EXHIBIT 13

                              IONICS, INCORPORATED
                  PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS OF
                          IONICS, INCORPORATED FOR THE
                       FISCAL YEAR ENDED DECEMBER 31, 2000

 (The  following  sections  constitute  an Exhibit  to Form  10-K:  Management's
Discussion and Analysis of Results of Operations and Financial Condition; Report
of Independent Accountants;  Consolidated Statements of Operations; Consolidated
Balance Sheets; Consolidated Statements of Cash Flow; Consolidated Statements of
Stockholders'  Equity;  Notes to  Consolidated  Financial  Statements;  Selected
Financial Data.

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

<PAGE>

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


The following  discussion  and analysis of results of  operations  and financial
condition 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 a more  detailed  description  of these four business
groups.

RESULTS OF OPERATIONS

2000 Compared to 1999

The Company reported a 32.5% increase in revenues and a net loss of $1.9 million
in 2000. The decrease in the Company's operating  performance resulted primarily
from the performance of CWG and EBG. CWG results reflect charges associated with
the  Company's  decision to abandon  plans to  establish a  bleach-manufacturing
plant in Elkton,  MD.  Additionally,  CWG results  were  impacted  by  inventory
adjustments  as well as  charges  relating  to  accounts  receivable  and  notes
receivable in both its domestic Aqua Cool and home water businesses,  as well as
residual  costs  associated  with a system  conversion in its domestic Aqua Cool
business.  The decrease in EBG operating  performance was impacted by a shift in
the  product  mix to lower  margin  capital  projects,  primarily  the  Trinidad
project, as well as charges in inventory,  accounts receivable and the Company's
decision to write down the value of goodwill associated with an acquisition made
in 1996. UWG operating  performance  reflected continued pricing pressure on the
capital  equipment  business,  as well as losses on several  projects in the Far
East. IBG operating  performance  improved from 1999 to 2000. IBG EBIT increased
$0.5 million on increased  revenues despite expenses  recognized during 2000 for
charges associated with relocating the Watertown, MA-based instrument operations
to Boulder,  CO. These  expenses  reflected  charges for  inventory,  relocation
expenses  and  accounts  receivable.   The  Company  also  incurred  significant
litigation-related  costs,  primarily  attributable to three patent infringement
lawsuits brought against the Company.

Revenues

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 groups.

EBG revenues  increased  by $64.5  million in 2000 over 1999,  primarily  due to
increased sales of capital equipment  (including the desalination  plant project
in Trinidad) and partial  delivery of a storage system to manage the containment
of spent nuclear fuel at a commercial  U.S.  nuclear energy plant.  UWG revenues
increased  $38.7  million in 2000 from 1999,  primarily as a result of increased
capital equipment sales to the microelectronics  industry,  predominantly in the
Far East. CWG revenues increased by $11.8 million in 2000 from 1999,  reflecting
growth in both  domestic and European  operations  for Aqua Cool and home water.
IBG  revenues  increased  $1.4  million  in 2000  compared  to  1999,  resulting
primarily from increased sales to the microelectronics industry.

1999 Compared to 1998

Revenues

Consolidated  revenues were $358.2 million in 1999, compared with $351.3 million
in 1998.  Higher revenues in both EBG and CWG offset revenue declines in UWG and
IBG.

EBG revenues  increased  by $10.9  million in 1999 over 1998,  primarily  due to
increased  sales of capital  equipment,  particularly  water reuse equipment and
desalination  equipment.  The revenue  increase  also reflects  engineering  and
design work begun on a contract to  manufacture  a storage  system to manage the
containment of spent nuclear fuel.
<PAGE>

UWG revenues  decreased by $17.8 million in 1999 from 1998. UWG primarily serves
the   microelectronics   industry  and,  to  a  lesser  extent,  the  power  and
pharmaceutical  industries.  As was the case in 1998,  revenues in 1999 from the
microelectronics industry continued to reflect a significant decline,  primarily
due  to  a  continuing  slowdown  in  capital  spending  for  new  manufacturing
facilities.

CWG revenues increased by $15.7 million in 1999 from 1998,  primarily reflecting
continued growth for bottled water and home water products and services. Through
the  acquisition  of  Aquarelle  SA (now called Aqua Cool  France),  the Company
entered the French  bottled water market at the  beginning of 1999.  The bottled
water  business  also  continued to expand its customer  base in both the United
States  and the United  Kingdom.  Such  expansion  is being  achieved  primarily
through internal growth and, to a lesser extent,  through small  acquisitions in
geographic areas contiguous to existing  locations.  In the home water business,
the Company opened its first  international  office, in the Republic of Ireland,
during the second quarter of 1999.

IBG revenues  declined by $1.9  million in 1999 from 1998  levels.  In the first
half of 1998,  IBG benefited from strong demand for the Group's TOC analyzers as
a result of the  adoption of a new U.S.  pharmaceutical  industry  standard  for
measuring water purity. Sales of TOC instruments began to increase in the second
half of 1999 as  compared  to the  first  half of the  year,  as a result of new
European pharmaceutical regulations and new product offerings.

Cost of Sales and Operating Expenses

2000 Compared to 1999

Cost of sales as a percentage  of revenues was 73.8% and 66.4% in 2000 and 1999,
respectively.

The  increase in cost of sales as a  percentage  of  revenues  from 1999 to 2000
includes  increases in all four of the business  groups and is  attributable  to
several factors. For EBG, cost of sales as a percentage of revenues 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  from 75.5% in 1999 to 80.5% in 2000,
reflecting  the  continued  competitive   environment  in  the  microelectronics
industry for ultrapure water capital  equipment,  as well as a change in product
mix from higher margin service business to lower margin capital equipment sales.
Cost of sales as a percentage of revenue  increased  from 56.0% in 1999 to 61.2%
in 2000 for CWG. Factors  affecting this increase are 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  from  41.9% in 1999 to  44.4% in 2000.  The
increase in cost of sales in 2000 is primarily attributable to inventory charges
incurred  in  2000,  relating  to  the  relocation  of the  Watertown,  MA-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.

1999 Compared to 1998

Cost of sales as a percentage  of revenues was 66.4% and 67.4% in 1999 and 1998,
respectively.
<PAGE>

The improvement in 1999 compared to 1998 is attributable to the decrease in cost
of sales as a  percentage  of  revenues  for UWG to 75.5% in 1999 from  78.2% in
1998. This decrease resulted primarily from the higher proportion of the Group's
revenues in 1999 which were derived from higher margin service business compared
to  equipment  business.  Cost of  sales as a  percentage  of  revenues  for EBG
increased to 72.3% in 1999 from 71.5% in 1998. This increase was the result of a
shift in the mix of contracts to lower margin equipment business.  Cost of sales
as a  percentage  of revenues  for IBG  increased to 41.9% in 1999 from 39.9% in
1998,  primarily due to a higher  portion of revenues  being derived from Ionics
Sievers'  lower  margin  service  business.  Cost of  sales as a  percentage  of
revenues  for CWG  remained  the same in 1999 and 1998 at 56.0%.  Overall  gross
margins for the Company also  benefited  from the change in mix of the Company's
sales. CWG sales grew 19.4% in 1999 (with 44.0% gross margins),  while UWG sales
declined 16.0% in 1999 (with gross margins of 24.5%).

Operating  expenses as a percentage  of revenues were 25.7% in 1999, an increase
from 23.6% in 1998.  Increased operating expenses as a percentage of revenues in
1999 as compared to 1998 were attributable to: start-up expenses for several new
operating  facilities in Asia, the United States and Europe;  increased expenses
relative to revenues in UWG; expenses relating to the Company's Y2K program; and
continued  expenses in defense of pending  patent  infringement  litigation.  In
addition,  the higher  operating  expenses as a  percentage  of revenues in 1999
reflected the impact of higher revenue growth in CWG, which generally has higher
operating  expenses as a percentage of revenues than the other business  groups.
The Company also established additional bad debt reserves in 1999, primarily for
UWG and to a  lesser  extent  for CWG and  EBG.  CWG  also  incurred  additional
expenses  in 1999 in  conjunction  with the  installation  of a new  information
system for the U.S. Aqua Cool business.

