UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549 __________________________________ FORM 10-K (Mark One) [X]

  ANNUAL REPORT PURSUANT TO SECTION 13 OR
  15(d) OF THE SECURITIESEXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2000OR[ 
  ]

  TRANSITION REPORT PURSUANT TO SECTION 13 OR
  15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the transition period from ________ to
  __________
  Commission File No. 1-12714OSMONICS, INC.(Exact name of registrant as specified in
  its charter)Minnesota

  41-0955959(State or other jurisdiction of
  incorporation or organization)

  (I.R.S. Employer Identification No.)5951 Clearwater Drive, Minnetonka,
  Minnesota

  55343(Address of principal executive offices)

  (Zip Code)(952) 933-2277(Registrant's telephone number)Securities
  registered pursuant to Section 12(b) of the Act:Common Shares, par value $0.01 per share

  New York Stock Exchange(Title of each class)

  (Name of each exchange on which registered)Securities
  registered pursuant to Section 12(g) of the Act:None.
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X          No Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this form 10-K.  [X].


As
of March 21, 2001, 14,432,026 Common Shares were outstanding.  The aggregate market value of the Common
Shares held by non-affiliates of the Registrant on such date (based upon the
closing price of such shares on the New York Stock Exchange on
March 21, 2001) was $112,136,842.  DOCUMENTS INCORPORATED
BY REFERENCE Portions
of the Annual Report to Shareholders for the fiscal year ended December 31,
2000 (the "Annual Report to Shareholders"), are incorporated by
reference into Parts II and IV. 
Portions of the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 9, 2001 (the "Proxy Statement"), and
to be filed within 120 days after the Registrant's fiscal year ended December 31, 2000,
are incorporated by reference into Part III.  PART I ITEM 1. 
BUSINESS The following discussion contains certain information and other
forward-looking statements that involve a number of risks and
uncertainties.  The actual results of
Osmonics could differ materially from the Company's historical results of
operations and those discussed in the forward-looking statements.  See "Certain Factors" and other
portions of this Form 10-K for discussion of some of these risks and
uncertainties. Osmonics,
Inc., founded in 1969, and its wholly-owned subsidiaries (the
"Company") design, manufacture and market a wide range of products
used in the filtration, separation and processing of fluids ranging from
complete fluid processing systems to replaceable components used in
purification, filtration, and separation equipment.  The Company classifies its products into three segments, namely
Filtration and Separations, Process Water and Household Water. Development of Business In
addition to developing the Company's product line through internal research and
development, the Company has expanded its business through a series of
acquisitions.  Recent major acquisitions
in the last five years include: 

  Desalination Systems- In July 1996, the Company acquired
  Desalination Systems, Inc. ("Desal"), a manufacturer of crossflow
  filtration membrane and membrane elements that are marketed worldwide.  Desal, which has facilities in Vista,
  California has products that extend the range of membranes and membrane
  elements previously offered by the Company. 
  The acquisition extended the Company's distribution network for such
  products.

  AquaMatic- In February 1997, the Company
  acquired AquaMatic, Inc., a Rockford, Illinois-based company offering a line
  of specialty valves and controllers for the water conditioning market, which
  are sold through the Company's existing distribution channels.




  Micron Separations, Inc.- In February 1998, the Company
  acquired Micron Separations, Inc. ("MSI"), a Westborough,
  Massachusetts-based developer and manufacturer of microfilter membrane and
  membrane products for diagnostic, laboratory and industrial use. These
  products expand the Company's range of nylon and cellulosic membrane
  applications.  The products are sold
  through the Company's existing distribution channels.

  Membrex Corp.- In April 1998, the Company acquired
  Membrex Corp. of Fairfield, New Jersey. 
  The acquisition gives the Company the most hydrophilic UF membrane in
  the market.  This patented membrane is
  primarily used to separate oil from water and is also used in a variety of
  applications in biotechnology, laboratory and petrochemical processes.
  Membrex also has a patented machine using its UF membrane, which separates
  oil from aqueous chemical cleaners, used in parts cleaning and other
  industrial and commercial applications. 
  Some Membrex products are sold through an exclusive agreement with
  Safety-Kleen Corp. and the remainder through the Company's existing
  distribution channels.

  ZyzaTech Water Systems, Inc. In July 1999, the Company acquired
  ZyzaTech Water Systems, Inc. (ZyzaTech), a Seattle, Washington-based
  manufacturer of medical and pharmaceutical water purification and fluid
  handling products.  ZyzaTech products
  are being sold through their existing distribution channels, offering a
  broadened line of hemodialysis products.  Business Segments The
Company's products are divided into three primary business segments, namely,
Filtration and Separations, Process Water and Household Water. Filtration and Separations: The
Company's Filtration and Separations group consist primarily of membranes,
filter media, membrane elements and filter cartridges.  The filtration media and membrane are
produced primarily from polymers or polymer-based compounds. Membranes
are generally sheets of material that, due to their unique characteristics, can
separate various materials from a fluid. 
Membrane elements are the combination of membrane, support materials and
connections, which allows the membrane to be broadly utilized. Membrane
elements are typically replaced every 6 to 60 months, depending upon the
severity of the application.  The
Company manufactures most of the membrane material and membrane elements used
in its own systems, and also manufactures membrane and membrane elements for
other original equipment manufacturers (OEM's) who include them as component
parts in their products.


The
Company's crossflow membranes are used in many bioengineering processes such as
the production of high fructose corn sugar, enzyme purification, and
purification of pharmaceuticals produced by biological processes.  Other uses include water purification
applications in hemodialysis, semiconductor manufacturing, production of pure
water for beverages, production of ultrapure pharmaceutical and boiler feed
water, industrial water purification, oil/water separation and waste removal
for pollution control compliance. The
Company is registered with the United States Food and Drug Administration for
the manufacture and sale of certain membrane elements used in biological
preparations. The
Company markets its microfiltration normal flow membrane for use in a variety
of laboratory and medical diagnostic applications.  Numerous applications exist for the Company's microfilters
because of unique features, including use in diagnostics, air monitoring and in
laboratory procedures for cancer and other research. The
Company markets several types of replaceable cartridge filters. Cartridge
filters consist of the various membranes and filtration media manufactured by
the Company and third parties together with various end caps and other parts
that allow them to be used and replaced in filtration equipment and
systems.  These cartridge filters
include depth cartridge filters, pleated cartridge filters, and rolled
cartridge filters. Cartridge
filters are manufactured in a range of pore sizes and particulate retention
ratings.  Cartridge filters are designed
to retain particles in the filters.  As
a result, cartridge filters are typically replaced at intervals of eight hours
to four weeks, depending on the particular application. Process Water: The
Companys Process Water group manufactures and sells a broad range of equipment
products ranging from large independent fluid treatment systems custom designed
for a particular customer and its related filtration requirements to
instruments used to determine the amount of a particular substance in a
fluid.  The Company's filtration
equipment utilizes a wide range of filtration techniques including: crossflow filtration
(which includes reverse osmosis, nanofiltration, ultrafiltration and
microfiltration), normal filtration (which includes microfiltration and
particle filtration), coalescing filtration, ion exchange, clarification,
chromatography, ozonation and distillation. 
As a result, the Company's Equipment is used in a broad range of
applications from complete fluid processing systems used in beverage production
to water for high performance boilers used in power generation.  The Company's Equipment products are
manufactured in multiple locations throughout the United States. The
Company manufacturers and sells crossflow and normal filtration machines.  Such machines are comprised of one or more
membrane elements, cartridge filters, pumps, valves, controls, transformers,
heat exchangers, pipes and a steel frame on which the components are
mounted.  The size and number of
membrane elements and filters can vary greatly.  Pumps, pipes and frames of various sizes can be combined and
configured to accommodate the membrane elements or filters required for various
fluid handling or separation tasks.


The
systems sold by the Company are comprised of one or more machines or pieces of
equipment designed and manufactured by the Company as well as ancillary
equipment, such as additional pumps, heat exchangers and holding tanks.  The type, size and number of machines and
the ancillary equipment included in a system will vary with the nature and size
of the fluid separation task. The
Company is a major manufacturer and marketer of machines and systems used for
the production of pure for water for artificial kidney dialysis and is
registered with the U.S. FDA for the manufacture of Class II medical devices
used to purify and process water for hemodialysis. The
Company manufactures and sells a line of multi-stage centrifugal pumps.  These pumps were developed by the Company to
meet the need for dependable high pressure pumps and are available in 60
standard sizes with flows ranging from 3 gallons per minute to 500 gallons per
minute and pressure capabilities from 25 pounds per square inch (psi) to
500 psi.  The pumps are capable of
operating in series to obtain 1000 psi for seawater desalting and other high
pressure applications.  The Company
recently developed an energy recovery turbine that complements its centrifugal
pumps primarily for use in desalting seawater with reverse osmosis. The
Company manufactures and markets equipment to generate ozone from electricity
using corona discharge.  Ozone is
becoming increasingly important as a bactericide and water purifier because it
kills bacteria, virus and giardia cysts 10 to 300 times faster than
chlorine.  Ozone is also effective in
oxidizing trace organic materials in water which are precursors of the
carcinogenic trihalomethanes.  Ozone can
also be used to purify solvent-contaminated groundwater and is often used to
de-color water and wastewater. The
Company also manufactures and markets electronic controllers to operate
precision valves for water conditioning; flow control and measuring devices and
instrumentation;housings and specialty holders and devices for containing and
retaining various membranes and filters; analog and digital products for
chemical water treatment and monitoring; and instruments used to measure and control
conductivity, pH, ORP, chlorine and specific ions.  The instruments are capable of being used in local operating
network (LON) communications and data acquisition. Household Water: The
Company is a leader in the manufacture of the controllers and valves used to
effect ion exchange technology.  The
most commonly used ion exchange process is for water softening where the ions
of calcium and magnesium are replaced with sodium to reduce soap usage, improve
boiler operation and improve cleaning. 
Another ion exchange application is to polish ultrapure water for
electronics manufacture and high-pressure boiler feed. The
Company also manufactures and sells automated chlorination units for
residential and farm water system disinfection.


In addition, the Company manufactures and
sells home reverse osmosis (HRO) membrane elements and cartridge filters to
OEMs who package them into systems for use in homes, offices and retail
vending establishments to produce purified drinking water. Segment Sales For
the twelve months of 2000, Filtration and Separations was 40% of total sales,
Process Water was 40% of total sales and Household Water made up 20% of total
sales.  For the twelve months of 1999,
Filtration and Separations was 42% of total sales, Process Water was 38% of
total sales and Household Water made up 20% of total sales. As
a result of a Company-wide reorganization on January 1, 2000, this sales
comparison is only available for the 24 months detailed above.  Restatement of prior periods' results under
this method of reporting was deemed impracticable due to the anticipated costs
and unavailability of such financial information. Sales and Marketing The
Companys broad range of products are used in the purification of water and
industrial solutions, dewatering and recycling of commercial and industrial
fluids, pollution control and seawater desalting.  The Company's principal domestic and international markets, from
which it derives more than 50% of its sales, include the potable water, health
care, biotechnology, food and beverage, electronics, chemical processing and
power generation industries. The
Company focuses the marketing of its products through targeted selling efforts
in four main regions of the world: 1.  USA and Canada 2.  Mexico, Central and South
America 3.  Euro/Africa 4.  Asia/Pacific These sales efforts are supported by
application engineers and customer service personnel. The
Company markets its engineered systems and equipment through its direct sales
force and third-party integrators.  The
Company's other equipment products in the Process Water and Household Water
products are marketed to a network of independent distributors and value-added
resellers with the help of Company district managers.  These value-added resellers provide worldwide installation
service and stocking of a wide range of the Company's equipment.  Filtration and Separations products are sold
through a worldwide network of independent distributors.  Some sales are made directly to certain of
the Company's largest customers and to other manufacturers of filtration
equipment and systems.


