<TABLE>
                                             OSMONICS, INC.
                                    CONSOLIDATED STATEMENTS OF INCOME


                                    (In thousands, except share data)
<CAPTION>

                    
                                                                    Year ended December 31,             
                                                       1995                  1994                1993   
<S>                                                  <C>                    <C>                 <C>     
Sales                                                $111,610               $96,180             $89,043 

Cost of sales                                          63,213                52,841              49,272 

Gross profit                                           48,397                43,339              39,771 

Operating expenses:

   Selling, general and administrative                 26,415                23,480              21,839 
   Research, development and engineering                7,779                 7,174               6,795 
   Embezzlement recovery  (Note 3)                          -                     -                (562)
   Merger and transition expenses                           -                     -               1,644 
                                                       34,194                30,654              29,716 
Income from operations                                 14,203                12,685              10,055 

Other income (expense), net (Note 4):

   Interest income                                      1,649                 1,543               1,279 
   Interest expense                                    (1,061)                 (747)               (943)
   Other                                                1,100                   142                 401 
                                                        1,688                   938                 737 
Income before income taxes                             15,891                13,623              10,792 

Income taxes (Note 9)                                   4,679                 3,668               2,897 

Net income                                           $ 11,212               $ 9,955             $ 7,895 


Net income per share                                $   0.88               $  0.79             $  0.63  

Average shares outstanding                         12,745,000            12,668,000          12,624,000 
</TABLE>
<TABLE>

                                             OSMONICS, INC.
                                       CONSOLIDATED BALANCE SHEETS
                                    (In thousands, except share data)
<CAPTION>
                                                                                    December 31,       
                                                                            1995                 1994  
<S>                                                                      <C>                  <C>                      
ASSETS                                                                            
Current assets
   Cash and cash equivalents                                             $  4,361             $  9,453 
   Marketable securities (Note 4)                                          26,307               27,623 
   Trade accounts receivable, net of allowance for doubtful
     accounts of $1,127 in 1995 and $1,259 in 1994                         20,501               15,536 
   Inventories (Note 5)                                                    26,227               19,428 
   Deferred tax assets (Note 10)                                            3,719                3,284 
   Other current assets                                                     1,851                1,303 
     Total current assets                                                  82,966               76,627 
Property and equipment, at cost                                                   
   Land and land improvements                                               2,310                1,951 
   Buildings                                                               15,557               12,300 
   Machinery and equipment                                                 36,645               32,756 
   Construction in progress                                                 5,970                  818 
                                                                           60,482               47,825 
   Less accumulated depreciation and amortization                         (27,923)             (25,262)
                                                                           32,559               22,563 
Goodwill, net of accumulated amortization of 
   $289 in 1995 and $170 in 1994                                            7,655                1,695 
Other assets, net of accumulated amortization of 
   intangible assets of $230 in 1995 and $145 in 1994                       1,878                1,150 
     Total assets                                                        $125,058             $102,035 
LIABILITIES AND SHAREHOLDERS' EQUITY                                              
Current liabilities                                                               
   Accounts payable                                                      $ 12,247             $  6,459 
   Notes payable and current portion of long-term debt (Note 7)             1,695                  744 
   Accrued compensation and employee benefits                               4,231                4,154 
   Reserve for discontinued operations                                      1,957                2,088 
   Other accrued liabilities (Note 6)                                       8,612                7,187 
     Total current liabilities                                             28,742               20,632 
Long-term debt (Note 7)                                                    12,441               14,050 
Deferred income taxes (Note 10)                                             4,954                2,913 
Other liabilities                                                             450                  689 
Commitments and contingencies (Note 12)                                         -                    - 
Shareholders' equity                                                              
   Common stock, $0.01 par value
     Authorized -- 20,000,000
     Issued -- 1995: 12,773,184 and 1994: 12,701,041                          129                  127 
   Capital in excess of par value                                          21,709               21,000 
   Retained earnings                                                       52,620               41,408 
   Unrealized gain on marketable securities (Note 4)                        3,694                1,038 
   Cumulative effect of foreign currency 
     translation adjustments                                                  319                  178 
     Total shareholders' equity                                            78,471               63,751 
     Total liabilities and shareholders' equity                          $125,058             $102,035                  
</TABLE>
<TABLE>
                                            OSMONICS, INC.
                                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                                             (In thousands)
<CAPTION>
                                                                    Year ended December 31,        
                                                             1995            1994            1993  
<S>                                                        <C>             <C>             <C>        
Cash flows from operations:
  Net income                                               $11,212         $ 9,955         $ 7,895 
  Non-cash items included in net income:
    Depreciation and amortization                            3,222           3,048           3,080 
    Deferred income taxes                                      (91)           (341)            281 
    Gain on sale of land and investments                      (810)              -            (499)
  Changes in assets and liabilities 
    (net of business acquisitions)
    Reserve for VAT tax                                          -          (1,605)         (1,030)
    Accounts receivable                                     (4,232)         (1,463)            181 
    Inventories                                             (6,085)         (2,584)          2,785 
    Other current assets                                      (507)          1,475            (302)
    Accounts payable and accrued liabilities                 4,292           1,499             209 
    Reserve for deferred compensation                         (432)            (78)             72 
    Reserves for losses of discontinued operations               -              -             (471)
        Net cash provided (used) by operations               6,569           9,906          12,201 