Interest, Equity Income and Taxes

Interest  income was $1.3 million in 2000, $1.0 million in 1999 and $1.1 million
in 1998. Interest expense, net of capitalized  interest,  was $4.9 million, $0.7
million and $0.3 million in 2000,  1999 and 1998,  respectively.  The  increased
interest  costs  reflect the higher  average  borrowings of the Company in 2000,
primarily from increased revenues and resulting accounts  receivable  increases,
as well as borrowings related to certain long-term contracts.

Equity  income  increased  to $1.6  million in 2000 from $1.1  million  and $0.6
million in 1999 and 1998,  respectively.  The increase in equity  income in 2000
resulted  primarily from realization of full-year equity income for two projects
located in Mexico that began operation in 1999.

The Company's  effective tax rate was 34.0% in 2000,  32.0% in 1999 and 32.5% in
1998.

The net loss for 2000 was $1.9 million,  compared to net income of $19.4 million
in 1999 and $21.4 million in 1998.

FINANCIAL CONDITION

At December 31, 2000, the Company had total assets of $577.5  million,  compared
to total assets of $500.9  million at December 31, 1999.  The increase in assets
reflects  an  increase  in  accounts  receivable  of  $42.3  million,  primarily
attributable to the Company's  increased  sales volume in 2000.  Deferred income
taxes  increased $8.0 million,  reflecting  future  benefits for  non-deductible
charges in the current  year,  primarily  accruals  relating  to legal  charges.
Investments in affiliated  companies and long-term  notes  receivable  increased
$7.6 million and $7.5 million,  respectively,  from 1999 to 2000. Both increases
were  primarily  attributable  to  the  Company's  investment  in  the  Trinidad
desalination  project and a loan to the majority equity participant.  Additional
investments  in  affiliates   relate  to  a  joint  venture  formed  with  Toray
Industries, Inc. and Mitsui & Co. (U.S.A.), Inc., called Toray Membrane America,
Inc.  (TMA),  to  manufacture  and  sell  reverse  osmosis  membranes.   Capital
expenditures  of $41.2  million  were  made  during  2000 for "own and  operate"
facilities  offset by disposals of fixed assets primarily related to the sale of
manufacturing equipment to TMA.

Working capital  decreased to $85.4 million in 2000 compared to $94.3 million in
1999, and the Company's current ratio decreased to 1.5 in 2000 from 1.9 in 1999.

Net cash used by operating  activities was $5.3 million in 2000, compared to net
cash provided by operating activities of $26.9 million in 1999. The decrease was
the result of a net loss in 2000 and  increased  accounts  receivable  offset by
increased accounts payable and accrued expenses.  Accounts receivable  increases
are  attributable to increased sales  activities  while the increase in accounts
payable and accrued  expenses are primarily  attributable to  litigation-related
charges  accrued  late in  2000.  Net  cash  provided  by  operating  activities
decreased by $18.9 million in 1999 compared to 1998, primarily due to a decrease
in accounts  payable and accrued expenses in 1999 from 1998. The relatively high
level of accounts  payable and accrued  expenses at December  31, 1998  resulted
from significant  purchasing activity late in the year relating to certain large
customer contracts.
<PAGE>

Net cash used by investing  activities  decreased by $32.5  million in 2000 over
1999.  The decrease in 2000 over 1999 reflects  lower capital  expenditures,  as
well as the sale of  manufacturing  equipment to TMA. Net cash used by investing
activities  increased by $27.5 million in 1999 over 1998.  This increase was due
primarily  to capital  expenditures  and  acquisitions  completed  in 1999.  The
Company  spent $8.5 million in 1999 in acquiring  Ionics Life  Sciences,  Ionics
Agar and Aqua Cool  France.  The  capital  expenditures  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.

The Company  spent $4.5 million for several  acquisitions  in 2000,  compared to
$8.5 million in 1999. (See Note 15.)

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 used by financing activities in
1999.  The  change  resulted  primarily  from the  higher  level  of  short-term
borrowings at December 31, 2000 from prior year-end.  In 1999, net cash provided
by financing activities increased $28.9 million as compared to 1998. This change
resulted primarily from increased short and long-term borrowings in 1999.

The Company  maintains several domestic and foreign lines of credit. At December
31, 2000,  the Company had  domestic  credit  arrangements  under which it could
borrow up to a total of $75 million. During 2000, the Company's revolving credit
agreement with its principal  domestic  lender,  Fleet National Bank (the Bank),
was amended and restated to increase  available  borrowings  to $70 million.  On
March 1,  2001,  this  agreement  was  further  amended to  increase  the amount
available for borrowing to $80 million.  In consideration of this increase,  the
Company  gave the Bank a  "springing  lien,"  which would  result in a perfected
security  interest in the assets of the Company  and its  domestic  subsidiaries
(other  than real estate and motor  vehicles)  in the event that the Company (i)
defaults under any of its covenants or obligations in the credit  agreement,  or
(ii) fails to pay down outstanding  borrowings under the credit agreement to $50
million by May 15, 2001. (See Note 8.) The Company has a second U.S. credit line
of $5 million.

Foreign  lines of credit  outstanding  at December  31, 2000 were $3.0  million,
excluding  those for specific  project  financing.  The Company also has several
facilities to accommodate its foreign trade requirements.  At December 31, 2000,
the Company's  controlled Barbados affiliate had outstanding  borrowings of $9.2
million in connection  with the financing of a Barbados  desalination  facility.
(See Note 8.)

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.

Significant  expenditures  in 2001 are  anticipated  to include  investments  in
additional "own and operate"  facilities and the continued expansion of all four
business groups.

Also  during  2001,  construction  will  continue on the  Trinidad  desalination
facility owned by Desalination Company of Trinidad and Tobago Ltd.  (Desalcott),
in which the  Company  has a 40% equity  interest.  During  2000 and through the
first quarter of 2001,  the Company  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.  Desalcott  entered into a "bridge loan"  agreement with a
Trinidad bank  providing $60 million in  construction  financing.  However,  the
bridge loan plus the $20 million  equity  provided to Desalcott will not provide
sufficient funds to complete construction of the project. 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,  or prior to
completion of construction.  If permanent financing is not obtained prior to the
completion  of  construction,  Desalcott  will be required to obtain  additional
funds  to  complete  construction,  and the  Company  has  committed  to lend to
Desalcott up to $10 million under such circumstances.

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.
<PAGE>

ACCOUNTING PRONOUNCEMENTS

In June 1999, the Financial  Accounting  Standards Board (FASB) issued Statement
of Financial  Accounting  Standards  (SFAS) No. 137,  "Accounting for Derivative
Instruments  and Hedging  Activities  - Deferral of the  Effective  Date of FASB
Statement No. 133." SFAS No. 137 amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was issued in June 1998. SFAS No. 137
defers the effective  date of SFAS No. 133 to all fiscal years  beginning  after
June 15, 2000.  Accordingly,  the Company adopted the provisions of SFAS No. 133
for the fiscal  year 2001 which  commenced  on January 1, 2001.  This  Statement
should not have a material effect on the Company's financial statements.

In  December  1999,  the  Securities  and  Exchange  Commission  released  Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial  Statements.  This
bulletin  summarizes  certain views of the staff on applying  generally accepted
accounting principles to revenue recognition in financial statements.  The staff
believes  that  revenue is  realized  or  realizable  and earned when all of the
following  criteria  are met:  persuasive  evidence  of an  arrangement  exists;
delivery has occurred or services have been rendered;  the seller's price to the
buyer is fixed or determinable;  and collectibility is reasonably  assured.  The
Company believes that its current revenue  recognition  policy complies with the
Commission's guidelines.

