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 SECURITIES     
     EXCHANGE ACT OF 1934  
For the Fiscal Year Ended December 31, 1996

                                   OR

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934  
For the transition period from _________ to ________


Commission File No. 1-12714

                               OSMONICS, INC.                           
         (Exact name of registrant as specified in its charter)


              Minnesota                               41-0955759        
    (State or other jurisdiction                    (I.R.S. Employer
  of incorporation or organization)               Identification No.)


    5951 Clearwater Drive, Minnetonka, Minnesota              55343      
      (Address of principal executive offices)               (Zip Code)

                             (612) 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].
<P2>
      As of March 3, 1997, 14,210,139 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 3, 1997) was
$208,715,715.


                   DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Annual Report to Shareholders for the fiscal year
ended December 31, 1996 (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 14, 1997 (the "Proxy Statement"), and to be filed within 
120 days after the Registrant's fiscal year ended December 31, 1996, are
incorporated by reference into Part III.
<P3>
                                 PART I

ITEM 1.  BUSINESS

      Osmonics, Inc. and its wholly-owned subsidiaries (the "Company")
design, manufacture and market machines, systems and components used in
the processing and handling of fluids.  The Company was founded in 1969
and manufactures replaceable, semi-permeable membranes and other filter
media for use in fluid separation and filtration.  The Company's
processing equipment employs crossflow filtration (including reverse
osmosis, nanofiltration, ultrafiltration and microfiltration), normal
filtration (including microfiltration and particle filtration),
coalescing filtration, ion exchange, clarification, chromatography,
ozonation and distillation.  The Company's fluid handling equipment
includes centrifugal, diaphragm and bellows pumps; electronic
controllers to operate precision valves for water conditioning; flow
control and measuring devices and instrumentation; and specialty holders
and devices for retaining its membranes and filter media.

      Crossflow, normal and coalescing filtration are precision
processes in which a semi-permeable membrane or other filter material
separates a fluid's components.  Separation is accomplished by applying
pressure to a fluid in order to cause selective passage of some
components of the fluid through the membrane or filter media.  Ion
exchange and chromatography are quasi-filtration processes in which
specialized plastic beads are used to selectively remove ionized or
charged particles from a fluid.  The fluid is pressurized and passes
through a bed of the plastic beads in a normal filtration mode. 
Distillation is the condensation of steam from boiling water to produce
ultrapure water.  Ozone generation equipment uses electricity to develop
a corona discharge which produces ozone, a strong oxidant used in the
purification of water and other fluids.

      The Company's processing products are used in fractionation,
preferential separation, conditioning and purification in connection
with such processes as 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 electronics, potable water, health care, biotechnology, food
and beverage, chemical processing and power generation industries.    

      Filtration processes cover a broad spectrum ranging from those
which separate discrete molecules and ions to those which separate
particles visible to the naked eye.  Historically, the Company
specialized in products utilizing crossflow filtration processes
designed to separate particles in the molecular range.  Through
acquisitions and internal product developments, the Company now has a
full line of filtration products including depth cartridge filters for
particle filtration and pleated membrane cartridge filters for
microfiltration.  The filtration media and membrane is produced
primarily from polymers; however, inorganic membranes and filters of
metal and ceramic are also manufactured.  In addition, the Company
manufactures housings to contain the filters.  The crossflow filter
membrane elements, and the microfilter and depth filter cartridges are
replaceable while the housings are a permanent fixture in the fluid
processing system.
<P4>
      To provide a complete line of products for the production of pure
water, the Company manufactures distillation equipment, both single-
effect and more energy efficient multi-effect.  In addition,
deionization and softening equipment in both laboratory size and large
scale is manufactured in multiple locations.  

      In June 1989, the Company acquired Ozone Research & Equipment
Corporation of Phoenix, Arizona.  Ozone Research was founded in 1957 and
is a pioneer in the manufacture of ozone generation equipment for the
purification of water and the testing of elastomeric materials.