Cash flows from investing activities:
  Business acquisitions (net of cash acquired)              (5,380)           (673)
  Purchase of investments                                   (6,633)        (17,467)        (15,253)
  Maturities and sales of investments                       13,228          11,225           8,680 
  Purchase of property and equipment                       (12,568)         (3,435)         (3,257)
  Proceeds from sale of subsidiary                               -               -             613 
  Other                                                       (315)            190            (111)
        Net cash provided (used) for investing
        activities                                         (11,668)        (10,160)         (9,328)

Cash flows from financing activities:
  Notes payable and current debt                              (299)            282            (376)
  Reduction of long-term debt                                 (311)           (521)           (552)
  Issuance of common stock                                     711             680             295 
        Net cash provided (used) in financing
        activities                                             101             441            (633)

  Effect of exchange rate changes on cash                      (94)           (444)            143 

Increase (decrease) in cash and cash equivalents            (5,092)           (257)          2,383 

Cash and cash equivalents - beginning of year                9,453           9,710           7,327 

Cash and cash equivalents - end of year                    $ 4,361         $ 9,453         $ 9,710 
</TABLE>
<TABLE>
                                             OSMONICS, INC.
                       CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                    (In thousands, except share data)

<CAPTION>
                                                                                 Unrealized
                                                         Capital                 Gain on     Cumulative 
                                                         in Excess   Retained    Marketable  Translation
                                      Common Stock       Par Value   Earnings    Securities  Adjustment
                                    Shares     Amount    
<S>                               <C>           <C>       <C>         <C>          <C>           <C>                  
Balance - January 1, 1993         12,607,707    $126      $20,026     $23,558      $    -        $133
  Net income                               -       -            -       7,895           -          - 
  Translation adjustment                   -       -            -           -           -          37
  Employee stock purchase
     plans                            29,766       -          295           -           -           -
Balance - December 31, 1993       12,637,473     126       20,321      31,453           -         170
  Net income                               -       -            -       9,955           -           -
  Translation adjustment                   -       -            -           -           -           8
  Unrealized gain on  
     marketable securities                 -       -            -           -       1,038           -
  Business combinations 
     (Note 2)                          7,000       -          102           -           -           -

  Employee stock purchase
     plans                            56,568       1          577           -           -           -
Balance - December 31, 1994       12,701,041     127       21,000      41,408       1,038         178
  Net income                               -       -            -      11,212           -           -
  Translation adjustment                   -       -            -          -            -         141
  Unrealized gain on
     marketable securities                 -       -            -           -       2,656           -

  Employee stock purchase
     plans                            72,143      2           709           -           -           -
Balance - December 31, 1995       12,773,184    $129      $21,709     $52,620      $3,694        $319
</TABLE>
<TABLE>
                                            TEN-YEAR RESULTS
                                (In thousands, except per share amounts)

INCOME DATA:  (Restated)
(CAPTION>                         
                                         Year ended December 31, 

                            1995       1994      1993      1992      1991  
<S>                      <C>         <C>       <C>       <C>       <C>                  
Sales                    $111,610    $96,180   $89,043   $84,017   $77,253

Income from continuing 
  operations               11,212      9,955     7,895     3,255     5,371

Income from continuing 
  operations per share      $0.88      $0.79     $0.63     $0.26     $0.43

Average shares 
  outstanding              12,745     12,668    12,624    12,561    12,491
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA:  (Restated)
<S>                      <C>        <C>        <C>       <C>       <C>                
Total assets             $125,058   $102,035   $88,826   $82,874   $81,102

Long-term debt             12,441     14,050    13,913    14,630    15,715
</TABLE>


<TABLE>


INCOME DATA:  (As Reported)
<CAPTION>
                                             Year ended December 31,

                     1995     1994    1993     1992      1991    1990     1989    1988     1987    1986 
<S>               <C>       <C>     <C>      <C>        <C>     <C>      <C>     <C>      <C>     <C>                    
Sales             $111,610  $96,180 $89,043  $50,541    $46,738 $43,553  $36,223 $31,058  $20,464 $15,472

Gross profit        48,397   43,339  39,771   21,507     19,805  18,985   16,213  13,554    8,384   6,689

Pretax income       15,891   13,623  10,792    5,963      5,804   5,444    6,075   4,420    1,616   1,166

Income taxes         4,679    3,668   2,897    1,855      1,902   1,730    2,028   1,430      465     330

Net income          11,212    9,955   7,895    4,528(F1)  3,902   3,714    4,047   2,990    1,151     836

Net income 
  per share          $0.88    $0.79   $0.63    $0.50(F1)  $0.43   $0.40    $0.34   $0.25    $0.10   $0.08

Average shares 
  outstanding       12,745   12,668  12,624    9,065      8,999   9,246   11,853  11,820   11,801  10,773

<FN>
<F1>
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."
</FN>
</TABLE>
<TABLE>  
<CAPTION>
BALANCE SHEET DATA:  (As Reported)
<S>               <C>      <C>      <C>      <C>       <C>     <C>      <C>     <C>      <C>     <C>              
Total assets      $125,058 $102,035 $88,826  $60,300   $54,931 $54,370  $45,884 $43,430  $37,715 $33,328