FORWARD-LOOKING INFORMATION

Derivative Instruments

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

Market Risk

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

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  business  conditions  and the general
economy;  competitive  factors,  such as  acceptance  of new  products and price
pressures;  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.
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

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


 In our opinion, the accompanying  consolidated statements of operations and the
related consolidated balance sheets,  consolidated statements of cash flows, and
consolidated statements of stockholders' equity, present fairly, in all material
respects,  the financial  position of Ionics,  Incorporated and its subsidiaries
(the "Company"),  at December 31, 2000 and December 31, 1999, and the results of
its  operations  and its cash  flows for each of the three  years in the  period
ended  December 31, 2000, in conformity  with  accounting  principles  generally
accepted in the United States of America.  These  financial  statements  are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits 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 19, 2001

<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
----------------------------------------------------------------------------------------------------------------------
For the years ended December 31
<S>                                                             <C>              <C>             <C>
Amounts in Thousands, Except per Share Amounts                       2000             1999           1998
----------------------------------------------------------------------------------------------------------
Revenues:
     Equipment Business Group                                   $ 205,181        $ 140,655       $129,751
     Ultrapure Water Group                                        132,236           93,562        111,349
     Consumer Water Group                                         108,324           96,569         80,884
     Instrument Business Group                                     28,810           27,431         29,342
----------------------------------------------------------------------------------------------------------
                                                                  474,551          358,217        351,326
                                                         -------------------------------------------------

Costs and expenses:
     Cost of sales of Equipment Business Group                    164,556          101,744         92,826
     Cost of sales of Ultrapure Water Group                       106,498           70,636         87,039
     Cost of sales of Consumer Water Group                         66,327           54,052         45,261
     Cost of sales of Instrument Business Group                    12,794           11,500         11,716
     Research and development                                       7,980            7,066          6,635
     Selling, general and administrative                          113,222           84,892         76,299
     Impairment of long-lived assets                                3,398                -              -
----------------------------------------------------------------------------------------------------------
                                                                  474,775          329,890        319,776
                                                         -------------------------------------------------

(Loss) income from operations                                        (224)          28,327         31,550
Interest income                                                     1,286              961          1,058
Interest expense                                                   (4,909)            (668)          (331)
Equity income                                                       1,623            1,111            606
----------------------------------------------------------------------------------------------------------
(Loss) income before income taxes and minority interest            (2,224)          29,731         32,883
Benefit (provision) for income taxes                                  756           (9,522)       (10,680)
----------------------------------------------------------------------------------------------------------
(Loss) income before minority interest                             (1,468)          20,209         22,203
Minority interest expense                                             402              848            817
----------------------------------------------------------------------------------------------------------
Net (loss) income                                                $ (1,870)        $ 19,361       $ 21,386
==========================================================================================================
(Loss) earnings per basic share                                   $ (0.12)          $ 1.20         $ 1.33
==========================================================================================================
(Loss) earnings per diluted share                                 $ (0.12)          $ 1.18         $ 1.31
==========================================================================================================
Shares used in basic earnings per share calculations               16,243           16,148         16,077
Shares used in diluted earnings per share calculations             16,243           16,388         16,357

</TABLE>

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

<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets

---------------------------------------------------------------------------------------------
For the years ended December 31
---------------------------------------------------------------------------------------------
<S>                                                                   <C>           <C>
Dollars in Thousands, Except Share Amounts                                2000          1999
---------------------------------------------------------------------------------------------
Assets
Current assets:

     Cash and cash equivalents                                        $ 25,497      $ 13,169
     Short-term investments                                              1,105           195
     Notes receivable, current                                           4,741         5,374
     Accounts receivable                                               162,711       120,407
     Receivables from affiliated companies                                 792         1,231
     Inventories                                                        34,701        33,880
     Other current assets                                               16,443        14,816
     Deferred income taxes                                              12,749         4,730
---------------------------------------------------------------------------------------------
         Total current assets                                          258,739       193,802
---------------------------------------------------------------------------------------------
Notes receivable, long-term                                             17,502        10,027
Investments in affiliated companies                                     18,310        10,752
Property, plant and equipment, net                                     222,843       227,250
Other assets                                                            60,072        59,075
---------------------------------------------------------------------------------------------
         Total assets                                                $ 577,466     $ 500,906
=============================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
     Notes payable and current portion of long-term debt              $ 75,045      $ 25,514
     Accounts payable                                                   56,014        41,867
     Other current liabilities                                          42,304        32,094
---------------------------------------------------------------------------------------------
         Total current liabilities                                     173,363        99,475
---------------------------------------------------------------------------------------------
Long-term debt and notes payable                                        10,911         8,351
Deferred income taxes                                                   30,334        26,803
Other liabilities                                                        5,997         4,425
Commitments and contingencies
Stockholders' equity:
     Common stock, par value $1, authorized shares: 55,000,000
         in 2000 and 1999; issued and outstanding: 16,369,029 in
         2000 and 16,201,483 in 1999.                                   16,369        16,201
     Additional paid-in capital                                        162,114       159,288
     Retained earnings                                                 197,616       199,304
     Accumulated other comprehensive income                            (19,238)      (12,905)
     Unearned compensation                                                   -           (36)
---------------------------------------------------------------------------------------------
         Total stockholders' equity                                    356,861       361,852
---------------------------------------------------------------------------------------------
         Total liabilities and stockholders' equity                  $ 577,466     $ 500,906
=============================================================================================

The accompanying notes are an integral part of these financial statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
---------------------------------------------------------------------------------------------------------------------

For the years ended December 31
---------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>              <C>             <C>
Dollars in Thousands                                                            2000            1999            1998
---------------------------------------------------------------------------------------------------------------------
Operating activities:
      Net (loss) income                                                     $ (1,870)        $19,361         $21,386
      Adjustments to reconcile net (loss) income
      to net cash (used) provided by operating activities:
        Depreciation and amortization                                         30,948          26,464          25,519
        Amortization of intangibles                                            2,847           2,333           1,695
        Impairment of long-lived assets                                        3,398               -               -
        Provision for losses on accounts and notes receivable                  5,204           2,643           1,319
        Deferred income tax (benefit) provision                               (2,092)          3,723           2,478
        Compensation expense on restricted stock awards                           36             108             108
        Changes in assets and liabilities,
        net of effects of businesses acquired:
          Notes receivable                                                    (7,913)         (3,539)           (168)
          Accounts receivable                                                (48,579)        (11,405)        (14,695)
          Inventories                                                         (1,240)         (2,081)         (2,773)
          Deferred income taxes and other current assets                      (8,924)        (11,566)         (1,461)
          Investments in affiliates                                           (7,695)         (4,232)         (2,815)
          Accounts payable and accrued expenses                               22,758          (1,640)         20,267
          Income taxes                                                         6,913           5,234            (218)
          Other                                                                  878           1,502          (4,851)
---------------------------------------------------------------------------------------------------------------------

             Net cash (used) provided by operating activities                 (5,331)         26,905          45,791
                                                                       ----------------------------------------------
Investing activities:
        Additions to property, plant and equipment                           (41,211)        (61,515)        (42,196)
        Disposals of property, plant and equipment                            11,464           2,177           1,882
        Sale and maturity of short-term investments                                -             164             137
        Purchase of short-term investments                                      (931)              -               -
        Acquisitions, net of cash acquired                                    (4,491)         (8,513)              -
---------------------------------------------------------------------------------------------------------------------

             Net cash used by investing activities                           (35,169)        (67,687)        (40,177)
                                                                       ----------------------------------------------

Financing activities:
      Principal payments on current debt                                     (97,891)        (10,393)        (15,339)
      Proceeds from borrowings of current debt                               145,508          28,762           9,716
      Principal payments on long-term debt                                    (2,827)           (756)             (8)
      Proceeds from borrowings of long-term debt                               5,666           7,093             419
      Proceeds from stock option plans                                         2,734           1,424           2,447
---------------------------------------------------------------------------------------------------------------------