      In November 1989, the Company acquired certain assets for the
manufacture and sale of MACE flow control and pumping products to
increase its fluid handling offerings.  MACE products are made from
Teflon PTFE, the most chemically stable polymer available, and are used
to handle ultrapure and aggressive chemicals.  

      In December 1990, the Company acquired certain assets of the
FASTEK Division of Eastman Kodak for the production of reverse osmosis
membrane, home reverse osmosis membrane elements, a rolled filter
product, and a blown microfiber filter cartridge product.  This
Syracuse, New York facility and manufacturing equipment provides the
Company with added capacity and capability and gives the Company three
sites for manufacturing membrane and membrane elements.

      In October 1993, the Company acquired Autotrol Corporation through
a pooling-of-interests, stock-for-stock transaction.  Autotrol was
founded in 1962 and is a leader in the manufacture of controllers for
water softening and filtration equipment.  In addition, Autotrol
manufactures other fluid control and measuring devices such as a
totalizing flow meter and dosing system to assure proper treatment of
cooling tower water.  Most of Autotrol's products are sold to OEM's who
then use them as a component in a water conditioning device which is
then sold to consumers.  

      In November 1994, the Company acquired substantially all of the
assets of Lakewood Instruments of Phoenix, Arizona.  This acquisition
adds a line of instruments, sensors and analyzers used in the
measurement of fluid characteristics in the chemical water treatment and
pure water industries.

      In October 1995, the Company acquired the assets and operations of
Western Filter Company, Denver, Colorado, an important supplier to the
beverage and bottled water industry for over 50 years.  Western Filter
has extensive experience in providing the beverage market with
conventional water treatment technologies and membrane water treatment. 
Western Filter also has experience in coagulation clarification
pretreatment technologies.  These technologies will be utilized with
Osmonics' existing distribution channels, allowing the Company to expand
capability in the international markets where conventional water
treatment is required, as well as complement municipal sales in the
United States where ozone disinfection is becoming accepted.

      In July 1996, the Company acquired Desalination Systems, Inc.
("Desal") through a pooling-of-interests, stock-for-stock transaction. 
Desal manufactures crossflow filtration membrane and membrane elements. 
<P5>
Desal has manufacturing facilities in Vista, California, and markets its
products worldwide.  Desal's products extend the range of membranes and
membrane elements previously offered by the Company.  The acquisition
also extends the Company's distribution network for such products.  

      In February 1997, the Company acquired AquaMatic, Inc. of
Rockford, Illinois.  AquaMatic, started in 1930, offers a line of
specialty valves and controllers for the water conditioning market,
which will be sold through existing Osmonics distribution channels.

      The Company focuses the marketing of its products through two
sales groups:

   1.  Large equipment and systems.

   2.  Components and product sales.

Both of these sales groups are supported by Application Engineers and
market support personnel.  

Products

      Membranes and Membrane Elements:  The Company markets polymer
membranes for crossflow applications sold in replaceable elements.  Most
membranes are produced in a spiral-wound configuration ranging in
diameter from two to twelve inches and in length from twelve to sixty
inches.  

      Membrane elements are typically replaced every 6 to 60 months,
depending upon the severity of the application.  The Company
manufactures the membrane material and membrane elements used in its own
systems, and also manufactures membrane elements for other original
equipment manufacturers (OEM's) who include them as component parts in
their products.  

      The Company's 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 and waste removal for pollution control compliance. 
In addition, the Company sells its home reverse osmosis (HRO) membrane
elements to OEM's who package them into systems for use in homes,
offices and retail vending establishments to produce purified drinking
water.  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.

      Beginning in December 1985, the Company funded the start-up of
Poretics Corporation for the development, manufacture, and sale of
polycarbonate track-etched membrane and the hardware for use in a
variety of laboratory and medical diagnostic applications.  The Company
also manufactures silver microfiltration membranes and ceramic
microfilters used in the laboratory.  Use of the silver membrane in
normal filtration will neither kill bacteria nor cause them to grow,
<P6>
permitting use of this separation process to count bacteria by
collecting them on the membrane.  Numerous applications exist for the
Company's microfilters because of unique features, including use in air
monitoring and in laboratory procedures for cancer and other research.

