IONICS, INCORPORATED
                        ANNUAL REPORT TO STOCKHOLDERS OF
                          IONICS, INCORPORATED FOR THE
                       FISCAL YEAR ENDED DECEMBER 31, 1999

 (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; Board of Directors;  Corporate Officers; Location of Principal
Subsidiaries, Offices and Affiliates Worldwide; Corporate Headquarters; Trading
Information, Form 10-K Annual Report; Annual Meeting; Auditors; and Transfer
Agent and Registrar.)

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

<PAGE>
Ionics, Incorporated

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.  See  Note  15 to the
consolidated  financial statements for a more detailed description of these four
business groups.

RESULTS OF OPERATIONS

1999 Compared to 1998

The  Company  reported a 2.0%  increase in  revenues  and a 9.5%  decline in net
income in 1999.  Operating results continued to be impacted by weakened business
conditions  which led to  highly  competitive  equipment  pricing  pressures  in
several markets,  particularly in the microelectronics industry, which is served
by the Company's  Ultrapure Water Group (UWG), and by a decline in the financial
performance  of the Instrument  Business Group (IBG).  The decline in net income
primarily  reflects lower earnings before interest,  taxes and minority interest
(EBIT) of 49.9% and 60.3% in UWG and IBG,  respectively,  on lower  revenues  of
16.0% and 6.5%,  respectively.  IBG's decline in 1999 is due to comparison  with
unusually  strong  performance  in 1998,  when the  adoption  of new  monitoring
standards by the U.S.  pharmaceutical  industry resulted in very strong sales of
our Total Organic Carbon (TOC) analyzer.  The stronger financial  performance of
the Equipment  Business Group (EBG) partially  offset the decline in the results
of UWG and IBG. EBG  reported  increases in revenues and EBIT of 8.4% and 33.4%,
respectively,  reflecting a stronger capital equipment market,  particularly for
water reuse and "zero liquid  discharge"  applications,  and improved  operating
margins on the water  supply  business in the  Caribbean.  Consumer  Water Group
(CWG) revenues increased by 19.4%, primarily reflecting continued revenue growth
in both the bottled water and home water businesses. EBIT for CWG increased only
2.9%,  primarily due to costs relating to acquiring new customers or opening new
locations,  as well as costs associated with converting to a new computer system
for all Aqua Cool(R) Pure Bottled Water domestic locations.

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  resulting
from increased sales of capital  equipment,  particularly  water reuse equipment
and desalination  equipment.  The revenue increase also reflects engineering and
design work begun on a $10 million  contract to  manufacture a storage system to
manage the containment of spent nuclear fuels.

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 by that industry.

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, 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, in 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.
<PAGE>
Ionics, Incorporated

1998 Compared to 1997

Revenues

The Company's revenues totaled $351.3 million in 1998, down slightly from $352.5
million  in 1997.  Revenues  were  higher in CWG,  IBG and UWG,  while  revenues
declined in EBG.

EBG  revenues  declined by $16.1  million in 1998 as compared to 1997 because of
reduced  capital  equipment  sales;  the  expiration  of the Santa Barbara water
supply contract in early 1997; the sale of bleach manufacturing equipment in the
U.K. in the fourth quarter of 1997; and the  consolidation of the Company's food
processing business in early 1998.

UWG   revenues   increased   by  2.5%  in  1998.   Revenues  in  1998  from  the
microelectronics industry were down significantly from 1997 revenues,  primarily
due to a slowdown in capital spending by that industry.  This decline was offset
by additional  revenues in 1998  resulting  from the  acquisition  of a majority
interest in Enersave  Engineering Systems Sdn Bhd, a Malaysian  corporation (now
Ionics Enersave),  in the third quarter of 1997. The decline in profits relating
to the reduction of revenues from the microelectronics industry was greater than
the profits contributed by Ionics Enersave.

The 10.7% increase in revenues of CWG in 1998 compared to 1997 was due to growth
in the Company's bottled water business. The bottled water business expanded its
customer  base in both the  United  States and the  United  Kingdom,  while also
pursuing  product  line  expansions  and  realizing a higher  average  price per
bottle.

The revenues of IBG increased by 17.5% in 1998 compared to 1997,  largely driven
by  the  pharmaceutical   industry's   increased   purchases  of  the  Company's
instruments for measuring TOC levels.

Cost of Sales and Operating Expense Comparisons

Cost of sales as a percentage  of revenues  was 66.4%,  67.4% and 67.2% in 1999,
1998 and 1997, respectively.

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% average gross  margins),  while
UWG sales declined 16.0% in 1999 (with average gross margins of 24.5%).

Cost of sales as a percentage of revenues decreased during 1998 compared to 1997
for  EBG and  CWG,  and  increased  for UWG and  IBG.  The  decrease  in the EBG
percentage  reflected  primarily an improvement in its product mix. The decrease
in the CWG  percentage  reflected an overall  improvement  in prices in the home
water business.  The increase in the UWG percentage  resulted from the continued
competitive  environment in the  microelectronics  industry for ultrapure  water
capital  equipment.  The  increase  in the IBG  percentage  reflected  increased
spending associated with manufacturing and service department operations.

Operating  expenses as a percentage  of revenues were 25.7% in 1999, an increase
from  23.6%  in 1998  and  20.7%  in 1997.  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

<PAGE>
Ionics, Incorporated

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.

Operating  expenses as a percentage of revenues also  increased in 1998 compared
to 1997.  This  increase  reflected  the fact  that  revenues  from  EBG,  which
generally has lower selling  costs  relative to revenues than do other  business
groups, decreased in 1998. Additionally,  the Company experienced revenue growth
in IBG and CWG,  which  generally  have higher  selling costs as a percentage of
revenues than do the other business groups. Operating expenses also increased in
1998 due to expenses associated with the Company's Y2K program,  increased legal
expenses, and expanded marketing initiatives, as well as the Company's continued
commitment to investment in its research and development programs.

Interest, Equity Income and Taxes

Interest  income was $1.0 million,  $1.1 million and $1.2 million in 1999,  1998
and 1997, respectively.  Interest expense, net of capitalized interest, was $0.7
million,  $0.3  million and $0.9 million in 1999,  1998 and 1997,  respectively.
Capitalized  interest was $1.0  million,  $0.6 million and $0.2 million in 1999,
1998 and 1997, respectively.  The higher interest costs incurred in 1999 reflect
the  Company's  higher  average  borrowings in that year. A large portion of the
borrowings  financed  plant and equipment  construction  and,  accordingly,  the
interest related to such long-term projects was capitalized.

Equity  income  increased  to $1.1  million in 1999 from $0.6  million  and $0.5
million in 1998 and 1997,  respectively.  The increase in equity  income in 1999
resulted primarily from the Company's investment in a Mexican joint venture.

