with
the  Securities  and  Exchange  Commission  within  120 days of the close of the
Company's  fiscal  year.  The  information  required  by  this  Item  concerning
Executive Officers is included in Part I of this Annual Report on Form 10-K.

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 8,  2002,  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 8,  2002,  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 8,  2002,  which  will be filed  with the  Securities  and  Exchange
Commission within 120 days of the close of the Company's fiscal year.

                                     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 Statement Schedule on
        page 30.

     2. Financial Statement Schedule

          See Index to Financial  Statements and Financial Statement Schedule on
          page 30. All other  Financial  Statement  Schedules  have been omitted
          because they are either not applicable or the required  information is
          included in the Consolidated Financial Statements or notes thereto.



                                       56
<PAGE>




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).

 10.0        Material Contract

             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 26, 2002.

             10.3   Second Amendment and Waiver to Third
                    Amended and Restated Revolving Credit
                    Agreement dated as of March 28, 2002
                    between the Company and Fleet National
                    Bank.

                                       57
<PAGE>

            10.3(1)     First Amendment and Waiver to Third
                        Amended and Restated Revolving Credit
                        Agreement dated as of December 21, 2001
                        by and among the Company, Fleet National
                        Bank (as agent and lender), Bank
                        America, N.A., The Chase Manhattan Bank
                        and Mellon Bank, N.A.

            10.4        Third Amended and Restated Credit               *
                        Agreement dated as of June 29,  2001,
                        among the Company, Fleet National Bank
                        (as agent and lender), Bank of America,
                        N.A., The Chase Manhattan Bank and
                        Mellon Bank, N.A. (filed as Exhibit 4.1
                        to the Company's Quarterly Report on
                        Form 10-Q for the quarterly period ended
                        June 30, 2001).

            10.5        Global Amendment and Affirmation                *
                        Agreement dated as of June 29,  2001,
                        among the Company, Fleet National Bank
                        and certain subsidiaries of the Company
                        (filed as Exhibit 4.2 to the Company's
                        Quarterly Report on Form 10-Q for the
                        quarterly period ended June 30, 2001).

            10.6        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).

            10.6(1)     Amendment 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 (filed as Exhibit 10.3(1)
                        to the Company's Annual Report on Form
                        10-K for the year ended December 31,
                        2000).

            10.6(2)     Amendment Agreement No. 2 to Second             *
                        Amended and Restated Credit  Agreement
                        among the Company, Fleet National Bank
                        and Fleet National Bank as Agent dated
                        May 14, 2001 (filed as Exhibit 10.2 to
                        the Company's Quarterly Report on Form
                        10-Q for the quarterly period ended
                        March 31, 2001).

            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).

            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).

                                       58
<PAGE>

              10.11       Shareholders' Agreement dated April 3,        *
                          2001 between the Company  and Mohammed
                          Abdulmohsin Al-Kharafi & Sons (filed as
                          Exhibit 10.1 to the Company's Quarterly
                          Report on Form 10-Q for the quarterly
                          period ended March 31, 2001).

              10.12       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).

              10.13       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).

              10.14       Loan Agreement dated as of October 25,        *
                          2000 between the Company  and Hafeez
                          Karamath Engineering Services Limited
                          (filed as Exhibit 10.13 to the Company's
                          Annual Report on Form 10-K for the year
                          ended December 31, 2000).

         21.0              Subsidiaries of the Registrant.

         23.0              Consents

                            23.1  Consent of PricewaterhouseCoopers LLP

         24.0               Power of Attorney.
         -------------------------------
         *Incorporated herein by reference

(b)        Reports on Form 8-K

          A report on Form 8-K was filed by the  Company  on  December  3, 2001,
          reporting under Item 5 the issuance of a press release  announcing the
          Company's agreement to sell its bottled water business.



                                       59
<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.

                                       60
<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 29, 2002

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 29, 2002        By: /s/Arthur L. Goldstein
                                 ----------------------
                                  Arthur L. Goldstein
                                  Chairman of the Board
                                  President and Chief Executive Officer
                                  (principal executive officer) and Director

Date:  March 29, 2002        By: /s/Daniel M. Kuzmak
                                 -------------------
                                  Daniel M. Kuzmak
                                  Vice President and
                                  Chief Financial Officer
                                  (principal financial officer)

Date:  March 29, 2002        By: /s/Anthony Di Paola
                                 -------------------
                                  Anthony Di Paola
                                  Vice President and Corporate Controller
                                  (principal accounting officer)