The
Company's marketing activities include appearances at trade shows, direct
marketing campaigns, advertisements in professional and trade journals and
appearances before professional organizations. 
The Company participates with its customers in planning the systems in
which its products are to be used, particularly if new applications are
involved.  In some cases, the sale of a
system designed for a particular customer may result from an engineering and
service relationship which has extended over several years. Research and Development Research
and development activities emphasize product development and applied research,
with the goal of developing proprietary products.  Such expenditures totaled $7,886,000 in 2000, $7,694,000 in 1999,
and $9,913,000 in 1998. Patents and Trademarks The
Company has been granted domestic and certain foreign trademarks on numerous
product names, and on its logotypes. 
The Company holds domestic and foreign patents on certain of its filter
media, membranes, filters, controlling valves, machine designs and other
products.  The Company has also from
time to time acquired businesses that own patents and trademarks.  Although the Company believes that its
patents have value, the Company's business as a whole is not dependent on any
patent or group of related patents because the Company considers its
technological position to be based primarily on its proprietary manufacturing
methods, innovative engineering and marketing expertise.  However, the loss of patents relating to
certain specialized membranes and related products could have a significant
effect on the Company's future revenues. Employees As
of December 31, 2000, the Company employed 1,399 persons, including
224 holding engineering or technical degrees. Competition The
Company experiences competition from a variety of sources with respect to
virtually all of its products, although the Company knows of no single entity
that competes with it across the full range of its products and systems.  Competition in the markets served by the
Company is based on a number of factors, which may include price, technology,
applications experience, know-how, availability of financing, reputation,
product warranties, reliability, service and distribution. With
respect to the Company's membrane and related water treatment equipment
business activity, there are a number of companies, including several sizable
chemical companies that manufacture membranes, but not equipment.  There are numerous smaller companies,
primarily fabricators, that build water treatment and desalination equipment,
but which generally do not have their own proprietary membrane technology.  A limited number of companies manufacture
both membranes and equipment.  In ozone
equipment, there are both large and small competitors with no single dominant
competitor.  In water softener controls
and valves, the Company has three primary and numerous secondary
competitors.  Some competitors sell only
controller valves and some sell complete softeners.  The Company has numerous competitors in its conventional water
treatment and filtration product business activities. With respect to the
Company's disposable filter and lab products, two companies dominate the industry with several smaller
companies competing in selected product lines.

With
respect to the Company's pump and fluid handling products, there are numerous
competitors of larger size and with greater resources than the Company.  Some competitors have significantly broader
product lines than the Company.

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

Raw Materials

The
principal raw materials used by the Company are various plastic materials
including polyvinyl chloride, polypropylene, Noryl PPO, Nylon, cellulose
acetate, polycarbonate, polyester, polysulfone, polyacrylonitrile; stainless steel,
steel, brass, copper, and various other synthetic materials, all of which are
normally available from sources within the continental United States.  Most raw materials used by the Company are
available from multiple sources of supply. 
A limited number of materials are proprietary products of major
companies which, if not available, would have a material effect on the
Company's sales and profits.  The
Company believes it could find substitutes for these materials if they should
become unavailable, but has no assurance that the substitute would perform as
well or be priced as favorably.

In
2000, the Company experienced no difficulty in securing any of its needed raw
materials and components.  However,
during 1999, the Company experienced difficulty in securing a certain needed
raw material in its membrane manufacturing. 
Financial results in 1999 were negatively impacted as the Company missed
shipment dates and incurred increased scrap rates while adjusting manufacturing
processes to accept other substituted products.  The Companyexperienced no other difficulty in securing any of its
needed raw materials and components in 1999.

Customers

No
one customer accounted for 10 percent or more of the Company's consolidated
revenue in 2000, 1999, or 1998.


Backlog The dollar amount
of the Company's backlog of orders considered to be firm at December 31, 2000,
was $26.6 million.  The comparable
backlog at December 31, 1999, was $25.4 million.  The Company expects that nearly all orders included in the
backlog at December 31, 2000 will be filled during the 2001 fiscal
year.  The Company does not believe that
its backlog at any time is necessarily indicative of annual sales.  The business of the Company is not subject
to significant seasonal variations. Governmental Regulation Certain
applications of the Company's reverse osmosis and ultrafiltration products and
fluid handling equipment are subject to governmental regulation.  Products used for fractionation of cheese
whey for human consumption are subject to regulation by the United States
Department of Agriculture.  Reverse
osmosis, ultrafiltration and fluid handling systems used in medical
applications, particularly the systems used in artificial kidney dialysis
equipment and pharmaceutical water for injection, are subject to regulation by
the United States Food and Drug Administration.  Ultrafiltration and microfiltration products used for biological
separations are subject to regulation by the United States Food and Drug Administration. The
Company received a warning letter issued on June 7, 2000 by the Food and Drug
Administration (FDA) related to the Companys Millenium Portable Reverse
Osmosis System manufactured in its Kent, Washington facility. The letter
addressed the procedures for reporting quality errors.  In response, the Company took corrective
actions and received a letter from the FDA dated August 8, 2000, which stated
that the corrective efforts appeared acceptable and that the FDA planned to
review them during future scheduled inspections of Osmonics Kent, Washington,
facility.  The Millenium units produce
pure water for kidney dialysis.  The
Company believes that the pure water aspects of the medical systems were not compromised
and no patients were put at risk. The
sanitation district in which one of the Company's operating plants is located
revised its discharge regulations in 1999. 
As a result, the district adjusted the Company's discharge permit by
reducing the amount of discharge at one of the Company's locations.  This adjustment has and will result in
additional operating and capital expenditures. Foreign Operations Substantially
all of the Company's operations and assets are located in the United
States.  The Company has sales offices
and distribution facilities in France, Thailand, Switzerland, Germany, Hong
Kong, Japan, Singapore and China. 
Limited assembly is conducted in Europe and Asia.  The profitability of domestic and foreign
sales is substantially equal.  Sales to
Canada are made on the same trade terms as are available to U.S. customers.


The
Company transacts business with certain international customers under defined
credit terms and in U.S. dollars.  Large
export equipment and system sales are primarily made on the basis of confirmed
irrevocable letters of credit or time drafts to selected customers in U.S.
dollars.  The Company believes that
currency fluctuation related to these sales do not constitute substantial
risks. The
Companys French operation sells to foreign customers primarily in euros.   The Company also has certain raw material
sourcing arrangements transacted in foreign currencies.  Currently, the Company does not hedge for
either type transaction; however, it may in the future.  The Company believes these transactions do
constitute some level of risk and adverse currency fluctuations may occur.  See Note 12 of Notes to Consolidated
Financial Statements for a breakdown of the Company's foreign operations and
export sales by geographic area. Certain Factors In addition to the factors discussed elsewhere in the Company's Annual
Report to Shareholders or this Form 10-K, such as intellectual property and
other technological risks, regulatory risks, environmental risks and Year 2000
risks, the following are some important factors that could cause actual results
or events to differ materially from those contained in any forward-looking
statements made by or on behalf of the Company. EARNINGS VARIATIONS The
sale of capital equipment within the water purification and fluid filtration
industry is cyclical and influenced by various economic factors including
interest rates and general fluctuations of the business cycle.  A significant portion of the Company's
revenues is derived from capital equipment sales.  While the Company sells capital equipment to customers in diverse
industries and in global markets, cyclicality of capital equipment sales and
instability of general economic conditions, including those in the United
States, Europe, Asia, Latin America and certain other markets, could have a
material adverse effect on the Company's revenues and profitability. Operating
results from the sale of water purification and fluid filtration systems also
can be expected to fluctuate significantly as a result of the limited pool of
existing and potential customers for these systems, the timing of new
contracts, possible deferrals or cancellations of existing contracts and the
evolving and unpredictable nature of the markets for water purification
systems.  As a result of these and other
factors, the Company's operating results may be subject to quarterly or annual
fluctuations.  There can be no assurance
that at any given time the Company's operating results will meet or exceed
stock market analysts' expectations.


COMPETITION All
of the markets in which the Company competes are highly competitive, and most
are fragmented, with numerous regional and local participants.  There are competitors of the Company in
certain markets that are divisions or subsidiaries of companies that have
significantly greater resources than the Company.  Competitive factors include price, technical expertise, product
quality and responsiveness to customer needs, including service and technical
support.  The Company competes not only
with a large number of independent wholesalers and with other distribution
chains similar to the Company, but also with manufacturers who sell directly to
customers.  The Company's HRO business
also competes with companies with national distribution networks, businesses
with regional scope, and local product assemblers or service companies, as well
as retail outlets.  The Company believes
that there are thousands of participants in the residential water
business.  The HRO business competes
principally on the basis of price, product quality and "taste,"
service, distribution capabilities, geographic presence and reputation.  Competitive pressures, including those
described above, and other factors could cause the Company to lose market share
or could result in significant price erosion, either of which could have a
material adverse effect upon the Company's financial position, results of
operations and cash flows. RISKS RELATED TO ACQUISITIONS The
Company has acquired a number of United States-based companies and product
lines.  The Company plans to continue to
consider and potentially pursue acquisitions that expand the segments of the
water, wastewater treatment and water-related industries in which it
participates; complement its technologies, products or services; broaden its
customer base and geographic areas served; expand its global distribution
network; and provide opportunities.  The
Company's acquisition strategy entails the potential risks inherent in
assessing the value, strengths, weaknesses, contingent or other liabilities and
potential profitability of acquisition candidates and in integrating the
operations of acquired companies. 
Although the Company believes that it has generally been successful in
pursuing acquisitions, there can be no assurance that acquisition opportunities
will continue to be available, that the Company will have access to the capital
required to finance potential acquisitions, that the Company will continue to
acquire businesses or that any business acquired will be integrated
successfully or prove profitable. PROFIT UNCERTAINTY IN FIXED-PRICE CONTRACTS A
significant portion of the Company's revenues is generated under fixed price
contracts.  To the extent that original
cost estimates are inaccurate, scheduled deliveries are delayed or progress
under a contract is otherwise impeded, revenue recognition and profitability
from a particular contract may be adversely affected. RISKS OF DOING BUSINESS IN OTHER COUNTRIES The
Company sells a significant amount of its product in markets outside the United
States.  While these activities may
provide important opportunities for the Company to offer its products and
services internationally, they also entail the risks associated with conducting
business internationally, including the risk of currency fluctuations, slower
payment of invoices, the lack in some jurisdictions of well-developed legal
systems, nationalization and possible social, political and economic
instability. ITEM
2.PROPERTIES

The
executive offices and principal manufacturing facilities of the Company are
located in Minnetonka, Minnesota, a suburb of Minneapolis.

A
summary of the Company's main operating facilities is as follows:



Location

  Status

  Size

  

  FunctionMinnetonka, MN

  Owned

  309,600

  sq
  ft

  Sales, Manufacturing, WarehouseVista, CA

  Owned

  110,000

  sq
  ft

  Sales, Manufacturing, WarehouseMilwaukee, WI

  Owned

  103,700

  sq
  ft

  Sales, Manufacturing, WarehouseRockford, IL

  Owned

  58,400

  sq
  ft

  Sales, Manufacturing, WarehouseWestborough, MA

  Leased

  51,200

  sq
  ft

  Sales, Manufacturing, WarehouseKent, WA

  Leased

  50,000

  sq
  ft

  Sales, Manufacturing, WarehouseSyracuse, NY

  Owned

  48,500

  sq
  ft

  Sales, Manufacturing, WarehouseLe
  Mée, France

  Owned

  36,900

  sq
  ft

  Sales, Manufacturing, WarehouseCedar Grove, NJ

  Leased

  4,000

  sq
  ft

  Research & DevelopmentEscondido, CA

  Leased

  12,700

  sq
  ft

  ManufacturingEmmetsburg, IA

  Leased

  8,800

  sq
  ft

  Manufacturing, WarehouseBryan, TX

  Owned

  2,500

  sq
  ft

  Manufacturing, WarehouseTotal Owned

  

  669,600

  sq
  ftTotal Leased

  

  126,700

  sq
  ftTotal Owned and Leased

  

  796,300

  sq
  ftCertain
borrowings of the Company are collateralized by real property of the Company.

The
current manufacturing facilities are adequate for intermediate-term
operations.  In addition, the Company
leases space in Thailand, China, Germany, Japan, Hong Kong, Switzerland and
Singapore that is used primarily for sales activities.


ITEM 3. 
LEGAL PROCEEDINGS The
Company is currently involved in several lawsuits incidental to its business.
Management does not believe that any of the lawsuits will have a material
adverse effect on the Company's financial position or results of operations. ITEM 4. 
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No
matter was submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year that ended December 31, 2000. EXECUTIVE OFFICERS OF THE REGISTRANT Name and Age

  Position with Company

  Officer SinceD. Dean Spatz (56)

  Chief Executive Officer and Chairman of the
  Board

  1969Ruth Carol Spatz (56)

  Secretary

  1969Phillip M. Rolchigo (39)

  Chief Technology Officer

  1998Edward J. Fierko (59)

  President and Chief Operating Officer

  1999Keith B. Robinson (46)

  Chief Financial Officer and Sr. Vice
  President Administration

  1999  All
of the executive officers have been officers of the Company for more than five
years except the following: Dr.
Rolchigo came to Osmonics from Membrex Corp., which Osmonics acquired in
1998.  Dr. Rolchigo is the principal
inventor of advanced vortex flow filtration technology.  His technical expertise spans diverse
industries from environmental waste to pharmaceutical processing.  He has served as a research affiliate in
chemical engineering for MIT, and belongs to numerous industry organizations.