      Filters:  The Company markets replaceable depth cartridge filters,
pleated cartridge filters, and rolled cartridge filters.  The depth
cartridge filters consist of a matrix of thermally-bonded polypropylene
blown microfibers.  The structure of these fibers allows particles to be
trapped throughout the depth of the cartridge filter rather than simply
on its surface, enhancing the efficiency of the filtration process.  The
pleated cartridge filters use either a specially processed sheet of
blown polypropylene microfibers or microporous membranes and use surface
filtration to act as a very selective filter.  Rolled cartridge filters
use media similar to pleated filters in a semicrossflow configuration,
for enhanced filtration in specialized applications.  Cartridge filters
are manufactured in a range of pore sizes and particulate retention
ratings.  As a result of retention of particles in the filters,
cartridge filters are typically replaced at intervals of eight hours to
four weeks.

      The Company markets ceramic cartridge filters for microfiltration
and particulate filtration.  The ceramic cartridge filters operate
similar to the pleated cartridge filters in that particles are trapped
on the surface.  Ceramic cartridge filters are used to sterilize
pharmaceutical solutions and are used in laboratory applications, where
many analytic and diagnostic procedures require purification or
sterilization.

      The Company also markets separation elements and equipment used in
coalescing filtration, a process distinct from crossflow and normal
filtration, which separates different liquids based on their density and
adsorption differences.  This process can reduce concentrations of
contaminants of several percent to only a few parts per million. 
Applications of coalescing filtration include removal of contaminants
from compressed air and gas lines, dewatering of solvents and jet fuel,
and removal of trace oil from waste water prior to disposal.

      Ion Exchange and Chromatography Equipment:  The Company markets
equipment using ion exchange technology.  Ion exchange plastic beads and
selected polymer gels are utilized to preferentially adsorb ionized and
charged material from a fluid stream.  After the ion exchange beads have
adsorbed a certain amount of material, they must be regenerated,
typically with acid or caustic, or in the case of chromatography with a
selected fluid to strip off the adsorbed material.  The most 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.  The Company is a leader in the
manufacture of the controllers and valves used to effect softening. 
Another ion exchange application is to polish ultrapure water for
electronics manufacture and high pressure boiler feed.  Chromatography
is primarily used to purify biotech fluids and food proteins.

      Distillation Equipment:  The Company markets distillation and
related water purification equipment used primarily in the laboratory
and pharmaceutical industries.  Distillation, which involves the
<P7>
condensation of steam from boiling water, was one of the first
technologies used to purify water.  The Company's distillation product
lines range from laboratory stills to elaborate 2000-gallon-per-hour
multi-stage purifiers.  

      Ozonation Equipment:  The Company 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 waste water.  

      Pumps, Valves and Flow Control Devices:  The Company markets 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 markets two types of chemical-resistant, air-operated
pumps used in both the chemical and electronics industries.  These
unique pumps are constructed of Teflon PTFE or polypropylene materials
making them resistant to acids, caustics, solvents and numerous other
aggressive chemicals.

      The Company markets a dry chemical feeder system to sanitize well
water and reduce iron and sulfur odors, and also markets the pellets
used in the feeder.  

      The Company markets totalizing flow meters and electronic
controllers made of corrosion resistant Noryl plastic, as well as a line
of Teflon PTFE fluid control products including valves, fittings and
flow meters used in the electronics, pharmaceutical and chemical
industries.  The PTFE is molded and machined into unique shapes to
provide extremely chemical resistant high temperature parts.