                                       61
<PAGE>




Date: March 29, 2002          By:  /s/Douglas R. Brown
                                   -------------------------------------------
                                   Douglas R. Brown, Director

Date: March 29, 2002          By:  /s/Stephen L. Brown
                                   -------------------------------------------
                                   Stephen L. Brown, Director

Date: March 29, 2002          By:  /s/Arnaud de Vitry d'Avaucourt
                                   -------------------------------------------
                                   Arnaud de Vitry d'Avaucourt, Director

Date: March 29, 2002          By:  /s/Kathleen F. Feldstein
                                   -------------------------------------------
                                   Kathleen F. Feldstein, Director

Date: March 29, 2002          By:  /s/William E. Katz
                                   -------------------------------------------
                                   William E. Katz, Director

Date: March 29, 2002          By:  /s/William K. Reilly
                                   -------------------------------------------
                                   William K. Reilly, Director

Date: March 29, 2002          By:  /s/John J. Shields
                                   -------------------------------------------
                                   John J. Shields, Director

Date: March 29, 2002          By:  /s/Carl S. Sloane
                                   -------------------------------------------
                                   Carl S. Sloane, Director

Date: March 29, 2002          By:  /s/Daniel I. C. Wang
                                   -------------------------------------------
                                   Daniel I. C. Wang, Director

Date: March 29, 2002          By:  /s/Mark S. Wrighton
                                   -------------------------------------------
                                   Mark S. Wrighton, Director

Date: March 29, 2002          By:  /s/Allen S. Wyett
                                   -------------------------------------------
                                   Allen S. Wyett, Director




                                       62
<PAGE>

                                 EXHIBIT INDEX

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).

 10.0        Material Contract

             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 26, 2002.

             10.3   Second Amendment and Waiver to Third
                    Amended and Restated Revolving Credit
                    Agreement dated as of March 28, 2002
                    between the Company and Fleet National
                    Bank.


                                       63
<PAGE>



            10.3(1)     First Amendment and Waiver to Third
                        Amended and Restated Revolving Credit
                        Agreement dated as of December 21, 2001
                        by and among the Company, Fleet National
                        Bank (as agent and lender), Bank
                        America, N.A., The Chase Manhattan Bank
                        and Mellon Bank, N.A.

            10.4        Third Amended and Restated Credit               *
                        Agreement dated as of June 29,  2001,
                        among the Company, Fleet National Bank
                        (as agent and lender), Bank of America,
                        N.A., The Chase Manhattan Bank and
                        Mellon Bank, N.A. (filed as Exhibit 4.1
                        to the Company's Quarterly Report on
                        Form 10-Q for the quarterly period ended
                        June 30, 2001).

            10.5        Global Amendment and Affirmation                *
                        Agreement dated as of June 29,  2001,
                        among the Company, Fleet National Bank
                        and certain subsidiaries of the Company
                        (filed as Exhibit 4.2 to the Company's
                        Quarterly Report on Form 10-Q for the
                        quarterly period ended June 30, 2001).

            10.6        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).

            10.6(1)     Amendment 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 (filed as Exhibit 10.3(1)
                        to the Company's Annual Report on Form
                        10-K for the year ended December 31,
                        2000).

            10.6(2)     Amendment Agreement No. 2 to Second             *
                        Amended and Restated Credit  Agreement
                        among the Company, Fleet National Bank
                        and Fleet National Bank as Agent dated
                        May 14, 2001 (filed as Exhibit 10.2 to
                        the Company's Quarterly Report on Form
                        10-Q for the quarterly period ended
                        March 31, 2001).

            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).

            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).



                                       64
<PAGE>


              10.11       Shareholders' Agreement dated April 3,        *
                          2001 between the Company  and Mohammed
                          Abdulmohsin Al-Kharafi & Sons (filed as
                          Exhibit 10.1 to the Company's Quarterly
                          Report on Form 10-Q for the quarterly
                          period ended March 31, 2001).

              10.12       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).

              10.13       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).

              10.14       Loan Agreement dated as of October 25,        *
                          2000 between the Company  and Hafeez
                          Karamath Engineering Services Limited
                          (filed as Exhibit 10.13 to the Company's
                          Annual Report on Form 10-K for the year
                          ended December 31, 2000).

         21.0              Subsidiaries of the Registrant.

         23.0              Consents

                            23.1  Consent of PricewaterhouseCoopers LLP

         24.0               Power of Attorney.
         -------------------------------
         *Incorporated herein by reference