Mr.
Fierko joined Osmonics in 1998 as a Vice President and General Manager of two
Global Business Units.  Previously, Mr.
Fierko served as President and CEO of EcoWater International, Inc.  Before that, he served as President of
EcoWater Systems and was with General Electric Company for 23 years prior to
joining EcoWater in 1987. Mr.
Robinson joined Osmonics in 1999 as Chief Financial Officer and Senior Vice
President Administration.  Previously,
Mr. Robinson served as Senior Director of Planning and Finance at West Group.  Before that, he served as Chief Financial
Officer of The Thompson Corporation. All
executive officers are elected annually by, and serve at the direction of, the
Board of Directors.  D. Dean Spatz and
Ruth Carol Spatz are husband and wife. PART II ITEM 5.

  MARKET FOR THE REGISTRANT'S COMMON EQUITY
  ANDRELATED SHAREHOLDER MATTERS  "Common Stock
Data," and "Notes to Consolidated Financial Statements," pages
20-27of the Annual Report to Shareholders, are incorporated herein by
reference.  As of March 21, 2001 there
were 1,961 shareholders of record. The
Company has not paid cash dividends on its common shares.  The Board of Directors currently intends to
retain its earnings for the expansion of the Company's business. The Company
has issued promissory notes that contain a covenant limiting the payment of
dividends to shareholders.  At December
31, 2000, approximately $9,000,000 of retained earnings was eligible for
dividend distribution under this covenant. ITEM 6. 
SELECTED FINANCIAL DATA "Selected
Financial Data," page 32 of the Annual Report to Shareholders, is
incorporated herein by reference. ITEM 7.

  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
  FINANCIALCONDITION AND RESULTS OF OPERATIONS "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
pages 28-31 of the Annual Report to Shareholders, is incorporated herein by
reference.


ITEM 8. 
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The
following consolidated financial information of the Registrant and its
subsidiaries, included in the Annual Report to Shareholders, is incorporated
herein by reference: Independent
  Auditors' ReportConsolidated
  Statement of OperationsConsolidated
  Balance SheetsConsolidated
  Statements of Cash FlowConsolidated
  Statements of Changes in Shareholders' EquityNotes
  to Consolidated Financial StatementsQuarterly
  Financial Data  PART III ITEM 10. 
DIRECTORS The
information required by this item is incorporated herein by reference to the
definitive Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's fiscal year ended
December 31, 2000 and forwarded to shareholders prior to the Company's 2001 Annual
Meeting of Shareholders (the "2001 Proxy Statement"). ITEM 11. 
EXECUTIVE COMPENSATION The
information required by this Item is incorporated herein by reference to the
2001 Proxy Statement. ITEM 12.

  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
  OWNERS ANDMANAGEMENT The
information required by this Item is incorporated herein by reference to the
2001 Proxy Statement.


ITEM 13. 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The
information required by this Item is incorporated herein by reference to the
2001 Proxy Statement. PART IV ITEM 14.

  EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND
  REPORTSON FORM 8-K(a) (1)

  Financial StatementsThe consolidated financial statements of
  the Registrant and its subsidiaries, included in the Annual Report to
  Shareholders, are incorporated by reference in Item 8, and are also
  incorporated herein by reference.(a) (2)

  Financial Statement ScheduleReports of Independent Public Accountants
  on Supplemental Schedule to the Consolidated Financial Statements.Valuation and qualifying accounts.Schedules not listed above have been
  omitted because they are either not applicable, not material or the required
  information has been given in the financial statements or in the notes to the
  financial statements.(2)

  Agreement and Plan of Merger among
  Desalination Systems, Inc., Osmonics, Inc. and DSI Acquisition Corp. dated
  May 17, 1996.  (Incorporated
  herein by reference to Exhibit 2 to Registration Statement on Form S-3, File
  No. 33-05029.)(3)A.

  Certificate of Incorporation of the
  Registrant, as amended.  (Incorporated
  herein by reference to Exhibit 3.1 to Registration Statement on Form S-2,
  File No. 33-336.)  Certificate of Amendment.  (Incorporated herein by reference to
  Exhibit (3)A on Form 10-K for fiscal year ended December 31, 1987, File No. 0–8282.)B.

  By-Laws of the Registrant.  (Incorporated herein by reference to
  Exhibit 3.2 to Registration Statement on Form S-2, File No. 33-336.)(4)A.

  Note Purchase Agreement dated July 12,
  1991.  (Incorporated herein by
  reference to Annual Report on Form 10-K for fiscal year ended December 31,
  1991.)


(10)A.*

  1993 Stock Option Plan and related form of
  stock option agreement.  (Incorporated
  herein by reference to Annex C of the Registrant's Joint Proxy
  Statement/Prospectus dated September 10, 1993.)B.

  Stock Option Agreement with Michael L.
  Snow, Director.  (Incorporated herein
  by reference to Annual Report on Form 10-K for fiscal year ended
  December 31, 1993.)D.

  1995 Employee Stock Purchase Plan.  (Incorporated herein by reference to the
  Registrant's Proxy Statement dated March 27, 1995.)E.*

  1995 Director Stock Option Plan.  (Incorporated herein by reference to the
  Registrant's Proxy Statement dated March 27, 1995.)* Denotes Executive Compensation Plan.(13)

  2000 Annual Report to Shareholders.  (Only those portions incorporated herein
  by reference shall be deemed filed with the Commission.)(21)

  Subsidiaries of the Registrant.(23)

  Consent of Deloitte & Touche LLP.(b)

  Reports on Form 8-KNo reports on Form 8-K were filed during
  the quarter ended December 31, 2000.


SIGNATURES Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized. OSMONICS, INC.By /s/ D. Dean SpatzD. Dean Spatz, CEODated: 
  March 27, 2001   Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated: Signatures

  Title

  Date/s/

  Keith B. Robinson

  Chief Financial Officer (Principal Finance
  and Accounting Officer)

  March 27, 2001Keith B. Robinson/s/

  Ruth Carol Spatz

  Director

  March 29, 2001Ruth Carol Spatz/s/

  Michael L. Snow

  Director

  March 30, 2001Michael L. Snow/s/

  Ralph E. Crump

  Director

  March 28, 2001Ralph E. Crump/s/

  Verity C. Smith

  Director

  March 28, 2001Verity C. Smith/s/

  Charles W. Palmer

  Director

  March 28, 2001Charles W. Palmer/s/

  William Eykamp

  Director

  March 28, 2001William Eykamp/s/

  D. Dean Spatz

  CEO, Chairman of the Board and Director (Principal
  Executive Officer)

  March 27, 2001D. Dean Spatz


OSMONICS, INC.CONSOLIDATED STATEMENTS OF
OPERATIONS
(In thousands, except share data)  Year Ended December 31,2000
  1999
  1998Sales
  $200,139
  $187,028
  $179,742Cost
  of sales
  139,733
  128,608
  116,641Gross
  profit
  60,406
  58,420
  63,101Operating expenses:Selling,
  general and administrative
  44,195
  43,720
  43,487Research,
  development and engineering
  7,886
  7,694
  9,913Special
  charges
  250
  2,575
  7,98852,331
  53,989
  61,388Income
  from operations
  8,075
  4,431
  1,713Other
  income (expense), net:Interest
  income
  397
  612
  668Interest
  expense
  (4,337)
  (4,053)
  (4,288)Other
  3,947
  2,058
  8297
  (1,383)
  (2,791)Income
  (loss) before income taxes
  8,082
  3,048
  (1,078)Income
  taxes (benefit)  (Note 10)
  2,663
  2,084
  (25)Net
  income (loss)
  $5,419
  $964
  $(1,053)Earnings
  (loss) per share  basic (Note 15)Net
  income (loss)
  $0.38
  $0.07
  $(0.08)Earnings
  (loss) per share  assuming dilution(Note
  15)Net
  income (loss)
  $0.38
  $0.07
  $(0.08) The accompanying notes are an integral part
of the consolidated financial statements.


OSMONICS, INC.CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31,2000
  1999ASSETSCurrent
  assets:Cash
  and cash equivalents
  $21
  $1,807Marketable
  securities (Note 3)
  1,889
  14,007Trade
  accounts receivable, net of allowance for doubtful accounts of $1,008 in 2000
  and $1,315 in 1999
  37,092
  35,804Inventories
  (Note 4)
  32,758
  24,350Deferred
  tax assets (Note 11)
  4,314
  4,773Other
  current assets
  2,487
  2,771Total
  current assets
  78,561
  83,512Property
  and equipment, at cost:Land
  and land improvements
  5,056
  5,358Buildings
  30,283
  31,785Machinery
  and equipment
  76,943
  73,148112,282
  110,291Accumulated
  depreciation
  (55,381)
  (51,961)56,901
  58,330Cash
  restricted for purchase and construction of equipment (Note 5)
  325
  325Goodwill,
  net of accumulated amortization of $6,478 in 2000 and $4,101 in 1999
  46,310
  48,826Long-term
  investments
  2,688
  1,008Other
  assets, net of accumulated amortization of intangible assets of $1,495 in
  2000 and $1,031 in 1999
  3,907
  2,365Total
  assets
  $188,692
  $194,366LIABILITIES
  AND SHAREHOLDERS EQUITYCurrent
  liabilities:Accounts
  payable
  $15,262
  $15,121Line
  of credit advances (Note 6)
  15,000
  18,500Notes
  payable and current portion of long-term debt (Note 8)
  4,759
  2,812Accrued
  compensation and employee benefits
  3,391
  3,633Other
  accrued liabilities (Note 7)
  10,393
  11,285Total
  current liabilities
  48,805
  51,351Long-term
  debt (Note 8)
  24,603
  32,201Deferred
  income taxes (Note 11)
  6,335
  6,256Other
  liabilities
  4
  16Commitments
  and contingencies (Note 13)Shareholders
  equity (Note 9):Common
  stock, $0.01 par value 
        Authorized  50,000,000 shares 
        Issued  2000:  14,408,634 and 1999: 
  14,262,130 shares
  144
  143Preferred
  stock:  Authorized - 500,000 shares;
  outstanding  none
  -
  -Capital
  in excess of par value
  23,818
  22,612Retained
  earnings
  85,458
  80,039Total
  other comprehensive income (loss)
  (475)
  1,748Total
  shareholders equity
  108,945
  104,542Total
  liabilities and shareholders equity
  $188,692
  $194,366  The accompanying notes are an integral part
of the consolidated financial statements.


OSMONICS, INC.CONSOLIDATED STATEMENTS OF CASH
FLOWS
(In thousands) Year Ended December 31,2000
  1999
  1998Cash flows from
  operations:Net
  income (loss)
  $5,419
  $964
  $(1,053)Non-cash items included
  in net income:Depreciation
  and amortization
  10,139
  8,772
  7,964Deferred
  income taxes
  1,609
  3,227
  (2,059)Gain
  on sale of land and investments
  (3,788)
  (2,625)
  (1,285)Special
  charges
  -
  3,610
  9,988Changes
  in assets and liabilities (net of business acquisitions):Accounts
  receivable
  (1,205)
  (357)
  (3,774)Inventories
  (8,158)
  5,372
  7,367Other
  current assets
  (366)
  2,464
  (3,052)Accounts
  payable and accrued liabilities
  (1,255)
  (1,338)
  (5,994)Net
  cash provided by operations
  2,395
  20,089
  8,102Cash flows from
  investing activities:Business acquisitions
  (net of cash acquired)
  -
  (6,846)
  (39,880)Purchase
  of investments
  (1,178)
  (3,603)
  (808)Maturities
  and sales of investments
  14,029
  6,409
  4,480Purchase
  of property and equipment
  (7,058)
  (8,323)
  (7,808)Sales
  of property and equipment
  367
  747
  110Other
  (1,322)
  (728)
  424Net
  cash provided by (used in) investing activities
  4,838
  (12,344)
  (43,482)Cash flows from
  financing activities:(Payments)
  proceeds from notes payable and current debt
  (1,553)
  9,000
  32,000Reduction
  of long-term debt
  (8,434)
  (17,061)
  (2,264)Cash
  restricted for purchase and construction of equipment
  -
  235
  570Issuance
  of common stock
  1,207
  1,882
  472Net
  cash (used in) provided by financing activities
  (8,780)
  (5,944)
  30,778Effect
  of exchange rate changes on cash
  (239)
  (570)
  306(Decrease)
  increase in cash and cash equivalents
  (1,786)
  1,231
  (4,296)Cash
  and cash equivalents - beginning of year
  1,807
  576
  4,872Cash and cash
  equivalents - end of year
  $21
  $1,807
  $576  The accompanying notes are integral part of
the consolidated financial statements.