The Company's  effective tax rate was 32.0% in 1999,  32.5% in 1998 and 33.0% in
1997. The reduction in the effective tax rate in 1999 was primarily due to a tax
holiday  declared for 1999 in Malaysia where Ionics Enersave  conducts the major
part of its  operations  (and  where its  earnings  are  considered  permanently
invested). The reduction of the tax rate in 1998 compared to 1997 was due to the
Company's foreign sales corporation  providing a proportionately  larger benefit
than in prior years.

Net income  decreased 9.5% to $19.4 million in 1999 compared to $21.4 million in
1998. Net income in 1998 was 24.5% lower than 1997 net income of $28.3 million.

FINANCIAL CONDITION

At December 31, 1999, the Company had total assets of $500.9 million compared to
total  assets of $452.1  million at December  31,  1998.  The increase in assets
primarily reflects an increase in property, plant and equipment,  which included
capital  expenditures  of $61.5  million  and  $42.2  million  in 1999 and 1998,
respectively.  Accounts receivable also increased by $8.6 million in 1999. Other
current assets increased by approximately $6.7 million in 1999, primarily due to
an income tax refund,  a related interest  receivable and additional  funding of
the  Company's  Retirement  Plan.  The  increase  in  other  assets  in 1999 was
primarily due to goodwill  relating to the acquisitions of Ionics Life Sciences,
Ionics Agar and Aquarelle SA.

Working capital decreased to $94.3 million in 1999 as compared to $101.2 million
in 1998,  and the Company's  current ratio  decreased to 2.0 in 1999 from 2.2 in
1998.

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. Net cash
provided by operating  activities  decreased by $1.9 million in 1998 compared to
1997, due primarily to lower net income and an increase in accounts  receivable,
offset by an increase in accounts payable and accrued expenses.

Net cash used by investing  activities  increased by $27.5  million in 1999 over
1998 and increased by $5.8 million in 1998 over 1997. These increases  primarily
reflect  capital  expenditures  made  in 1999  and  1998  and  the  acquisitions
completed in 1999.  The Company  spent $8.5 million in 1999 in acquiring  Ionics
Life Sciences,  Ionics Agar and Aquarelle SA. The capital  expenditures of $61.5
million and $42.2 million in 1999 and 1998, respectively, were generally made to

<PAGE>
Ionics, Incorporated

expand the Company's  bottled water operations and to expand or build additional
manufacturing and "own and operate" facilities. Cash from operations, borrowings
of current and long-term debt and proceeds from stock option exercises  provided
funds for these expenditures. In 1997, funds were also provided through the sale
of certain fixed assets, including bleach-manufacturing equipment in the U.K.

In 1999, net cash provided by financing  activities was $26.1 million,  a change
of $28.9 million from the $2.8 million that was used by financing  activities in
1998.  This change  resulted  primarily  from the higher level of short-term and
long-term borrowings at December 31, 1999 from the prior year-end.  In 1998, net
cash used by financing activities increased by $4.1 million as compared to 1997.
The change was primarily  due to a reduction in cash  obtained  from  short-term
borrowings.

The Company maintains several lines of credit, including domestic lines totaling
$35 million,  which are  available to meet working  capital  needs.  The Company
anticipates  increasing its domestic  lines of credit in 2000.  Foreign lines of
credit, excluding those for specific project financing, total approximately $6.6
million.  The Company has arranged two lines of credit totaling $8.2 million for
its  controlled  affiliate  in  Barbados  to  provide  project  financing  for a
desalination  plant.  In  addition,   the  Company  has  several  facilities  to
accommodate its foreign trade  requirements.  The Company believes that its cash
of $13.2 million at the beginning of 2000,  together with cash from  operations,
lines of credit and foreign trade  facilities are adequate to meet its currently
anticipated needs.

Significant  expenditures  in 2000 are  anticipated  to include  investments  in
additional "own and operate"  facilities and the continued  expansion of bottled
water operations.

In addition,  the Company anticipates incurring in 2000 approximately $2 million
in costs  relating  primarily to providing  assistance  to a project  company in
obtaining  financing for, and preliminary project management and design work on,
a $120 million seawater  desalination project in Trinidad announced in September
1999.  Such costs would be additional to the  approximately  $1 million in costs
related to this  project  incurred as of December 31,  1999.  Financing  for the
project has not yet been obtained. Should financing not be obtained, these costs
would be expensed.

Inflationary  increases in material and labor costs remained moderate during the
last three  years.  The  Company  has worked 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.

YEAR 2000 (Y2K) DISCLOSURE

The Company  undertook a program in years 1998 and 1999 to assure the ability of
its  information  and  manufacturing  systems to properly  recognize and process
date-sensitive  information  beginning on January 1, 2000. To date,  the Company
has  completed  the  transition  from  calendar  1999 to 2000  with no  reported
significant  impact to  operations.  The  Company  will  continue to monitor Y2K
related  matters at suppliers and customers,  as well as the Company's  systems,
facilities  and  products,  to  ensure  that  latent  defects  do  not  manifest
themselves over the next several months.  The Company spent  approximately  $1.5
million in 1998 through  1999,  excluding  the cost of new  systems,  on its Y2K
program.  Costs  to be  expended  on this  program  in 2000 are  expected  to be
insignificant.

Although a number of minor information technology projects have been deferred as
a result of the priority given to the Y2K program, no significant  projects have
been delayed which would materially affect the Company's financial condition.

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
will adopt the  provisions  of SFAS No. 133 for the fiscal  year 2001 which
commences  on January 1, 2001.  This  Statement  should not have a material
effect on the Company's financial statements.

<PAGE>
Ionics, Incorporated

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, 1999.
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, 1999,  the Company had $25.5 million of short-term
debt and $8.4 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  exposure  to  foreign  currency  exchange  rate
fluctuations  has been and is expected to remain modest due to the fact that the
operations of its  international  subsidiaries are primarily  conducted in their
respective local currencies.

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 of latent Y2K defects;  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.

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 (the "Company"),  at
December 31, 1999 and December 31, 1998,  and the results of its  operations and
its cash flows for each of the three  years in the  period  ended  December  31,
1999, in conformity with accounting  principles generally accepted in the United
States.  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 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 the opinion expressed above.