             Net cash provided (used) by financing activities                 53,190          26,130          (2,765)
                                                                       ----------------------------------------------

Effect of exchange rate changes on cash                                         (362)           (949)            134
                                                                       ----------------------------------------------
Net change in cash and cash equivalents                                       12,328         (15,601)          2,983
Cash and cash equivalents at end of prior year                                13,169          28,770          25,787
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of current year                            $ 25,497         $13,169         $28,770
=====================================================================================================================
</TABLE>

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


<PAGE>
<TABLE>
<CAPTION>

Consolidated Statements of Stockholders' Equity

                                                                                          Accumulated
                                                                   Additional                 Other                    Total
                                                Common Stock         Paid-In     Retained Comprehensive    Unearned    Stockholders'
Dollars in Thousands                        Shares     Par Value     Capital     Earnings     Income     Compensation  Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>           <C>         <C>         <C>          <C>           <C>         <C>
Balance December 31, 1997                 16,001,285    $16,001     $154,479    $158,557     $(9,126)      $(252)      $319,659

Comprehensive income:
   Net income                                      -          -            -      21,386           -           -         21,386
   Translation adjustments, net of tax of $(619)   -          -            -           -       1,237           -          1,237
                                                                                                                      ---------
Total comprehensive income                                                                                               22,623
                                                                                                                       --------

Stock options exercised                      115,364        116        2,331           -           -           -          2,447
Tax benefit of stock option activity               -          -          761           -           -           -            761
Amortization of unearned compensation              -          -            -           -           -         108            108
-------------------------------------------------------------------------------------------------------------------------------

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, net of tax of $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, net of tax of $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
===============================================================================================================================
</TABLE>

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

<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 bottled water and home water purifiers. 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 consolidated  financial  statements include the accounts of the Company, its
wholly  and   majority-owned   subsidiaries  and  controlled   affiliates.   All
significant intercompany accounts and transactions have been eliminated.

Investments  in affiliated  companies,  representing  non-controlling  ownership
interests, are accounted for under the equity method.

Revenue Recognition

Product  revenues are recorded upon shipment,  and service revenues are recorded
as the services are performed.  Interest  revenues on consumer  water  equipment
loans are  recognized  over the life of the loans.  Interest  earned on customer
notes receivable,  totaling $1,728,000,  $1,686,000 and $1,470,000 in 2000, 1999
and 1998, respectively, is included in revenues.

Most  equipment  leases to customers  are  accounted  for as  operating  leases.
Therefore,  rental revenues are recognized  over the life of the lease,  and the
cost of the  equipment  is  depreciated  over its useful  life.  Some leases are
accounted  for as  sales-type  leases  wherein  the  present  value of the lease
revenues and costs are recognized at the time of shipment of the product.

Revenues from large contracts are recognized  using the percentage of completion
method  of  accounting  in the  proportion  that  costs  incurred  bear to total
estimated costs at completion. Losses, if any, are provided for in the period in
which the loss is determined.

In  December  1999,  the  Securities  and  Exchange  Commission  released  Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial  Statements.  This
bulletin  summarizes  certain views of the staff on applying  generally accepted
accounting principles to revenue recognition in financial statements.  The staff
believes  that  revenue is  realized  or  realizable  and earned when all of the
following  criteria  are met:  persuasive  evidence  of an  arrangement  exists;
delivery has occurred or services have been rendered;  the seller's price to the
buyer is fixed or determinable;  and collectibility is reasonably  assured.  The
Company believes that its current revenue  recognition  policy complies with the
Commission's guidelines.

Cash Equivalents

Short-term  investments  with a  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.
<PAGE>

Notes Receivable

Notes  receivable have been reported at their estimated  realizable  value.  The
allowance for  uncollectible  notes receivable  totaled $186,000 and $213,000 at
December 31, 2000 and 1999, 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.  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 $320,000,
$957,000  and  $616,000  in  2000,  1999 and  1998,  respectively.  In  general,
depreciation is computed on a straight-line basis over the expected 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  evaluates its long-lived  assets for impairment  whenever events or
changes in  circumstances  indicate  that the book value of the asset may not be
recoverable. (See Note 6.)

Goodwill

Goodwill is included in other assets and represents the  unamortized  difference
between  acquisition  cost and 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. The Company  evaluates its goodwill for impairment  whenever events or
changes in  circumstances  indicate  that the book value of the asset may not be
recoverable. (See Note 6.)

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 $(782,000),
$11,000 and $(28,000) for 2000, 1999 and 1998, 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.
<PAGE>

Earnings Per Share

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

Use of Estimates

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

Derivative Instruments and Hedging Activities

In June 1999, the Financial  Accounting  Standards Board (FASB) issued Statement
of Financial  Accounting  Standards  (SFAS) No. 137,  "Accounting for Derivative
Instruments  and Hedging  Activities  - Deferral of the  Effective  Date of FASB
Statement No. 133." SFAS No. 137 amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was issued in June 1998. SFAS No. 137
defers the effective  date of SFAS No. 133 to all fiscal years  beginning  after
June 15, 2000.  Accordingly,  the Company will adopt the  provisions of SFAS No.
133 for the fiscal year 2001 which  commenced on January 1, 2001. This Statement
should not have a material effect on the Company's financial statements.



Note 2. Consolidated Balance Sheet Details

Dollars in Thousands                             2000                1999
-------------------------------------------------------------------------
Raw materials                                $ 21,061           $  20,216
Work in process                                 8,264               8,913
Finished goods                                  5,376               4,751
-------------------------------------------------------------------------
Inventories                                  $ 34,701           $  33,880
=========================================================================

Land                                        $   8,738          $    8,352
Buildings                                      48,773              44,858
Machinery and equipment                       312,138             299,303
Other, including furniture,
  fixtures and vehicles                        48,470              49,119
-------------------------------------------------------------------------
                                              418,119             401,632
Accumulated depreciation                     (195,276)           (174,382)
-------------------------------------------------------------------------
Property, plant and equipment, net           $222,843            $227,250
=========================================================================

Goodwill                                    $  64,829           $  62,631
Accumulated amortization                      (12,650)             (9,164)
Other                                           7,893               5,608
-------------------------------------------------------------------------
Other assets                                $  60,072           $  59,075
=========================================================================

Customer deposits                          $    4,883          $    2,671
Accrued commissions                             2,002               2,362
Accrued expenses                               35,419              27,061
-------------------------------------------------------------------------
Other current liabilities                   $  42,304           $  32,094
=========================================================================

<PAGE>


Note 3.   Supplemental Schedule of Cash Flow Information

Dollars in Thousands              2000             1999              1998
-------------------------------------------------------------------------
Cash payments for interest
   and income taxes:
   Interest                   $  4,662         $  1,740         $    685
   Taxes                      $  6,974         $  7,534         $  8,481


Note 4.  Accounts Receivable

Dollars in Thousands                     2000             1999
--------------------------------------------------------------
Billed receivables                   $112,065        $  80,647
Unbilled receivables                   55,710           43,167
Allowance for doubtful accounts        (5,064)          (3,407)
---------------------------------------------------------------
Accounts receivable                  $162,711         $120,407
==============================================================


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  contractual  milestones.  Substantially  all  of the
unbilled amounts at December 31, 2000 are expected to be billed during 2001.

Billed  receivables  include  retainage  amounts of $6,007,000 and $1,416,000 at
December 31, 2000 and 1999,  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 and the sale of equipment and replacement parts.

                                                                     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. - MA                                         43%
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.