OSMONICS, INC.CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY
(In thousands, except share data) Common Stock
  Capital
  in Excess of
  Par Value
  Retained
  Earnings
  Accumulated
  Other
  Comprehensive
  Income(2)
  Total
  Shareholders
  EquityShares
  AmountBalance  January 1, 1998
  13,943,544
  $140
  $20,261
  $80,128
  $1,846
  $102,375Comprehensive
  income (loss)Net
  loss
  -
  -
  -
  (1,053)
  -
  (1,053)Other
  comprehensive income(1)Translation
  adjustment
  -
  -
  -
  -
  306
  306Marketable
  securities adjustment(3)
  -
  -
  -
  -
  55
  55Other
  comprehensive income
  -
  -
  -
  -
  361
  361Total
  comprehensive income (loss)
  -
  -
  -
  -
  -
  (692)Employee
  stock purchase plans
  64,819
  -
  664
  -
  -
  664401(k)
  stock match
  23,468
  -
  234
  -
  -
  234Recovery
  of common stock
  (40,540)
  -
  (426)
  -
  -
  (426)Balance - December 31, 1998
  13,991,291
  140
  20,733
  79,075
  2,207
  102,155Comprehensive
  incomeNet
  income
  -
  -
  -
  964
  -
  964Other
  comprehensive income (loss) (1)Translation
  adjustment
  -
  -
  -
  -
  (570)
  (570)Marketable
  securities adjustment(3)
  -
  -
  -
  -
  111
  111Other
  comprehensive income (loss)
  -
  -
  -
  -
  (459)
  (459)Total
  comprehensive income
  -
  -
  -
  -
  -
  505Employee
  stock purchase plans
  69,209
  1
  555
  -
  -
  556401(k)
  stock match
  51,078
  1
  483
  -
  -
  484Stock
  options exercised
  150,552
  1
  841
  -
  -
  842Balance - December 31, 1999
  14,262,130
  143
  22,612
  80,039
  1,748
  104,542Comprehensive
  incomeNet
  income
  -
  -
  -
  5,419
  -
  5,419Other
  comprehensive income (loss) (1)Translation
  adjustment
  -
  -
  -
  -
  (239)
  (239)Marketable
  securities adjustment(3)
  -
  -
  -
  -
  (1,984)
  (1,984)Other
  comprehensive income (loss)
  -
  -
  -
  -
  (2,223)
  (2,223)Total
  comprehensive income
  -
  -
  -
  -
  -
  3,196Employee
  stock purchase plans
  74,017
  1
  522
  
  -
  523401(k)
  stock match
  59,748
  -
  498
  -
  -
  498Minority
  contribution
  -
  -
  136
  -
  -
  136Stock
  options exercised
  12,739
  -
  50
  -
  -
  50Balance - December 31, 2000
  14,408,634
  $144
  $23,818
  $85,458
  $(475)
  $108,945  (1)
  All items included in other comprehensive
  income (loss) are shown net of taxes. 
  The tax effect for the marketable securities adjustment was $(1,051),
  $43 and $22 for 2000, 1999 and 1998, respectively.(2)
  Accumulated
  other comprehensive income is comprised of accumulated currency translation
  of $(837), $(598) and $(28) and marketable securities adjustment of $362,
  $2,346 and $2,235 at December 31, 2000, 1999 and 1998, respectively.(3)
  Marketable
  securities reclassification adjustment for gains realized in net income (net
  of tax) was $1,256, $1,617 and $584 for 2000, 1999 and 1998, respectively.  The accompanying notes are integral part of
the consolidated financial statements.


FIVE-YEAR RESULTS
(In thousands, except per share amounts) INCOME DATA: Year
  Ended December 31,2000
  1999
  1998
  1997
  1996Sales
  $200,139
  $187,028
  $179,742
  $164,905(a)
  $155,946(a)Income (loss) from
  continuing operations
  5,419
  964
  (1,053)
  8,643
  13,467Net income (loss)
  5,419
  964
  (1,053)
  9,793
  13,467Earnings (loss) per
  share  basic (Note 15)Income
  (loss) from continuing operations
  $0.38
  $0.07
  $(0.08)
  $0.60
  $0.95Net
  income (loss)
  $0.38
  $0.07
  $(0.08)
  $0.70
  $0.95Earnings
  (loss) per share  assuming dilution (Note 15)Income
  (loss) from continuing operations
  $0.38
  $0.07
  $(0.08)
  $0.59
  $0.93Net
  income (loss)
  $0.38
  $0.07
  $(0.08)
  $0.68
  $0.93Average shares
  outstandingBasic
  14,329
  14,162
  13,976
  14,031
  14,145Assuming
  dilution
  14,404
  14,252
  13,976
  14,313
  14,458BALANCE SHEET DATATotal assets
  $188,692
  $194,366
  $194,049
  $164,483
  $152,176Long-term debt
  24,603
  32,201
  31,665
  13,792
  15,900 (a) Excludes impact of EITF 00-10 discussed
in Note 1.   
________________________________________________________________________________________________________________ TWELVE-YEAR RESULTS
(In thousands, except per share amounts) SUPPLEMENTARY DATA These schedules present the prior twelve-year
results of the Company as originally reported, before restatement of prior
period data for those acquisitions accounted for as poolings-of-interests, to
show the effect of the Companys strategic acquisition activity. INCOME DATA:(As
originally reported) Year
  Ended December 31,2000
  1999
  1998
  1997
  1996
  1995
  1994
  1993
  1992
  1991
  1990
  1989Sales
  $200,139
  $187,028
  $179,742
  $164,905(e)
  $155,946(e)
  $111,610(e)
  $96,180(e)
  $89,043(e)
  $50,541(e)
  $46,738(e)
  $43,553(e)
  $36,223(e)Net income
  5,419
  4,533(d)
  6,516(c)
  9,452(b)
  13,467
  11,212
  9,955
  7,895
  4,528(a)
  3,902
  3,714
  4,047BALANCE SHEET DATA:(As originally reported)Total assets
  $188,692
  $194,366
  $194,049
  $164,483
  $152,176
  $125,058
  $102,035
  $88,826
  $60,300
  $54,931
  $54,370
  $45,884Working capital
  29,756
  32,161
  33,976
  45,273
  54,006
  54,224
  55,995
  45,281
  29,471
  25,955
  21,692
  21,117Long-term debt
  24,603
  32,201
  31,665
  13,792
  15,900
  12,441
  14,050
  13,913
  13,221
  13,697
  13,761
  3,788Shareholders  equity
  108,945
  104,542
  102,155
  102,375
  97,943
  78,471
  63,751
  52,070
  33,793
  28,891
  24,720
  33,067(a)
  Includes an increase
  in earnings of $420 ($0.05 per share) as a result of adopting the Financial
  Accounting Standards Board Statement No. 109, Accounting for Income Taxes.(b)
  Excludes impact of
  December 1997 special charge of $1,448 and 1997 recovery on discontinued
  operations of $1,330 net of taxes.(c)
  Excludes impact of
  June 1998 special charge of $9,988.(d)
  Excludes impact of
  September and December 1999 special charge of $3,610.(e)
  Excludes impact of
  EITF 00-10 discussed in Note 1.


QUARTERLY FINANCIAL DATA(In thousands, except per share amounts) Quarterly Financial Data - 2000  Quarter EndedMarch 31
  June 30
  September 30
  December 31Sales
  $51,095
  $50,110
  $48,463
  $50,471Gross profit
  16,284
  15,888
  14,100
  14,134Net income
  1,592
  1,848
  1,019
  960Net income per share  basic
  0.11
  0.13
  0.07
  0.07Net income per share  assuming dilution
  $0.11
  $0.13
  $0.07
  $0.07   Quarterly Financial Data - 1999 Quarter EndedMarch 31
  June 30
  September 30
  December 31(a)Sales
  $45,021
  $46,957
  $47,573
  $47,477Gross profit
  15,369
  16,174
  14,840
  12,037Net income (loss)
  1,582
  2,139
  1,458
  (4,215)Net income (loss) per share  basic
  0.11
  0.15
  0.10
  (0.29)Net income (loss) per share  assuming
  dilution
  $0.11
  $0.15
  $0.10
  $(0.29)  (a)
  Special
  charges of $3,880 ($0.26 per share after taxes assuming dilution) were
  recorded during the fourth quarter of 1999.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share data)  1.       Summary
of Significant Accounting Policies Osmonics, Inc. is a manufacturer and marketer
of high technology water purification, fluid filtration, fluid separation, and
fluid transfer equipment and instruments, as well as the replaceable components
used in purification, filtration and separation equipment.  These products are used by a broad range of
industrial, commercial, consumer and institutional customers. The consolidated financial statements include
the accounts of Osmonics, Inc. and its wholly and majority owned subsidiaries
(the Company).  Significant intercompany
accounts and transactions have been eliminated. In December 1999, Staff Accounting Bulletin
(SAB) No. 101 Revenue Recognition in Financial Statements was issued.  The Company applied this bulletin in
2000.  In accordance with SAB No. 101,
sales are recorded when the product is shipped or the service is provided as
the earnings process is substantially complete, collectibility is probable and
pricing is fixed and determinable.  The
estimated cost of warranty obligations is accrued at the time revenue is
recognized.  The Companys adoption of
the bulletin had no effect on the financial position or results from
operations. The estimated fair value for notes payable
and long-term debt approximates carrying value due to the relatively short-term
nature of the instruments and/or due to the short-term floating interest rates
on the borrowing.  The estimated fair
value of notes receivable approximates the net carrying value, as management
believes the respective interest rates are commensurate with the credit,
interest rate and repayment risks involved. The Company considers highly liquid debt
instruments purchased with a maturity of three months or less to be cash equivalents. Inventories are stated at lower of cost
(first-in, first-out method) or market for all operations except for two plants
which are valued using the last-in, first-out method. Depreciation and amortization of property and
equipment are provided on the straight-line method over estimated lives of 3 to
40 years.


Deferred income taxes have been provided for
income and expenses which are recognized in different accounting periods for
financial reporting purposes rather than for income tax purposes. Foreign currency assets and liabilities are
translated into U.S. dollars using the exchange rates in effect at the balance
sheet date.  Results of operations are
translated using the average exchange rates throughout the period. The excess of cost over the fair market value
of assets acquired in acquisitions is amortized over not more than 40 years,
with the majority at 30 years.  Other
intangibles are carried at cost and amortized using the straight-line method
over their estimated lives of 5 to 20 years. 
In 1999, the estimated life of 40 years for the recorded AquaMatic
goodwill was reduced to 10 years based on the maturity of the product line and
continued softness of the Asia/Pacific market. 
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 121 on impairment of long-lived assets, the carrying values of these
intangibles are reviewed quarterly for impairment using discounted cash flows
when events or circumstances warrant such a review (see Note 16). On January 1, 2001, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities.  SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities.  It requires that all derivatives, including
those embedded in other contracts, be recognized as either assets or liabilities
and that those financial instruments be measured at fair value.  The accounting for changes in the fair value
of derivatives depends on their intended use and designation.  Management has reviewed the requirements of
SFAS No. 133 and has determined that they have no embedded derivatives.  All contracts that contain provisions
meeting the definition of a derivative also meet the requirements of, and have
been designated as, normal purchases or sales. 
The Companys policy is to not enter into contracts containing
derivatives with terms that cannot be designated as normal purchases or sales. In May 2000, the Emerging Issues Task Force
in EITF 00-10 reached a consensus on the issue of How a seller of goods should
classify in the income statement amounts billed to a customer for shipping and
handling.  The consensus was that all
amounts billed to a customer in a sales transaction related to shipping and
handling, if any, represent revenues earned for the goods provided and should
be classified as revenue.  The Company
adopted EITF 00-10 in the fourth quarter 2000. 
Comparative financial statements for prior periods have been
reclassified to comply with the classification guidelines of this issue.  Freight revenue added to sales and cost of
goods sold were $3,104, $2,357 and $1,923 in 2000, 1999 and 1998, respectively. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period.  Actual results could
differ from those estimates.