/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
February 22, 2000

<PAGE>
Ionics, Incorporated

<TABLE>
<CAPTION>

Consolidated Statements of Operations

For the years ended December 31
<S>                                                          <C>             <C>          <C>
Amounts in Thousands, Except Per Share Amounts                   1999            1998         1997
--------------------------------------------------------------------------------------------------

Revenues:
  Equipment Business Group                                   $140,655        $129,751     $145,844
  Ultrapure Water Group                                        93,562         111,349      108,601
  Consumer Water Group                                         96,569          80,884       73,046
  Instrument Business Group                                    27,431          29,342       24,978
--------------------------------------------------------------------------------------------------
                                                              358,217         351,326      352,469
                                                              ------------------------------------
Costs and expenses:
  Cost of sales of Equipment Business Group                   101,744          92,826      104,638
  Cost of sales of Ultrapure Water Group                       70,636          87,039       80,964
  Cost of sales of Consumer Water Group                        54,052          45,261       41,510
  Cost of sales of Instrument Business Group                   11,500          11,716        9,908
  Research and development                                      7,066           6,635        5,410
  Selling, general and administrative                          84,892          76,299       67,593
--------------------------------------------------------------------------------------------------
                                                              329,890         319,776      310,023
                                                              ------------------------------------

Income from operations                                         28,327          31,550       42,446
Interest income                                                   961           1,058        1,197
Interest expense                                                 (668)           (331)        (947)
Equity income                                                   1,111             606          526
--------------------------------------------------------------------------------------------------

Income before income taxes and minority interest               29,731          32,883       43,222
Provision for income taxes                                      9,522          10,680       14,280
--------------------------------------------------------------------------------------------------

Income before minority interest                                20,209          22,203       28,942
Minority interest expense                                         848             817          613
--------------------------------------------------------------------------------------------------

Net income                                                   $ 19,361        $ 21,386     $ 28,329
==================================================================================================

Earnings per basic share                                     $   1.20        $   1.33     $   1.78
==================================================================================================

Earnings per diluted share                                   $   1.18        $   1.31     $   1.73
==================================================================================================

Shares used in basic earnings per share calculations           16,148          16,077       15,936
Shares used in diluted earnings per share calculations         16,388          16,357       16,409

</TABLE>

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


<PAGE>
Ionics, Incorporated

<TABLE>
<CAPTION>

Consolidated Balance Sheets

December 31

Dollars in Thousands, Except Share Amounts                                                   1999             1998
------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>             <C>
Assets
Current assets:

    Cash and cash equivalents                                                            $ 13,169         $ 28,770
    Short-term investments                                                                    195              359
    Notes receivable, current                                                               5,374            4,144
    Accounts receivable                                                                   120,407          111,844
    Receivables from affiliated companies                                                   1,231            2,329
    Inventories                                                                            33,880           31,549
    Other current assets                                                                   14,816            8,098
    Deferred income taxes                                                                   4,730                -
------------------------------------------------------------------------------------------------------------------
       Total current assets                                                               193,802          187,093
------------------------------------------------------------------------------------------------------------------
Notes receivable, long-term                                                                10,027            8,824
Investments in affiliated companies                                                        10,752            7,057
Property, plant and equipment, net                                                        227,250          195,683
Other assets                                                                               59,075           53,466
------------------------------------------------------------------------------------------------------------------
       Total assets                                                                      $500,906         $452,123
==================================================================================================================


Liabilities and Stockholders' Equity
Current liabilities:

     Notes payable and current portion of long-term debt                                 $ 25,514         $  6,873
     Accounts payable                                                                      41,867           37,361
     Other current liabilities                                                             32,094           38,052
     Income taxes                                                                               -            3,648
------------------------------------------------------------------------------------------------------------------
       Total current liabilities                                                           99,475           85,934
------------------------------------------------------------------------------------------------------------------
Long-term debt and notes payable                                                            8,351            1,519
Deferred income taxes                                                                      26,803           17,036
Other liabilities                                                                           4,425            2,036
Commitments and contingencies                                                                   -                -
Stockholders' equity:
     Common stock, par value $1, authorized shares: 55,000,000 in 1999 and 1998;
        issued and outstanding: 16,201,483 in 1999 and 16,116,649 in 1998                  16,201           16,117
     Additional paid-in capital                                                           159,288          157,571
     Retained earnings                                                                    199,304          179,943
     Accumulated other comprehensive income                                               (12,905)          (7,889)
     Unearned compensation                                                                    (36)            (144)
------------------------------------------------------------------------------------------------------------------
       Total stockholders' equity                                                         361,852          345,598
------------------------------------------------------------------------------------------------------------------
       Total liabilities and stockholders' equity                                        $500,906         $452,123
==================================================================================================================
</TABLE>


The accompanying notes are an integral part of these financial statements.
<PAGE>
Ionics, Incorporated
<TABLE>
<CAPTION>

Consolidated Statements of Cash Flows

For the years ended December 31
<S>                                                                           <C>            <C>             <C>
Dollars in Thousands                                                            1999           1998            1997
-------------------------------------------------------------------------------------------------------------------

Operating activities:

   Net income                                                                $19,361        $21,386         $28,329
   Adjustments to reconcile net income to net cash provided by
       operating activities:
     Depreciation and amortization                                            26,464         25,519          25,833
     Amortization of intangibles                                               2,333          1,695           1,214
     Provision for losses on accounts and notes receivable                     2,643          1,319           1,408
     Deferred income tax provision                                             3,723          2,478           5,571
     Compensation expense on restricted stock awards                             108            108             108
     Changes in assets and liabilities, net of effects of businesses
       acquired:
       Notes receivable                                                       (3,539)          (168)         (2,264)
       Accounts receivable                                                   (11,405)       (14,695)         (7,865)
       Inventories                                                            (2,081)        (2,773)         (2,395)
       Deferred income taxes and other current assets                        (11,566)        (1,461)          2,594
       Investments in affiliates                                              (4,232)        (2,815)         (1,106)
       Accounts payable and accrued expenses                                  (1,640)        20,267          (5,219)
       Income taxes                                                            5,234           (218)          2,470
       Other                                                                   1,502         (4,851)           (988)
-------------------------------------------------------------------------------------------------------------------
                            Net cash provided by operating activities         26,905         45,791          47,690
                                                                              -------------------------------------

Investing activities:

   Additions to property, plant and equipment                                (61,515)       (42,196)        (33,510)
   Disposals of property, plant and equipment                                  2,177          1,882          10,114
   Sale and maturity of short-term investments                                   164            137               -
   Acquisitions, net of cash acquired                                         (8,513)             -         (11,016)
-------------------------------------------------------------------------------------------------------------------
                            Net cash used by investing activities            (67,687)       (40,177)        (34,412)
                                                                              -------------------------------------

Financing activities:

   Principal payments on current debt                                        (10,393)       (15,339)        (17,077)
   Proceeds from borrowings of current debt                                   28,762          9,716          14,937
   Principal payments on long-term debt                                         (756)            (8)            (31)
   Proceeds from borrowings of long-term debt                                  7,093            419             363
   Proceeds from stock option plans                                            1,424          2,447           3,188
-------------------------------------------------------------------------------------------------------------------
                           Net cash provided (used) by financing activities   26,130         (2,765)          1,380
                                                                              -------------------------------------
Effect of exchange rate changes on cash                                         (949)           134          (1,140)
                                                                              -------------------------------------
Net change in cash and cash equivalents                                      (15,601)         2,983          13,518
Cash and cash equivalents at end of prior year                                28,770         25,787          12,269
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of current year                             $13,169        $28,770         $25,787
===================================================================================================================
</TABLE>