Working capital     54,224   55,995  45,281   29,471    25,955  21,692   21,117  15,707   13,836  17,660

Long-term debt      12,441   14,050  13,913   13,221    13,697  13,761    3,788   3,664    3,753   3,618
      
Shareholders' 
  equity            78,471   63,751  52,070   33,793    28,891  24,720   33,067  28,909   25,598  24,664
</TABLE>
<TABLE>

                                          QUARTERLY INCOME DATA
                                (In thousands, except per share amounts)


Quarterly Income Data - 1995
<CAPTION>

                                                          Quarter Ended                     

                                   March 31        June 30      September 30     December 31
<S>                                 <C>            <C>             <C>              <C>                                 
Sales                               $26,870        $26,796         $27,176          $30,768 

Gross profit                         11,912         11,958          11,484           13,043 

Net income                            2,800          2,671           2,625            3,116 

Net income per share                  $0.22          $0.21           $0.21            $0.24 

</TABLE>



<TABLE>

Quarterly Income Data - 1994

<CAPTION>
                                                          Quarter Ended                     

                                   March 31        June 30      September 30     December 31
<S>                                 <C>            <C>             <C>              <C>                    
Sales                               $23,534        $24,843         $23,383          $24,420 

Gross profit                         10,478         10,916          10,499           11,446 

Net income                            2,371          2,503           2,289            2,792 

Net income per share                  $0.19          $0.20           $0.18            $0.22 
</TABLE>

                               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            (Dollars in thousands, except per share amounts)

1.    Summary of Significant Accounting Policies

      The Company is a manufacturer and marketer of high technology water
      purification, fluid filtration, fluid separation, and fluid transfer
      equipment, as well as the replaceable components used in
      purification, filtration, and separation equipment.  These products
      are used by a broad range of industrial, commercial 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.

      Sales are recorded when the product is shipped.

      The estimated fair value for cash and cash equivalents, trade
      accounts receivable, accounts payable, 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 prepayment 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 (FIFO method) or market for
      all operations except the Autotrol subsidiary domestic operations
      which have historically valued inventory on the LIFO 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 than for income tax purposes.

      The Company accrues for the estimated cost of warranty and start-up
      obligations at the time revenue is recognized.

      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.  The carrying values of these intangibles are
      reviewed quarterly based on the sales and profitability of the
      acquired assets.  Other intangibles are carried at cost and
      amortized using the straight-line method over their estimated lives
      of 5 to 17 years.  

      Net income per share is based on the weighted average number of
      shares outstanding during each year.  The exercise of stock options
      would not have a material effect on net income per share.

      The preparation of financial statements in conformity with generally
      accepted accounting principles 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.

      In October 1995, the Financial Accounting Standards Board issued
      Statement of Financial Accounting Standards No. 123 (SFAS 123),
      "Accounting for Stock-Based Compensation."  The Company will
      evaluate adoption of SFAS 123 in 1996.

      Certain reclassifications have been made to prior year amounts to
      conform with current year presentations.

2.    Business Acquisitions

      Potential Acquisition:

      The Company announced in December 1995 the execution of an agreement
      in principle to merge with Desalination Systems Inc. (DESAL) in a
      stock transaction valued at approximately $30,000.  The outstanding
      shares of DESAL will be exchanged on a share-for-share basis for the
      Company's common stock.  The transaction is structured to qualify as
      a tax-free exchange and a "pooling-of-interests" for accounting
      purposes.  The transaction is expected to add over $20,000 to
      Osmonics' 1996 sales.

      The transaction will require the approval of a definitive merger
      agreement by both companies, regulatory approvals, and the
      satisfaction of customary closing conditions. 

      Completed Acquisitions:

      On October 4, 1995, the Company acquired the assets and operations
      of Western Filter Co., Denver, Colorado.  The purchase price was
      approximate $7,000 and included $5,780 of intangible assets. 
      Western Filter products will be sold through the existing Osmonics
      distribution channels, offering a more complete line of water and
      waste water treatment options.  Revenues of Western Filter were less
      than $10,000 in 1994 and 1995.  The purchase method of accounting
      was used.

      On November 18, 1994, the Company acquired the assets of Lakewood
      Instruments, Inc.  The Company also obtained noncompetition
      agreements from two previous Lakewood directors.  The purchase
      method of accounting was used.  

      On January 1, 1994, the Company acquired the 18% minority
      shareholder interest of its majority-owned subsidiary, Poretics. 
      The Company owns 100% of Poretics' shares after the transaction. 
      The purchase method of accounting was used.  

      These acquisitions had no significant pro forma effect on the
      Company's sales, net income, or net income per share in 1995 or
      1994.  

      On October 15, 1993, Autotrol Corporation (Autotrol) merged with
      Osmonics through an exchange of 0.77 of a share of Osmonics common
      stock for each share of Autotrol common stock.  The exchange ratio
      and share amounts, when revised to reflect Osmonics' 3-for-2 stock
      split on March 21, 1994, equate to an exchange of 1.155 shares of
      Osmonics common stock for each of the 3.0 million shares of Autotrol
      common stock.  The transaction was accounted for as a pooling-of-
      interests.  Autotrol's principal business is the manufacture and
      marketing of controls, valves and measuring devices related to water
      conditioning. 