Certain reclassifications have been made to
prior year amounts to conform with current year presentations. 2.       Business
Acquisitions On July 1, 1999, the Company acquired all of
the equity interest of ZyzaTech Water Systems, Inc. (ZyzaTech) of Seattle,
Washington.  The purchase price was
approximately $10,000 and included $8,600 of goodwill which is being amortized
on the straight-line method over 20 years. 
ZyzaTech products are being sold through their existing distribution
channels, offering a broadened line of hemodialysis products. The acquisition,
included in the Process Water segment, was recorded under the purchase method
of accounting. The results of operations of ZyzaTech are
included in the consolidated statements of operations from the date of
acquisition. Pro forma 1999 and 1998 combined financial
results of Osmonics, Inc. and ZyzaTech would be as follows: 1999
  Osmonics
  ZyzaTech
  CombinedSales
  $187,028
  $5,826
  $192,854Income
  from operations
  4,431
  397
  4,828Acquisition interest expense
  320
  320
  640Net
  income
  964
  57
  1,021Net
  income per share - assuming dilution
  $0.07
  
  $0.071998
  Osmonics
  ZyzaTech
  CombinedSales
  $179,742
  $11,241
  $190,983Income
  from operations
  1,713
  714
  2,427Acquisition interest expense
  
  640
  640Net
  income (loss)
  (1,053)
  88
  (965)Net
  loss per share - assuming dilution
  $(0.08)
  
  $(0.07)


On February 17, 1998, the Company acquired
all of the equity interest of Micron Separations, Inc. (MSI) of Westborough,
Massachusetts.  The purchase price was
approximately $25,000 which included $1,902 of in-process research and development
(R&D), $1,900 of cash, $4,500 of tax loss carryforwards and carrybacks and
$13,600 of goodwill, which is being amortized on the straight-line method over
30 years.  MSI products are being sold
through existing Osmonics distribution channels, complementing the Companys
existing cartridge filter products and providing a broader portfolio of
diagnostic and laboratory membrane products to the laboratory and analytical
testing markets.  The acquisition,
included in the Filtration and Separations segment, was recorded under the
purchase method of accounting. The results of operations of MSI are included
in the consolidated statements of operations from the date of acquisition. On April 29, 1998, the Company acquired all
of the equity interest of Membrex Corp. (Membrex) of Fairfield, New
Jersey.  The purchase price was
approximately $16,000 plus assumed net liabilities of approximately
$3,000.  The price included $4,320 of
in-process R&D and $15,700 of goodwill, which is being amortized on the
straight-line method over 30 years. 
Membrex products are primarily related to membrane products and
oil/water separating systems for commercial and industrial customers.  The acquisition, included in the Filtration
and Separations segment, was recorded under the purchase method of accounting. Safety-Kleen (SK), the principal customer for
the Membrex products, filed for Chapter 11 bankruptcy in June of 2000.  As a result, second, third and fourth
quarter 2000 sales to SK of $700, $750 and $264, respectively, were substantially
below first quarter 2000 sales of $2,100. 
SK has continued to order product and parts at reduced levels to support
its installed base.  Future sales levels
are uncertain and could be minimal. The Company has a contract with SK that
provides some exclusivity to SK for certain Membrex products.  This contract is contingent on both
companies meeting certain service, production and sales levels.  The exclusivity provisions are conditioned
on certain minimum purchase requirements by SK.  The Company anticipates that the exclusivity provisions of the
contract will expire in the third quarter of 2001 due to the anticipated
failure of SK to buy the required minimum amount of products and has begun
discussions with SK to renegotiate the contract based on the current situation. The Company has determined that two-thirds
($9,500) of the Membrex goodwill is associated with these products.  The Company has concluded there was no
impairment of goodwill at December 31, 2000. 
In its analysis, Management used a discounted cash flow model in
accordance with current accounting guidelines, a detailed five-year sales plan
and anticipated an ongoing business relationship with SK while it proceeds
through and comes out of bankruptcy. 
The ongoing business relationship assumes that SK will continue to
purchase replacement membrane for existing product installations at the rate of
two or three replacements per year per installation. In the event that SK does not survive
bankruptcy, Management believes it will be capable of selling and marketing
these products through other sales channels in a manner that will support the
goodwill value.  The Company is
investigating alternative approaches to market as allowed by the contract for
these products.  Additionally, the
Company is continuing to investigate new applications for the technology
acquired from Membrex.  The Company
believes the patented technology associated with Membrex brings a
cost-effective solution to hazardous waste disposal, which could become a
required environmental standard. The results of operations of Membrex are
included in the consolidated statements of operations from the date of
acquisition. The pro forma combined impact of MSI and
Membrex on financial results for 1998 was not material. 3.     Marketable
Securities The Company considers all of its marketable
securities available-for-sale. Marketable securities at December 31, 2000
consisted of the following: Amortized
  Unrealized
  Unrealized
  FairCost
  Gains
  (Losses)
  ValueMunicipal
  bonds 
    0-5 year maturity
  100
  -
  -
  100Corporate
  debt securities and other 
    0-5 year maturity
  100
  -
  (1)
  99Equity
  securities
  919
  815
  (44)
  1,690Total
  before-tax effect
  $1,119
  815
  (45)
  $1,889Deferred
  tax effect of unrealized (gains) losses
  
  (432)
  24Net
  unrealized gains (losses) on marketable securities
  
  $383
  $(21)


Marketable securities at December 31, 1999
consisted of the following: Amortized
  Unrealized
  Unrealized
  FairCost
  Gains
  (Losses)
  ValueU.S.
  government securities0-5
  year maturity
  $1,649
  $6
  $(37)
  $1,618Municipal
  bonds0-5
  year maturity
  3,831
  104
  -
  3,9356
  year or greater maturity
  1,193
  14
  (57)
  1,150Corporate
  debt securities and other0-5
  year maturity
  499
  -
  (7)
  492Equity
  securities
  3,012
  3,885
  (85)
  6,812Total
  before-tax effect
  $10,184
  4,009
  (186)
  $14,007Deferred
  tax effect of unrealized (gains) losses
  
  (1,549)
  72Net
  unrealized gains (losses) onmarketable
  securities
  
  $2,460
  $(114)  Proceeds from sales of available-for-sale
securities for the years ended December 31, 2000, 1999 and 1998 were $13,740,
$6,409 and $2,253, respectively.  The
gains and losses on these sales, determined on the specific identification
method, were $4,102 and $314 in 2000, $2,813 and $442 in 1999, and $949 and $90
in 1998 and are included in Other Income. Market values are based on quoted market
prices. 4.       Inventories Inventories
consist of the following: December 31,2000
  1999Finished
  goods
  $8,013
  $8,640Work in
  process
  8,775
  6,457Raw
  materials
  17,695
  10,82034,483
  25,917Adjustment
  to reduce inventories of $11,643 and $8,329 to the last-in, first-out method
  (see Note 1)
  (1,725)
  (1,567)$32,758
  $24,350


5.     Restricted
Cash Cash restricted for purchase and construction
of equipment at December 31, 2000 and 1999 represents proceeds received from
the issuer of Industrial Development Revenue Bonds (see Note 8) restricted to
the purchase and construction of property and equipment used in one of the Companys
operations. 6.     Line
of Credit The Company, at December 31, 2000, had an
unsecured revolving line of credit of $24,000 for working capital needs.  The revolving line of credit matures on
March 31, 2003, and borrowings bear a variable interest rate related to
LIBOR.  The terms of the credit
agreement contain certain restrictions related to financial ratios,
indebtedness, tangible net worth and capital expenditures.  As of December 31, 2000, the Company was in
compliance with all debt covenants.  As
of December 31, 2000, the Company had borrowings outstanding under the line of
$15,000 and the interest rate was 8.33%. 
At December 31, 1999, the Company had borrowings outstanding under the
line of $18,500 and the interest rate was 7.56%. 7.     Other
Accrued Liabilities Other
accrued liabilities consist of the following: December 31,2000
  1999Warranty
  and start-up
  $2,222
  $1,936Professional
  fees and other accruals
  3,249
  3,040Taxes
  1,428
  282Deferred
  acquisition-related payments
  53
  2,074Corporate
  restructuring
  160
  1,233Customer
  deposits
  3,281
  2,720$10,393
  $11,285


8.     Debt  Long-term
debt is as follows: December 31,2000
  1999Promissory
  notes; interest payable quarterly at the three-month LIBOR plus 125 b.p.; due
  through 2001.  The interest rate on
  December 31, 2000 was 7.91%.
  $2,875
  $4,300Industrial
  development revenue bonds (IDRBs), principal due in varying annual payments
  through 2007; interest payable monthly at a variable rate determined
  periodically by the bond remarketing agent (4.35% at December 31, 2000).
  6,300
  6,950Promissory
  notes; interest payable quarterly at fixed rate of 6.72%; due through 2008.
  4,000
  5,000Promissory
  notes; interest payable quarterly at the three-month LIBOR plus 125 b.p.; due
  through 2008.  The interest rate on
  December 31, 2000 was 7.91%.
  12,000
  15,000Mortgage
  notes payable to two French banks; interest payable monthly at PIBOR plus 40
  b.p.  The interest rate on December
  31, 2000 was 5.34%.
  108
  232Mortgage
  notes payable to two French banks; interest payable monthly at fixed rate of
  4.45%; due through 2006.
  1,373
  1,712Promissory
  notes; interest payable annually at fixed rate of 8.00%; due through 2003.
  1,583
  1,483Other
  notes
  1,123
  33629,362
  35,013Current
  portion
  (4,759)
  (2,812)$24,603
  $32,201


The IDRB debt and the mortgage notes payable to French banks are
collateralized by real and personal property of the Company. Aggregate maturities of long-term debt outstanding at December 31, 2000
are: 2001 - $4,466; 2002 - $3,725; 2003 - $3,368; 2004 - $3,199; 2005 -
$3,212; beyond 2005 - $10,647. Capital Leases The
Company leases its vehicles under noncancelable capital leases expiring in
2004.  The total leased assets were
$1,388, and related accumulated amortization was $552 as of December 31,
2000.  Minimum future lease obligations
under the capital lease for the Companys vehicles as of December 31, 2000 are
as follows: Year
  ending December 31:2001
  $3772002
  3402003
  1532004
  10Total minimum lease payments
  880Less
  amount representing interest
  135Present
  value of minimum lease payments
  745Less
  current portion
  293Long-term
  portion
  $452  The Companys promissory notes contain a
covenant which limits the payment of dividends to shareholders.  At December 31, 2000, approximately $9,000
of retained earnings was eligible for dividend distribution under this
covenant.  The Companys various debt
agreements contain certain restrictions related to financial ratios,
indebtedness, tangible net worth and capital expenditures.  As of December 31, 2000, the Company was in
compliance with all debt covenants. The Company also has an unsecured standby
letter of credit of $5 million with a large financial institution.  As of December 31, 2000, no amount was
outstanding. Cash payments for interest related to all
debts of the Company were $4,169, $4,086 and $4,037 for the years ended
December 31, 2000, 1999 and 1998, respectively. 9.Stock OptionsThe Companys 1993 Stock Option Plan, with
800,000 reserved common shares, is intended to facilitate ownership and
increase the interest of key employees in the growth and performance of the
Company, thus enhancing the value of the Company for the benefit of the shareholders.  Options are granted at a price not less than
market value on the date of the grant and become exercisable over a period of
up to ten years, after which they expire. 
The 1993 Stock Option Plan terminates on September 1, 2003.The Companys 1995 Director Stock Option Plan
provides that each director of the Company shall automatically receive, as of
the date of each Annual Meeting of Shareholders, a non-qualified option to
purchase 3,000 shares of the Companys common stock.  The options have a ten-year term and are exercisable one year
after the grant date at an exercise price equal to the fair market value of the
shares on the grant date.  The 1995
Director Stock Option Plan terminates on May 17, 2005.Shares reserved for future issuance under all
of the Companys plans totaled approximately 1.484 million at December 31,
2000.The Company
  applies Accounting Principles Board (APB) Opinion No. 25 Accounting for
  Stock Issued to Employees and related interpretations in accounting for its
  plans.  No compensation cost has been
  recognized for its stock-based compensation plans as the exercise price of
  the stock option grants was equal to the fair market value of the shares on
  the grant date.  Had compensation costs
  been determined based on the fair value of the 2000, 1999 and 1998 stock
  option grants consistent with the requirements of SFAS No. 123, Accounting
  for Stock-Based Compensation, net income and earnings per share would have
  been reported as the following pro forma amounts:2000
  1999
  1998Net
  income (loss)As
  reported
  $5,419
  $964
  $(1,053)Pro
  forma
  5,200
  738
  $(1,468)Earnings
  (loss) per share assuming
  dilutionAs
  reported
  $0.38
  $0.07
  $(0.08)Pro
  forma
  $0.36
  $0.05
  $(0.11)The fair
  value of the stock options used to calculate the pro forma net income and
  earnings per share amounts above is estimated using the Black-Scholes options
  pricing model with the following weighted average assumptions:2000
  
  1999
  
  1998Dividend
  yield
  0
  %
  0
  %
  0
  %Expected
  volatility
  30.0
  %
  46.9
  %
  42.5
  %Risk-free
  interest rate
  7.0
  %
  6.5
  %
  6.0
  %Expected
  life
  5.0
  
  5.0
  
  5.0


Information related to stock options at
December 31 under the aforementioned stock option plans is as follows: 2000
  1999
  1998Weighted
  Weighted
  