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


<PAGE>
Ionics, Incorporated
<TABLE>
<CAPTION>


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

Balance December 31,  1996                15,823,205    $15,823     $149,337    $130,228    $ (2,811)      $(360)      $292,217

Comprehensive income:
   Net income                                      -          -            -      28,329           -           -         28,329
   Translation adjustments,
     net of tax of $2,690                          -          -            -           -      (6,315)          -         (6,315)
                                                                                                                       --------
Total comprehensive income                                                                                               22,014
                                                                                                                       --------

Stock options exercised                      163,214        163        3,025           -           -           -          3,188
Tax benefit of stock option activity               -          -        1,421           -           -           -          1,421
Other activity                                14,866         15          696           -           -           -            711
Amortization of unearned compensation              -          -            -           -           -         108            108
-------------------------------------------------------------------------------------------------------------------------------

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

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

<PAGE>
Ionics, Incorporated

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 $1,686,000,  $1,470,000 and $1,380,000 in 1999, 1998
and 1997, respectively, is included in revenues.

Most  equipment  leases to customers are accounted for as operating  leases and,
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  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.
<PAGE>
Ionics, Incorporated

Investments

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

Notes Receivable

Notes  receivable have been reported at their estimated  realizable  value.  The
allowance for  uncollectible  notes receivable  totaled $213,000 and $363,000 at
December 31, 1999 and 1998, 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 $957,000,
$616,000  and  $238,000  in  1999,  1998 and  1997,  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

Impairment losses resulting from an excess of carrying value of long-term assets
over their fair values are recognized as such losses are identified.

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  the  realizability  of  goodwill  based upon
expectations  of  non-discounted  cash  flows  and  operating  income  for  each
subsidiary having a material goodwill balance.

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  gains/(losses)
included in income before income taxes and minority  interest  totaled  $11,000,
$(28,000) and $100,000 for 1999, 1998 and 1997, respectively.
<PAGE>
Ionics, Incorporated

Income Taxes

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

Earnings Per Share

Basic  earnings per share is computed  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 commences
on January 1, 2001.  This Statement  should not have a material effect on the
Company's financial statements.

<TABLE>
<CAPTION>

Note 2. Consolidated Balance Sheet Details
<S>                                             <C>                 <C>
Dollars in Thousands                             1999                1998
-------------------------------------------------------------------------
Raw materials                                $ 20,216            $ 19,164
Work in process                                 8,913               8,523
Finished goods                                  4,751               3,862
-------------------------------------------------------------------------
Inventories                                  $ 33,880            $ 31,549
=========================================================================

Land                                         $  8,352            $  8,194
Buildings                                      44,858              41,594
Machinery and equipment                       299,303             259,885
Other, including furniture,
  fixtures and vehicles                        49,119              44,267
-------------------------------------------------------------------------
                                              401,632             353,940
Accumulated depreciation                     (174,382)           (158,257)
-------------------------------------------------------------------------
Property, plant and equipment, net           $227,250            $195,683
=========================================================================

Goodwill                                     $ 62,631            $ 53,377
Accumulated amortization                       (9,164)             (6,831)
Other                                           5,608               6,920
-------------------------------------------------------------------------
Other assets                                 $ 59,075            $ 53,466
=========================================================================

Customer deposits                            $  2,671            $  3,965
Accrued commissions                             2,362               2,203
Accrued expenses                               27,061              31,884
-------------------------------------------------------------------------
Other current liabilities                    $ 32,094            $ 38,052
=========================================================================

</TABLE>
<PAGE>
Ionics, Incorporated

<TABLE>
<CAPTION>

Note 3.   Supplemental Schedule of Cash and Non-Cash Flow Information
<S>                                                 <C>              <C>               <C>
Dollars in Thousands                                    1999             1998              1997
-----------------------------------------------------------------------------------------------
Cash payments for interest
   and income taxes:
   Interest                                          $ 1,740           $  685           $   634
   Taxes                                             $ 7,534           $8,481           $ 2,860
Liabilities assumed in
   conjunction with acquisitions:
   Fair value of assets purchased                    $11,300           $    -           $19,352
   Net cash paid                                      (8,513)               -           (11,016)
-----------------------------------------------------------------------------------------------
Liabilities assumed                                  $ 2,787           $    -           $ 8,336
===============================================================================================
</TABLE>

<TABLE>
<CAPTION>

Note 4.  Accounts Receivable
<S>                                       <C>              <C>
Dollars in Thousands                        1999             1998
-----------------------------------------------------------------
Billed receivables                      $ 80,647         $ 74,059
Unbilled receivables                      43,167           40,313
Allowance for doubtful accounts           (3,407)          (2,528)
-----------------------------------------------------------------
Accounts receivable                     $120,407         $111,844
=================================================================
</TABLE>

Unbilled  receivables  represent the excess of revenues recognized on percentage
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, 1999 are expected to be billed during 2000.

Billed  receivables  include  retainage  amounts of $1,416,000 and $3,654,000 at
December 31, 1999 and 1998,  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
-------------------------------------------------------------------------------
Agrinord S.r.l. - Italy                                                   50%
Aguas Tratadas de Cadereyta S.A. de C.V. - Mexico                         20%
Aguas Tratadas de Madero, S.A. de C.V. - Mexico                           20%
Aqua Cool Kuwait - Kuwait                                                 49%
Aqua Cool Saudi Arabia - Saudi Arabia                                     40%
Aqua Design Ltd. - Cayman Islands                                         39%
Jalal-Ionics, Ltd. - Bahrain                                              40%
Mega a.s. - Czech Republic                                                25%
Watlington Waterworks, Ltd. - Bermuda                                     26%
Yuasa-Ionics Co., Ltd. - Japan                                            50%


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

Activity in investments in affiliated companies:
<PAGE>
Ionics, Incorporated

<TABLE>
<CAPTION>
<S>                                               <C>          <C>         <C>
Dollars in Thousands                               1999       1998        1997
------------------------------------------------------------------------------
Investments at end
   of prior year                                $ 7,057     $3,983      $2,908
Equity in earnings                                1,111        606         526
Distributions received                             (475)      (396)       (575)
Cumulative translation
   adjustments                                     (540)       172          (7)
Reclassification of Watlington
   Waterworks from other
   assets resulting from change in
   ownership interest                                 -      1,208           -
Additional investments                            3,599      1,484       1,131
------------------------------------------------------------------------------
Investments at end of current year              $10,752     $7,057      $3,983
==============================================================================
</TABLE>


At December 31, 1999, the Company's  equity in the total assets and in the total
liabilities  of  its  foreign   affiliates  was  $24,171,000  and   $13,419,000,
respectively.  The  Company's  equity  in  the  1999  total  revenues  of  these
affiliates was $7,962,000.