      The historical financial statements of the Company have been
      restated to give effect to the acquisition as though the companies
      had operated together from the beginning of the earliest period
      presented.  Before pooling, results for the first nine months of
      1993 for Osmonics were net sales of $41,213 and net income of
      $3,678, and for Autotrol were sales of $25,272 and net income of
      $2,076.  

3.    Embezzlement

      In February 1993, Autotrol, prior to acquisition by Osmonics, 
      discovered that a former employee of its French subsidiary had been
      embezzling funds for several years.  The funds were embezzled
      through the issuing of fraudulent checks by the former employee and
      falsifying of value added tax (VAT) returns and diverting the funds
      received from the French government.  

      Autotrol's investigation of the embezzlement revealed that
      approximately $4,750 was embezzled from 1988 to 1992.  The prior
      years' financial statements reflect embezzlement losses in the year
      the embezzlement initially occurred.  The Company had net recoveries
      of $562 in 1993 from insurance and reductions in VAT payable.

4.  Marketable Securities

      Effective January 1, 1994, the Company adopted Statement of
      Financial Accounting Standard No. 115 (SFAS 115), "Accounting for
      Certain Investments in Debt and Equity Securities," which requires
      the Company to report certain marketable securities at fair market
      value.  The Company considers all of its marketable securities
      available-for-sale.  Marketable securities at December 31, 1995
      consisted of the following:
<TABLE>
<CAPTION>                        
                                                                                                  Fair                  
                                                Amortized     Unrealized       Unrealized        Market
                                                   Cost          Gain             (Loss)          Value 
      <S>                                       <C>           <C>              <C>              <C>                      
      U.S. government securities
          0-5 year maturity                     $ 4,784       $   60           $ (23)           $ 4,821
          6 year or greater maturity                648           24               -                672

      Municipal bonds
          0-5 year maturity                       2,320          112               -              2,432
          6 year or greater maturity              4,777          211               -              4,988

      Corporate debt securities and other       
          0-5 year maturity                       1,505           24             (43)             1,486
          6 year or greater maturity                699           16               -                715

      Equity securities                           5,616        5,681            (104)            11,193

      Total before tax effect                   $20,349        6,128            (170)           $26,307

      Deferred tax effect of 
          unrealized (gain) loss                              (2,329)             65 

      Unrealized gain (loss) on marketable 
          securities                                          $3,799           $(105)
</TABLE>
<TABLE>
      Marketable securities at December 31, 1994 consisted of the
      following:
<CAPTION>

                                                                                                 Fair
                                                Amortized     Unrealized       Unrealized        Market
                                                 Cost           Gain             (Loss)          Value 
      <S>                                       <C>           <C>              <C>              <C>                     
      U.S. government securities
          0-5 year maturity                     $ 6,479       $     -          $  (318)         $ 6,161
          6 year or greater maturity              1,748             -             (101)           1,647

      Municipal bonds
          0-5 year maturity                       1,977           100                -            2,077
          6 year or greater maturity              6,348            28             (374)           6,002

      Corporate debt securities and other       
          0-5 year maturity                       3,764            15                -            3,779
          6 year or greater maturity                599             -              (44)             555

      Equity securities                           5,104         2,319              (21)           7,402

      Total before tax effect                   $26,019         2,462             (858)         $27,623

      Deferred tax effect of 
          unrealized (gain) loss                                (869)              303 

      Unrealized gain (loss) on marketable 
          securities                                          $1,593           $  (555)

      Market values are based on quoted market prices. 
</TABLE>

      In 1995, proceeds from sales of available-for-sale securities were
      $7,037.  The net gain on these sales was $919, determined on the
      specific identification method.

      In 1994, proceeds from sales of available-for-sale securities were
      $2,846.  There were no material gross realized gains or losses on
      these sales, as determined on the specific identification method.

5.    Inventories

      Inventories consist of the following:
<TABLE>
<CAPTION>
                                                                          December 31,   
                                                                        1995             1994 
      <S>                                                             <C>              <C>                             
      Finished goods                                                  $ 4,111          $ 2,578   

      Work in process                                                   6,964            5,312

      Raw materials                                                    15,801           12,187 

                                                                       26,876           20,077
      Less adjustment to reduce 
         inventories of $4,728 and $3,475 
         to last-in, first-out method 
         (See Note 1)                                                    (649)            (649)    

                                                                      $26,227          $19,428 
</TABLE>
6.    Other Accrued Liabilities

      Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
                                                                           December 31, 
                                                                       1995             1994 
      <S>                                                             <C>              <C>                 
      Warranty and start-up                                           $1,688           $1,942   

      Professional fees and other accruals                             3,466            2,377      

      Customer deposits                                                1,748            1,007   

      Accrued property taxes, income
         taxes and other taxes                                         1,710            1,861   

                                                                      $8,612           $7,187   
</TABLE>
7.    Debt
<TABLE>
<CAPTION>

      Long-term debt is as follows:
                                                                           December 31,   
                                                                        1995             1994  
      <S>                                                             <C>              <C>                                      
      Promissory Notes; interest payable 
         quarterly at the three month LIBOR 
         rate plus 80 b.p.; due 1996 through 
         2001.  The interest rate on 
         December 31, 1995 was 6.64%.                                 $10,000          $10,000

