LOGO]   IONICS                     Address Mail To:
         ____________________       P.O. Box 9131
         IONICS, INCORPORATED       Watertown, Massachusetts 02471-9131

                                 65 Grove Street
                                    Watertown, Massachusetts 02472-2882
                                    Telephone: (617) 926-2500
                               Fax: (617) 926-3760

May 15, 2001

Securities and Exchange Commission
Filing Desk - Room 1004
450 Fifth St., NW
Washington, D.C.  20549

    Re:  Ionics, Incorporated  (Commission File No. 1-7211) -
         Filing of Form 10-Q for quarter ended March 31, 2001
         Account No. 0000052466

Ladies and Gentlemen:

I enclose via electronic filing pursuant to the Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") System on behalf of Ionics, Incorporated
(the "Company"), the Form 10-Q for the quarter ended March 31, 2001. Please
acknowledge receipt of this electronic filing by return E-mail to the Company's
E-mail address, plynes@ionics.com.

A manually signed copy of the Form 10-Q will be kept on file at the offices of
the Company.

If you have any questions or require further information, please contact
the undersigned at (617)926-2510, ext. 450.

Very truly yours,



/s/Stephen Korn
Stephen Korn
Vice President and
General Counsel

Enclosures

cc:    Arthur L. Goldstein, Chairman and Chief Executive Officer
       Daniel M. Kuzmak, Vice President, Finance and Chief Financial Officer

<PAGE>

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                    FORM 10-Q

           [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended: March 31, 2001
                                                 --------------

                                       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 Number: 1-7211

                              IONICS, INCORPORATED
             (Exact name of registrant as specified in its charter)

       MASSACHUSETTS                                    4-2068530
(State or other jurisdiction of            (IRS Employer Identification Number)
incorporation or organization)

       65 Grove Street
       Watertown, Massachusetts                         02472
(Address of principal executive offices)              (Zip Code)

       Registrant's telephone number, including area code: (617) 926-2500

Former name, former address and former fiscal year, if changed since last
report: 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 the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

At April 30, 2001 the Company had 17,270,429  shares of Common Stock,  par value
$1 per share, outstanding.


<PAGE>
                              IONICS, INCORPORATED
                                    FORM 10-Q
                        FOR QUARTER ENDED MARCH 31, 2001




                                      INDEX




                                                                   Page Number

Part I        Financial Information

              Consolidated Statements of Operations                     1

              Consolidated Balance Sheets                               2

              Consolidated Statements of Cash Flows                     3

              Notes to Consolidated Financial Statements                4

              Management's Discussion and Analysis of Results
                  of Operations and Financial Condition                 7


Part II       Other Information                                        10

              Signatures                                               11

              Exhibit Index                                            12


<PAGE>
<TABLE>
<CAPTION>
                         PART I - FINANCIAL INFORMATION

                              IONICS, INCORPORATED
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                (Amounts in thousands, except per share amounts)

                                                               Three months ended
                                                                    March 31,
                                                           ----------------------------
                                                               2001            2000
                                                           -----------     ------------

Revenue:
<S>                                                          <C>              <C>
     Equipment Business Group                                $ 51,981         $ 41,356
     Ultrapure Water Group                                     33,848           27,746
     Consumer Water Group                                      29,345           26,419
     Instrument Business Group                                  7,788            7,274
                                                           -----------     ------------

                                                              122,962          102,795
                                                           -----------     ------------

Costs and expenses:
     Cost of sales of Equipment Business Group                 40,000           31,405
     Cost of sales of Ultrapure Water Group                    25,680           21,865
     Cost of sales of Consumer Water Group                     18,004           15,701
     Cost of sales of Instrument Business Group                 3,439            3,278
     Research and development                                   1,690            1,821
     Selling, general and administrative                       28,501           22,974
                                                           -----------     ------------

                                                              117,314           97,044
                                                           -----------     ------------


Income from operations                                          5,648            5,751

Interest income                                                   225              267

Interest expense                                               (1,604)            (724)

Equity income                                                     441              332
                                                           -----------     ------------


Income before income taxes and minority interest                4,710            5,626

Provision for income taxes                                      1,601            1,913
                                                           -----------     ------------


Income before minority interest                                 3,109            3,713

Minority interest expense                                         114              151
                                                           -----------     ------------


Net income                                                    $ 2,995          $ 3,562
                                                           ===========     ============


Basic earnings per share                                       $ 0.18           $ 0.22
                                                           ===========     ============


Diluted earnings per share                                     $ 0.18           $ 0.22
                                                           ===========     ============


Shares used in basic earnings per share calculations           16,389           16,209
                                                           ===========     ============


Shares used in diluted earnings per share calculations         16,574           16,404
                                                           ===========     ============

</TABLE>

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

<PAGE>
<TABLE>
<CAPTION>
                              IONICS, INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
           (Amounts in thousands, except share and par value amounts)

                                                                                March 31,           December 31,
                                                                                  2001                  2000
                                                                             ----------------      ---------------
                                                                             ----------------      ---------------
ASSETS
Current assets:
<S>                                                                                 <C>                  <C>
      Cash and cash equivalents                                                     $ 21,976             $ 25,497
      Short-term investments                                                             468                1,105
      Notes receivable, current                                                        4,194                4,741
      Accounts receivable                                                            154,966              162,711
      Receivables from affiliated companies                                            1,375                  792
      Inventories:
          Raw materials                                                               21,400               21,061
          Work in process                                                              9,958                8,264
          Finished goods                                                               4,898                5,376
                                                                             ----------------      ---------------

                                                                                      36,256               34,701
      Other current assets                                                            10,985               16,443
      Deferred income taxes                                                           12,749               12,749
                                                                             ----------------      ---------------

          Total current assets                                                       242,969              258,739

Notes receivable, long-term                                                           21,764               17,502
Investments in affiliated companies                                                   22,277               18,310
Property, plant and equipment:
      Land                                                                             8,652                8,738
      Buildings                                                                       48,349               48,773
      Machinery and equipment                                                        310,214              312,138
      Other, including furniture, fixtures and vehicles                               49,071               48,470
                                                                             ----------------      ---------------

                                                                                     416,286              418,119
      Less accumulated depreciation                                                 (198,984)            (195,276)
                                                                             ----------------      ---------------

                                                                                     217,302              222,843
Other assets                                                                          58,313               60,072
                                                                             ----------------      ---------------

          Total assets                                                             $ 562,625            $ 577,466
                                                                             ================      ===============


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
      Notes payable and current portion of long-term debt                           $ 78,898             $ 75,045
      Accounts payable                                                                37,617               56,014
      Customer deposits                                                                5,939                4,883
      Accrued commissions                                                              2,283                2,002
      Accrued expenses                                                                37,288               35,419
                                                                             ----------------      ---------------

          Total current liabilities                                                  162,025              173,363

Long-term debt and notes payable                                                      11,049               10,911
Deferred income taxes                                                                 27,636               30,334
Other liabilities                                                                      6,073                5,997
Stockholders' equity:
      Common stock, par value $1, authorized
      shares: 55,000,000; issued: 16,395,429 in 2001 and 16,369,029 in 2000           16,395               16,369
      Additional paid-in capital                                                     162,664              162,114
      Retained earnings                                                              200,611              197,616
      Accumulated other comprehensive income                                         (23,828)             (19,238)
                                                                             ----------------      ---------------

          Total stockholders' equity                                                 355,842              356,861
                                                                             ----------------      ---------------

          Total liabilities and stockholders' equity                               $ 562,625            $ 577,466
                                                                             ================      ===============

</TABLE>

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

<PAGE>
<TABLE>
<CAPTION>
                              IONICS, INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                             (Dollars in thousands)


                                                                                          Three Months Ended
                                                                                              March 31,
                                                                              ---------------------------------------

                                                                                  2001                      2000
                                                                              -------------             -------------

      <S>                                                                          <C>                       <C>
      Net income                                                                   $ 2,995                   $ 3,562
      Adjustments to reconcile net income to net cash (used)
      provided by operating activities:
         Depreciation and amortization                                               8,758                     7,788
         Provision for losses on accounts and notes receivable                       1,421                       724
         Compensation expense on restricted stock awards                                 -                        27
         Changes in assets and liabilities:
            Notes receivable                                                        (4,591)                     (459)
            Accounts receivable                                                      3,476                    (8,434)
            Inventories                                                             (2,012)                   (1,977)
            Other current assets                                                     5,209                     1,199
            Investments in affiliates                                               (4,091)                      877
            Accounts payable and accrued expenses                                  (13,871)                    4,904
            Income taxes                                                               716                       584
            Other                                                                     (440)                   (1,302)
                                                                              -------------             -------------

               Net cash (used) provided by operating activities                     (2,430)                    7,493
                                                                              -------------             -------------

Investing activities:
      Additions to property, plant and equipment                                    (6,513)                  (12,369)
      Disposals of property, plant and equipment                                       241                       724
      Acquisitions, net of cash acquired                                                 -                    (4,250)
      Sale (purchase) of short-term investments                                        515                      (214)
                                                                              -------------             -------------

               Net cash used by investing activities                                (5,757)                  (16,109)
                                                                              -------------             -------------

Financing activities:
      Principal payments on current debt                                           (18,543)                  (18,785)
      Proceeds from borrowings of current debt                                      23,368                    29,332
      Principal payments on long-term debt                                            (243)                      (18)
      Proceeds from borrowings of long-term debt                                       135                     1,285
      Proceeds from stock option plans                                                 576                       242
                                                                              -------------             -------------

               Net cash provided by financing activities                             5,293                    12,056
                                                                              -------------             -------------

Effect of exchange rate changes on cash                                               (627)                      336
                                                                              -------------             -------------

Net change in cash and cash equivalents                                             (3,521)                    3,776
Cash and cash equivalents at beginning of period                                    25,497                    13,169
                                                                              -------------             -------------

Cash and cash equivalents at end of period                                        $ 21,976                  $ 16,945
                                                                              =============             =============


</TABLE>

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

<PAGE>

                              IONICS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       Basis of Presentation:

In the opinion of the management of Ionics,  Incorporated  (the "Company"),  all
adjustments have been made that are necessary to present fairly the consolidated
financial  position of the Company,  the consolidated  results of its operations
and the  consolidated  cash flows for each period  presented.  The  consolidated
results of operations for the interim periods are not necessarily  indicative of
the results of  operations  to be expected  for the full year.  These  financial
statements  should be read in conjunction  with the Company's 2000 Annual Report
as filed on Form 10-K with the Securities and Exchange Commission. Other than as
noted below, there have been no significant changes in the information  reported
in those Notes,  other than from the normal business  activities of the Company,
and there have been no changes which would, in the opinion of management, have a
materially adverse effect upon the Company. Certain prior year amounts have been
reclassified to conform to the current year  presentation  with no impact on net
income.