      The acquisition of Lakewood Instruments brings to the Company a
line of analog and digital instrumentation which strengthens and
broadens corporate offerings to the chemical water treatment and high
purity water industries.  Lakewood manufactures conductivity, pH, ORP,
chlorine and specific ion sensors, analyzers and controllers, which
offer unique synergies with Autotrol's flow-based controls, enabling
chemical water treatment companies to offer a comprehensive line of
products for cooling tower and boiler water treatment from a single
source.  Lakewood is also developing new local operating network (LON)
communications and data acquisition capabilities, which allow networking
multiple sensors to an individual control/display device using standard
telephone cable.  
<P8>

      Machines and Systems:  The crossflow and normal filtration
machines manufactured by the Company 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 prefilters and postfilters, ion
exchange equipment, ozonator equipment, 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 registered with the United States Food & Drug
Administration as a Class II medical device manufacturer for certain of
its reverse osmosis machines, as is required to supply water
purification equipment for use in artificial kidney dialysis.

      The following table shows the percentage of net sales during the
past five years attributable to the Company's fluid processing and
handling equipment compared to its replaceable components:

         Year Ended                        Replaceable
         December 31      Equipment <F1>    Components <F2>
            1996              49%               51%
            1995              48%               52%
            1994              51%               49%   
            1993              49%               51%
            1992              50%               50%

F1   
Equipment includes: (i) membrane elements, filter elements, ion
exchange resin and filter cartridges sold with machines, (ii)
pumps, controls, instruments, valves, fittings, chemicals, and
other ancillary equipment sold with systems and (iii) pumps,
control valves, instruments and machines sold separately.

F2   
Replaceable components include only those membrane elements,
coalescer and dielectric elements, cartridges, membranes, filters
and other components sold by the Company as replacements for its
machines, systems and products, or as replaceable components for
products manufactured by others.  They do not include those
components originally sold as parts of new machines or systems
manufactured by the Company.  Sales of components and replacement
parts provide the Company with a relatively stable and continuing
source of revenue.

Sales and Marketing

      The Company markets its custom machines and systems through its
direct sales force.  The Company's standard products are marketed to a
network of independent distributors with the help of Company district
managers.  These distributors provide worldwide installation service and
<P9>
stocking of a wide range of the Company's standard products.  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 mail 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 $10,937,000 in 1996, $9,399,000 in 1995, and
$8,989,000 in 1994.  The Company anticipates that research and
development expenditures in 1997 will be similar to the 1996 level as a
percent of sales.

Patents and Trademarks

      The Company has been granted domestic and certain foreign
trademarks on numerous product names, and on its logo-types.  The
Company holds domestic and foreign patents on certain of its filter
media, filters, controlling valves, machine designs and other products. 
Although the Company believes that its patents have value, the Company's
business is not dependent on any patent or group of related patents. 
The Company considers its technological position to be based primarily
on its proprietary manufacturing methods, innovative engineering and
marketing expertise.

Employees

      As of December 31, 1996, the Company employed 1,402 persons,
including 247 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. 
<P10>
In ozone and distillation 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 products business
activities.  

      With respect to the Company's disposable filter and lab products,
two companies, Pall and Millipore, 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, cellulose acetate, polycarbonate, polyester, polysulfone, and PTFE;
ceramic and glass materials, stainless steel, steel, brass, copper,
titanium, silver and various 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 chemical 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.

      To date, the Company has experienced no difficulty in securing any
of its needed raw materials and components.

Customers

      No one customer accounted for 10 percent or more of the Company's
consolidated revenue in 1996, 1995 or 1994.

Backlog

      The dollar amount of the Company's backlog of orders considered to
be firm at December 31, 1996, was $27.9 million.  The comparable backlog
at December 31, 1995, was $20.6 million.  The Company expects that
nearly all orders included in the backlog at December 31, 1996, will be
filled during the 1997 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.  
<P11>
Governmental Regulation

      Certain applications of the Company's reverse osmosis and
ultrafiltration products and distillation equipment are subject to
governmental regulation.  Systems used for fractionation of cheese whey
for human consumption are subject to regulation by the United States
Department of Agriculture.  Reverse osmosis, ultrafiltration and
distillation 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.

      To date, compliance with federal, state and local provisions
relating to the protection of the environment has had no material effect
upon the capital expenditures, earnings or competitive position of the
Company.

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, 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.