      Industrial revenue bonds (IRB's);
         interest payable at LIBOR plus 45 to  
         95 b.p. depending on collateral 
         deposited with the lender; due in 1997.  
         The interest rate on December 31, 1995 
         was 6.29%.                                                     2,800            2,800

      Mortgage notes payable to two French
         banks; interest payable monthly at PIBOR 
         plus 40 b.p.  The interest rate on 
         December 31, 1995 was 5.43%.                                     928              993

      Term notes payable to municipalities
         in varying installments through 
         October 15, 1995.                                                  -              421

      Notes Payable; interest payable annually
         at the prime rate; due 1996 through 1999.
         The interest rate on December 31, 1994 
         was 8.5%.                                                        258              341

      Other notes                                                         150              239 

                                                                       14,136           14,794

      Less current portion                                             (1,695)            (744)

                                                                      $12,441          $14,050 

</TABLE>

      The IRB debt and mortgage notes payable to French banks are
      collateralized by real and personal property of the Company.

      The aggregate maturities of outstanding long-term debt are:  
      1996 - $1,695; 1997 - $4,459; 1998 - $1,659; 1999 - $1,659; 
      2000 - $1,600; beyond 2000 - $3,064.

      The interest rate on the IRB's is determined in part by the amount
      of collateral held by the lender.  At December 31, 1995, $2,000 of
      collateral was held by the lender, resulting in an interest rate of
      LIBOR plus 45 b.p.  The $2,000 of collateral is included in
      marketable securities.  

      The Company has a $1,000 line of credit with a bank, with interest
      at the bank reference rate (8.5% at December 31, 1995) and which
      requires a 5% compensating cash balance.  The line of credit was
      unused at year end and the $50 compensating balance is included in
      the balance of cash and cash equivalents.

      The promissory notes contain a covenant which limits the payment of
      dividends to shareholders.  At December 31, 1995, approximately
      $24,742 of retained earnings was restricted under this covenant.  In
      addition, the promissory notes and IRB debt contain certain
      restrictions related to financial ratios, indebtedness, tangible net
      worth and capital expenditures.

      Cash payments for interest related to all debts of the Company were
      $1,021, $735, and $955, for 1995, 1994, and 1993, respectively.

8.  Stock Options

      At December 31, 1995, the Company had reserved 86,206 common shares
      for issuance to key employees under a 1983 stock option plan. 
      Options are issued at a price not less than market value on date of
      grant and become exercisable over a five-year period, after which
      they expire.  The following is a summary of activity under the 1983
      stock option plan.  No additional options can be granted under the
      1983 plan.
<TABLE>
<CAPTION>

                                                           Year ended December 31,  
                                                          1995            1994            1993

      <S>                                                <C>             <C>             <C>              
      Options held by employees
       at December 31                                    86,206          121,126         143,850   
      Exercise price range on                            $ 6.45 to       $ 3.63 to       $ 3.63 to  
        options held at December 31                      $13.50          $13.50          $13.50 

      Number of options exercised
       during the year                                   34,920          22,724          1,875  
      Price range of options                             $ 3.63 to       $ 3.63 to       $10.16 to  
       exercised during the year                         $10.16          $10.16          $10.16      

      Exercisable options held at
       December 31                                       84,330          97,500          83,289 
      Exercise price range of                            $ 6.45 to       $ 3.63 to       $ 3.63 to  
       exercisable options                               $13.50          $13.50          $13.50  

</TABLE>

      The Company also has reserved 299,313 common shares at December 31,
      1995 for issuance to key employees under a 1993 Stock Option Plan. 
      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 following is a summary of
      activity under the 1993 Stock Option Plan.  

<TABLE>
<CAPTION>

                                                           Year ended December 31,  
                                                          1995            1994            1993
      <S>                                                <C>             <C>             <C>    
      Options held by employees
       at December 31                                    34,163          12,633          2,250
      Exercise price range on                            $13.67 to       $13.67 to       $13.67  
       options held at December 31                       $18.25          $14.50                

      Number of options exercised
       during the year                                   500             187             0      
      Price range of options                             $14.38 to       $13.67 to       N/A  
       exercised during the year                         $14.38          $13.67

      Exercisable options held at
       December 31                                       2,463           375             0       
      Exercise price range of                            $13.67 to       $13.67 to       N/A  
       exercisable options                               $14.50          $13.67

</TABLE>

      The Company also had a 1985 Employee Stock Purchase Plan.  No
      additional shares may be issued under the 1985 Plan.  The following
      is a summary of shares issued under this plan:
<TABLE>
<CAPTION>

                                                           1985 Plan
                                                 1995               1994             1993
      <S>                                       <C>                <C>              <C>                 
      Number of shares                          14,548             34,048           23,380

      Average price per share                   $13.58             $12.80           $10.62

</TABLE>

      The 1985 Plan was superseded by the 1995 Employee Stock Purchase
      Plan, approved by the shareholders at the 1995 Annual Meeting and
      effective June 1, 1995.  Employees may purchase common shares of the
      Company at 85% of market price.  In 1995, 22,175 shares were issued
      under the 1995 Plan at an average price per share of $14.79.  At
      December 31, 1995, 377,825 shares remain unissued in the 1995 Plan. 
      