2.       Contingent Liabilities:

On March 30, 2001,  the two lawsuits  alleging  infringement  of certain  United
States  patents  and  brought  against  the  Company  by  United  States  Filter
Corporation,   U.S.   Filter/Ionpure,   Inc.,  IP  Holding  Company,   Millipore
Corporation and Millipore  Investment  Holdings Limited in U.S.  District Court,
Boston  (Civil  Actions  No.  98-10541-REK  and No.  99-11242-RWZ),  and a third
lawsuit  alleging  infringement of another United States patent and also brought
against the Company by United States Filter Corporation and U.S. Filter/Ionpure,
Inc., in U.S.  District  Court,  Boston (Civil  Action No.  00-11157-REK),  were
settled.

Under terms of the settlement agreement  concluding the first two lawsuits,  the
Company will make certain payments to United States Filter  Corporation (USF) in
exchange for a release and  covenant not to sue. In the fourth  quarter of 2000,
Ionics reserved against this financial obligation. Under terms of the settlement
agreement,   Ionics   is  free   to   continue   its   current   activities   in
electrodeionization (EDI).

Under terms of the  settlement  agreement  concluding  the third  lawsuit,  also
entered into as of March 30, 2001, the Company  agreed to an injunction  against
its  future  infringement  of U.S.  Patent No.  4,574,049.  The  Company  has no
separate financial obligation under this settlement agreement.

3.   Earnings Per Share (EPS) Calculations:

<TABLE>
<CAPTION>

                                                        (Amounts in thousands, except per share amounts)

                                                              For the three months ended March 31,
                                   ---------------------------------------------------------------------------------------------

                                      2001                                            2000
                                   --------------------------------------------    ---------------------------------------------

                                       Net                          Per Share          Net                          Per Share
                                     Income          Shares          Amount          Income          Shares          Amount
                                   ------------    ------------    ------------    ------------    ------------   --------------

Basic EPS
     <S>                               <C>              <C>             <C>            <C>              <C>              <C>
     Income available to
     common stockholders               $ 2,995          16,389          $ 0.18         $ 3,562          16,209           $ 0.22

     Effect of dilutive
     stock options                           -             185               -               -             195                -
                                   ------------    ------------    ------------    ------------    ------------   --------------


Diluted EPS                            $ 2,995          16,574          $ 0.18         $ 3,562          16,404           $ 0.22
                                   ============    ============    ============    ============    ============   ==============

</TABLE>

The effect of dilutive stock options  excludes those stock options for which the
impact would have been antidilutive  based on the exercise price of the options.
The number of options that were antidilutive at the three months ended March 31,
2001 and 2000 was 1,568,234 and 736,250, respectively.

4.   Comprehensive Income:

The Company has adopted the Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting  Comprehensive  Income," which establishes standards for the
reporting  and display of  comprehensive  income and its  components.  The table
below  sets  forth  "comprehensive  income"  as  defined by SFAS No. 130 for the
three-month periods ended March 31, 2001 and 2000.

                                        (Amounts in thousands)
                                          Three months ended
                                     March 31,
                                    -------------------------------
                                    -------------------------------
                                        2001              2000
                                    -------------      ------------
                                    -------------      ------------
Net income                               $ 2,995           $ 3,562
Other comprehensive income,
     net of tax:
     Translation adjustments              (4,590)           (2,410)
                                    -------------      ------------
                                    -------------      ------------
Comprehensive income                    $ (1,595)          $ 1,152
                                    =============      ============

<PAGE>


5.   Segment Information:

In 1998,  the Company  adopted SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related  Information."  At the end of 1998,  the Company  changed
from three  reportable  segments to four  reportable  "business  group" segments
corresponding  to a "business  group"  structure which was put into place in the
latter  part of 1998.  As of March 31,  2001,  no changes  have been made to the
basis of  segmentation  or the measurement of profit or loss from that which was
reported  in the  Company's  2000  Annual  Report as filed on Form 10-K with the
Securities and Exchange Commission,  and there were no material changes to total
assets by segment.

The following  table  summarizes  the Company's  operations by the four business
group  segments  and   "Corporate"   (Corporate   includes  the  elimination  of
intersegment transfers).
<TABLE>
<CAPTION>

                                                           For the three months ended March 31, 2001
                                     -------------------------------------------------------------------------------------

                                      Equipment      Ultrapure     Consumer      Instrument
                                       Business        Water         Water        Business
                                        Group          Group         Group         Group        Corporate       Total
                                     -------------  ------------  ------------  -------------   -----------  -------------

(Amounts in thousands)
<S>                                      <C>           <C>           <C>             <C>            <C>         <C>
Revenue - unaffiliated
     customers                           $ 51,981      $ 33,848      $ 29,345        $ 7,788           $ -      $ 122,962
Inter-segment transfers                     1,397         1,181             -            682        (3,260)             -
Gross profit                               11,981         8,168        11,341          4,349             -         35,839



                                            For the three months ended March 31, 2000
                                     -------------------------------------------------------------------------------------

                                      Equipment      Ultrapure     Consumer      Instrument
                                       Business        Water         Water        Business
                                        Group          Group         Group         Group        Corporate       Total
                                     -------------  ------------  ------------  -------------   -----------  -------------

(Amounts in thousands)
Revenue - unaffiliated
     customers                           $ 41,356      $ 27,746      $ 26,419        $ 7,274           $ -      $ 102,795
Inter-segment transfers                     1,582           225             -            386        (2,193)             -
Gross profit                                9,951         5,881        10,718          3,996             -         30,546

</TABLE>


<PAGE>


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

Results of Operations

Comparison of the Three Months Ended March 31, 2001 with the Three Months Ended
-------------------------------------------------------------------------------
March 31, 2000
--------------

Revenues for the first quarter of 2001 increased 19.6%, and net income decreased
by 15.9%, compared to the results of the first quarter of 2000. Gross profit was
$35.8  million in the first  quarter of 2001  compared to gross  profit of $30.5
million in the first quarter of 2000. Gross profit for the first quarter of 2001
increased in each of the four  business  groups from the first  quarter of 2000.
These  increases were primarily due to higher sales volume of capital  equipment
and consumer water products as well as improved  margins for the Ultrapure Water
Group (UWG) in the first quarter of 2001 compared to the first quarter of 2000.

Total  revenues for the first  quarter of 2001 were $123.0  million  compared to
revenues of $102.8  million for the first quarter of 2000.  Revenues were higher
in all of the business  group segments for the first quarter of 2001 as compared
to the first quarter of 2000.

Equipment Business Group (EBG) revenues  increased 25.7%, or $10.6 million,  for
the first three  months of 2001 as  compared to the first three  months of 2000.
The increase was due to increased capital equipment sales and continuing work on
a  desalination  facility in  Trinidad as well as partial  delivery of a storage
system for the containment of nuclear fuel at a commercial  U.S.  nuclear energy
plant.

UWG revenues  increased $6.1 million,  or 22%, in the first quarter of 2001 from
the first quarter of 2000,  primarily as a result of increased capital equipment
sales to the microelectronics industry.

The revenues of the Consumer Water Group (CWG) increased $2.9 million, or 11.1%,
in the first  quarter  of 2001  compared  to the  first  quarter  of 2000.  This
increase  was due to continued  growth in both the bottled  water and home water
businesses.

Instrument Business Group (IBG) revenues increased $0.5 million, or 7.1%, in the
first quarter of 2001 compared to the first quarter of 2000.

Cost of sales as a percentage  of revenue was 70.9% in the first quarter of 2001
compared to 70.3% in the first quarter of 2000.

Cost of sales as a percentage of revenue increased in the first quarter of 2001,
compared  to the first  quarter of 2000,  for EBG and CWG while such  percentage
decreased for UWG and IBG. EBG's cost of sales percentage  increased to 77.0% in
the first quarter of 2001 from 75.9% in the first  quarter of 2000  reflecting a
shift in business mix to lower margin capital  equipment.  The increase in CWG's
cost of sales to 61.4% in the  first  quarter  of 2001  from  59.4% in the first
quarter  of 2000 is  primarily  the result of higher  distribution  costs due to
continued  increases in fuel and labor  costs.  These  increases  were offset by
decreases in the cost of sales as a  percentage  of revenue for UWG and IBG. The
decrease in UWG's cost of sales percentage to 75.9% in the first quarter of 2001
from  78.8%  in the  first  quarter  of  2000  was  primarily  due  to  improved
performance  in certain  domestic  and Far East  operations.  Cost of sales as a
percentage  of revenues for IBG  decreased to 44.2% in the first quarter of 2001
from 45.1% in the first quarter of 2000,  primarily due to the  consolidation of
operations at the end of 2000.

Operating  expenses as a percentage  of revenues were 24.6% in the first quarter
of 2001 and  24.1% in the first  quarter  of 2000.  The  increase  in  operating
expenses as a percentage  of revenue  primarily  relates to accounts  receivable
charges and legal expenses.

Interest  income  of $0.2  million  for the  first  quarter  of 2001 was flat in
comparison  to interest  income for the first  quarter of 2000.  The increase of
interest  expense by $0.9  million  in the first  quarter of 2001 from the first
quarter of 2000 is attributable to higher average borrowings by the Company.

Financial Condition
-------------------

Working  capital  decreased  $4.4 million  during the first three months of 2001
while the Company's  current  ratio of 1.5 at March 31, 2001 was unchanged  from
the Company's  current ratio at December 31, 2000. At March 31, 2001 the Company
had $155.0  million of  accounts  receivable,  a decrease of $7.7  million  from
December 31,  2000.  Accounts  payable  decreased  by $18.4  million,  and other
current assets decreased by $5.5 million.