  WeightedAverage
  Average
  
  AverageShares
  Exercise
  Shares
  Exercise
  Shares
  ExerciseStock Options
  (000)
  Price
  (000)
  Price
  (000)
  PriceOutstanding at beginning of year
  1,025
  $10.76
  947
  $10.21
  653
  $9.94Granted
  353
  7.77
  255
  8.93
  379
  11.85Exercised
  13
  3.92
  151
  3.76
  -
  -Forfeited
  153
  11.66
  26
  12.71
  85
  15.55Outstanding at end of year
  1,212
  9.85
  1,025
  10.76
  947
  10.21Options exercisable at year-end
  592
  10.75
  487
  10.64
  486
  7.37Weighted average fair value of options
  granted during the year
  $3.11
  
  $4.44
  
  $5.48 The following table summarizes information
about stock options outstanding at December 31, 2000: Options Outstanding
  Options ExercisableShares
  
  Weighted
  Shares
  WeightedRange of
  Outstanding
  Remaining
  Average
  Exercisable
  AverageExercise
  at 12/31/00
  Contractual
  Exercise
  at 12/31/00
  ExercisePrices
  (000)
  Life
  Price
  (000)
  Price$ 2.23-6.72
  217
  3.0 yrs
  $5.99
  217
  $5.996.73-13.42
  759
  8.4 yrs
  8.81
  194
  10.3413.43-17.90
  204
  6.5 yrs
  16.26
  149
  16.2817.91-22.38
  32
  5.3 yrs
  19.66
  32
  19.66 In 1998, the Company adopted a Stock Match
Plan under which the Company matches, in the form of company common stock,
certain eligible U.S. employee savings plan contributions.  Employees are vested in the shares immediately.  Shares issued under the Stock Match Plan
were 59,748, 51,078 and 23,468 shares at a cost of approximately $498,000,
$483,000 and $234,000 in 2000, 1999 and 1998, respectively.  At December 31, 2000, there were
approximately 66,000 shares reserved for future issuance.


The Company has an Employee Stock Purchase
Plan which allows eligible employees to purchase common shares of the Company
at 85% of market price.  During 2000,
74,017 shares were issued at prices ranging from $5.84 to $7.86 per share.  During 1999, 69,209 shares were issued at
prices ranging from $6.80 to $9.99 per share. 
During 1998, 64,819 shares were issued at prices ranging from $7.18 to
$14.08 per share.  At December 31, 2000,
there were approximately 70,000 shares reserved for future issuance. The Company had 500,000 authorized and
unissued shares of preferred stock at December 31, 2000 and 1999. 10.   Income
Taxes Income
tax expense (benefit) consists of: Year ended December 31,2000
  1999
  1998Current:Federal
  $1,339
  $300
  $213State
  133
  (213)
  261Foreign
  61
  162
  395Deferred:Losses
  and credits not usable in current year, carried forward to
  future
  years
  (29)
  (1,319)Depreciation
  89
  (26)
  298Amortization
  of intangibles
  298
  1,635
  (1,387)Net
  operating loss usage
  712
  512
  508Allowance
  for doubtful accounts, start-up, warranty, inventory
  and
  other accruals
  520
  424
  (347)Deduction
  for unqualified option exercise
  -
  251Other
  (460)
  358
  34Total
  provision
  $2,663
  $2,084
  $(25)  Cash payments for income taxes were $1,344,
$1,155 and $3,624 for the years ended December 31, 2000, 1999 and 1998,
respectively. When Osmonics, Inc. acquired MSI, on February
17, 1998, MSI had incurred $11,827 of tax losses, which had not yet been offset
against previous or subsequent years taxable income of MSI.  In 1999, MSI filed a refund request that
offset $8,684 of these losses against income of MSI for the years from 1988 to
1995, under the Claim of Right rule. 
All of the taxes claimed in this refund request were received in
1999.  The remaining losses of $3,143
were carried forward, for offset against MSI income in years after the
acquisition.  $1,989, $0 and $1,154 of
these losses were offset against MSI income for the years of 2000, 1999 and
1998, respectively.  After the 2000
offset, there were no more remaining losses available for carryforward. Osmonics
generated a net operating loss (NOL) of $1,639 in 1999.  The entire loss was used as an offset
against income generated in 1997, which resulted in a refund of
$556 received in 2000.  Osmonics also
generated credits in 1998 and 1999, totaling $1,224, that can be carried back
and offset against taxes paid in the years 1996 through 1997.  Remaining credits can then be carried
forward, and offset against taxes owed in future years.  $292 of these credits were offset against
taxes paid in 2000.  The credit
carryforwards that have expiration dates will expire in years ranging from the
year 2003 to the year 2019.A reconciliation of the income taxes computed
at the federal statutory rate to the Companys income tax expense is as
follows:Year Ended December 31,2000
  1999
  1998Taxes
  at federal rate (35% in 2000, 1999 and 1998)
  $2,829
  $1,067
  $(377)Increase
  (decrease) resulting from:State
  taxes, net of federal tax benefit
  217
  6
  216Foreign
  Sales Corp. benefit
  (571)
  (615)
  (503)Tax
  credits
  (109)
  (227)
  (307)Tax-exempt
  interest/dividend deduction
  (55)
  (100)
  (123)Effect
  of foreign affiliates with different tax rates or net losses
  119
  15
  91Nondeductibility
  of intangible write-offs and amortization
  469
  1,547
  851Other
  (236)
  391
  127Total
  provision
  $2,663
  $2,084
  $(25)


11.   Deferred
Tax Assets and Liabilities Temporary differences which give rise to
deferred tax assets and liabilities are as follows as of December 31: 2000
  1999Current
  assets:Allowance
  for doubtful accounts, start-up, warranty and other accruals
  $3,192
  $3,592Unrealized
  gain on marketable securities
  (408)
  (1,477)Inventory
  costs capitalized for tax
  66
  33Net
  operating losses available for carryback or carryforward
  1,400
  2,638Other
  64
  (13)Total
  current deferred assets
  $4,314
  $4,773Noncurrent liabilities:Depreciation
  $3,932
  $3,889Amortization
  of intangibles
  2,165
  1,981Other
  238
  386Total
  noncurrent deferred tax liabilities
  $6,335
  $6,256  12.     Sales
and Segment Information The Company designs, manufactures and markets
equipment, systems and components used in the processing and handling of
fluids.  In 2000, the Company changed
the focus of its reporting structure from a two-segment, product-focused
structure to a three-segment, market-focused structure. The three-market-segment structure was
established to provide strategic leadership within the three major market segments
in which the Company conducts business. 
The new structure was implemented on January 1, 2000.  Restatement of 1999 financial results under
this method of reporting has been completed and is disclosed comparatively in
financial reports.  Restatement of
results prior to 1999 under this method of reporting has been deemed
impracticable due to the costs and unavailability of certain financial
information. The Filtration and Separations segment
includes products such as filter cartridges, membrane elements, membranes,
instruments and laboratory products. 
The Process Water segment includes products such as pumps, housings,
valves, controls, reverse osmosis/ultrafiltration (RO/UF) machines, ozonators
and water treatment systems used for industrial, commercial and municipal
applications.  The Household Water
segment includes products such as valves, controls and home reverse osmosis
membranes used for the residential water purification and water softening
market segments.  Each segment is
currently supported by several manufacturing facilities, a sales force and
various corporate functions.  The
segments do not have separate accounting, administration or manufacturing
functions. The
reportable segment information for 2000 and 1999 is as follows (all segmentinformation
excludes the impact of special charges in both years):Year Ended December 31,2000
  1999Sales:Filtration and Separations
  $79,977
  $78,640Process Water
  80,647
  71,306Household Water
  39,515
  37,082Net Sales
  200,139
  187,028Gross Profit:Filtration and Separations
  27,526
  30,315Process Water
  20,141
  17,078Household Water
  12,489
  12,062Gross Profit
  60,156
  59,455Operating Income:Filtration and Separations
  4,986
  7,159Process Water
  (191)
  (1,299)Household Water
  3,280
  2,181Operating Income
  $8,075
  $8,041Currently, management does not report the
balance sheet or any cash-generating measurements by such segments.All
operations for which geographic data is presented below are in one principal
industry (design, manufacture and marketing of machines, systems, instruments
and components used in the processing of fluids).


2000
  1999
  1998Sales
  to unaffiliated customers from:United
  States
  $182,324
  $172,194
  $165,831Foreign
  operations
  17,815
  14,834
  13,911Transfers
  from (to) geographic areas:United
  States
  15,253
  10,142
  8,780Foreign
  operations
  (15,253)
  (10,142)
  (8,780)$200,139
  $187,028
  $179,742Income
  (loss) from operationsbefore
  income taxes:United
  States
  $7,952
  $2,681
  $(1,926)Foreign
  operations
  130
  367
  848$8,082
  $3,048
  $(1,078)Identifiable
  assets:United
  States
  $178,820
  $185,338
  $185,814Foreign
  operations
  9,872
  9,028
  8,235$188,692
  $194,366
  $194,049 NOTE: 
Transfers are made at fair market value. Sales by United States operations to unaffiliated customers in
  foreign geographic areas are as follows:  Year Ended December 31,2000
  1999
  1998Asia/Pacific
  $22,653
  $17,953
  $15,967Euro/Africa
  14,771
  18,437
  17,710Americas
  15,297
  10,491
  11,227$52,721
  $46,881
  $44,904


Total
international sales for the Company were as follows: Year Ended December 31,2000
  1999
  1998International
  sales
  $70,536
  $61,715
  $58,815% of
  sales
  35.2%
  33.0%
  32.7%  13.   Commitments
and Contingencies Operating Leases- The
Company leases facilities for sales, service, or manufacturing purposes in
Iowa, Massachusetts, New Jersey, Washington and Wisconsin in the United States,
as well as in China, Germany, Hong Kong, Japan, Singapore, Switzerland and
Thailand. Future minimum lease payments on all
operating leases of $4,710 are payable as follows:  2001 - $1,475; 2002 - $1,322; 2003 - $1,021; 2004 - $507; 2005 -
$243 and beyond 2005 - $142.  Rent
expense for the three years ended December 31 was:  2000 - $1,942; 1999 - $2,316; and 1998 - $1,794. The Company is involved in certain legal
actions arising in the ordinary course of business.  In the opinion of management, based on the advice of legal
counsel, such litigation and claims will be resolved without a material effect
on the Companys financial position or results of operations. 14.   Employee
Benefit Plan The Company has a noncontributory
discretionary profit sharing plan covering certain employees meeting age and
length of service requirements.  The
Company contributes annually to the plan an amount established at the
discretion of the Board of Directors. Total expense recognized by the Company under
this plan amounted to $300, $284 and $687 in 2000, 1999 and 1998, respectively.


15.   Earnings
Per Share The following table reflects the calculation
of basic and diluted earnings per share from operations. 2000
  1999
  1998Earnings
  (loss) per share - basicIncome
  (loss) from operations  available to common stockholders
  $5,419
  $964
  $(1,053)Weighted
  average shares outstanding
  14,329
  14,162
  13,976Income
  (loss) from operations per share  basic
  $0.38
  $0.07
  $(0.08)Earnings (loss) per share  assuming
  dilutionIncome
  (loss) from operations available to common stockholders
  $5,419
  $964
  $(1,053)Weighted
  average shares outstanding
  14,329
  14,162
  13,976Dilutive
  impact of stock options outstanding
  75
  90
  -Weighted
  average shares and potential dilutive shares outstanding
  14,404
  14,252
  13,976Income
  (loss) from operations per share  assuming dilution
  $0.38
  $0.07
  $(0.08)  Additionally, options to purchase 625,000 shares of common stock at a
  range of $8.56 to $22.38 were outstanding during 2000 but were not included
  in the computation of diluted earnings per share because the options
  exercise price was greater than the average market price of the common
  share.Sales by United States operations to unaffiliated customers in foreign
  geographic areas are as follows:  16.   Special
Charges Special charges included a $250 recovery of
1999 special charge inventory accruals primarily due to gains recognized on the
sale of inventory at the Companys Rockland, Massachusetts manufacturing
facility, which reduced cost of goods sold. 
The special charge of $250 related to workforce reduction severance
costs.  Workforce reductions of 75
employees with expected severance/outplacement costs of $250 related to the
first quarter 2000 restructuring of several corporate functions and the planned
third quarter 2000 closure of the Companys Phoenix, Arizona facility. Special charge expenditures in 2000 were $329
for workforce reductions.  The remaining
negative accrual balance of $79 was offset by a like amount of overage in the
1999 special charge accruals.