      The Company had 500,000 authorized and unissued shares of preferred
      stock at December 31, 1995 and 1994.

      In 1993, the Company granted a director an option to purchase 
      45,000 shares of common stock at an exercise price of $12.33 per
      share.  This option vests over a five-year period.  

      In 1995, the Board of Directors adopted a 1995 Director Stock Option
      Plan.  The 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.  In 1995,
      options to purchase 18,000 shares at a price of $17.13 were issued
      under this plan.  No options were exercisable at December 31, 1995.

9.    Income taxes

      Income tax expense consists of:
<TABLE>
<CAPTION>

                                                                Year ended December 31,    
                                                              1995            1994            1993  
      Current:
         <S>                                                 <C>             <C>             <C>          
         Federal                                             $3,975          $3,506          $2,632

         State                                                  423             354             134

         Foreign                                                372             156            (250)

      Deferred:                                                              

         Depreciation                                            30            (229)           (157)

         Valuation allowance adjustment                        (197)              0               0

         Allowance for doubtful 
            accounts, start-up, warranty, 
            inventory and other accruals                        310            (247)             10

         Discontinued operations                                228             350             524

         Other                                                 (462)           (222)              4   
         
                                                             $4,679          $3,668          $2,897 
</TABLE>

      Cash payments for income taxes were $5,079, $3,062, and $2,935, for
      1995, 1994, and 1993, respectively.

      A reconciliation of the income taxes computed at the Federal
      statutory rate to the Company's income tax expense is as follows:

<TABLE>
<CAPTION>

                                                                Year ended December 31,    
                                                             1995            1994            1993  
      <S>                                                    <C>             <C>             <C>                           
      Taxes at Federal rate (35% in                           
         1995 and 1994 and 34% in 1993)                      $5,562          $4,768          $3,670
      
      Increase (decrease) resulting from:

      Valuation allowance adjustment                           (471)           (608)           (350)

      State taxes, net of Federal tax
        benefit                                                 203             220              66  

      Foreign Sales Corp. benefit                              (190)           (167)           (159)

      Tax credits                                              (271)           (272)           (209)

      Tax exempt interest/dividend
         deduction                                             (200)           (193)           (176)

      Effect of foreign affiliates with
         different tax rates or net losses                      245            (324)           (446)

      Nondeductibility of merger costs                            -               -             363 
      
      Other                                                    (199)            244             138  

                                                             $4,679          $3,668          $2,897  


</TABLE>

      During 1992, the Financial Accounting Standards Board issued
      Statement of Financial Accounting Standard No. 109, "Accounting for
      Income Taxes," which requires the Company to adjust its deferred tax
      assets and liabilities to reflect current tax rates.  Osmonics, Inc.
      and its subsidiaries adopted the provision of SFAS 109 in reporting
      its financial results for 1992, prior to the merger of Osmonics,
      Inc. and Autotrol Corporation.

      Autotrol Corporation and its subsidiaries adopted SFAS 109 in 1993,
      prior to the merger of Osmonics, Inc. and Autotrol Corporation.  As
      a result of the adoption of SFAS 109, Autotrol Corp. increased its
      current deferred tax assets from $0 to $4,328 and its long-term
      deferred tax assets from $0 to $14.  These increases in deferred tax
      assets were accompanied by increases in offsetting valuation
      reserves for the same amounts, thus creating no increase or decrease
      in income for the year ended December 31, 1993.

      As a result of the merger between Osmonics, Inc., and Autotrol Corp.
      in 1993, value was created for the deferred tax assets of Autotrol
      Corp., due to the deductibility of Autotrol expenses on future
      consolidated tax returns.  This increased Autotrol Corp.'s equity
      value by $2,081 above its previously stated book value prior to the
      merger.  The combination of adopting SFAS 109, and the merger in
      1993, resulted in increased tax expense from continuing operations
      for Autotrol Corporation of $384 for the year ended December 31,
      1993.  

10.   Deferred Tax Assets and Liabilities

      Temporary differences which give rise to Deferred Tax Assets and
      Liabilities are as follows as of December 31:
<TABLE>
<CAPTION>
 

                                                                        1995             1994 
      Current assets:
          <S>                                                         <C>              <C>                           
          Allowance for doubtful
            accounts, start-up, warranty, 
            inventory and other accruals                              $3,674           $3,506

          Net operating loss and credit
            carryforwards                                                 61              335

          Other                                                          (16)             (30)

          Less valuation allowance                                         -             (527)

          Total current deferred assets                               $3,719           $3,284 

      Noncurrent liabilities:                                         

          Depreciation                                                $2,360           $2,395   

          Unrealized gain on marketable
            securities                                                 2,264              566

          Other                                                          330              (48)

          Total non-current deferred 
            tax liabilities                                           $4,954           $2,913 

</TABLE>


      The Company had outstanding net operating loss carryforwards and tax
      credit carryforwards of $61 and $633 at December 31, 1995 and 1994,
      respectively.  The carryforwards will expire in the years of 2008 to
      2009.