Cash used by  operating  activities  totaled  $2.4  million  for the first three
months of 2001,  primarily due to the decrease in accounts payable.  The primary
use of cash for  investing  purposes was for  additions  to property,  plant and
equipment by the Company's various business groups and among the different asset
classifications.  Net cash  provided by financing  activities  was $5.3 million,
primarily from short-term borrowings.

During 2001,  construction  has been  continuing  on the  Trinidad  desalination
facility owned by Desalination Company of Trinidad and Tobago Ltd.  (Desalcott),
in which the  Company  has a 40% equity  interest.  During  2000 and through the
first quarter of 2001,  the Company  loaned $10 million to the 60% equity owner,
Hafeez Karamath  Engineering Services Ltd. (HKES), as the source of HKES' equity
contribution,  in addition to the $10 million contributed by the Company for its
40% equity interest. Desalcott has entered into a "bridge loan" agreement with a
Trinidad bank  providing $60 million in  construction  financing.  However,  the
bridge loan plus the $20 million  equity  provided to Desalcott will not provide
sufficient funds to complete construction of the project. Although Desalcott has
received proposals for long-term debt financing, there is no assurance that such
financing  will be  obtained  on  terms  acceptable  to  Desalcott,  or prior to
completion of construction.  If permanent financing is not obtained prior to the
completion  of  construction,  Desalcott  will be required to obtain  additional
funds  to  complete  construction,  and the  Company  has  committed  to lend to
Desalcott up to $10 million under such circumstances.

The Company completed a private placement of common stock to Fidelity Management
&  Research  Company  (Fidelity),  on behalf of funds and  accounts  managed  by
Fidelity,  in April  2001.  875,000  shares  were sold at a price of $24.93  per
share, and the total proceeds to the Company were  approximately  $21.8 million.
The proceeds were used to reduce short-term  borrowings.  The Company has agreed
to file a registration  statement  with the  Securities and Exchange  Commission
covering the resale of these shares.

On March 1, 2001, the Company's  principal revolving credit agreement with Fleet
National  Bank (the  Bank) was  amended  and  restated  to  increase  the amount
available for borrowing  from $70 million to $80 million.  In  consideration  of
this increase,  the company gave the Bank a "springing lien," which would result
in a perfected  security  interest in the assets of the Company and its domestic
subsidiaries  (other than real estate and motor  vehicles) in the event that the
Company (i) defaults  under any of its  covenants or  obligations  in the credit
agreement,  or (ii) fails to pay down  outstanding  borrowings  under the credit
agreement  to $50  million  by May 15,  2001.  On May 14,  2001,  the  principal
revolving  credit  agreement  with the Bank was again  amended to eliminate  the
"springing  lien" and to reduce the  borrowing  capacity from $80 million to $65
million.  Under the amended credit  agreement,  the Company has agreed to reduce
the principal amount of its borrowings to $50 million by September 30, 2001.

The Company believes that its cash and cash  equivalents,  cash from operations,
lines of  credit  and  foreign  exchange  facilities  are  adequate  to meet its
currently anticipated needs.


<PAGE>


Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------

Derivative Instruments and Market Risk
--------------------------------------

There has been no material change in the  information  reported in the Company's
2000  Annual  Report  as filed on Form  10-K with the  Securities  and  Exchange
Commission with respect to these risk matters.

Forward-Looking Information
---------------------------

Safe Harbor Statement under Private Securities Litigation Reform Act of 1995
----------------------------------------------------------------------------

The Company's future results of operations and certain  statements  contained in
this  report,  including,  without  limitation,   "Management's  Discussion  and
Analysis  of  Results  of  Operations  and  Financial   Condition,"   constitute
forward-looking  statements.  Such statements are based on management's  current
views and  assumptions and involve risks,  uncertainties  and other factors that
could  cause  actual  results to differ  materially  from  management's  current
expectations.  Among  these  factors  are  business  conditions  and the general
economy;  competitive  factors,  such as  acceptance  of new  products and price
pressures;  risk of nonpayment of accounts  receivable;  risks  associated  with
foreign operations; risks involved in litigation; regulations and laws affecting
business in each of the Company's  markets;  market risk  factors,  as described
above  under  "Derivative  Instruments  and Market  Risks;"  and other risks and
uncertainties  described  from time to time in the  Company's  filings  with the
Securities and Exchange Commission.


<PAGE>


                           PART II - OTHER INFORMATION

Item 5.    Other Information

The two lawsuits  alleging  infringement  of certain  United States  patents and
brought  against  the  Company  by  United  States  Filter   Corporation,   U.S.
Filter/Ionpure,  Inc., IP Holding Company,  Millipore  Corporation and Millipore
Investment  Holdings Limited in U.S.  District Court,  Boston (Civil Actions No.
98-10541-REK and No. 99-11242-RWZ), and a third lawsuit alleging infringement of
another  United  States  patent and also  brought  against the Company by United
States Filter Corporation and U.S. Filter/Ionpure, Inc., in U.S. District Court,
Boston (Civil Action No. 00-11157-REK), have been settled.

Under the terms of the settlement  agreement  concluding the first two lawsuits,
entered  into as of March 30, 2001,  the Company  will make certain  payments to
United States Filter  Corporation (USF) in exchange for a release and a covenant
not to sue.  In the  fourth  quarter  of  2000,  Ionics  reserved  against  this
financial  obligation.  Under the terms of the settlement  agreement,  Ionics is
free to continue its current activities in electrodeionization (EDI).

Under the terms of the settlement agreement  concluding the third lawsuit,  also
entered into as of March 30, 2001, the Company  agreed to an injunction  against
its  future  infringement  of U.S.  Patent No.  4,574,049.  The  Company  has no
separate financial obligation under this settlement agreement.

Item 6.    Exhibits and Reports on Form 8-K

           (a)    Exhibits

                  Exhibit No.               Exhibit

                  10.1                      Shareholders' Agreement dated
                                            April 3, 2001 between the Company
                                            and Mohammed Abdulmohsin Al-Kharafi
                                            & Sons.

                  10.2                      Amendment Agreement No. 2, dated May
                                            14, 2001, to Second Amended and
                                            Restated Credit Agreement among the
                                            Company, Fleet National Bank and
                                            Fleet National Bank as agent.

(b)      Reports on Form 8-K

         No reports on Form 8-K were filed with the Securities and
         Exchange Commission during the quarter ended March 31, 2001.


<PAGE>


                                   SIGNATURES



Pursuant  to the  requirements  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.



                               IONICS, INCORPORATED



Date:  May 15, 2001            By: /s/Arthur L. Goldstein
       ------------                -------------------------------------
                                    Arthur L. Goldstein
                                    Chairman and Chief Executive Officer
                                    (duly authorized officer)



Date:  May 15, 2001            By: /s/Daniel M. Kuzmak
       ------------                -------------------------------------
                                    Daniel M. Kuzmak
                                    Vice President and
                                    Chief Financial Officer
                                    (principal financial officer)


<PAGE>


                                  EXHIBIT INDEX



Exhibits
--------

10.1 Shareholders'  Agreement  dated  April 3,  2001  between  the  Company  and
     Mohammed Abdulmohsin Al-Kharafi & Sons.

10.2 Amendment  Agreement  No. 2,  dated May 14,  2001,  to Second  Amended  and
     Restated Credit Agreement among the Company,  Fleet National Bank and Fleet
     National Bank as agent.

<PAGE>





                                   EXHIBIT 10


                               DATED April 3, 2001



                     MOHAMMED ABDUL MOHSIN AL KHARAFI & SONS

                                       and

                              IONICS, INCORPORATED





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

                             SHAREHOLDERS' AGREEMENT
          -------------------------------------------------------------






<PAGE>








                                    CONTENTS

CLAUSE                                                    Page

1.       INTERPRETATION......................................3
2.       CONDITIONS PRECEDENT................................6
3.       WARRANTIES..........................................6
4.       BUSINESS OF THE COMPANY.............................6
5.       FORMATION OF THE COMPANY............................6
6.       RESERVED MATTERS....................................7
7.       MANAGEMENT AND CONTROL BODIES.......................7
8.       THE BOARD...........................................7
9.       CONTINUING OBLIGATIONS..............................9
10.      FUNDING.............................................9
11.      DIVIDEND POLICY....................................10
12.      PROTECTIVE COVENANTS...............................10
13.      OPTION.............................................11
14.      DEFAULT............................................12
15.      CONFIDENTIALITY....................................12
16.      DURATION...........................................13
17.      DISPUTES...........................................14
18.      ANNOUNCEMENTS......................................14
19.      NOTICES............................................14
20.      COSTS .............................................15
21.      SEVERABILITY.......................................15
22.      GENERAL............................................15
23.      WHOLE AGREEMENT....................................17
24.      GOVERNING LAW......................................17

SCHEDULES

1.       RESERVED MATTERS
2.       REPRESENTATIONS AND WARRANTIES
3.       CONTINUING OBLIGATIONS
4.       SHARED COSTS

<PAGE>


THIS AGREEMENT is made on April 3, 2001 BETWEEN:

(1)  MOHAMMED ABDUL MOSHIN AL KHARAFI & SONS (or its wholly owned Affiliate),  a
     company  duly  incorporated  under the laws of Kuwait and whose  registered
     office is at MAK Building No. 4, Area No. 2, Shuwaikh,  Kuwait ("Kharafi");
     and

(2)  IONICS,  INCORPORATED  (or its  wholly  owned  Affiliate),  a company  duly
     incorporated under the laws of Massachusetts and whose registered office is
     at 65 Grove Street, Watertown, Massachusetts, 02472, U.S.A. ("Ionics")


each a "Party" and together the "Parties".

WHEREAS:

(A)  The Parties have agreed to form a consortium  for the purpose of performing
     the concession awarded by the State of Kuwait,  through either the Ministry
     of Finance or the Ministry of Public Works, to build,  operate and transfer
     a wastewater  treatment and  reclamation  plant in  Sulaibiya,  Kuwait (the
     "Concession").

(B)  The Parties  intend to  establish a With  Limited  Liability  company to be
     incorporated  under the laws of Kuwait  and whose  registered  office is at
     Office No. 2, 2nd Floor,  Building No. 282,  Al-Shuhada Street, Plot No. 1,
     Area No. 11, Kuwait City, Kuwait (the "Company") to act as  concessionaire,
     and upon its  establishment  to conduct its business in accordance with the
     terms  and  conditions  of  this  Shareholders  Agreement,  the  Concession
     Agreement and the Articles.