Note 6.  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
business of the Company.

The Company  was  notified in 1992 that it is a  potentially  responsible  party
(PRP)  at a  Superfund  site,  Solvent  Recovery  Services  of  New  England  in
Southington,  Connecticut (the "SRS Site"). Ionics' share of assessments to date
for site work totals  approximately  $60,000. The ultimate site clean-up cost is
currently not expected to exceed $59 million, of which the Company's share would
not exceed $308,000  including the amounts already assessed against the Company.
While it is too soon to predict the scope and cost of the final  remedy that the
EPA will select,  based upon the large number of PRPs identified,  the Company's
small volumetric ranking  (approximately  0.5%) and the identities of the larger
PRPs,  the Company  believes  that its  liability in this matter will not have a
material effect on the Company or its financial position.

The Attorney General of the Commonwealth of Massachusetts has been conducting an
investigation into certain former operations of a division of the Company during
portions of the years 1991 through 1995.  The Company has  cooperated  with this
investigation of possible  violations of environmental  statutes and regulations
that relate to one facility that ceased  operations in 1995.  The Company cannot
predict the outcome of this matter, but it may result in  administrative,  civil
or criminal charges and/or monetary payments.

On March 27,  1998,  the  Company was served  with a summons  and  complaint  in
connection with a lawsuit now captioned United States Filter  Corporation,  U.S.
Filter/Ionpure,  Inc., IP Holding Company,  Millipore  Corporation and Millipore
Investment Holdings Limited v. Ionics, Incorporated,  filed in the U.S. District
Court, District of Massachusetts (Boston). Plaintiffs allege that the Company is
infringing a certain reissue patent,  which issued on March 10, 1998, by making,
selling,  offering  to sell and using the  Company's  electrodeionization  (EDI)
systems within the United States.  On June 10, 1999, the Company was served 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, which pioneered the development of the EDI process over 30
years ago and holds a number of patents related to EDI technology, believes that
it has  valid  defenses  to the  plaintiffs'  infringement  claims  and  intends
vigorously  to  defend  itself  in this  litigation,  which is in the  discovery
stages.
<PAGE>
Ionics, Incorporated

Other Matters

As of December 31, 1999,  the Company had incurred $1 million of costs  relating
primarily to providing  assistance to a project  company in obtaining  financing
for,  and  preliminary  project  management  and design work on, a $120  million
seawater  desalination  project in Trinidad announced in September 1999. Project
financing  for  this  project  has  not  yet  been  obtained.  If it  were to be
determined  that financing for this project was not available,  such costs would
then be expensed, along with approximately $2 million expected to be incurred in
2000 prior to a determination concerning project financing.
<TABLE>
<CAPTION>

Note 7.   Long-Term Debt and Notes Payable
<S>                                                <C>            <C>
Dollars in Thousands                                  1999          1998
------------------------------------------------------------------------
Borrowings outstanding                             $33,865        $8,392
Less installments due within one year               25,514         6,873
------------------------------------------------------------------------
Long-term debt and notes payable                   $ 8,351        $1,519
========================================================================
</TABLE>


Maturities of borrowings outstanding for the five years ending December 31, 2000
through 2004 are approximately $25,514,000,  $2,191,000,  $810,000, $787,000 and
$770,000, respectively.

The Company has domestic credit  arrangements  with various banks under which it
can borrow up to an aggregate of  approximately  $35 million,  at the prime rate
(8.5% at December 31, 1999),  the money market rate (5.75% at December 31, 1999)
or the London  Interbank  Offered  Rate (LIBOR) plus 1/2% (6.68% at December 31,
1999),  at the  Company's  option.  The Company had  outstanding  borrowings  of
$14,500,000  against  these lines of credit at December 31, 1999.  There were no
borrowings against these lines of credit at December 31, 1998.

Under  foreign  lines of credit,  excluding  those  related to specific  project
financing,  the Company can borrow an aggregate of approximately $6.6 million at
interest rates of LIBOR plus 1/2% (6.68% at December 31, 1999) or at the lending
bank's Base Cost of Funds plus 1 3/4% (5.25% at December 31, 1999).  The Company
had outstanding  borrowings of $6.4 million and $1.2 million against these lines
of credit at December 31, 1999 and 1998, respectively.

The Company  has  arranged  two lines of credit  totaling  $8.2  million for its
controlled affiliate in Barbados to provide project financing for a desalination
plant at LIBOR plus 2% (8.18% at December  31,  1999) for its $5.5  million line
and at a fixed rate of 8% for its $2.7 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 $7.2 million
against  these lines of credit at December 31, 1999.  These lines of credit were
not open at December 31, 1998.

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  typical  to such  agreements
relating  to  working  capital  and to  consolidated  tangible  net  worth.  The
weighted-average  interest rate on all  borrowings at December 31, 1999 and 1998
was approximately 7% and 10%, respectively.
<PAGE>
Ionics, Incorporated

Note 8.  Income Taxes

The  components of domestic and foreign  income before income taxes and minority
interest were as follows:
<TABLE>
<CAPTION>
<S>                                  <C>             <C>             <C>
Dollars in Thousands                    1999            1998            1997
----------------------------------------------------------------------------
U.S.                                 $15,317         $21,468         $27,450
Non-U.S.                              14,414          11,415          15,772
----------------------------------------------------------------------------
Income before income taxes
   and minority interest             $29,731         $32,883         $43,222
============================================================================
</TABLE>

<TABLE>
<CAPTION>

The provision for income taxes consisted of the following:
<S>                                   <C>          <C>         <C>
Dollars in Thousands                    1999           1998        1997
-----------------------------------------------------------------------
  Federal                             $1,353        $ 4,925     $ 5,891
  Foreign                              3,814          2,386       2,276
  State                                  632            891         542
-----------------------------------------------------------------------
Current provision                      5,799          8,202       8,709
-----------------------------------------------------------------------
  Federal                              4,176          2,317       3,599
  Foreign                               (318)          (116)        996
  State                                 (135)           277         976
-----------------------------------------------------------------------
Deferred provision                     3,723          2,478       5,571
-----------------------------------------------------------------------
Provision for income taxes            $9,522        $10,680     $14,280
=======================================================================
</TABLE>
<PAGE>
Ionics, Incorporated

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, 1999, the
tax effects of the temporary differences were:

<TABLE>
<CAPTION>

<S>                                            <C>                   <C>
Dollars in Thousands                            Tax Assets       Liabilities
----------------------------------------------------------------------------
Depreciation                                       $     -           $19,310
Goodwill amortization                                    -               876
Inventory valuation                                  2,641                 -
Bad debt reserves                                      324                 -
Accrued commissions                                    542                 -
Profit on sales to foreign subsidiaries                862                 -
Insurance accruals                                     720                 -
U.S. tax on unrepatriated earnings                       -             5,692
Alternative minimum tax                              2,307                 -
Foreign withholding taxes on
   undistributed earnings                                -             1,956
Foreign deferred liabilities, net                        -             3,856
Tax effect of currency translation loss              4,786                 -
Net operating loss carryforwards                     4,099                 -
Miscellaneous                                        2,320             3,703
----------------------------------------------------------------------------
                                                    18,601            35,393
Valuation allowance for deferred tax assets         (1,800)                -
----------------------------------------------------------------------------
Deferred income taxes                              $16,801           $35,393
============================================================================
</TABLE>

The United  States  statutory  corporate tax rate is reconciled to the Company's
effective tax rate as follows:
<TABLE>
<CAPTION>
<S>                                          <C>          <C>            <C>
                                             1999         1998          1997
----------------------------------------------------------------------------
U.S. Federal statutory rate                  35.0%        35.0%         35.0%
Foreign Sales Corporation                    (2.1)        (2.1)         (1.5)
Goodwill                                      1.0          0.4           0.1
State income taxes, net of
   federal tax benefit                        1.7          2.3           2.3
Foreign income taxed at
  different rates                            (3.8)        (3.0)         (3.3)
Other, net                                    0.2         (0.1)          0.4
----------------------------------------------------------------------------
Effective tax rate                           32.0%        32.5%         33.0%
============================================================================
</TABLE>


At December 31, 1999, the Company had unused tax loss  carryforward  benefits of
$4,099,000  (expiring in fiscal years 2004 to 2009).  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, 1999 and 1998.
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.  $2,299,000 of the net unused
tax loss carryforward  benefit has been included in other assets at December 31,
1999.

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  $5,065,000,
$3,932,000 and $2,843,000 as of December 31, 1999, 1998 and 1997, respectively.

<PAGE>
Ionics, Incorporated

Note 9.  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 1999,  1998 and 1997:  expected
volatility of 30.5% in 1999, 27.3% in 1998 and 23.4% in 1997;  weighted-average,
risk-free  interest  rates of 5.27%,  5.41%  and  6.33% in 1999,  1998 and 1997,
respectively;  and expected lives of five years.  No dividends are assumed.  The
weighted-average  fair value of options  granted during 1999,  1998 and 1997 was
$11.07, $10.43 and $15.88, respectively.

At  December  31,  1999,  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 income as reported for 1999 of
$19.4  million would have been $16.6  million,  1998 net income of $21.4 million
would have been $19.3  million and 1997 net income of $28.3  million  would have
been $26.7  million.  Diluted  earnings  per share as reported for 1999 of $1.18
would have been $1.01,  1998 diluted earnings per share of $1.31 would have been
$1.18 and 1997 diluted earnings per share of $1.73 would have been $1.63.  Basic
earnings  per share as reported  for 1999 of $1.20  would have been $1.03,  1998
basic  earnings per share of $1.33 would have been $1.20 and 1997 basic earnings
per share of $1.78 would have been $1.67.  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, 1999 and 1998,  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 will be 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. At December 31, 1999 and 1998, there were 835,950
and 526,373 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, 1999 and 1998,  54,000 and
62,500 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.  No shares were issued  under the 1994 Plan in 1999,
1998 and 1997.  As of  December  31,  1999,  a total of  280,178  shares  remain
reserved for issuance.
<PAGE>
Ionics, Incorporated

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 97,199
shares were reserved for issuance under the Fee Plan as of December 31, 1999.

A summary of the status of the  Company's  stock option plans as of December 31,
1999,  1998 and 1997 and  changes  during  the years  ending  on those  dates is
presented below:
<TABLE>
<CAPTION>
<S>                                             <C>         <C>          <C>        <C>         <C>       <C>
                                                      1999                    1998                   1997
------------------------------------------------------------------     -------------------    ------------------
                                                         Weighted-               Weighted-             Weighted-
                                                           Average                 Average               Average
                                                          Exercise                Exercise              Exercise
Options in Thousands                          Options        Price     Options       Price    Options      Price
------------------------------------------------------------------     -------------------    ------------------

Outstanding at end of prior year                2,796       $29.70       2,035      $29.31      2,200     $28.39
Granted                                            80        30.27         956       29.81         55      45.99
Exercised                                         (82)       16.31        (115)      21.25       (163)     19.56
Canceled                                          (60)       33.25         (80)      33.48        (57)     37.80
----------------------------------------------------------------------------------------------------------------
Outstanding at end of current year              2,734       $30.04       2,796      $29.70      2,035     $29.31
Options exercisable at year-end                 1,918       $30.29       1,814      $29.89      1,964     $29.44

</TABLE>

The following table summarizes the information  about stock options  outstanding
at December 31, 1999:
<TABLE>
<CAPTION>

Options in Thousands                              Options Outstanding                Options Exercisable
--------------------                              -------------------                -------------------
<S>                                     <C>          <C>            <C>                <C>       <C>
                                               Weighted-
                                                 Average          Weighted                     Weighted-
                                    Number     Remaining           Average         Number        Average
Range of                       Outstanding      Contract          Exercise    Exercisable       Exercise
Exercise Prices                at 12/31/99         Years             Price    at 12/31/99          Price

$12.25                                  91           0.7            $12.25             82        $12.25
$19.75-$25.63                          916           3.7             22.07            916         22.07
$27.00-$29.88                          991           8.5             29.38            205         29.22
$30.00-$33.81                           30           8.8             32.47             21         33.39
$42.38-$48.25                          706           6.8             43.48            694         43.50
-------------------------------------------------------------------------------------------------------
$12.25-$48.25                        2,734           6.2            $30.04          1,918        $30.29
</TABLE>

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, 1999, 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.
<PAGE>
Ionics, Incorporated
<TABLE>
<CAPTION>

Note 10. Earnings Per Share Calculations (EPS)
<S>                             <C>         <C>        <C>       <C>        <C>        <C>       <C>        <C>       <C>
Dollars in Thousands,
Except Per Share Amounts            For the Year Ended 1999          For the Year Ended 1998        For the Year Ended 1997
------------------------            -----------------------          -----------------------        -----------------------
                                     Net          Per Share          Net           Per Share        Net           Per Share
                                  Income   Shares    Amount       Income    Shares    Amount     Income     Shares   Amount
-----------------------------------------------------------       --------------------------     --------------------------
Basic EPS
  Income available to
  common stockholders            $19,361   16,148     $1.20      $21,386    16,077     $1.33    $28,329     15,936    $1.78
  Effect of dilutive stock
  options                              -      240      (.02)           -       280      (.02)         -        473     (.05)
---------------------------------------------------------------------------------------------------------------------------
Diluted EPS                      $19,361   16,388     $1.18      $21,386    16,357     $1.31    $28,329     16,409    $1.73
===========================================================================================================================
</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, 1999 and 1998 were
1,661,000 and 729,000, respectively.