      The valuation reserve decreased by $527 to $0 during the year ended
      December 31, 1995.  This decrease was due to the use of net
      operating loss carryforwards and credits during the year, as offsets
      against taxable income, and to the determination that the remaining
      deferred tax assets are more likely than not to confer future tax
      benefits to the Company.  The carryforwards outstanding at December
      31, 1994 have been fully offset by valuation reserves.  

11.   Sales and Segment Information                          

      All continuing operations for which geographic data is presented
      below are in one principal industry (design, manufacture and
      marketing of machines, systems, and components used in the
      processing of fluids).
<TABLE>
<CAPTION>

                                                                 1995          1994           1993   

      Sales to unaffiliated customers from:
         <S>                                                   <C>           <C>            <C>                   
         United States                                         $ 97,791      $ 83,904       $ 77,212
         Foreign operations                                      13,819        12,276         11,831

      Transfers from (to) geographic areas:

         United States                                            7,936         6,699          7,139
         Foreign operations                                      (7,936)       (6,699)        (7,139)

                                                               $111,610      $ 96,180       $ 89,043 

      Pretax income from continuing operations:

         United States                                         $ 15,248      $ 12,311       $ 10,273 
         Foreign operations                                         643         1,312            519 

                                                               $ 15,891      $ 13,623       $ 10,792 

      Identifiable assets:                                                   

         United States                                         $117,047      $ 94,504       $ 79,457
         Foreign operations                                       8,011         7,531          9,369 

                                                               $125,058      $102,035       $ 88,826 
</TABLE>

      NOTE:  Transfers are made at market value.

      Sales by United States operations to unaffiliated customers in
      foreign geographic areas are as follows:
<TABLE>
<CAPTION>
                                                                 Year ended December 31,   
                                                                 1995          1994           1993 
      <S>                                                      <C>           <C>            <C>                     
      Asia/Pacific                                             $ 8,745       $ 7,460        $ 6,488

      Europe                                                     3,100         3,193          2,611

      Rest of the World                                          8,403         6,211          6,470
                                                               $20,248       $16,864        $15,569

</TABLE>

      Total international sales for the Company were as follows:  1995 -
      $34,067; 1994 - $29,140; and 1993 - $27,400.

12.   Commitments and Contingencies

      The Company leases facilities for sales, service or manufacturing
      purposes in Minnesota, Wisconsin, Massachusetts, California, Iowa,
      Arizona, Switzerland, Hong Kong, Japan, Singapore, Indonesia, and
      Thailand.

      Future minimum lease payments on all operating leases of $3,245 are
      as follows:  1996 - $1,064; 1997 - $539; 1998 - $378; 1999 - $281;
      2000 - $256; and beyond 2000 - $727.  Rent expense for the past
      three years was:  1995 - $1,322; 1994 - $1,262; and 1993 - $1,463.

      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.  

      The Company may be required to make additional payments of up to
      $2,000 over the period ending December 1998, contingent upon the
      sales and gross margins of Western Filter Co.

13.   Stock Split

      On February 18, 1994, the Company approved a three-for-two stock
      split in the form of a 50% stock dividend for shareholders of record
      March 4, 1994.  All share and per share amounts have been restated
      to reflect the stock split.

14.   Employee Benefit Plans

      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 these plans amounted
      to $846, $982, and $816 in 1995, 1994, and 1993, respectively.  


<TABLE>
                   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
                                     AND RESULTS OF OPERATION
                         (Dollars in thousands, except per share amounts)

As an aid to understanding the Company's operating
results, the following table indicates the percentage of
sales that each income statement item represents, and the
percentage increase or decrease in such items for the
years indicated.

<CAPTION>
                                                 Year ended December 31,                 (Decrease)    
                                               1995         1994        1993          1994        1993
<S>                                           <C>          <C>         <C>            <C>      
Sales                                         100.0%       100.0%      100.0%         16.0%       8.0%

Cost of sales                                  56.6         54.9        55.3          19.6        7.2 

Gross profit                                   43.4         45.1        44.7          11.7        9.0 

Operating expenses:                                                                  
   Selling, general and administrative         23.7         24.4        24.5          12.5        7.5
   Research, development and engineering        7.0          7.5         7.6           8.4        5.6
   Embezzlement recovery                          -            -        (0.6)            -          -
   Merger & transition expenses                   -            -         1.9             -          -  
                                               30.7         31.9        33.4          11.5        3.2 
Income from operations                         12.7         13.2        11.3          12.0       26.2

Other income (expense), net:
   Interest income                              1.5          1.6         1.4           6.9       20.6
   Interest expense                            (1.0)        (0.8)       (1.1)         42.0      (20.8)
   Other income (expense)                       1.0          0.1         0.5         674.7      (64.6)
                                                1.5          1.0         0.8          80.0       27.3 

Income from continuing operations
   before income taxes                         14.2         14.2        12.1          16.6       26.2

Income taxes                                    4.2          3.8         3.3          27.6       26.6 

Net income                                     10.0%        10.4%        8.9%         12.6%      26.1% 

</TABLE>

RESULTS OF OPERATIONS

Sales:

Sales for 1995 increased by 16% over 1994 and sales for 1994 increased
by 8% over 1993.  The Company's sales are composed of capital equipment
and replaceable components.  The ratio of equipment sales compared to
replaceable component sales as a percent of total sales was at 56% in
1995 compared to 60% for both 1994 and 1993.  International sales
increased at the same rate as domestic sales in 1995, due to improved
markets and selling efforts in the Asia/Pacific and Americas areas.  The
1995 sales growth also benefited from the October 1995 acquisition of
Western Filter and the November 1994 acquisition of Lakewood
Instruments.