<PAGE>

Activity in investments in affiliated companies:

Dollars in Thousands                       2000          1999           1998
----------------------------------------------------------------------------
Investments at end

   of prior year                       $ 10,752      $  7,057         $3,983
Equity in earnings                        1,623         1,111            606
Distributions received                   (2,092)         (475)          (396)
Cumulative translation
   adjustments                             (172)         (540)           172
Reclassification of Agrinord S.r.l.
 resulting from change in
 ownership interest
   (see Note 15)                         (1,389)            -              -
Reclassification of Watlington
   Waterworks from other
   assets resulting from change in

   ownership interest                         -             -          1,208
Additional investments                    9,588         3,599          1,484
----------------------------------------------------------------------------
Investments at end of current year    $  18,310       $10,752         $7,057
============================================================================


At December 31, 2000, the Company's  equity in the total assets and in the total
liabilities  of  its  foreign   affiliates  was  $31,922,000  and   $13,612,000,
respectively.  The  Company's  equity  in  the  2000  total  revenues  of  these
affiliates was $12,599,000.

Note 6. Impairment of Long-Lived Assets

In accordance with Statement of Financial  Accounting  Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company  evaluates  its  long-lived  assets for  impairment
whenever events or changes in circumstances  indicate that the book value of the
asset may not be  recoverable.  During the fourth  quarter of 2000,  the Company
wrote  down  approximately  $3.4  million of  impaired  long-lived  assets.  The
write-down primarily included approximately $2.0 million of bleach-manufacturing
equipment and $0.8 million of goodwill  associated  with an acquisition  made in
1996.  The  $2.0  million  write-down  of   bleach-manufacturing   equipment  is
attributable to the Company's  decision in the fourth quarter of 2000 to abandon
plans to commence bleach-manufacturing  operations in Elkton, Maryland. The $0.8
million  impairment  of goodwill was  indicated by the  operating  record of the
related business unit. In both cases, the Company recognized impairment when the
future  undiscounted  cash flows of the assets were estimated to be insufficient
to recover its related carrying value.

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 generally that it has meritorious defenses and that none of the
pending  matters  will have an outcome  material to the  financial  condition or
results of operations 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 totals  approximately  $65,000.  The United  States  Environmental
Protection  Agency  ("EPA") has delayed  issuing a decision  regarding  clean-up
methods  and costs.  While it is too soon to  predict  the scope and cost of the
final  remedy  that the EPA will  select,  based  upon the large  number of PRPs
identified,  the Company's small volumetric ranking (approximately 0.5%) and the
identities of the larger PRPs,  the Company  believes that its liability in this
matter will not have a material  effect on the Company's  financial  position or
results of operations.
<PAGE>

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

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

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

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

Other

The Company has a 40% equity  interest in the  Desalination  Company of Trinidad
and Tobago  Ltd.  (Desalcott)  which  owns the  Trinidad  desalination  facility
currently under construction. During 2000 and through the first quarter of 2001,
the  Company  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.  Desalcott entered into a "bridge loan" agreement with a Trinidad bank
providing $60 million in construction  financing.  However, the bridge loan plus
the $20 million equity provided to Desalcott will not provide  sufficient  funds
to  complete  construction  of the  project.  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,  or prior to
completion  of  construction.  If permanent  financing is not obtained  prior to
completion  of  construction,  Desalcott  will be required to obtain  additional
funds  to  complete  construction,  and the  Company  has  committed  to lend to
Desalcott up to $10 million under such circumstances.

Note 8. Long-Term Debt and Notes Payable

Dollars in Thousands                                  2000          1999
------------------------------------------------------------------------
Borrowings outstanding                             $85,956       $33,865
Less installments due within one year               75,045        25,514
------------------------------------------------------------------------
Long-term debt and notes payable                   $10,911      $  8,351
========================================================================


Maturities of borrowings outstanding for the five years ending December 31, 2001
through 2005 are approximately $75,045,000,  $1,336,000,  $1,182,000, $1,210,000
and $1,251,000, respectively.

At December 31, 2000, the Company had domestic credit  arrangements  under which
it could  borrow  up to a total  of $75  million.  During  2000,  the  Company's
revolving  credit agreement with its principal  domestic lender,  Fleet National
Bank (the Bank),  was amended and restated to increase  available  borrowings to
$70 million.  On March 1, 2001,  this agreement was further  amended to increase
the amount  available for  borrowing to $80 million.  In  consideration  of this
increase,  the Company gave the Bank a "springing lien," which would result in a
perfected  security  interest  in the  assets of the  Company  and its  domestic
subsidiaries  (other than real estate and motor  vehicles) in the event that the
Company (i) defaults  under any of its  covenants or  obligations  in the credit
agreement,  or (ii) fails to pay down  outstanding  borrowings  under the credit
agreement to $50 million by May 15, 2001.  The credit  agreement does not permit
the  Company to pay cash  dividends.  Borrowings  from the Bank under the credit

<PAGE>

agreement as amended  bear  interest at 0.25% above the prime rate or from 1% to
2.25% above the London Interbank  Offered Rate (LIBOR),  at the Company's option
(the precise interest rate depends on the Company's leverage ratio). At December
31,  2000,  the  prime  rate was 9.5% and  LIBOR  was  6.48%.  The  Company  had
outstanding borrowings of $65,000,000 and $14,500,000 against its domestic lines
of credit at December 31, 2000 and 1999, respectively.

Under  foreign  lines of credit,  excluding  those  related to specific  project
financing, the Company can borrow an aggregate of approximately $11.9 million at
interest  rates of LIBOR plus 1/2% (6.98% at December 31, 2000),  at the lending
bank's Base Cost of Funds plus 1 3/4% (7.0% at December  31, 2000) or at lending
rates of 7.3% and 8.0%. The Company had  outstanding  borrowings of $3.0 million
and $6.4  million  against  these lines of credit at December 31, 2000 and 1999,
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% (8.69% at December 31, 2000) 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 $9.2 million and $7.2 million against these lines
of credit at December 31, 2000 and 1999, 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, 2000 and 1999
was 8% and 7%, 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 before income taxes and minority
interest were as follows:

Dollars in Thousands                    2000            1999            1998
----------------------------------------------------------------------------
U.S.                                $(16,974)        $15,317         $21,468
Non-U.S.                              14,750          14,414          11,415
----------------------------------------------------------------------------
(Loss) income before income taxes
   and minority interest           $  (2,224)        $29,731         $32,883
============================================================================


The provision for income taxes consisted of the following:

Dollars in Thousands                       2000        1999           1998
--------------------------------------------------------------------------
  Federal                               $ 3,264     $(1,353)     $  (4,925)
  Foreign                                (5,304)     (3,814)        (2,386)
  State                                     704        (632)          (891)
---------------------------------------------------------------------------
Current provision                        (1,336)     (5,799)        (8,202)
---------------------------------------------------------------------------
  Federal                                   555      (4,176)        (2,317)
  Foreign                                 1,546         318            116
  State                                      (9)        135           (277)
---------------------------------------------------------------------------
Deferred benefit (provision)              2,092      (3,723)        (2,478)
---------------------------------------------------------------------------
Benefit (provision) for income taxes $   756        $(9,522)      $(10,680)
===========================================================================

<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, 2000, the
tax effects of the temporary differences were:

                                                  Deferred      Deferred Tax

Dollars in Thousands                            Tax Assets       Liabilities
----------------------------------------------------------------------------
Depreciation                                    $        -           $20,253
Goodwill amortization                                    -             1,189
Inventory valuation                                  1,654                 -
Bad debt reserves                                    1,130                 -
Legal                                                1,842                 -
Accrued commissions                                    488                 -
Profit on sales to foreign subsidiaries                862                 -
Insurance accruals                                     745                 -
U.S. tax on unrepatriated earnings                       -             7,535
Alternative minimum tax                              2,307                 -
Foreign withholding taxes on
   undistributed earnings                                -             1,684
Foreign deferred liabilities, net                        -             3,305
Tax effect of currency translation loss              7,013                 -
Net operating loss carryforwards                     5,642                 -
Miscellaneous                                        3,512             4,715
----------------------------------------------------------------------------
                                                    25,195            38,681
Valuation allowance for deferred tax assets         (1,800)                -
----------------------------------------------------------------------------
Deferred income taxes                              $23,395           $38,681
============================================================================