Note 11. 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  $118,495,000  and  $102,498,000  at December 31, 1999 and
1998,  respectively.   The  accumulated  depreciation  for  such  equipment  was
$46,964,000 and $42,539,000 at December 31, 1999 and 1998, respectively.

At December 31, 1999,  future minimum  rentals  receivable  under  noncancelable
operating  leases in the years 2000  through  2004 and later were  approximately
$29,960,000,    $26,414,000,    $24,178,000,    $21,905,000,   $19,968,000   and
$126,994,000, respectively.

The Company  leases  facilities and personal  property  under various  operating
leases.  Future minimum  payments due under lease  arrangements  are as follows:
$4,253,000 in 2000,  $3,178,000 in 2001,  $2,742,000 in 2002, $2,108,000 in 2003
and  $2,076,000  in 2004.  Rent  expense  under these  leases was  approximately
$4,368,000, $4,428,000 and $3,928,000 for 1999, 1998 and 1997, respectively.

Note 12. 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  Bridgeville,
Pennsylvania Fabricated Products Division.  Company contributions to the defined
contribution  plan are made  from  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 $281,000, $254,000 and $253,000 in 1999, 1998 and 1997, respectively.
<PAGE>
Ionics, Incorporated

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, 1999 and
1998:
<TABLE>
<CAPTION>
<S>                                                   <C>              <C>
Dollars in Thousands                                     1999             1998
------------------------------------------------------------------------------
Change in Benefit Obligation

Benefit obligation as of prior year-end               $15,296          $13,591
Service cost                                            1,239            1,347
Interest cost                                           1,186              987
Actuarial gain                                         (2,347)            (161)
Expenses paid                                            (105)            (117)
Benefits paid                                            (805)            (351)
------------------------------------------------------------------------------
Projected benefit obligation as of year-end           $14,464          $15,296
==============================================================================

Change in Plan Assets

Fair value of plan assets as of prior year-end        $14,145          $12,731
Actual return on plan assets                             (178)           1,132
Employer contributions                                  3,201              750
Expenses paid                                            (105)            (117)
Benefits paid                                            (805)            (351)
------------------------------------------------------------------------------
Fair value of plan assets as of year-end              $16,258          $14,145
==============================================================================

Funded Status

Funded status as of year-end                          $ 1,794          $(1,151)
Unrecognized transition asset                            (203)            (256)
Unrecognized prior service cost                           412              449
Unrecognized net actuarial loss                           870            1,817
------------------------------------------------------------------------------
Prepaid benefit cost as of year-end                   $ 2,873          $   859
==============================================================================
</TABLE>
<TABLE>
<CAPTION>

The expense of the defined benefit plan was as follows:
<S>                                   <C>               <C>              <C>
Dollars in Thousands                    1999              1998             1997
-------------------------------------------------------------------------------

Components of Net Periodic
Benefit Cost

Service cost                          $1,239            $1,347           $1,172
Interest cost                          1,186               987              932
Expected return on plan assets        (1,376)           (1,153)            (879)
Amortization of transition asset         (53)              (53)             (53)
Amortization of prior service cost        37                37               37
Recognized net actuarial loss            155                 1               48
-------------------------------------------------------------------------------
Net periodic benefit cost             $1,188            $1,166           $1,257
===============================================================================
</TABLE>


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% in
1999, 1998 and 1997; rate of compensation increase of 4.75% in 1999 and 1998 and
of 5.0% in 1997; and a discount rate of 8.25% in 1999, 6.75% in 1998 and 7.0% in
1997.
<PAGE>
Ionics, Incorporated

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 $735,000,  $778,000 and $749,000 in 1999, 1998
and 1997, 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 13.  Financial Instruments

Off-Balance-Sheet Risk

The Company  issues  letters of credit and  performance  bonds as guarantees for
various  performance and bid obligations.  Approximately $72.9 million and $30.1
million of these  guarantees  were  outstanding  at December  31, 1999 and 1998,
respectively.  Approximately  39% of the guarantees  outstanding at December 31,
1999 are  scheduled to expire in 2000.  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, 1999 and had $318,000 of foreign exchange contracts  outstanding at
December 31, 1998.

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 1999 and 1998 were not significant.

Long-term  investments,  maturing  in 2001,  2003 and 2004,  which  the  Company
intends to hold to maturity have been  recorded at a net cost of $2,228,000  and
$1,640,000 at December 31, 1999 and 1998, respectively. At December 31, 1999 and
1998,  the Company also had  short-term  investments  of $195,000 and  $359,000,
respectively,  which the Company intends to hold to maturity.  The cost of these
investments approximates fair value.

Note 14.  Acquisitions

1999 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.  Additional payments of up to $1,425,000 may be required depending upon
the achievement of certain future operating results. Such payments will increase
the purchased goodwill of Ionics Life Sciences, Inc.
<PAGE>
Ionics, Incorporated

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 for
approximately $4.4 million. The acquisition was accounted for under the purchase
method with the results of Aquarelle SA 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.
Aquarelle is a French company in the five-gallon bottled water market.

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.
Additional  payments may be required depending upon the achievement of
certain  future  operating  results.  Such  payments will increase the
purchased goodwill of Ionics Agar Environmental Ltd.

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.

Prior Years' Purchases

Enersave Engineering Systems Sdn Bhd

In September  1997,  the Company  acquired a 55% ownership  interest in Enersave
Engineering Systems Sdn Bhd (now Ionics Enersave Sdn Bhd) for approximately $9.6
million.  An  additional  payment  of  $135,000  was made in 1999 based upon the
achievement of certain operating  results.  This payment increased the purchased
goodwill of Ionics Enersave.

The  acquisition was accounted for under the purchase method with the results of
Ionics Enersave included from September 1, 1997. Goodwill of approximately $10.5
million is being  amortized on a  straight-line  basis over 30 years.  Pro forma
results of operations have not been presented as the effect of this  acquisition
on the  financial  statements  was not  material.  Fiscal 1997  revenues for the
period prior to September 1997 were approximately $10 million.  Ionics Enersave,
a Malaysian  company with  operations  in Malaysia  and China,  is a supplier of
water and wastewater treatment systems and services in Southeast Asia.

Watertec Engineering Pty. Ltd.

Effective  September  1,  1997,  the  Company  acquired  100% of the  assets and
liabilities  of  Watertec   Engineering   Pty.  Ltd.,  as  Trustee  of  Watertec
Engineering Unit Trust and two related  corporations  (together Ionics Watertec)
for an initial  payment of $1.9 million.  An additional  payment of $305,000 was
made in 1998  based upon the  achievement  of certain  operating  results.  This
payment increased the purchased goodwill of Ionics Watertec.