(C)  The  Shareholders  (as  defined  below)  have  agreed  to enter  into  this
     Agreement  for the purposes of (i)  recording  the terms and  Conditions on
     which  they will  subscribe  for  shares  in and  provide  funding  for the
     Company,  (ii) regulating their  relationship with each other in the period
     prior  to the  establishment  of the  Company  and for so long as they  are
     shareholders in the Company,  and (iii) regulating,  as between themselves,
     certain aspects of the affairs of the Company, including voting as required
     under the Articles to give effect to the provisions of this Agreement.

IT IS AGREED as follows:

1.       Interpretation

(1)      In this Agreement:

         "Affiliate" means in relation to any party, any other person that,
         directly or indirectly, through one or more intermediaries, controls,
         is controlled by or is under common control with the specified person.
         For the purposes of this definition, the term "control" means the power
         to direct the management or policies of an entity, directly or
         indirectly, whether through the ownership of voting securities or other
         equity interests, by contract or otherwise (provided that the direct or
         indirect ownership of fifty percent (50%) or more of the voting
         securities is deemed to constitute control of that entity);

         "Agreed Form" means, in relation to any document, the form of that
         document which has been initialled for the purpose of identification by
         the Parties with such changes as the Shareholders may agree in writing
         before the Effective Date.

         "Articles" means the articles of association of the Company in the
         Agreed Form.

         "Auditors" means the auditors of the Company from time to time, being
         an independent firm of accountants of international repute.

         "Board" means the board of directors for the time being of the Company.

         "Business" means the development, engineering, procurement,
         construction, operation, and maintenance of a wastewater treatment and
         reclamation project in Sulaibiya, Kuwait in accordance with the
         provisions of the Project Agreements.

         "Business Plan" means the business plan from time to time of the
         Company and its subsidiaries (if any).

         "Chairman" means the chairman of the Board appointed in accordance with
         the provisions of this Agreement and the Articles.

         "Companies Law" means the Kuwait Commercial companies Law No. 15 of
         1960.

         "Concession Agreement" means the agreement to be entered between the
         State of Kuwait and the Company.

         "Director" means a member of the Board appointed in accordance with the
         provisions of this Agreement and the Articles.

         "Effective Date" means the date on which the Concession Contract is
         signed by the Parties and the State of Kuwait.

         "Financial Year" means a financial year for the purposes of the
         Companies Law.

         "General Assembly" means any meeting of the Shareholders and Investors
         including both general meetings and extraordinary meetings of
         Shareholders and Investors.

         "Investor" means a person or entity, other than a Shareholder, with
         equity participation in the Company.

         "Kuwait" means the State of Kuwait.

         "Loan Agreement" means the long-term financing loan agreement and any
         bridge loan agreement in the Agreed Form between the Company and its
         lender(s), including any letters of commitment.

         "Plant" means the wastewater treatment and reclamation plant to be
         built, operated and transferred in accordance with the provisions of
         the Concession Agreement.

         "Post-tax Profits" means in respect of any Financial Year the audited
         post-tax profit of the Company as shown in the audited profit and loss
         account of the Company for that Financial Year.

         "Project" means the build, operate and transfer project for Sulaibiya
         Wastewater Treatment and Reclamation Plant in accordance with the
         Concession Agreement.

         "Project Agreements" includes but is not limited to the Concession
         Agreement, the Articles, the EPC Agreements, the Ductile Iron Pipe
         Supply Agreement, the O&M Agreements, and the Loan Agreement.

         "Relevant Date" means the date on which any party becomes a party to
         this Agreement whether as an original party or by subsequently adhering
         to its terms in the manner described in this Agreement.

         "Required Majority" means:

(One)in respect of the matters set out in Schedule 1  ("Reserved  Matters),  the
     affirmative  vote of a majority  of the Board of  Directors,  provided  the
     affirmative  vote of the Ionics  Directors are included ; and

(Two) in respect of any other matter a simple majority of the Directors.

         "Reserved Matters" means each of the matters in Schedule 1.

         "Shareholder" means each of Kharafi and Ionics or any Affiliate, as
         defined previously, of each of them to whom Shares are transferred,
         subject to the transfer policy and to the approval of the Ministry of
         Finance or Ministry of Public Works, in accordance with this Agreement
         from time to time.

         "Shareholder Loan" means any capital contribution required to be made
         by a Shareholder pursuant to Clause 10 which is contributed by a
         Shareholder by way of debt.

         "Shares" means the investment representing the equity share interest of
         each Shareholder in the capital of the Company having the rights set
         out in the Articles.

(2)  Any reference,  express or implied, to an enactment includes references to:

     (a)  that enactment as re-enacted, amended, extended or applied by or under
          any other enactment (before or after the signature of this Agreement);

     (b)  any  enactment  which  that  enactment   re-enacts  (with  or  without
          modification); and

     (c)  any  subordinate  legislation  made (before or after the  signature of
          this Agreement) under that enactment, as re-enacted, amended, extended
          or applied as described in paragraph (a) above, or under any enactment
          referred to in paragraph (b) above.

(3)      In this Agreement:

     (a)  words importing the singular shall include the plural and vice versa;

     (b)  words   denoting   persons   shall   include   bodies   corporate  and
          unincorporated associations of persons and vice versa; and

     (c)  references  to a Party  shall  include  successors  or assigns of that
          Party.

(4)      The headings in this Agreement do not affect its interpretation.

(5)      Any schedule or appendix to this Agreement shall take effect as
         if set out in this Agreement and references to this Agreement shall
         include its schedules and appendices.

2.       Conditions Precedent

         The provisions of Clauses 2, 5(1)(a)(i), 12, 13, 15, 17, 18, 19, 20,
         21, 22, 23 and 24 shall be effective on and from the date of this
         Agreement. All other provisions of this Agreement shall only become
         effective on and from the Effective Date.

3.       Warranties

         Each Shareholder represents and warrants to the others as at the
         Effective Date that the matters contained in Schedule 2 are true and
         accurate.

4.       Business of the Company

(1)      The business of the Company shall be the development,
         engineering, procurement, construction, operation and maintenance of a
         wastewater treatment and reclamation plant located at Sulaibiya,
         Kuwait, in accordance with the provisions of the Project Agreements.

(2)      Subject as otherwise required by law or by this Agreement,
         proceedings of the Company shall be conducted in such a way as to
         maximise profit available for distribution to the Shareholders to the
         extent consistent with good business practice.

(3)      The Company, in all matters during the course of the Project and
         under this Agreement, shall deal with the Shareholders and their
         Affiliates on an arm's length basis and the Shareholders shall ensure
         that any existing or potential conflicts of interest are brought to the
         attention of the Company at the earliest opportunity so that they can
         be dealt with in accordance with this Agreement and the Articles. In
         the event of any conflicts between Shareholders with respect to the
         determination of the form of any Project Agreements, the interests of
         the Company shall have primacy over the interests of the Shareholders.

5.       Formation of the Company

(1)      As soon as reasonably practicable:

          (a)  the Parties  shall (i) take all such  preliminary  administrative
               actions  as  may  be  reasonably  necessary  to  incorporate  the
               Company,  and thereafter (ii) incorporate the Company and procure
               that  the  Company  is duly  authorised  in  accordance  with all
               applicable  laws to  carry on the  Business;

          (b)  Kharafi  shall  subscribe  for 75 Shares in cash and shall pay to
               the Company the cash sum of 750,000  Kuwaiti  Dinars;

          (c)  Ionics shall subscribe for 25 Shares in cash and shall pay to the
               Company the cash sum of 250,000  Kuwaiti  Dinars;

          (d)  the Shareholders  shall procure that the Company shall on receipt
               by it of the  subscription  monies  allot and  issue  the  Shares
               specified in paragraphs (b) and (c) (inclusive) above credited as
               fully paid to the respective Shareholder and enter their names in
               the  register  of members of the  Company as the holders of those
               Shares;

          (e)  the Articles  shall  stipulate  that the Board of Directors  will
               comprise  a  minimum  of five and a  maximum  of seven  Directors
               appointed  by  the  General   Assembly  in  accordance  with  the
               Articles,  three to represent  Kharafi,  two to represent Ionics,
               (collectively  constituting the minimum of five Directors) and in
               the event of the  admission of Investors,  two to represent  such
               Investors;  and

          (f)  the Shareholders shall procure that a meeting is held at which it
               is resolved that:

          (i)  the three (3) persons identified in writing by Kharafi to Ionics;

          (ii) the two(2)persons identified in writing by Ionics to Kharafi;

          (iii) Pricewaterhouse Coopers LLC be appointed as the Auditors;

          (iv) the  Financial  Year of the  Company  shall be set as the  period
               commencing on 1 January and ending on 31 December in each year;

          (v)  the  registered  office of the  Company be fixed to Office No. 2,
               2nd Floor,  Building No. 282, Al-Shuhada Street, Plot No. 1, Area
               No. 11, Kuwait City, Kuwait;

          (vi) the first meeting of the Board shall resolve that

               a) the Business Plan in the Agreed Form be adopted;

               b) the  Project  Agreements,  when due,  be  entered  into by the
          Company or, where relevant, the Shareholders or their nominees.

6.       RESERVED MATTERS

         The Parties agree that they shall procure that the Company shall not do
         any of the things listed in Schedule 1 without the prior written
         approval of the Required Majority.

7.       Management and Control Bodies

(1)      The highest governing body of the Company shall be the General Assembly

(2)      (a) The General  Assembly shall be responsible for deciding all matters
             which are reserved for the General Assembly under the laws of
             Kuwait.

         (b) The Board shall be responsible for the overall management of the
             Company.

8.       The Board

8.1      Constitution of the Board

(1)  Following  the  Effective  Date  the  Board  shall  comprise  Directors  as
     stipulated in Article 5 of this Agreement.

(2)  As long as Kharafi and Ionics shall  collectively  own not less than 51% of
     the shares of the Company,  Kharafi shall  maintain three (3) Directors and
     Ionics  shall  maintain  two (2)  Directors  to the  Board.