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

                                             2000         1999          1998
----------------------------------------------------------------------------
U.S. Federal statutory rate                  34.0%        35.0%          35.0%
Foreign Sales Corporation                   (33.9)        (2.1)         (2.1)
Goodwill                                     34.3          1.0           0.4
State income taxes, net of
   federal tax benefit                      (20.5)         1.7           2.3
Foreign income taxed at
  different rates                             7.2         (3.8)         (3.0)
Non-deductible charges                       13.9          0.4           0.3
Other, net                                   (1.0)        (0.2)         (0.4)
-----------------------------------------------------------------------------
Effective tax rate                           34.0%        32.0%         32.5%
=============================================================================


At December 31, 2000, the Company had unused tax loss  carryforward  benefits of
$5,642,000.  Domestic tax loss  carryforwards of $5,158,000  include  $3,912,000
which expire in fiscal years 2004 to 2009 and $1,246,000  which expires in 2020.
Foreign tax loss  carryforwards  of $484,000 expire  beginning in 2005.  Because
certain  provisions of the tax law may limit the  utilization of these benefits,
the Company has established  $1,800,000 as a valuation allowance at December 31,
2000 and 1999.  In the event this  valuation  allowance is no longer  considered
necessary,  the valuation  allowance will reduce the related entity's  goodwill.
The remaining  unreserved portion is considered to be realizable.  $2,112,000 of
the net unused tax loss carryforward  benefit of $3,842,000 has been included in
other assets at December 31, 2000.

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  $6,426,000,
$5,065,000 and $3,932,000 as of December 31, 2000, 1999 and 1998, respectively.

<PAGE>

Note 10.  Stockholders' Equity

The Company adopted the disclosure-only  provision 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 2000,  1999 and 1998:  expected
volatility of 37.4% in 2000, 30.5% in 1999 and 27.3% in 1998;  weighted-average,
risk-free  interest  rates of 6.25%,  5.27%  and  5.41% in 2000,  1999 and 1998,
respectively;  and expected lives of five years.  No dividends are assumed.  The
weighted-average  fair value of options  granted during 2000,  1999 and 1998 was
$9.65, $11.07 and $10.43, respectively.

At  December  31,  2000,  the  Company had the  stock-based  compensation  plans
described below. The Company applies  Accounting  Principles Board Opinion 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 loss as reported for 2000 of $1.9
million would have been $4.9  million,  net income as reported for 1999 of $19.4
million would have been $16.6 million and 1998 net income of $21.4 million would
have been $19.3  million.  Diluted  earnings  per share as reported  for 2000 of
$(0.12) would have been $(0.30),  1999 diluted earnings per share of $1.18 would
have been $1.01 and 1998  diluted  earnings  per share of $1.31  would have been
$1.18.  Basic earnings per share as reported for 2000 of $(0.12) would have been
$(0.30),  1999 basic  earnings per share of $1.20 would have been $1.03 and 1998
basic earnings per share of $1.33 would have been $1.20. 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 are
immediately  exercisable,  are 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  will be granted  under the 1979  Plan.  At
December 31, 2000 and 1999,  respectively,  no shares were reserved for issuance
of additional options 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
as  well as 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, 2000
and 1999,  there were  527,256 and 835,950  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.

Under the 1986 Stock Option Plan for  Non-Employee  Directors (the "1986 Plan"),
options are granted automatically 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, 2000 and 1999,  36,000 and
54,000 shares,  respectively,  were reserved for issuance of additional  options
under the 1986 Plan.

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.  In 2000,  17,937  shares  were  granted  under  the

<PAGE>

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. No shares were issued
under the 1994 Plan in 1999 or 1998. As of December 31, 2000, a total of 280,178
shares remain reserved for issuance.

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 92,853
shares were reserved for issuance under the Fee Plan as of December 31, 2000.

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 were exercised.

A summary of the status of the  Company's  stock option plans as of December 31,
2000,  1999 and 1998 and  changes  during  the years  ending  on those  dates is
presented below:
<TABLE>
<CAPTION>

                                                      2000                    1999                   1998
------------------------------------------------------------------     -------------------    ------------------
<S>                                             <C>         <C>          <C>        <C>         <C>       <C>
                                                         Weighted-               Weighted-             Weighted-
                                                           Average                 Average               Average
                                                          Exercise                Exercise              Exercise
Options in Thousands                          Options        Price     Options       Price    Options      Price
------------------------------------------------------------------     -------------------    ------------------

Outstanding at end of prior year                2,734       $30.04       2,796      $29.70      2,035     $29.31
Granted                                           941        22.28          80       30.27        956      29.81
Exercised                                        (163)       16.74          (82)     16.31        (115)    21.25
Canceled                                         (286)       30.70          (60)     33.25         (80)    33.48
----------------------------------------------------------------------------------------------------------------
Outstanding at end of current year              3,226       $28.38       2,734      $30.04      2,796     $29.70
Options exercisable at year-end                 1,835       $30.86       1,918      $30.29      1,814     $29.89
</TABLE>



The following table summarizes the information  about stock options  outstanding
at December 31, 2000:
<TABLE>
<CAPTION>

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 12/31/00         Years             Price    at 12/31/00             Price
<S>                                 <C>             <C>         <C>                 <C>              <C>
$19.75-$26.50                        1,667           6.1        $22.09               842             $22.13
$27.00-$29.88                          903           7.5         29.33               353              29.31
$30.00-$33.81                           29           8.0         32.54                21              33.28
$42.38-$48.25                          627           5.8         43.52               619              43.54
-----------------------------------------------------------------------------------------------------------
$19.75-$48.25                        3,226           6.4        $28.38             1,835             $30.86
</TABLE>
<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, 2000, 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 2000          For the Year Ended 1999         For the Year Ended 1998
--------------------------------------------------------          -----------------------         -----------------------
                                     Net          Per Share          Net           Per Share       Net            Per Share
                                    Loss   Shares    Amount       Income    Shares    Amount     Income     Shares   Amount
-----------------------------------------------------------       --------------------------     --------------------------
<S>                         <C>             <C>      <C>         <C>        <C>        <C>       <C>        <C>       <C>
Basic EPS
  (Loss) income available to
   common stockholders      $    (1,870)    16,243   $(0.12)     $19,361    16,148     $1.20     $21,386    16,077    $1.33
  Effect of dilutive stock options    -          -        -            -       240     (0.02)          -       280    (0.02)
----------------------------------------------------------------------------------------------------------------------------
Diluted EPS                 $    (1,870)    16,243   $(0.12)     $19,361    16,388     $1.18     $21,386    16,357    $1.31
===========================================================================================================================
</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, 2000, 1999 and 1998
were 1,649,000, 1,661,000, and 729,000, 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  $116,152,000  and  $118,495,000  at December 31, 2000 and
1999,  respectively.   The  accumulated  depreciation  for  such  equipment  was
$53,497,000 and $46,964,000 at December 31, 2000 and 1999, respectively.

At December 31, 2000,  future minimum  rentals  receivable  under  noncancelable
operating  leases in the years 2001  through  2005 and later were  approximately
$24,187,000,    $20,800,000,    $19,290,000,    $16,313,000,   $17,591,000   and
$102,557,000, respectively.

The Company  leases  facilities and personal  property  under various  operating
leases.  Future minimum  payments due under lease  arrangements  are as follows:
$4,845,000 in 2001,  $3,363,000 in 2002,  $2,950,000 in 2003, $2,359,000 in 2004
and  $1,815,000  in 2005.  Rent  expense  under these  leases was  approximately
$5,695,000, $4,368,000 and $4,428,000 for 2000, 1999 and 1998, respectively.
<PAGE>

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  $300,000,  $281,000  and  $254,000 in 2000,  1999 and 1998,
respectively.

The Company also has a contributory  defined  benefit pension plan for its 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.