The increase in sales for 1994 was strongly influenced by an increase in
crossflow filtration equipment and systems activity, with lesser
influence from growth in the sales of certain replaceable component
product lines.  Osmonics' core product lines showed sales increases of
13% for the year, while Autotrol product sales were flat with 1993.  In
1995, Autotrol began selling Osmonics' products through their existing
sales organization.

The dollar amount of the Company's backlog of orders considered to be
firm at December 31, 1995 was $20,600.  The comparable backlog at
December 31, 1994 was $15,700.  The Company believes that its backlog at
any time is not necessarily indicative of annual sales.  The business of
the Company is not subject to significant seasonal variations.  

Selective price increases averaged less than 1% from 1994 to 1995, and
less than 1% from 1993 to 1994.

Gross Margins:

Gross margins for 1995 decreased to 43.4% of sales, due to an increased
mix of sales of lower margin products, increased material costs, and
more aggressive pricing.  Gross margins for 1994 had increased to 45.1%
of sales compared to 44.7% in 1993 as a result of better management of
costs on system sales, value engineering of equipment, reduced
manufacturing costs on replaceable products and improved plant
utilization rates on the higher sales volume.  

Operating Expenses:

Selling, general and administrative expenses in both 1995 and 1994
increased in dollars from the preceding year's level.  Increases were
attributable to increased marketing programs and expanded domestic and
international selling efforts.  As a percent of sales, the ratio
declined slightly in 1995, as a result of continued cost savings in the
administrative area as recent acquisitions into Osmonics are
assimilated.
  
Research, development and engineering expense increased in each of the
past three years at a rate lower than the increase in sales.  For 1995,
RD&E was $7,779 or 7.0% of sales, RD&E expense was $7,174 or 7.5% of
sales, and $6,795 and 7.6% of sales in 1994 and 1993, respectively.

During 1993, the Company incurred $1,644 of merger and transition
expenses related to the acquisition of Autotrol which are non-recurring
in nature, and were not capitalizable in a pooling-of-interests merger. 
During late 1993, the Company obtained $562 net recovery of embezzlement
losses incurred at Autotrol's French subsidiary in years prior to the
acquisition by the Company.

Other Income (Expense):

During 1995 and 1994, interest income increased due to increasing
interest rates.  Other Income in 1995 includes $104 of currency
translation and exchange losses, compared to $325 of such gains in 1994. 
Other income in 1993 includes a $295 gain on the sale of land claimed by
a municipality.  Other income was also affected in 1995 and 1993 by the
sale of certain investments at net pretax gains of $919 and $204,
respectively.  No such net gains occurred in 1994.

Income Taxes:

The Company's effective tax rates during 1995, 1994, and 1993, were 29%,
27%, and 27%, respectively.  The increase in the effective tax rate in
1995 as compared to 1994 and 1993, is primarily due to the deduction of
French embezzlement losses in 1993 and the use of loss carryforwards and
credits at Autotrol and its subsidiaries in 1993 and 1994.  These tax
benefits were not repeated in 1995.  R&D tax credits and Foreign Sales
Corporation (FSC) tax benefits have increased in 1994 and 1995.

Liquidity and Capital Resources:

At December 31, 1995, the Company had cash and cash equivalents of
$4,361 and marketable securities of $26,307 versus $9,453 and $27,623,
respectively, at December 31, 1994.  The net decrease in cash, cash
equivalents and marketable securities resulted primarily from capital
expenditures and acquisitions increases exceeding the cash flows
generated from operations in 1995.  The current ratio decreased to 2.9
as of December 31, 1995 from 3.7 as of December 31, 1994.

Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standard No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities."  The effect of SFAS 115 was
to increase marketable securities by $1,604 on investment with a cost of
$26,019 in 1994.  The current ratio increased to 3.7 as of December 31,
1994 compared to 3.3 as of December 31, 1993, primarily due to the
increased levels of cash and marketable securities.  

Net cash provided from operations in 1995, 1994, and 1993 amounted to
$6,569, $9,906, and $12,201, respectively. 

The Company's capital expenditures in 1995 were $12,568 compared to
$3,435 in 1994 and $3,257 in 1993.  During 1995, the Company purchased
its previously-leased Milwaukee facility for $3,100 and invested $4,557
in the expansion of its Minnetonka facility.

The Company believes that its current cash and investment position, its
cash flow from operations, and amounts available from bank credit will
be adequate to meet its anticipated cash needs for working capital,
capital expenditures, and potential acquisitions during 1996 and 1997.  

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.

Factors Affecting Future Performance:

The Company announced in December of 1995, an agreement in principle to
merge with Desalination Systems, Inc. (DESAL) in a stock transaction
valued at $30,000.  The transaction is expected to add over $20,000 to
Osmonics' 1996 sales.  


The Company believes that in most cases it has been and will be able to
increase selling prices in response to increases in the cost of raw
materials on a timely basis.

In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation."  The Company will evaluate adaption of SFAS
123 in 1996.