(3)  No  Director  representing  a  Shareholder  shall be  entitled  to  receive
     remuneration from the Company (for acting in his capacity as a Director but
     without  prejudice to any  entitlement  he may have to be remunerated if he
     also acts as an executive or employee of the Company) but the Company shall
     meet the  reasonable  costs and expenses  (including,  without  limitation,
     travel and  accommodation  costs) for Directors  attending a meeting of the
     Board.

(4)  The Chairman shall be appointed by simple majority.

8.2      Authority of the Board

(1)       A Director shall be fully authorised to vote and make decisions
         which are binding on the Shareholder he represents. Technical and other
         advisors as the Board may deem appropriate shall be entitled to attend
         Board Meetings upon invitation of the Board but shall not be counted in
         the quorum for any such meeting and shall not be entitled to vote on
         any resolution.

(2)      The Board may establish such sub-committees, including technical
         and financial sub-committees, as the Board may deem appropriate by a
         decision passed by the simple majority. The functions of such
         sub-committees shall be advisory or as otherwise determined by simple
         majority.

(3)      The business and affairs of the Company shall be managed by or
         under the direction of the Board. The power to act for or to bind the
         Company shall be vested exclusively in the Board. The Board may, by a
         decision passed by the simple majority, delegate any of its powers and
         duties which are not Reserved Matters to officers, employees, agents
         and other persons as deemed appropriate.

(4)      The Board shall appoint and determine the terms of compensation of any
         Director or senior employees of the Company.

8.3      Board Decisions

         All decisions, resolutions, approvals and other actions or action items
         of the Board shall be by simple majority unless stated under this
         Agreement to require the Required Majority.

8.4      Proceedings of Directors

(1)      The quorum for a meeting of the Board shall be four Directors
         present throughout the meeting, provided that both Shareholders are
         represented by at least one Director each.

(2)      Subject to the remaining provisions of this Clause 8.4, each
         Director shall be given not less than twenty (20) days written notice
         of any meeting of the Board. Such notice shall specify the date, time
         and place such meeting is to take place. The Company shall send an
         agenda of the matters and proposals to be considered or voted upon at
         the meetings to each Director and each Shareholder not less than five
         (5) days prior to meetings of the Board.

(3)      Any Shareholder may request a special meeting of the Board or,
         where relevant, a meeting of the General Assembly, by requesting that
         the Company give notice to each Director and each Shareholder of the
         Company. Upon receiving such request, the Company shall call such
         meeting for a date not less than five (5) days and not more than
         fifteen (15) days following such request.

(4)      The Company shall keep records of all proceedings of the Board.
         The Company shall make a record of each proposal voted on and the
         results of such voting at each Board meeting. The Company shall provide
         each Director and each Shareholder with a copy of the minutes of the
         Board meeting within 15 days after the end of the meeting, which shall
         be considered and if appropriate approved by the Board during the next
         Board meeting.

(5)      Notwithstanding sub-clause (2) above, a meeting of the Board
         (including, for the avoidance of doubt, a meeting convened pursuant to
         sub-clause (3) above) may consist of a conference between Directors
         some or all of whom are in different places, provided that each
         Director who participates is able:

(One)    to hear each of the other participating Directors addressing the
         meeting; and

(Two)if he so  wishes,  to  address  all of the  other  participating  Directors
     simultaneously,  whether directly,  by conference telephone or by any other
     form of communications  equipment  (whether in use as at the Effective Date
     or not) or by a combination of those methods.

(6)      Resolutions of the Directors may be passed in writing without
         the need for a meeting provided that all Directors sign such written
         resolutions.

9.       Continuing Obligations

         The Shareholders undertake that for so long as they are shareholders in
         the Company, they will take such actions and make such decisions as
         appropriate to comply with the obligations in Schedule 3.

10.      Funding

(1)     The Shareholders agree that the Company shall obtain financing
         without recourse against Shareholders or any of their Affiliates (and
         for purposes of this Clause 10(1), the term Affiliates shall include
         the joint venture arrangements of Affiliates with third parties) from
         financial institutions, capital and/or investment markets. In no event
         shall the Company's funding requirements obligate either Shareholder to
         accept financing terms and conditions that are not in accordance with
         this Agreement, and the failure of a Shareholder to accept or undertake
         financing with recourse against such Shareholder shall not constitute a
         breach of this Agreement or expose such Shareholder to liability under
         any performance undertakings or guarantees pursuant to the Concession
         Agreement. The Shareholders and their Affiliates will, as required,
         provide pre-completion guarantees for the construction period for their
         respective scopes of work, subject to the successful negotiations with
         the lending institutions.

(2)      In the event that the General Assembly determines that the
         capital of the Company should be increased, the Shareholders shall, in
         proportion to the number of Shares then held by each of them
         (proportionately adjusted in the event of the admission of Investors)
         subscribe such further capital as is determined, and pay the capital at
         such times as is determined by General Assembly.

(3)      The Company (in accordance with this Agreement) may arrange
         financing in addition to or in lieu of that referred to in sub-clause
         (1) above, from:

         (a)      additional loans or credit from the Shareholders, banks
                  or other financial institutions, capital markets or investors
                  within or outside Kuwait, on subordinated or other terms to be
                  approved by the Required Majority;

         (b)      any other means of financing permitted by applicable law; or

         (c)      any combination of the above.

(4)      If the Shareholders or any of their Affiliates (and for purposes
         of this Clause 10(4), the term Affiliate(s) shall include the joint
         venture arrangements of Affiliates with third parties) are required
         individually or together to provide any guarantees, warranties, or
         performance bonds, or other types of contingent equity of any kind
         pursuant to their requirements of the Concession Contract or to obtain
         debt financing, the Company shall negotiate directly with such
         Shareholder or Affiliate, on an arms length basis, a reasonable fee as
         compensation for the risk accepted by such Shareholder or Affiliate. If
         the guarantees, warranties or performance bonds can be provided by the
         Company directly, then the Company shall obtain back-to-back
         guarantees, warranties, or performance bonds from each of the
         Shareholders, their Affiliates and third parties entering into Project
         Agreements with the Company for their respective scopes of work.
         However, it is the intent of the Shareholders to limit, to the maximum
         extent permitted under the Concession Contract, any recourse to support
         of whatever nature from the Shareholders or their Affiliates to their
         equity commitments to the Company. If a Shareholder or Affiliate is
         responsible by its action or omission which results in a call on a
         guarantee, warranty or performance bond, that Shareholder or Affiliate
         alone will replenish such guarantee, warranty or performance bond.

11.      Dividend Policy

         The Shareholders shall procure that the Company shall, to the extent
         permitted by applicable law, the Loan Agreement, the Project Agreements
         and subject to the Company's cash requirements, distribute among the
         Shareholders the maximum amount of monies after allowing for any
         applicable legal reserve and the payment of taxes, such distributions
         to be made from time to time as soon as the Company may lawfully do so.

12.      Protective Covenants

(1)      The Shareholders agree to work exclusively with each other and
         their Affiliates during the term of this Agreement with respect to the
         Project.

(2)      In recognition of the mutual benefit to be achieved from working
         exclusively together in relation to the Project, during the term of
         this Agreement no Shareholder shall approach (and each Shareholder
         shall procure that none of its Affiliates shall approach), whether
         directly or indirectly whether as a promoter, developer, shareholder,
         investor, lender, advisor or in any other capacity whatsoever, and
         whether for its own benefit or that of another, any third party (except
         such Shareholder's own advisors) on issues relating to Reserved Matters
         and Confidential Information concerning the Project without the prior
         consent or agreement of the other Shareholder.

(3)      Each Shareholder acknowledges that the provisions of this clause
         are no more extensive than is reasonable to protect the other
         Shareholder as a subscriber of Shares.


13.      OPTION

(1)      In the event that there is any adverse governmental action whose
         impact to the Shareholders shall be solely and exclusively restricted
         to Ionics with respect to the Project, then Ionics shall have two (2)
         options:

Option A:  Ionics may sell its  Shares to a third  party  acceptable  to Kharafi
     (whose consent to such third party shall not be unreasonably withheld); or

Option B:  Ionics may exercise the option which is hereby  granted by
     Kharafi to Ionics to sell all (but not less than all) of its Shares and its
     Shareholder Loans (if any) to Kharafi.

         Option B may be exercised on the following terms:

         (One)    If approval of the purchase of Shares by Kharafi is
                  required by the Ministry of Finance (or such other Ministry
                  having authority) in accordance with the Concession Contract,
                  then such approval shall be a condition precedent to the
                  purchase of Ionics' shares by Kharafi. Kharafi hereby agrees
                  to use reasonable efforts to seek and obtain such approval.

         (Two) The option may only be exercised after sixty (60) days written
               notice by Ionics to Kharafi;

         (Three)  The price for the Shares and the Shareholder Loans to be
                  transferred shall be based on the book value of these Shares
                  and Shareholder Loans as of the notice date and as certified
                  by the Auditors; and

         (Four)   The price for the Shares and the Shareholder Loans to be
                  transferred shall be payable on the date agreed upon in the
                  written notice and shall be payable in Kuwaiti Dinars.

          Concurrently with the transfer of the Shares and the Shareholder
         Loans, Kharafi will take all actions necessary to the extent legally
         possible to remove, and to indemnify and hold harmless Ionics and its
         Affiliates from all continuing obligations that Ionics may have
         subsequent to the date of the exercise of the option with respect to
         any guarantees, warranties, performance bonds, or other types of
         contingent equity of any kind pursuant to the requirements of the
         Concession Contract or to obtain debt financing.

(2)      Kharafi may exercise the option which is hereby granted by
         Ionics to Kharafi to purchase such number of Shares as may be required
         to reduce Ionics' equity participation in the Company from twenty-five
         percent (25%) to twenty percent (20%). This option may only be
         exercised on the following terms:

         (One)    Kharafi shall obtain the approval of the purchase of Shares by
                  the Ministry of Finance (or such other Ministry having
                  authority) in accordance with the Concession Contract;

         (Two)    The option may only be exercised within sixty (60) days
                  following the execution of the Concession Agreement and upon
                  thirty (30) days written notice by Kharafi to Ionics;

         (Three)  The price for the Shares to be purchased shall be the book
                  value of the Shares at the time of purchase plus twenty
                  percent (20%) of the incremental difference between the book
                  value of the Shares and the market value of the Shares at the
                  time of purchase (the market value of Shares being determined
                  with reference to the last sale price of Shares in the Company
                  to Investors);

         (Four)   The price for the Shares to be  purchased  shall be  payable
                  on the date of  transfer  and shall be payable in U.S.
                  Dollars; and

         (Five)   As consideration for Ionics' grant of the foregoing
                  option, and notwithstanding the provisions of sub-clause
                  22(16)(b), Kharafi agrees to fund any shared costs of the
                  Company in accordance with an eighty percent (80%) equity
                  participation.