      Large export sales are primarily made on the basis of confirmed
irrevocable letters of credit or time drafts to selected customers in
U.S. dollars.  Therefore, the Company believes that problems of currency
fluctuation or political and economic stability do not constitute
substantial risks.  See Note 11 of Notes to Consolidated Financial
Statements for a breakdown of the Company's foreign operations and
export sales by geographic area.

ITEM 2.  PROPERTIES

      The executive offices and principal manufacturing facilities of
the Company are located in Minnetonka, Minnesota, a suburb of
Minneapolis.
<P12>
      A summary of the Company's main operating facilities is as
follows:


   Location         Status       Size                Function

Minnetonka, MN      Owned    309,600 sq ft      Sales, Manufacturing,
                                                Warehouse

Milwaukee, WI       Owned    103,700 sq ft      Sales, Manufacturing,
                                                Warehouse

Phoenix, AZ         Owned     57,600 sq ft      Sales, Manufacturing,
                                                Warehouse

Vista, CA           Owned    110,000 sq ft      Sales, Manufacturing,
                                                Warehouse

Escondido, CA       Leased    30,000 sq ft      Manufacturing

Rockland, MA        Leased    38,200 sq ft      Sales, Manufacturing,
                                                Warehouse

Syracuse, NY        Owned     48,500 sq ft      Sales, Manufacturing,
                                                Warehouse

Upland, CA          Leased    22,000 sq ft      Sales, Manufacturing,
                                                Warehouse

Denver, CO          Owned     20,700 sq ft      Sales, Manufacturing,
                                                Warehouse

Ft. Lauderdale, FL  Leased    20,000 sq ft      Sales, Warehouse

Livermore, CA       Leased     6,000 sq ft      Sales, Manufacturing,
                                                Warehouse

Emmetsburg, IA      Leased     8,800 sq ft      Manufacturing, Warehouse

Bryan, TX           Owned      2,500 sq ft      Manufacturing, Warehouse

Le Mee, France      Owned     18,300 sq ft      Sales, Manufacturing,
                                                Warehouse

Neuchatel,          Leased     4,000 sq ft      Sales, Warehouse
 Switzerland

Total Owned                  670,900 sq ft

Total Leased                 129,000 sq ft

Total Owned and Leased       799,900 sq ft
<P13>
      Certain debts 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, Japan, Hong Kong, Switzerland and Singapore that are 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.

      Autotrol's rotating biological contactor assemblies (the "RBC's")
were a product which Autotrol discontinued producing and selling in 
1982.  Currently there are no performance claims pending against the
Company with respect to the RBC's, and, as of December 31, 1996, the
Company has reserves to cover potential future liability with respect to
the RBC's.  


                                 PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
         SHAREHOLDER MATTERS

      The Company's common stock trades on the New York Stock Exchange
under the symbol "OSM".

      Shareholders of record on March 3, 1997 numbered 2,630.  The
Company estimates that an additional 2,500 shareholders own stock held for 
their account at brokerage firms and financial institutions.

                                 1996                   1995
Quarterly Prices<F1>        High      Low          High      Low
First Quarter              20 3/8    18 1/4       16 5/8    13 1/4  
Second Quarter             24 7/8    18 1/2       18 1/4    15 1/2
Third Quarter              22 3/4    18 1/4       17 7/8    15 1/2
Fourth Quarter             22 1/8    18 5/8       21 1/4    16 5/8


F1  Adjusted for splits.


      "Notes to Consolidated Financial Statements," pages 19-23 of the
Annual Report to Shareholders, are incorporated herein by reference. 
As of March 14, 1997 there were 2,650 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 which contain a covenant limiting the payment of dividends to
shareholders.  At December 31, 1996, approximately $33,583,000 of retained
earnings was restricted under this covenant.  

ITEM 6.  SELECTED FINANCIAL DATA

      "Selected Financial Data," page 29 of the Annual Report to
Shareholders, is incorporated herein by reference.