In 1999, the Company recorded net special
charges of $3,610 ($3,569 net-of-tax or $0.25 per share assuming
dilution).  Charges included a $3,500
asset impairment charge for non-deductible goodwill associated with the
acquisition of AquaMatic, Inc. in 1997, a $1,035 charge to cost of sales for
inventory related to plant closings and a $1,233 charge to operating expense
for corporate restructuring and consolidation of operations.  Operating expense recoveries included a
$1,943 gain on the sale of operations and $215 recovery on second quarter 1998
special charges. Asset impairment charges of $3,500 relate to
the AquaMatic products purchased in 1997 by the Company (see Note 2).  The impairment charge was based on the 1999
operating results and the estimated discounted future cash flows of the
products. Inventory charges of $1,035 represent the net
book value of inventory at two manufacturing locations that will not be
utilized in ongoing production of the Companys products or be recovered
through other methods of disposal. Corporate restructuring and consolidation of
operations costs of $1,233 primarily include facility closing/consolidation,
asset write-downs and workforce reduction severance costs.  Facility-related costs relate to closing two
manufacturing facilities and relocating certain manufacturing-related
activities to other existing locations. 
Certain manufacturing efforts will be exited as a result of the facility
closures.  Discontinuance and relocation
of such manufacturing has risks associated with potential production interruptions;
however, managements current assessment is that these risks can be effectively
managed to minimize impact to sales. Workforce reductions of 30 employees with
expected severance/outplacement costs of $75 related to the December 31, 1999
closure of the Companys Rockland, Massachusetts facility were included in the
1999 special charge.  Workforce
reductions of 50 employees with expected severance/outplacement costs of $200
related to the planned third quarter 2000 closure of the Companys Phoenix, Arizona
facility were not included in the 1999 special charge since the plan was not
announced to the employees at December 31, 1999. Special charge expenditures in 1999 were $850
for inventory costs, $164 for workforce reductions and $830 for facility closing/consolidation
costs in 2000.  In 2000, $79 of the 1999
special charge accrual was used to offset the 2000 special charges accrual
shortfall.  The remaining accrual
balance of $160 relates to the anticipated January 2001 costs to exit the
Companys Rockland, Massachusetts manufacturing facility.


In 1998, the Company recorded special charges
of $9,988 ($7,569 net-of-tax or $0.54 per share assuming dilution).  Charges include a $6,222 charge to operating
expense for in-process research and development (Note 2) related to the
acquisitions of Micron Separations, Inc. ($1,902) and Membrex Corp. ($4,320)
and a $2,000 charge to cost of sales for slow moving inventory.  The special charges also included operating
expense charges of $875 for corporate restructuring and consolidation of
operations, and $891 for re-engineering costs and write-downs of assets in
connection with the Companys implementation of a new information system. Corporate restructuring and consolidation of
operations costs of $875 primarily include workforce reduction severance and
facility closing/consolidation costs. 
Employment of 1,559 at June 30, 1998 was reduced to 1,360 at December
31, 1998.  Facility-related costs relate
to closing three manufacturing facilities and relocating manufacturing-related
activities to other existing locations. Expenditures were $300 for workforce
reductions and $110 for facility closing/consolidation costs in 1999.  In 1999, the remaining balance of $215
related to the 1998 corporate restructuring special charge was recovered into
operating expense.


INDEPENDENT AUDITORS'
REPORT  Osmonics,
Inc. Board of Directors and Shareholders
 Minnetonka, Minnesota We
have audited the accompanying consolidated balance sheets
of Osmonicis, Inc. and Subsidiaries (the Company) as of
December 31, 2000 and 1999 and the related consolidated
statements of operations, changes in shareholders' equity,
and cash flows for each of the three years in the period
ended December 31, 2000.  These
financial statements are the
responsibility of the Company's management. 
Our
responsibility is to express an opinion on the financial
statements based on our audits. We
conducted our audits in accordance with auditing standards
Generally accepted in the United States of America.  Those
standards require that we plan and perform the audit to obtain
reasonable assurance that the financial statements are
free of material misstatement.  An audit
includes examining,
on a test basis, evidence supporting the amounts and disclosures
in the financial statements.  An audit
also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation.  We believe that
our audits provide
a reasonable basis for our opinion. In
our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of the Company at
December 31, 2000 and 1999 and the results of its
operations and its cash flows for each of the three years
in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United
States of America. Deloitte
and Touche LLP Minneapolis,
Minnesota
February 23, 2001


MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS (Dollars
in thousands, except share data)  The
following discussion should be read in conjunction with the Companys
Consolidated Financial Statements and Notes included in this report. Results of Operations The
following table sets forth certain statements of operations data as a
percentage of net sales for the periods indicated.  Years Ended
  December 31,
  Increase (Decrease)2000 vs
  1999
  vs2000
  1999
  1998
  1999
  1998Net sales
  100.0%
  100.0%
  100.0%
  7.0%
  4.1%Cost of goods sold
  69.8
  68.8
  64.9
  8.7
  10.3Gross profit
  30.2
  31.2
  35.1
  3.4
  (5.8)Selling, general and
  administrative
  22.2
  23.3
  24.3
  1.1
  0.5Research, development and
  engineering
  3.9
  4.1
  5.5
  2.5
  (22.4)Special charges
  0.1
  1.4
  4.4
  (90.3)
  (67.8)Operating profit
  4.0
  2.4
  0.9
  82.2
  219.1Other income (expense)
  -
  (0.7)
  (1.5)
  100.5
  50.4Income taxes
  1.3
  1.2
  -
  27.8
  N/ANet income (loss)
  2.7
  0.5
  (0.6)
  462.1
  289.8
 Comparison of Years
Ended December 31, 2000 and December 31, 1999 Net Salesfor 2000
increased $13,111 or 7.0% to $200,139 as compared to net sales of $187,028 for
1999.  The 2000 sales increase was
primarily the result of renewed organic sales growth of 6%.  Sales in 2000 benefited from the full year
impact of ZyzaTech ($6,500), acquired in third quarter 1999, and were
negatively impacted by product lines that were exited as a result of closing
certain manufacturing facilities ($4,900). 
Sales in 2000 increased in all segments of the Company.  Internationally, 2000 sales improved $4,700
(26%) to customers in Asia/Pacific and $4,806 (46%) to customers in the
Americas.  The deterioration of the euro
in comparison to the U.S. dollar negatively impacted Year 2000 sales by
approximately $580K or 0.3%. Gross Profitfor 2000
increased $1,986 or 3.4% to $60,406 as compared to $58,420 in 1999.  As a percentage of net sales, gross profit
decreased to 30.2% from 31.2% in 1999. 
2000 gross profit includes $250 (0.1% of net sales) of a special
inventory recovery related to a plant closing recorded in the first quarter
2000.  1999 gross profit includes $1,035
(0.6% of net sales) of special inventory charges related to plant
closings.  The decrease in gross profit
percentage is primarily due to lower utilization and production issues at
certain manufacturing facilities.  To
reduce excess manufacturing capacity and costs in order to improve gross
margins, one facility (Rockland, Massachusetts) was closed on December 31, 1999,
another (Denver, Colorado) was closed in September 2000 and another facility
(Phoenix, Arizona) was closed in October 2000. The Company relocated certain production
capabilities throughout the year as it continues in its efforts to focus its
factories and eliminate duplicate capabilities and the
associated cost and overhead structures. 
Five such relocations were completed during 2000.  One-time costs of physically moving the
manufacturing efforts and near-term inefficiencies inherent with such changes
negatively impacted margins of the Company during the year.

In
the process of relocating production capabilities, the Company was unable to
achieve its expected scrap reduction targets. 
The Company experienced increasing raw material and energy costs in 2000
and was unable to offset with price increases. 
Specifically, surcharges on stainless steel and increased polypropylene
costs were the largest raw material impacts. 
While energy costs increased throughout the Company, the increases were
more substantial at the Companys Vista, California facility.  Should the energy costs in 2001 remain at
levels experienced in California during the second half of 2000, the Company
anticipates approximately $600 of additional costs that it may not be able to
pass on to its customers.  The reduction
of manufacturing scrap and the improvement in raw material sourcing remain
continuing priorities in Year 2001.

The
deterioration of the euro in comparison to the U.S. dollar negatively impacted
Year 2000 gross margin by approximately $580K or 0.3%.

Selling, General and
Administrative Expensesincreased $475 or 1.1% to $44,195 in
2000 as compared to $43,720 in 1999.  As
a percentage of sales, SG&A decreased from 23.3% to 22.2% in 2000.  The 2000 increase is attributed to the
acquisition of ZyzaTech Water Systems in July 1999 and offset by expense
control efforts of the Company.  The
Company has attempted to manage expenses through various efforts to restructure
the Company, improve the utilization of the Companys ERP system and
rationalize the products sold and the markets served by the Company.


The
Company continues to centralize its sales efforts within business segments to
focus responsibility for customer relationships.  The Company has increased its efforts to better understand its
customers requirements and believes it has made progress toward improving
performance and service levels to meet those requirements. Research, Development
and Engineering Expensesincreased $192 or 2.5% to $7,886 in
2000, compared to $7,694 in 1999.  As a
percentage of sales, the R&D expenses were 3.9% and 4.1% in 2000 and 1999,
respectively.  The decrease in percent
of sales is the result of the Company continuing to focus its R&D efforts
to eliminate duplication, to concentrate on new product development and improve
timeliness to market.  The Company
believes the current level of funding is adequate to support its product
development priorities. Special Charges
(Recovery)were recorded in the first quarter of
2000 that netted to zero.  Special
charges included a $250 recovery of inventory accruals primarily due to gains
recognized on the sale of inventory at the Companys Rockland, Massachusetts
manufacturing facility.  The special
charges also included $250 of workforce reduction severance costs related to
the first quarter 2000 restructuring of several corporate functions.  The special charges (recovery) are
summarized below:  Corporate restructuring
  $250Special inventory recovery related to plant closings
  (250)Gross special
  charges (recovery)
  $-Less special
  inventory recovery  in
  COS
  (250)Special charge in
  Operating
  Expense
  $250
 Other Expensedecreased
$1,390 to income of $7 in 2000, compared to expense of $1,383 in 1999.  The 2000 change is primarily the result of
gains on the sale of investment securities of $3,788 in 2000 compared to $2,371
in 1999.  Net interest expense increased
$499 to $3,940 in 2000 compared to $3,441 in 1999.  This resulted from a $215 decrease in interest income during 2000
resulting from the liquidation of marketable securities in 2000.  Also, 2000 interest expense increased $284
as interest rate increases negatively impacted the reduced average debt
carrying balance of the Company. Income Taxesincreased
$579 to $2,663 in 2000 compared to $2,084 in 1999.  The effective tax rate for the year ended December 31, 2000 was
32.9% compared to 31.8% for the same period in 1999.  The 1999 effective tax rate was computed after excluding the
non-deductible $3,500 goodwill asset impairment special charge related to
AquaMatic products. Net Incomeincreased
$4,455 to $5,419 ($0.38 per diluted share) in 2000, compared to $964 ($0.07 per
diluted share) in 1999.  Net income in
1999 was negatively impacted by special charges.  Without the special charges, 1999 net income would have been $4,533
($0.32 per diluted share).


Comparison of Years
Ended December 31, 1999 and December 31, 1998 Net Salesfor 1999
increased $7,286 or 4.1% to $187,028 as compared to net sales of $179,742 for
1998.  The 1999 sales increase was
primarily attributed to the third quarter 1999 acquisition of ZyzaTech Water
Systems and the full year impact of the 1998 MSI and Membrex acquisitions.  Existing business sales were down $3,053 in
1999 due to decreases in capital equipment sales, components sold to OEM
customers, sales of certain consumable products impacted by availability of
product and the sale of certain product lines. 
Overall, 1999 sales improved $3,009 (19%) to customers in Asia/Pacific,
while sales decreased $1,138 (4%) to customers in Euro/Africa. Gross Profitdecreased
$4,681 or 7.4% to $58,420 as compared to $63,101 in 1998.  As a percentage of net sales, gross profit
decreased to 31.2% from 35.1% in 1998. 
1999 gross profit includes $1,035 (0.6% of net sales) of special
inventory charges related to plant closings. 
The decrease in gross profit is primarily due to lower utilization and
production issues at certain manufacturing facilities.  To reduce excess manufacturing capacity,
reduce costs and improve gross margins, one facility was closed on December 31,
1999 and another location was closed in October 2000.  The Company is relocating certain production and product
capabilities in efforts to focus its factories and eliminate duplicate
capabilities and the associated cost and overhead structures.  The reduction of manufacturing scrap and the
improvement of raw material sourcing have been identified as major priorities
in Year 2000. Selling, General and
Administrative Expensesincreased $233 or 0.5% to $43,720 in
1999 as compared to $43,487 in 1998.  As
a percentage of sales, SG&A expenses decreased to 23.3% from 24.3% in
1998.  The 1999 increase is attributed
to the acquisition of ZyzaTech Water Systems in July 1999 and offset by expense
control efforts of the Company. The
Companys marketing priority is to get its products into distribution as soon
as possible.  The Company continues to
centralize its sales groups to focus responsibility for customer
relationships.  In addition, the Company
has invested in customer satisfaction initiatives and surveys during the year
to identify areas where the Company can improve performance and service levels
to better serve and meet our customers requirements.  The Company believes that these actions have enhanced customer
service and will increase market penetration in the future; however, in 1999 no
significant sales benefit was achieved.