14      Default

14.1     Failure to Meet Cash Call

(1)      If any Shareholder fails to meet any request for additional
         capital as provided for in sub-clause 10(2) within a period of thirty
         (30) days from the date on which such request for additional capital
         was required to be met, that Shareholder will be deemed to have waived
         its right to receive the amount of Shares corresponding to that unmet
         request for additional capital and such shares will instead be offered
         in accordance with sub-clause (2) for subscription to each Shareholder
         which has not failed to meet its request for additional capital.

(2)               (a) The offer for subscription referred to in
                  sub-clause (1) (the "Subscription Offer") shall be made by
                  notice in writing from the Company to each Shareholder which
                  has not failed to meet in request for additional capital
                  pursuant to 10(2) stating the additional Shares being offered
                  and any other terms of the Subscription Offer.

         (b)     The Subscription Offer shall remain open for a period
                  of thirty (30) calendar days, and if not accepted within that
                  period, the Subscription Offer will be deemed to be declined
                  by the Shareholder(s) concerned.

         (c)      The additional Shares shall be allotted to those
                  Shareholders who apply for them in proportion to the number of
                  Shares then held by each Shareholder concerned
                  (proportionately adjusted in the event of the admission of
                  Investors), or in the amount applied for, whichever is the
                  lesser amount.


14.2     General

(1)      In the event that any Shareholder fails to pay when due any
         amount payable to the Company or to any other Shareholder under or in
         respect of this Agreement; (and with respect to Clause 10(2) is not
         otherwise acquired by other Shareholders pursuant to Clause 15(2)) it
         shall pay on demand to such other person interest on the overdue amount
         from the due date up to the date of actual payment at a rate per annum
         equal to (i) the greater of (1) ten percent 10% or (2) Central Bank of
         Kuwait Discount Rate + 2%.

(2)      The rights and remedies, powers and privileges set out in this
         Clause are cumulative and not exclusive of any rights, remedies, powers
         and privileges provided by applicable law.

15.      Confidentiality

(1)    This Agreement shall be held to be strictly confidential as to its
       existence and the terms hereof, and shall only be disclosed to those
       senior management employees and outside advisors (at each Party's risk)
       on a need-to-know basis. During the term of this Agreement, and for a
       period of five (5) years thereafter, no Party shall use or disclose (and
       each Party shall procure that none of its Affiliates shall use or
       disclose), for any authorised purpose, any confidential information
       belonging to the others, their Affiliates or to any other person
       connected with the others, and each Party shall take all reasonable
       precautions for the safe custody of such confidential information. For
       clarity, it is expressly agreed that a Party shall be entitled to
       disclose such confidential information to any of its Affiliates which
       reasonably need to know that confidential information to assist the
       Parties in relation to the Project. That disclosure shall be made on
       terms that the Affiliate may use or disclose the confidential information
       only for that purpose, and in a way which reasonably protects the
       confidentiality of the information.

(2)    In this Agreement "confidential information" of a person means
       information of any nature concerning that person or its business which is
       not publicly known, including any compilation which is not publicly
       available of items of publicly known information, but does not include
       information which:

       (a)    is publicly known at the time of disclosure under this Agreement;

       (b)    after disclosure under this Agreement, becomes publicly known
              other than as a result of a breach of this confidentiality
              obligation; or

       (c)    can be shown was made available to the recipient by some
              other person who had a right to do so and who has not imposed on
              the recipient any obligation of confidentiality or restricted use.

(3)    Any Party receiving Confidential Information may use the
       Confidential Information only for the purposes of the Project and Project
       Development.

(4)    Nothing in this Agreement shall restrict a Party or its Affiliates
       from making any statement or disclosure that may be required by law or
       any applicable regulatory authority or stock exchange, or as may be
       required for tax or accounting purposes, provided that that Party shall
       advise the other about as to the nature, content and timing of the
       disclosure.

(5)    The Parties recognise that in some circumstances financial
       compensation will not be an adequate remedy for breach of this clause.
       Accordingly, each Party agrees that, in addition to any rights or
       remedies available at law, the Party whose confidential information is to
       be used or disclosed in an unauthorised way shall be entitled to
       immediate injunctive relief and to specific performance of the
       obligations in this Clause 15.

(6)    In the event of this Agreement being terminated prior to financial
       close, all confidential information shall be returned to the Party from
       which it was received, or shall be destroyed with an appropriate
       assurance that any and all copies thereof have been destroyed, or shall
       be retained by the receiving Party subject to the confidentiality,
       non-disclosure and use restrictions of this Clause 15.

 (7)   A Shareholder shall not be in breach of this Clause by virtue of any
       Director passing to the Shareholder which appointed him any information
       he receives as a Director of the Company, but nothing contained in this
       Agreement shall require such disclosure where the Director's fiduciary
       duty to the Company would be breached as a result.

16.      Duration

(1)  Subject  to Clause  2,  this  Agreement  shall  remain  in force  until the
     earliest of:

(a)  the date on which this Agreement is terminated by agreement of all Parties;

(b)  the  failure to enter into the  Concession  Agreement  within  twelve  (12)
     months of the signing of the Shareholders' Agreement; or

(c)  ______  the  termination  of the  Concession  Agreement  and all rights and
     obligations  of the Company  arising as a result of such  termination  have
     been discharged.

(2)      ______ Subject to sub-clause (3), a Shareholder will cease to have any
         further rights or obligations under this Agreement on ceasing to hold
         any Shares.

(3)      ______ Clauses 12, 15, 16 and 17 shall continue to apply to a
         Shareholder notwithstanding that it has ceased to hold any Shares.
         Sub-clause (2) shall not affect any of the rights or liabilities of any
         Parties in connection with any breach of this Agreement which may have
         occurred before that Shareholder ceased to hold any Shares.

17.      Disputes

(1)      ______ The Parties shall in good faith and using their best efforts
         take all steps as may be necessary to settle any dispute amicably
         through negotiations and other constructive discussions.

(2)      ______ If the Dispute has not been settled in the manner described
         above then, upon the application of an affected Party, All disputes
         arising in connection with the present Agreement shall be finally
         settled under the Rules of Conciliation and Arbitration of the
         International Chamber of Commerce by one arbitrator if the amount in
         dispute is less than US$1 Million and three arbitrators if the amount
         in dispute is US$1 Million or more appointed in accordance with the
         said Rules. The venue for the Arbitration shall be London, U.K. and the
         arbitration shall be conducted in the English language.

18.      Announcements

         Neither Party shall make or permit any person connected with it to make
         any announcement concerning this Agreement or any ancillary matter
         without the express written consent of the other Party.

19.      Notices

(1)      ______ Any notice or other document to be served under this Agreement
         may be delivered or sent by first class recorded delivery post, or
         facsimile process to the Party to be served at its address appearing in
         this Agreement or at such other address as it may have notified to the
         other Parties in accordance with this Clause.

(2)  Any notice or document  given in accordance  with  sub-clause  (1) shall be
     deemed to have been received:

(a)  if delivered or sent by post, then, at the actual time of delivery: or

(b)  if by facsimile process, then, when actually received,

         provided that, a notice or document given in accordance with the above
         but actually received on a non-working day or after business hours in
         the place of receipt will only be deemed to be received on the next
         working day in that place.

20       Costs

(1)      ______ Each party shall pay the costs and expenses incurred by it in
         connection with the entering into and completion of this Agreement.

(2)  All figures  stated in this  Agreement are exclusive of value added tax (if
     any).

21.      Severability

         The provisions contained in each clause and sub-clause of this
         Agreement shall be enforceable independently of each of the others and
         its validity shall not be affected if any of the others is invalid. If
         any of those provisions is void but would be valid if some part of the
         provision were deleted, the provision in question shall apply with such
         modification as may be necessary to make it valid.

22.      General

(1)      ______ The Parties agree, as between themselves, that they shall
         procure the convening of all meetings, the giving of all waivers and
         consents and the passing of all resolutions and shall otherwise
         exercise all powers and rights available to them in order to give
         effect to the provisions of this Agreement.

(2)      ______ Without prejudice to the generality of sub-clause (1), the
         Parties agree, as between themselves, that, if any provisions of the
         Articles at any time conflict with any provisions of this Agreement,
         the provisions of this Agreement shall, to the extent legally possible,
         prevail and the Shareholders shall exercise all powers and rights
         available to them to procure the amendment of the Articles to the
         extent necessary to permit the Company and its affairs to be regulated
         as provided in this Agreement. In case of a conflict between the
         provisions of Kuwaiti law and this Agreement, then to the extent
         allowable by Kuwaiti law, this Agreement will prevail.

(3)      ______ Except as expressly provided in this Agreement or in any Project
         Agreement determined by the Parties, none of the rights or obligations
         under this Agreement may be assigned or transferred without the prior
         written consent of all the Parties. For the avoidance of doubt, the
         Parties expressly intend by this Agreement that their respective rights
         and obligations may be assigned to wholly owned Affiliates, provided
         that such transfers shall be subject to and in full compliance with the
         provisions of the Concession Agreement and Kuwaiti Laws.

(4)      ______ This Agreement may be executed in any number of counterparts,
         all of which taken together shall constitute one and the same
         agreement, and any party may enter into this Agreement by executing a
         counterpart.

(5)  The  Parties  agree  that the  working  language  of the  Parties  shall be
     English.

(6)      ______ The Parties agree that it is their policy to comply with all
         applicable laws and mandatory requirements of any applicable
         governmental body in connection with the Project. Each Party will
         indemnify the other Parties against any fines, costs or damages
         incurred by the others as a result of a Party's failure to so comply.