The  following  table sets forth the defined  benefit  plan's  funded status and
amounts  recognized  in the  Company's  balance  sheets at December 31, 2000 and
1999:

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

Change in Benefit Obligation

Benefit obligation as of prior year-end               $14,464          $15,296
Service cost                                            1,055            1,239
Interest cost                                           1,107            1,186
Assumption changes                                      1,932           (4,444)
Actuarial (gain) loss                                    (792)           2,097
Expenses paid                                            (115)            (105)
Benefits paid                                          (1,852)            (805)
-------------------------------------------------------------------------------
Projected benefit obligation as of year-end           $15,799          $14,464
==============================================================================

Change in Plan Assets

Fair value of plan assets as of prior year-end        $16,258          $14,145
Actual return on plan assets                              632             (178)
Employer contributions                                      -            3,201
Expenses paid                                            (115)            (105)
Benefits paid                                          (1,852)            (805)
-------------------------------------------------------------------------------
Fair value of plan assets as of year-end              $14,923          $16,258
==============================================================================

Funded Status

Funded status as of year-end                          $  (876)        $  1,794
Unrecognized transition asset                            (150)            (203)
Unrecognized prior service cost                           375              412
Unrecognized net actuarial loss                         2,824              870
------------------------------------------------------------------------------
Prepaid benefit cost as of year-end                   $ 2,173         $  2,873
==============================================================================


The expense of the defined benefit plan was as follows:

Dollars in Thousands                       2000          1999         1998
--------------------------------------------------------------------------

Components of Net Periodic Benefit Cost

Service cost                             $1,055        $1,239       $1,347
Interest cost                             1,107         1,186          987
Expected return on plan assets           (1,445)       (1,376)      (1,153)
Amortization of transition asset            (53)          (53)         (53)
Amortization of prior service cost           37            37           37
Recognized net actuarial loss                 -           155            1
--------------------------------------------------------------------------
Net periodic benefit cost                $  701        $1,188       $1,166
==========================================================================

<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,  2000,  1999 and 1998;  rate of  compensation  increase of 5.0% at
December 31, 2000 and 4.75% at December 31, 1999 and 1998;  and a discount  rate
of 7.50%, 8.25% and 6.75% at December 31, 2000, 1999 and 1998, 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 $716,000,  $735,000 and $778,000 in 2000, 1999
and 1998, respectively, under this plan.

The Company does not provide post-retirement health care to its employees or any
other significant 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 $96.3 million and $72.9
million of these  guarantees  were  outstanding  at December  31, 2000 and 1999,
respectively.  Approximately  41% of the guarantees  outstanding at December 31,
2000 are  scheduled to expire in 2001.  These  instruments  were  executed  with
creditworthy institutions. The Company periodically enters into foreign exchange
contracts to hedge  certain  operational  and balance  sheet  exposures  against
changes in foreign currency  exchange rates.  Because the impact of movements in
currency exchange rates on foreign exchange contracts offsets the related impact
on the  underlying  items being  hedged,  these  instruments  do not subject the
Company  to risk that  would not  otherwise  result  from  changes  in  currency
exchange rates.  The Company had no foreign  exchange  contracts  outstanding at
December 31, 2000 and 1999.

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.

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 2000 and 1999 were not significant.

Long-term investments,  maturing in 2001, 2003, 2004 and 2005, which the Company
intends to hold to maturity have been  recorded at a net cost of $2,551,000  and
$2,228,000 at December 31, 2000 and 1999, respectively. At December 31, 2000 and
1999,  the Company also had  short-term  investments of $1,105,000 and $195,000,
respectively,  which the Company intends to hold to maturity.  The cost of these
investments approximates fair value.

<PAGE>

Note 15.  Acquisitions

2000 Purchases

Agrinord S.r.l.

At the end of 1999,  the Company  owned a 50%  interest in Agrinord  S.r.l.,  an
Italian  company in the  wastewater  treatment  business,  and accounted for the
investment  using the equity method.  In January 2000,  the Company  acquired an
additional 25% interest in Agrinord  S.r.l.  for a total  ownership  interest of
75%. The original 50% interest was transferred out of investments in affiliates,
and,  together with the  additional  25%  interest,  was accounted for under the
purchase method with the results of Agrinord S.r.l.  included from January 2000.
The total cost of the investment was  approximately $2 million,  and goodwill of
approximately  $1.7 million is being amortized on a  straight-line  basis over a
20-year  period.  Pro forma results of operations have not been presented as the
effect of this acquisition on the financial statements was not material.

Miller Spring Water

In January 2000,  the Company  acquired  substantially  all the assets of Miller
Spring Water for approximately  $1.6 million.  The acquisition was accounted for
under the purchase  method with the results of Miller Spring Water included from
January 1, 2000.  Goodwill of approximately $1.2 million is being amortized on a
straight-line  basis over a 10-year period. Pro forma results of operations have
not been presented as the effect of this acquisition on the financial statements
was not material.  Miller Spring Water is a domestic  company in the five-gallon
bottled water market.

O'Viv Sarl

In  February  2000,  the  Company  acquired  a 100%  interest  in O'Viv Sarl for
approximately $0.8 million. The acquisition was accounted for under the purchase
method with the results of O'Viv Sarl included from February  2000.  Goodwill of
approximately  $0.6 million is being amortized on a  straight-line  basis over a
10-year  period.  Pro forma results of operations have not been presented as the
effect of this acquisition on the financial  statements was not material.  O'Viv
Sarl is a French company in the five-gallon bottled water market.

Coffee de Juan

In March 2000, the Company  acquired  substantially  all the assets of Coffee de
Juan for approximately $1.3 million. The acquisition was accounted for under the
purchase  method  with the results of Coffee de Juan  included  from March 2000.
Goodwill of  approximately  $1.1 million is being  amortized on a  straight-line
basis  over a 10-year  period.  Pro forma  results of  operations  have not been
presented as the effect of this acquisition on the financial  statements was not
material.  Coffee de Juan is a domestic  company in the  office  coffee  service
business.

Prior Years' Purchases

M2 Innovative Solutions, Inc.

In  January  1999,  the  Company  acquired  a  100%  interest  in M2  Innovative
Solutions,  Inc. (now called Ionics Life Sciences,  Inc.) for approximately $2.6
million.  The  acquisition  was accounted for under the purchase method with the
results of Ionics  Life  Sciences  included  from  January 1, 1999.  Goodwill of
approximately  $2.6 million is being amortized on a straight-line  basis over 20
years.  Pro forma results of operations have not been presented as the effect of
this  acquisition  on the financial  statements  was not  material.  Ionics Life
Sciences is a supplier of  ultrapure  water  products  and  services,  including
validated pharmaceutical systems, to the life sciences industry.

Aquarelle SA

In January  1999,  the Company  acquired a 100%  interest in  Aquarelle  SA (now
called Aqua Cool France) for  approximately  $4.4 million.  The  acquisition was
accounted  for under the  purchase  method  with the results of Aqua Cool France
included  from January 1, 1999.  Goodwill of  approximately  $4 million is being
amortized on a straight-line  basis over a 20-year period.  Pro forma results of
operations  have not been  presented  as the effect of this  acquisition  on the
financial  statements was not material.  Aqua Cool France is a French company in
the five-gallon bottled water market.
<PAGE>

Agar Technologies Process and Environmental Control, Ltd.

In January  1999,  the Company  acquired a 100%  interest  in Agar  Technologies
Process and Environmental  Control,  Ltd. (now called Ionics Agar  Environmental
Ltd.) for  approximately  $1.5 million.  The acquisition was accounted for under
the  purchase  method with the results of Ionics Agar  included  from January 1,
1999.   Goodwill  of  approximately   $1.9  million  is  being  amortized  on  a
straight-line basis over 20 years. Pro forma results of operations have not been
presented as the effect of this acquisition on the financial  statements was not
material.  Ionics Agar is an Israeli  company which  produces  instruments  that
monitor, detect and measure oil on water surfaces.