Research, Development
and Engineering Expensesdecreased $2,219 or 22.4% to $7,694 in
1999, compared to $9,913 in 1998.  As a
percentage of sales, the R&D expenses decreased to 4.1% from 5.5% in
1998.  The Company has continued to
centralize and rationalize its R&D efforts to eliminate duplication of
efforts.  The Company believes the
current level of funding is adequate to support its product development
priorities. Special Chargesof $3,610
($3,569 net-of-tax or $0.25 per diluted share) were recorded in the second half
of 1999.  Charges included a $3,500
asset impairment charge for goodwill associated with the acquisition of
AquaMatic, Inc. in 1997, a $1,035 charge to cost of sales for inventory related
to plant closings and a $1,233 charge to operating expense for corporate
restructuring and consolidation of operations. 
Operating expense recoveries included a $1,943 gain on the sale of
operations and $215 recovery on second quarter 1998 special charges.  The special charges are summarized below:  Asset impairment  goodwill
  $3,500Inventory charge related to plant closings
  1,035Corporate restructuring
  1,233Gain on sale of operations
  (1,943)Recovery on second quarter 1998 special
  charge
  (215)Gross special charge
  $3,610Less inventory
  charge  in COS
  1,035Special charge in
  Operating Expense
  $2,575
 Other Expensedecreased
$1,408 to $1,383 in 1999, compared to $2,791 in 1998.  The 1999 change is primarily the result of gains on the sale of
investment securities of $2,371 during 1999. 
Offsetting these gains was additional interest expense for the full year
of $200 and $480 on the borrowing of $20,000 and $18,000 for the first quarter
1998 acquisition of Micron Separations, Inc. and the second quarter 1998
acquisition of Membrex Corp., respectively. 
Also, additional interest expense of $320 was recorded related to the
borrowing of $8,000 for the third quarter 1999 acquisition of ZyzaTech Water
Systems, Inc. Income Taxesincreased
$2,109 to $2,084 in 1999 compared to the tax benefit of $25 recorded in
1998.  The effective tax rate for the
year ended December 31, 1999 was 31.8% excluding the non-deductible $3,500
goodwill asset impairment special charge related to AquaMatic products.  The 1998 benefit was less than might have
been anticipated due to the non-deductibility of the Micron Separations, Inc.
in-process R&D that was written off in the second quarter of 1998.


Net Incomeincreased
$2,017 to income of $964 ($0.07 per diluted share) in 1999, compared to a loss
of $1,053 ($0.08 loss per diluted share) in 1998.  Net income in 1999 and 1998 was negatively impacted by special
charges.  Without the special charges,
1999 and 1998 net income would have been $4,533 ($0.32 per diluted share) and
$6,516 ($0.46 per diluted share), respectively. Liquidity and Capital
Resources At
December 31, 2000, the Company had cash and marketable securities of $1,910 as
compared to $15,814 at December 31, 1999. 
The decrease in cash and marketable securities was primarily the result
of the Company liquidating $14,029 of its marketable securities portfolio
during 2000. Cash
provided by operations was $2,395, $20,089 and $8,102 for the years ended
December 31, 2000, 1999 and 1998, respectively.  The decrease in cash provided by operating activities during 2000
was principally due to the Companys decision to strategically build inventory
levels of high volume items to better serve its customers.  The combination of Year 2000 increase of $8,158
and a 1999 decrease of $5,372 resulted in total cash flow from operations
impact change of $13,530.  The increase
in cash provided by operating activities during 1999 was principally due to
improved management of current liability balances of the Company, the receipt
of tax refunds and the timing of tax payments. Capital
expenditures for the years ended December 31, 2000, 1999 and 1998 were $7,058,
$8,323 and $7,808, respectively. 
Depreciation for the same time periods was $7,300, $6,632 and $6,290, respectively.  The Company anticipates increasing its
investment in capital assets in 2001. In
the first quarter of 2000, the Company entered into a loan agreement amendment
that reduced the Companys unsecured revolving line of credit to $30,000 from
$35,000.  In the second quarter 2000,
the Company negotiated the release of collateral arrangements with its lenders
associated with $10,000 of its marketable securities portfolio.  As a result, the Company liquidated that
portion of its marketable securities portfolio and used the proceeds to reduce
aggregate debt levels, fund current operations and enter into a loan agreement
amendment that reduced the Companys unsecured revolving line of credit to
$24,000 from $30,000.  At December 31,
2000, the Company had $9,000 available under the revolving line of credit,
compared to $16,500 as of December 31, 1999. On
January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. 
SFAS No. 133 established accounting and reporting standards for
derivative instruments and for hedging activities.  It requires that all derivatives, including those embedded in
other contracts, be recognized as either assets or liabilities and that those
financial instruments be measured at fair value.  The accounting for changes in the fair value of derivatives
depends on their intended use and designation. 
Management has reviewed the requirements of SFAS No. 133 and has
determined that they have embedded derivatives.  All contracts that contain provisions meeting the definition of a
derivative also meet the requirements of, and have been designated as, normal
purchases or sales.  The Companys
policy is to not enter into contracts containing derivatives with terms that
cannot be designated as normal purchases or sales. The
Company adopted Staff Accounting Bulletin No. 101 Revenue Recognition in
Financial Statements, which provides guidance on revenue recognition.  The Companys adoption of the bulletin had
no effect on the financial position or results of operations.

The
Company adopted EITF 00-10 Accounting for Shipping and Handling Fees and
Costs issued by the Emerging Issues Task Force in 2000.  Comparative financial statements for prior
periods have been reclassified to comply with the classification guidelines.  The freight amounts reclassified from cost
of sales into revenues were $3,104, $2,357 and $1,923 for the years ended
December 31, 2000, 1999 and 1998, respectively.

The
Companys operating cash requirements consist principally of working capital
requirements, capital expenditures and scheduled payments of principal on
outstanding indebtedness.  The Company
believes that its cash and marketable securities, cash flow from operating
activities and borrowings under its bank facility will be adequate to meet the
Companys liquidity and capital investment requirements in the foreseeable
future.

Review of Industry
Segments

As
discussed in Note 12 to the consolidated financial statements, in 2000 the
Company changed the focus of its reporting structure from a two-segment,
product-focused structure to a three-segment, market-focused structure.  Certain financial results for the 12 months
ended December 31, 2000 and 1999 are presented below as a percentage of net
sales by segment (all segment information excludes the impact of special
charges in both years):


Year EndedDecember 31,Increase2000
  1999
  (Decrease)Filtration and SeparationsSales
  100.0%
  100.0%
  1.7%Gross Profit
  34.4
  38.5
  (9.2)Operating Income
  6.2
  9.1
  (30.4)Process WaterSales
  100.0%
  100.0%
  13.1%Gross Profit
  25.0
  24.0
  17.9Operating Income
  (0.2)
  (1.8)
  (85.3)Household WaterSales
  100.0%
  100.0%
  6.6%Gross Profit
  31.6
  32.5
  3.5Operating Income
  8.3
  5.9
  50.4 Sales
to unaffiliated customers in foreign geographic areas are as follows: %
  of
  
  %
  of
  
  %
  ofTotal
  
  Total
  
  Total2000
  Sales
  1999
  Sales
  1998
  SalesAsia/Pacific
  $22,653
  11.3
  $17,953
  9.6
  $15,967
  8.9Euro/Africa
  32,586
  16.3
  33,271
  17.8
  31,621
  17.6Americas
  15,297
  7.6
  10,491
  5.6
  11,227
  6.2Total International Sales
  $70,536
  35.2
  $61,715
  33.0
  $58,815
  32.7 All
three segments experienced internal sales growth in the year ended December 31,
2000 compared to the same period in 1999. 
Process Water Treatment segment sales growth in 2000 was primarily the
result of sales from ZyzaTech ($6,500) acquired on July 1, 1999. The
gross margin and operating income percentage declines in Filtration and
Separations in 2000 compared to 1999 were primarily related to production
issues and lower production levels which resulted in unabsorbed overhead at
certain manufacturing locations.  In
addition, an unfavorable sales mix contributed to the reduced margins. The
gross margin and operating income percentage improvements in Process Water in
2000 compared to 1999 were principally the result of improved gross profits on
engineered systems and products. 
Offsetting the improvements were over $400 of one-time move expenses
related to the relocation of certain manufacturing activities in 2000.  Operating expenses decreased as a percent of
sales; however, they increased $1,955 or 10.6% in 2000 compared to 1999
primarily related to the full year impact of the July 1999 acquisition of
ZyzaTech Water Systems.  The remaining
increase was the result of the segment reinvesting in sales and marketing
resources in an effort to utilize remaining surplus manufacturing capacity. The
gross margin percentage decline in Household Water in 2000 compared to 1999 was
principally related to production issues that included increased manufacturing
scrap and variances at a certain manufacturing location.  Offsetting this decline was a reduction in
operating expenses of $672 or 6.8% in 2000. 
This decrease, related entirely to increased focus of R&D efforts and
related expenditures, helped drive operating income percentage improvements in
2000 compared to 1999.

Currently,
management does not report the balance sheet or any cash-generating
measurements by such segments.

Bankruptcy of Major
Customer

The
Company has $14,200 of goodwill recorded as of December 31, 2000 associated
with the second quarter 1998 acquisition of Membrex Corp. (Membrex).  Safety Kleen (SK), the principal customer
for the Membrex products, filed for Chapter 11 bankruptcy in June of 2000.  As a result, second, third and fourth
quarter 2000 sales to SK of $700, $750 and $264, respectively, were
substantially below first quarter 2000 sales of $2,100.  SK has continued to order product and parts
at reduced levels to support its installed base.  Future sales levels are uncertain and could be minimal.

Inventory
related to the Membrex products for SK was $1,700 while net receivables from SK
were current at December 31, 2000.  The
Company is monitoring the Chapter 11 bankruptcy proceedings to determine any
further financial impact to the Company.

The
Company has a contract with SK that provides some exclusivity to SK for certain
Membrex products.  This contract is
contingent on both companies meeting certain service, production and sales
levels.  The exclusivity provisions are
conditioned on certain minimum purchase requirements by SK.  The Company anticipates that the exclusivity
provisions of the contract will expire in the third quarter of 2001 due to the
anticipated failure of SK to buy the required minimum amount of products and
has begun discussions with SK to renegotiate the contract based on the current
situation.


The
Company has determined that two-thirds ($9,500) of the Membrex goodwill is
associated with the SK products.  The
Company has concluded there was no impairment of goodwill at December 31, 2000.  In its analysis, Management used a
discounted cash flow model in accordance with current accounting guidelines, a
detailed five-year sales plan and anticipated an ongoing business relationship
with SK while it proceeds through and comes out of bankruptcy.  This ongoing business relationship assumes
that SK will continue to purchase replacement membrane for existing product
installations at the rate of two or three replacements per year per
installation. In
the event that SK does not survive bankruptcy, Management believes it will be
capable of selling and marketing these products through other sales channels in
a manner that will support the goodwill value. 
The Company is investigating alternative approaches to market as allowed
by the contract for these products. 
Additionally, the Company is continuing to investigate new applications
for the technology acquired from Membrex. 
The Company believes the patented technology associated with Membrex
brings a cost-effective solution to hazardous waste disposal, which could become
a required environmental standard. Private Securities
Litigation Reform Act The
Private Securities Litigation Reform Act provides a safe harbor for
forward-looking statements.  Certain
information included in this Annual Report and other materials filed or to be
filed with the Securities and Exchange Commission (as well as information
included in statements made or to be made by the Company) contains statements
that are forward-looking.  Such
statements may relate to plans for future expansion and market penetration,
sales, business development activities, capital spending, financing, product
reorganizations, plant rationalizations, scrap reductions, contract
negotiations, or the effects of regulation and competition.  Such information involves important risks
and uncertainties that could significantly affect results in the future.  Such results may differ from those expressed
in any forward-looking statements made by the Company.  These risks and uncertainties include, but
are not limited to, those relating to product development, computer systems
development, dependence on existing management, global economic and market
conditions and changes in federal or state laws.