(7)      ______ The Parties acknowledge that certain laws, including the U.S.
         Foreign Corrupt Practices Act and Kuwaiti Penal Law prohibit any person
         from making any payment of money or giving other valuable
         consideration, directly or indirectly, to obtain or retain business or
         to influence improperly or unlawfully any decision or judgement of any
         official or any governmental body or political party or candidate for
         political office or any other person, in connection with the subject
         matter of this Agreement or in connection with any contracts or
         dealings with third parties associated with the Project. The Parties
         agree to comply fully with these obligations.

(8)      ______ Except to the extent (if any) expressly stated to the contrary,
         no Party to this Agreement is (and this Agreement shall not constitute
         any Party as) the partner or agent of the others or of their
         Affiliates. No Party is authorized to bind the others or to incur
         liabilities or to make representations on their behalf or on behalf of
         their Affiliates.

(9)      ______ Except to the extent expressly described in this Agreement, the
         Parties do not have a fiduciary relationship, each Party is free to act
         as it considers appropriate, and is not restricted from engaging for
         its own account, by itself or with others, in any business or activity
         of any nature whatever.

(10) No variation of any of the terms of this Agreement will be effective unless
     it is made in writing and signed by  the Parties.

(11)     _____ (1) Third Party Indemnification. Each Party shall indemnify,
         defend and hold harmless the other Party with respect to any and all
         claims made against any of them by any party or parties claiming, by or
         through such indemnifying Party, an interest in this Agreement, the
         Project or the Company or entitlement to payment of fees or
         reimbursement of costs in connection with the Project to which interest
         or claim the other Party or its representatives have not consented.

         (2)  Except for:

(a)  the obligations of a Party to make payments relating to the shared costs as
     set forth in Schedule 4;

(b)      the indemnification obligations of a Party in sub-clause 11(1); and

(c)  the gross negligence or wilful  misconduct of a Party resulting in a breach
     of this Agreement,

               in no event shall either Party or its Affiliates have any
               liability to the other Party or its Affiliates, or to the
               Company, for any loss or damage arising out of or in connection
               with this Agreement.

         (3)   ___ In no event shall any Party or its Affiliates be liable under
               this Agreement to the other Party or its Affiliates or to the
               Company for consequential, incidental, or indirect loss or
               damages. The releases from liability and limitations on liability
               set forth in this clause shall extend to the directors, officers,
               employees, agents, partners and Affiliates of such Party and
               their respective directors, officers, employees and agents.

(12)     _____ The Parties agree that they will modify this Shareholders
         Agreement to accommodate any changes necessary as a result of changes
         in the Concession Agreement.

(13)     _____ Kharafi and Ionics envisage a payment to them of a success fee
         conditional on Financial Close which will be paid in the proportion to
         each of the Parties' individual equity commitment in the Company under
         this Agreement. The success fee shall be paid to the Parties by the
         Company from the funds made available to the Company from the lenders
         and equity investors at Financial Close.

(14)     _____ The Company will enter into two EPC contracts, one with Kharafi /
         Bechtel Joint Venture, and the second EPC contract with Ionics and
         Kharafi joint venture (collectively, the "EPC Agreements"). The Company
         will enter into a "Ductile Iron Pipe Supply Agreement" with Kharafi for
         the supply of the ductile iron pipelines.

(15)     _____ The Company will enter into an agreement with an Affiliate of
         Kharafi to contract for O&M services for the Project; the Affiliate of
         Kharafi which is to provide the O&M services for the Project will
         sub-contract to Ionics by O&M Subcontract (or such other contractual
         arrangement as the Parties deem appropriate) for Micro Filtration and
         Reverse Osmosis system O&M services (collectively, the "O&M
         Agreements").

(16)     _____ Each of the Parties shall bear its own costs of the activities
         carried out in relation to the development phase of the Project prior
         to the Effective Date. However, certain services provided by the
         Parties prior to the Effective date shall be deemed to be shared costs
         as referred to in sub-clauses (a) and (b).

         (a)      ______ As soon as practical the Parties shall agree an Initial
                  Operating Budget for shared costs to be incurred in relation
                  to the Project as set forth in Schedule 4.

(b)               ______ The shared costs will be met by the Parties in
                  proportion to their equity commitment under this Agreement. In
                  the event that additional Investors are admitted to the
                  Company, they also shall pay their proportionate amount of
                  shared costs, including shared costs previously incurred.

23.      Whole Agreement

(1)      ______ This Agreement, including the Schedules annexed hereto and
         documents incorporated by reference, contains the whole Agreement
         between the Parties relating to the transactions contemplated by this
         Agreement.

(2)      ______ Each of the Parties acknowledges that, in agreeing to enter into
         this Agreement, it has not relied on any representation, warranty,
         collateral contract or other assurance (except those set out in this
         Agreement and the documents referred to in it) made by or on behalf of
         any other party before the signature of this Agreement. Each of the
         Parties waives all rights and remedies which, but for this sub-clause,
         might otherwise be available to it in respect of any such
         representation, warranty, collateral contract or other assurance,
         provided that nothing in this clause shall limit or exclude any
         liability for fraud.

24.      Governing Law

         This Agreement is governed by and shall be construed in accordance with
laws of Kuwait.



<PAGE>


AS WITNESS the hands of the duly authorised officers of the Parties on the date
which appears first on page 1.



Signed   /s/ Marzouk N. Al-Kharafi
For and on behalf of Mohammed Abdul Mohsin al Kharafi
(or its wholly owned Affiliate)

Name  Marzouk N. Al-Kharafi

Position  Assistant Director General




Signed /s/ Edward J. Cichon
For and on behalf of Ionics, Incorporated
(or its wholly owned Affiliate)

Name  Edward J. Cichon

Position  Vice President





<PAGE>


                                   SCHEDULE 1

                                RESERVED MATTERS






General



1.     Alter the Articles.

2.   Create, issue, increase,  decrease,  purchase or redeem the Company's share
     or loan capital.

3.     Pass any resolution for merger, consolidation or winding up the Company.

4.   Apply  for the  appointment  of a  receiver  or an  administrator  over the
     Company's assets.

Accounts and financial

5.     Appoint or change the Auditors.

6.     Alter the Company's accounting reference date.

Commercial

7.   Form any subsidiary or acquire shares in any company or participate  in, or
     terminate any participation in, any partnership or joint venture.

8.     Reorganise or change the nature or scope of the Company's business.

9.     Dispose of all or substantially all of the Company Assets.

General

10.    ____ Any form of or material amendment, waiver, consent, variation or
       other modification to any provision of this Agreement, or the Project
       Agreements related to the Project and/or referenced in this Agreement.
       (For purposes of this clause 10, the term "material", as it is used,
       refers to any amendment, waiver, consent, variation or other modification
       which is not in the usual course of business or which is prejudicial to
       the rights and interests of the Company.)

Accounts and financial

11.  Other than in the normal course of business,  incur  expenditure  exceeding
     US$150,000 on capital account.



Commercial

12.     Amend terms of the Loan Agreement

13.    Create or redeem any mortgage, charge, debenture or other security.

14.  Enter into any abnormal or unusual  contract or  commitment,  including any
     which:

       (a)    is outside the ordinary course of business;

     (b) would involve a total outlay over the term of the contract in excess of
US$150,000.

Taxation

15.  Make any voluntary claim,  disclaimer,  surrender,  election or consent for
     tax purposes.

Property

16.  Grant any lease or third party rights in respect of the Company's  property
     other than in the normal course of business.

17.  Transfer  or dispose  of the  Company's  property  other than in the normal
     course of business.

18.  Create any  interest  over the  Company's  property  (including  a security
     interest) other than in the normal course of business.

Intellectual property

19.    ____ Assign, licence, transfer, dispose of or create any security
       interest over, or otherwise deal with any of the Company's intellectual
       property.

20.    Apply for registration of any intellectual property.

21.    Allow any registration of intellectual property to lapse or be cancelled.

22.    ____ Prosecute any infringement action against parties other than
       partners, or defend any action for revocation or cancellation or any
       other challenge to the validity of any intellectual property.

23.    Accept any restriction on the use of the Company's intellectual property.

Employees

24.    ____ Change the terms and conditions of employment of any Director or
       senior employee of the Company (a "senior employee" being an employee
       with a gross annual salary in excess of ____________ US$75,000).

25.    Employ or dismiss any senior employee.



<PAGE>



                                   SCHEDULE 2

                         REPRESENTATIONS AND WARRANTIES



1.       Status

         It is a With Limited Liability company duly organised and validly
         existing under the laws of its country of incorporation.

2.       Powers

         It has the power to enter into and perform its obligations under this
         Agreement and each of the other documents referred to in this Agreement
         to which it is a party.

3.       Consents

         It has all necessary consents, licences and approvals in connection
         with the entry into and performance of its obligations under this
         Agreement and (if applicable) as a shareholder in the Company.

4.       Non-violation of law etc.

         Its entry into this Agreement and performance of its obligations under
         this Agreement, including those actions taken prior with respect to and
         leading up to the execution of this Agreement, has not violated or
         conflicted with and do not and will not violate or conflict with or
         exceed any limit imposed by (i) any law or regulation to which it is
         subject, including the Kuwaiti Penal Law and the U.S. Foreign Corrupt
         Practices Act, to which the Parties acknowledge applicability in
         accordance with sub-clause 22(7), (ii) its memorandum and articles of
         association or other applicable constitutional documents or (iii) any
         other agreement, instrument or undertaking binding upon it.




<PAGE>


                                   SCHEDULE 3

                             CONTINUING OBLIGATIONS

1.       Business Plan

         The Company shall prepare for the approval of the Shareholders a
         Business Plan for the coming Financial Year of the Company which it
         shall submit to the Shareholders not less than thirty (30) days before
         the end of the current Financial Year of the Company. Each Business
         Plan shall include:

         (a)      a projected balance sheet and profit and loss account;

         (b)      an estimate of working capital requirements;

         (c)      an operating budget; and

         (d) a report on the Company's performance during the current Financial
     Year of the Company.

2.       Information

         The Company shall provide each Shareholder with:

          (a) quarterly  accounts and progress reports within three weeks of the
     end of each quarter period in the Agreed Form or as otherwise agreed by the
     Shareholders;

         (b)      ______ audited accounts of the Company and each of its
                  subsidiaries (if any), and audited consolidated accounts of
                  the Company and its subsidiaries (if any) within three months
                  of the end of each Financial Year of the Company; and

         (c)      ______ such further information as each Shareholder may from
                  time to time reasonably require as to all matters relating to
                  the businesses or affairs or the financial position of the
                  Company and its subsidiaries (if any).