Note 16. Segment Information

In 1998,  the Company  adopted  SFAS No.  131.  At the end of 1998,  the Company
changed  from three  reportable  segments to four  reportable  "business  group"
segments corresponding to a "business group" structure,  summarized below, which
was put into place in the latter part of 1998.

Equipment  Business  Group -  equipment,  supply,  "own and operate" and related
services for  seawater  desalination,  brackish  water  desalination,  water and
wastewater  treatment and food and chemical  processing,  for municipalities and
communities, and for the petrochemical, nuclear and electric utilities, pulp and
paper, chemical processing and related industries.

Ultrapure  Water  Group -  equipment,  supply,  "own and  operate"  and  related
services for the production of ultrapure water for the semiconductor,  power and
pharmaceutical industries.

Consumer  Water Group - equipment  and supply  services for the consumer  market
including bottled water, over and under-the-sink  point-of-use  devices,  carbon
filtering  media,  point-of-entry  systems  for  treating  the entire home water
supply, household bleach, and other cleaning products.

Instrument  Business Group - instruments for the analysis and on-line monitoring
of certain  constituents,  impurities or contaminants in water or wastewater for
industrial and municipal customers.

The  accounting  policies of the four  business  group  segments are the same as
those described in "Significant  Accounting Policies." The Company evaluates the
performance of each business group segment and considers allocation of resources
to it based on earnings before interest,  taxes,  and minority  interest (EBIT),
and the evaluation of EBIT with respect to capital employed.

The business group  structure  reflects the  segmentation  of the product lines,
services,  and markets within defined areas of management  responsibility.  Four
business group managers,  one for each of the reportable segments,  are directly
accountable to, and maintain regular contact,  with the Chief Executive  Officer
to discuss operating activities, financial results, forecasts and plans.

The table on the following page summarizes the Company's  operations by the four
business group segments and "Corporate."  Corporate  includes legal and research
and  development  expenses  not  allocated  to the  business  groups and certain
corporate administrative and insurance costs.

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 15%, 16%
and 23% for 2000,  1999 and 1998,  respectively.  Including  these  U.S.  export
sales, the percentages of total revenues  attributable to activities outside the
U.S. were 42%, 44% and 47% in 2000, 1999 and 1998, respectively.

<PAGE>


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

                                         United

Dollars in Thousands                     States    International         Total

2000

Revenue - unaffiliated customers       $323,071        $151,480       $474,551
Long-lived assets                       174,063         127,162        301,225
------------------------------------------------------------------------------
1999

Revenue - unaffiliated customers       $239,591        $118,626       $358,217
Long-lived assets                       192,416         104,661        297,077
------------------------------------------------------------------------------
1998

Revenue - unaffiliated customers       $242,363        $108,963       $351,326
Long-lived assets                       170,528          85,678        256,206
------------------------------------------------------------------------------

<PAGE>

<TABLE>
<CAPTION>
<S>                                                          <C>           <C>         <C>          <C>       <C>             <C>
                                                            Equipment     Ultrapure    Consumer  Instrument
                                                             Business         Water       Water    Business
Dollars in Thousands                                            Group         Group       Group       Group   Corporate       Total
-----------------------------------------------------------------------------------------------------------------------------------
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, taxes and minority interest (EBIT)    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                                           250,241       138,321     163,281      18,454     (11,141)    559,156
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 from operations                                         14,507         3,842      10,869       2,148      (3,039)     28,327
Equity income                                                     444             -         667           -           -       1,111
Earnings before interest, taxes and minority interest (EBIT)   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
===================================================================================================================================
1998

Revenue - unaffiliated customers                             $129,751      $111,349   $  80,884     $29,342$           -   $351,326
Inter-segment transfers                                         3,916           437           -       1,673      (6,026)          -
Income from operations                                         11,129         7,668      10,686       5,408      (3,341)     31,550
Equity income                                                      78             -         528           -           -         606
Earnings before interest, taxes and minority interest (EBIT)   11,207         7,668      11,214       5,408      (3,341)     32,156
Interest income                                                     -             -           -           -           -       1,058
Interest expense                                                    -             -           -           -           -        (331)
Income before income taxes and minority interest                    -             -           -           -           -      32,883
Capital employed                                              158,189        88,715     122,382      26,879     (42,175)    353,990
Identifiable assets                                           178,197       102,292     135,880      12,587      16,110     445,066
Investments in affiliated companies                             4,081             -       2,976           -           -       7,057
Depreciation and amortization                                  10,554         6,117       9,751         524         268      27,214
Capital expenditures                                           13,625        14,536      12,429       1,310         296      42,196
===================================================================================================================================
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

SELECTED FINANCIAL DATA

Statement of Operations Data

Dollars in Thousands,
<S>                             <C>         <C>     <C>        <C>     <C>         <C>     <C>         <C>      <C>          <C>
Except Per Share Amounts          2000        %       1999       %       1998        %       1997        %        1996         %
--------------------------------------------------------------------------------------------------------------------------------
Revenues                        $474,551    100.0   $358,217   100.0   $351,326    100.0   $352,469    100.0    $326,662     100.0
(Loss) income before income taxes
   and minority interest         (2,224)    (0.5)     29,731     8.3     32,883      9.4     43,222     12.3      39,556      12.1
Net (loss) income                (1,870)    (0.4)     19,361     5.4     21,386      6.1     28,329      8.0      26,503       8.1
(Loss) earnings per basic share   (0.12)                1.20               1.33                1.78                 1.71
(Loss) earnings per diluted share (0.12)                1.18               1.31                1.73                 1.65

</TABLE>

<TABLE>
<CAPTION>

Balance Sheet Data
<S>                               <C>          <C>          <C>          <C>         <C>
Dollars in Thousands                  2000         1999         1998         1997        1996
---------------------------------------------------------------------------------------------
Current assets                    $258,739     $193,802     $187,093     $165,850    $144,422
Current liabilities                173,363       99,475       85,934       66,012      68,173
---------------------------------------------------------------------------------------------
Working capital                     85,376       94,327      101,159       99,838      76,249
Total assets                       577,466      500,906      452,123      406,736     378,589
Long-term debt and notes payable    10,911        8,351        1,519          804       2,132
Stockholders' equity               356,861      361,852      345,598      319,659     292,217

</TABLE>

<TABLE>
<CAPTION>

Selected Quarterly Financial Data (Unaudited)

                                               Earnings Earnings
                                                (Loss)    (Loss)                                                 Earnings  Earnings
Dollars in Thousands,                     Net      Per       Per                                                      Per       Per
Except Per                      Gross  Income    Basic   Diluted                                   Gross       Net  Basic   Diluted
Share Amounts      Revenues    Profit  (Loss)    Share     Share                     Revenues     Profit    Income  Share     Share
-----------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>        <C>      <C>       <C>       <C>                        <C>        <C>        <C>     <C>       <C>
2000                                                              1999
First Quarter      $102,795  $ 30,546 $ 3,562    $0.22     $0.22  First Quarter     $  87,416  $  29,164  $  4,672  $0.29     $0.29
Second Quarter      102,804    32,687   4,215     0.26      0.26  Second Quarter       84,568     29,669     5,104   0.32      0.31
Third Quarter       124,886    33,938   2,926     0.18      0.18  Third Quarter        86,671     30,712     5,369   0.33      0.33
Fourth Quarter      144,066    27,205 (12,573)   (0.77)    (0.77) Fourth Quarter       99,562     30,740     4,216   0.26      0.26
-----------------------------------------------------------------------------------------------------------------------------------
                   $474,551  $124,376 $ (1,870) $(0.12)   $(0.12)                    $358,217   $120,285   $19,361  $1.20     $1.18
===================================================================================================================================
</TABLE>



Common Stock Price Range

2000              High         Low           1999             High        Low
-------------------------------------------------------------------------------

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