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

      "Management's Discussion and Analysis of Financial Condition and
Results of Operations," pages 24 and 25 of the Annual Report to
Shareholders, is incorporated herein by reference.  
<P14>
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:

                                                     Page(s)
      
      Consolidated Statements of Income  . . . . . .   16
      
      Consolidated Balance Sheets  . . . . . . . . .   17

      Consolidated Statements of Cash Flows  . . . .   18

      Consolidated Statements of Changes in 

        Shareholders' Equity   . . . . . . . . . . .   19

      Independent Auditors' Report   . . . . . . . .   24

      Notes to Consolidated Financial Statements . .   19-23

      Quarterly Income Data  . . . . . . . . . . . .   26


                                PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                  Executive Officers of the Registrant
 
                                                                 Officer
    Name and Age              Position with Company               Since 

D. Dean Spatz (52)         President and Chairman                 1969
                           of the Board

Ruth Carol Spatz (52)      Secretary                              1969

Howard W. Dicke (59)       Vice President Human Resources         1978
                           and Corporate Development, 
                           and Treasurer

L. Lee Runzheimer (54)     Chief Financial Officer                1988

James J. Carbonari (55)    Vice President Sales & Marketing       1989

Kenneth E. Jondahl (40)    Vice President International           1991

Andrew T. Rensink (40)     Vice President Technology              1991

      All of the executive officers, except Messrs. Jondahl and Rensink,
have been officers of the Company for more than five years.  Mr. Jondahl
joined the Company in 1981 as an Application Engineer.  Since then he
has served as a Regional Sales Manager, Dairy Market Specialist, General
Manager of Osmonics Asia/Pacific, General Manager of Osmonics Europa,
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Marketing Manager and International Sales Manager.  He was promoted to
Vice President International in April 1991.  Mr. Rensink joined the
Company as Vice President Technology in September 1991.  Prior to that
he had been a plant manager and manufacturing manager for Mantaline, an
elastomeric extrusion company.  Previously he held various management
positions in both engineering and manufacturing in several General
Electric business units.  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.

ITEM 11.  EXECUTIVE COMPENSATION

      The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement for the Company's 1997
Annual Meeting of Stockholders.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

      The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement for the Company's 1997
Annual Meeting of Stockholders.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this Item is incorporated herein by
reference to the definitive Proxy Statement for the Company's 1997
Annual Meeting of Stockholders.  


                                 PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
          FORM 8-K

          (a) (1)  Financial Statement

                   The 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 Schedules

                   Reports of Independent Public Accountants on
                   Supplemental Schedules 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.
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              (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.)

                      C.* 1983 Stock Option Plan and related form of
                          stock option agreement.  (Incorporated herein
                          by reference to Exhibit 10.2 to Registration
                          Statement on Form S-2, File No. 33-336.)

                      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.)
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                          * Denotes Executive Compensation Plan.   
                  (13)    1996 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-K

                   No reports on Form 8-K were filed during the quarter
                   ended December 31, 1996.
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                               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 Spatz              
                                            D. Dean Spatz, President

Dated:  March 26, 1997


     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/ L. Lee Runzheimer    Chief Financial Officer      March 26, 1997
     L. Lee Runzheimer    (Principal Finance and 
                          Accounting Officer)


 /s/ Howard W. Dicke      Vice President Human         March 26, 1997
     Howard W. Dicke      Resources and Corporate 
                          Development, and Treasurer


 /s/ Ruth Carol Spatz     Director                     March 27, 1997
     Ruth Carol Spatz


 /s/ Michael L. Snow      Director                     March 18, 1997 
     Michael L. Snow


 /s/ Ralph E. Crump       Director                     March 18, 1997
     Ralph E. Crump


 /s/ Verity C. Smith      Director                     March 17, 1997
     Verity C. Smith


 /s/ Charles W. Palmer    Director                     March 17, 1997
     Charles W. Palmer


 /s/ D. Dean Spatz        President, Chairman of       March 26, 1997
     D. Dean Spatz        the Board and Director
                          (Principal Executive Officer)