The  acquisition was accounted for under the purchase method with the results of
Ionics Watertec included from September 1, 1997.  Goodwill of approximately $1.7
million is being  amortized over 30 years.  Pro forma results of operations have
not been presented as the effect of this acquisition on the financial statements
was not material. Fiscal 1997 revenues for the period prior to September 1, 1997
were approximately $2.3 million.  Ionics Watertec is involved in the manufacture
and supply of ozonation systems for water  disinfection and systems for chemical
metering.
<PAGE>
Ionics, Incorporated

Note 15. 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.  Segment  information  for prior
years has been restated to reflect this change.

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 Operating  Officer
and 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  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 16%, 23%
and 22% for 1999,  1998 and 1997,  respectively.  Including  these  U.S.  export
sales, the percentages of total revenues  attributable to activities outside the
U.S. were 44%, 47% and 41% in 1999, 1998 and 1997, respectively.

<PAGE>
Ioncs, Incorporated

<TABLE>
<CAPTION>

Information about the Company's operations by geographic area follows:
<S>                                     <C>             <C>            <C>
                                         United
Dollars in Thousands                     States    International         Total
------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------
1997

Revenue - unaffiliated customers        $264,604        $ 87,865       $352,469
Long-lived assets                        156,020          76,517        232,537
-------------------------------------------------------------------------------
</TABLE>

<PAGE>
Ionics, Incorporated

<TABLE>
<CAPTION>



<S>                                                          <C>           <C>         <C>          <C>                    <C>
                                                            Equipment     Ultrapure    Consumer  Instrument
                                                             Business         Water       Water    Business
Dollars in Thousands                                            Group         Group       Group       Group   Corporate       Total
-----------------------------------------------------------------------------------------------------------------------------------
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
===================================================================================================================================
1997
Revenue - unaffiliated customers                             $145,844      $108,601    $ 73,046     $24,978    $      -    $352,469
Inter-segment transfers                                         3,086           804           -         685      (4,575)          -
Income from operations                                         17,811        13,649       9,045       4,570      (2,629)     42,446
Equity income (loss)                                               85           (95)        536           -           -         526
Earnings before interest, taxes and minority interest (EBIT)   17,896        13,554       9,581       4,570      (2,629)     42,972
Interest income                                                     -             -           -           -           -       1,197
Interest expense                                                    -             -           -           -           -        (947)
Income before income taxes and minority interest                    -             -           -           -           -      43,222
Capital employed                                              147,791        89,111     106,617      26,643     (37,615)    332,547
Identifiable assets                                           157,207        90,649     132,305      12,101      10,491     402,753
Investments in affiliated companies                             1,201             -       2,782           -           -       3,983
Depreciation and amortization                                  12,208         5,250       8,960         415         214      27,047
Capital expenditures                                           11,386        11,532       9,787         563         242      33,510
===================================================================================================================================
</TABLE>

<PAGE>
Ionics, Incorporated

SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

Statement of Operations Data
<S>                           <C>         <C>     <C>        <C>     <C>         <C>     <C>         <C>      <C>          <C>
Dollars in Thousands,
Except Per Share Amounts          1999        %       1998       %       1997        %       1996        %        1995         %
--------------------------------------------------------------------------------------------------------------------------------
Revenues                      $358,217    100.0   $351,326   100.0   $352,469    100.0   $326,662    100.0    $257,293     100.0
Income before income taxes
   and minority interest        29,731      8.3     32,883     9.4     43,222     12.3     39,556     12.1      31,609      12.3
Net income                      19,361      5.4     21,386     6.1     28,329      8.0     26,503      8.1      21,025       8.2
Earnings per basic share          1.20                1.33               1.78                1.71                 1.45
Earnings per diluted share        1.18                1.31               1.73                1.65                 1.39

</TABLE>

<TABLE>
<CAPTION>

Balance Sheet Data
<S>                                                     <C>          <C>          <C>          <C>         <C>
Dollars in Thousands                                        1999         1998         1997         1996        1995
-------------------------------------------------------------------------------------------------------------------
Current assets                                          $193,802     $187,093     $165,850     $144,422    $122,387
Current liabilities                                       99,475       85,934       66,012       68,173      60,279
-------------------------------------------------------------------------------------------------------------------
Working capital                                           94,327      101,159       99,838       76,249      62,108
Total assets                                             500,906      452,123      406,736      378,589     322,044
Long-term debt and notes payable                           8,351        1,519          804        2,132         182
Stockholders' equity                                     361,852      345,598      319,659      292,217     253,044
</TABLE>

<TABLE>
<CAPTION>

Selected Quarterly Financial Data (Unaudited)
<S>               <C>       <C>                <C>       <C>                        <C>        <C>        <C>      <C>       <C>
                                             Earnings   Earnings                                                 Earnings  Earnings
Dollars in Thousands,                              Per       Per                                                      Per       Per
Except Per                      Gross     Net    Basic   Diluted                                   Gross       Net  Basic   Diluted
Share Amounts      Revenues    Profit  Income    Share     Share                     Revenues     Profit    Income  Share     Share
-----------------------------------------------------------------------------------------------------------------------------------
1999                                                              1998
First Quarter      $ 87,416  $ 29,164 $ 4,672    $ .29     $ .29  First Quarter      $ 78,974   $ 28,285   $ 6,008  $ .37     $ .37
Second Quarter       84,568    29,669   5,104      .32       .31  Second Quarter       80,267     26,821     4,620    .29       .28
Third Quarter        86,671    30,712   5,369      .33       .33  Third Quarter        88,876     27,999     5,183    .32       .32
Fourth Quarter       99,562    30,740   4,216      .26       .26  Fourth Quarter      103,209     31,379     5,575    .35       .34
-----------------------------------------------------------------------------------------------------------------------------------
                   $358,217  $120,285 $19,361    $1.20     $1.18                     $351,326   $114,484   $21,386  $1.33     $1.31
===================================================================================================================================

</TABLE>

<TABLE>
<CAPTION>

Common Stock Price Range
<S>                       <C> <C>       <C> <C>                                      <C> <C>        <C> <C>
1999                       High         Low                 1998                     High           Low
-----------------------------------------------------------------------------------------------------------

First Quarter             $35 3/4       $24 7/8            First Quarter             $45 13/16      $37 7/8
Second Quarter             36 11/16      29 3/8            Second Quarter             45 1/2         34 13/16
Third Quarter              36 15/16      27 1/4            Third Quarter              37             22 1/2
Fourth Quarter             33 1/4        25 1/2            Fourth Quarter             35 1/8         22 1/2

</TABLE>