         The provisions with respect to reporting may be modified pursuant to
         the reporting requirements under the Loan Agreements. The Parties agree
         to not unnecessarily duplicate any reporting requirements.

3.       Board meetings

         The Shareholders shall procure that meetings of the Directors are held
at least 4 times a year.

4.       Accounting records

         The Company and each of its subsidiaries (if any) shall maintain
         accurate and complete accounting and other financial records and shall
         procure that such accounting records are, during normal business hours,
         available for inspection by each Shareholder or its respective
         authorised representatives.



5.       Insurance

         The Company and each of its subsidiaries (if any) shall insure with a
         reputable insurance office with suitable ratings from an established
         rating organisation and keep so insured at all times:

         (a)      all its assets against such risks and in the manner and
                  to the extent as shall be in accordance with good
                  commercial practice with regard to assets of the same kind
                  in comparable circumstances; and

         (b)       itself in respect of any accident, damage, injury,
                  third party loss, loss of profits and other risks and in the
                  manner and to an extent as shall be in accordance with good
                  commercial practice with regard to a business of the same kind
                  as that of the Company or, if there are any, subsidiary
                  concerned.


6.       Compliance with Project Agreements and Loan Agreement

         The Shareholders shall procure that the Company complies with its
         obligations under the Project Agreements and the Loan Agreement and
         other financing and security arrangements to which the Company is a
         party.

7.       Ownership of Shares

         If other Investors are admitted to the Company, the Shareholders shall
         retain in the aggregate at least 51% of the equity ownership of the
         Company.


<PAGE>



                                   SCHEDULE 4

                                  SHARED COSTS


-        Company incorporation fees, etc.
-        Bid Budget
-        Third party legal counsel to the Company
-        Third party financial advisor to the Company
-        Other third party consultant(s) to the Company
-        Operational costs.
-        Concession Company costs


<PAGE>

                                  Exhibit 10.2

                            AMENDMENT AGREEMENT NO. 2
                                       TO
                  SECOND AMENDED AND RESTATED CREDIT AGREEMENT


         This AMENDMENT AGREEMENT NO. 2 (this "Amendment"), is made as of May
14, 2001, by and among IONICS, INCORPORATED (the "Borrower"), a Massachusetts
corporation having its principal place of business at 65 Grove Street,
Watertown, Massachusetts 02472, FLEET NATIONAL BANK (referred to herein as
"FNB"), with offices at 100 Federal Street, Boston, Massachusetts 02110, and the
other banking institutions listed on Schedule 1 to the Credit Agreement (as
hereinafter defined) (FNB and such other banking institutions being collectively
referred to herein as the "Banks" and each a "Bank") and FNB as agent for the
Banks (the "Agent").

         WHEREAS, the Borrower, the Banks and the Agent are parties to that
certain Second Amended and Restated Credit Agreement, dated as of July 28, 2000
(as amended by Amendment Agreement No. 1, dated as of March 1, 2001, and as
further amended and in effect from time to time, the "Credit Agreement"),
pursuant to which the Banks, upon certain terms and conditions, have made loans
to the Borrower; and

         WHEREAS, the Agent and the Borrower are parties to a certain fee letter
agreement, dated July 28, 2000 (the "Fee Letter"), pursuant to which certain
fees have and are to be paid by the Borrower to the Agent;

         WHEREAS, the Borrower has requested and the Banks and the Agent have
agreed, on the terms and subject to the conditions set forth herein, to amend
the Credit Agreement and the Fee Letter;

         NOW, THEREFORE, the parties hereto hereby agree as follows:

         ss.1. ______ Defined Terms. Capitalized terms which are used herein
without definition and which are defined in the Credit Agreement shall have the
same meanings herein as in the Credit Agreement.

       ss.2.      Amendment of Credit Agreement.  The Credit Agreement is hereby
                  --------- -- ------ ---------
                  amended as follows:

(a)           ______ Section 2.3 of the Credit Agreement is amended by deleting
              the date "May15, 2001" set forth therein and substituting the date
              "September 30, 2001" therefor.

(b)  Section 8 of the  Credit  Agreement  is  amended  by adding  the  following
     newss.8.17 at the end ofss.8:

              8.17 Interest Rate Protection. The Borrower will, no later than
              September 30, 2001, implement interest rate protection
              arrangements in an amount and on terms and conditions otherwise
              satisfactory to the Agent.

     ss.3.Amendment of Schedule 1 to Credit Agreement.  Schedule 1 of the Credit
          Agreement is ---------  -----------------------  ---------  -------- -
          amended by deleting  Schedule 1 in its entirety and  substituting  the
          attached Schedule 1 therefor. -------- - -------- -

     ss.4.Amendment to Fee Letter.  The Fee Letter is hereby amended by deleting
          each reference to ---------  -------------  the date "May 15, 2001" in
          the  second  paragraph  of  such  Letter  and  substituting  the  date
          "September 30, 2001" therefor.

     ss.5.Effectiveness.  This Amendment  shall be effective as of May 14, 2001,
          subject to the ------------- satisfaction of the following conditions:

          (a)  Delivery.  The  Borrower,  the  Banks and the  Agent  shall  have
     executed and delivered - -------- to the Agent this Amendment.

          (b) ______  Proceedings  and Documents.  All proceedings in connection
     with the  transactions  contemplated  by this  Amendment  and all documents
     incident thereto shall be reasonably  satisfactory in substance and form to
     the Banks and the Agent,  and the Agent shall have received all information
     and  such  counterpart  originals  or  certified  or other  copies  of such
     documents as the Agent may reasonably request.

         ss.6. ______ Termination of Escrow Arrangements; Release of Security
Documents. Upon giving effect to this Amendment, the parties agree that the
escrow arrangements set forth in the Escrow Agreement shall be terminated and
that the Escrow Agent shall be directed by the Agent to deliver the Security
Documents to the Borrower. Any security interest evidenced by the Security
Documents which would have become effective upon the occurrence of a Triggering
Event shall be automatically terminated and the Agent shall hold no security
interest in any of the assets of the Borrower.

     ss.7.Representations  and Warranties.  The Borrower represents and warrants
          to the Banks and the --------------- --- ---------- Agent as follows:

                  (a) ______ Representations and Warranties in Credit Agreement.
         ___ The representations and warranties of the Borrower contained in the
         Credit Agreement, (i) were true and correct in all material respects
         when made, and (ii) except to the extent such representations and
         warranties by their terms are made solely as of a prior date, continue
         to be true and correct in all material respects on the date hereof.

                  (b) ______ Authority, Etc. The execution and delivery by the
         Borrower of this Amendment and the performance by the Borrower of all
         of its agreements and obligations under this Amendment (i) are within
         the corporate authority of the Borrower, (ii) have been duly authorized
         by all necessary corporate proceedings by the Borrower, (iii) do not
         conflict with or result in any breach or contravention of any provision
         of law, statute, rule or regulation to which the Borrower is subject or
         any judgment, order, writ, injunction, license or permit applicable to
         the Borrower, and (iv) do not conflict with any provision of the
         corporate charter or by-laws of, or any agreement or other instrument
         binding upon, the Borrower.

                  (c) ______ Enforceability of Obligations. ___ This Amendment,
         and the Credit Agreement as amended hereby, constitute the legal, valid
         and binding obligations of the Borrower enforceable against in
         accordance with their respective terms. Immediately prior to and after
         giving effect to this Amendment, no Default or Event of Default exists
         under the Credit Agreement or any other Loan Document.

         ss.8. ______ No Waiver. Except as otherwise expressly provided for in
this Amendment, nothing in this Amendment shall extend to or affect in any way
any of the Borrower's obligations or any of the rights and remedies of the Banks
or the Agent in respect of the Credit Agreement arising on account of the
occurrence of any Event of Default, all of which are expressly preserved.

         ss.9. ______ Miscellaneous Provisions. (a) Except as otherwise
expressly provided by this Amendment, all of the terms, conditions and
provisions of the Credit Agreement shall remain the same. It is declared and
agreed by each of the parties hereto that the Credit Agreement, as amended
hereby, shall continue in full force and effect, and that this Amendment and the
Credit Agreement shall be read and construed as one instrument.

         (b) ______ THIS AMENDMENT IS INTENDED TO TAKE EFFECT AS AN AGREEMENT
UNDER SEAL AND SHALL BE CONSTRUED ACCORDING TO AND GOVERNED BY THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS.

         (c) ______ This Amendment may be executed in any number of
counterparts, but all such counterparts shall together constitute but one
instrument. In making proof of this Amendment it shall not be necessary to
produce or account for more than one counterpart signed by each party hereto by
and against which enforcement hereof is sought.

         (d) ______ The Borrower hereby agrees to pay to the Agent, on demand by
the Agent, all reasonable out-of-pocket costs and expenses incurred or sustained
in connection with the preparation of this Amendment (including reasonable legal
fees).

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]



<PAGE>


         IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
an agreement under seal of the date first written above.

                             IONICS, INCORPORATED


                             By: /s/Daniel M. Kuzmak
                                 -------------------------------
                                Name:  Daniel M. Kuzmak
                                Title: CFO

                             FLEET NATIONAL BANK, individually and as Agent


                             By: /s/John C. Dunne
                                 -------------------------------
                                 John C. Dunne, Senior Vice President


                            RATIFICATION OF GUARANTY

         Each of the undersigned Guarantors hereby acknowledges and consents to
the foregoing Amendment No. 2 as of May 14, 2001, and agrees that the applicable
Guaranty from such Guarantor in favor of the Agent for the benefit of the Agent
and the Banks and all other Loan Documents to which each of the Guarantors are a
party remain in full force and effect, and each of the Guarantors confirms and
ratifies all of its obligations thereunder.




                              AQUA COOL ENTERPRISES, INC.



                              By: /s/Theodore G. Papastavros
                                     Name: Theodore G. Papastavros
                                     Title: Treasurer



                              AQUA DESIGN, INC.



                              By: /s/Edward J. Cichon
                                     Name: Edward Cichon
                                     Title: President



                              FIDELITY PUREWATER, INC.



                              By: /s/Anthony Di Paola
                                     Name: Anthony Di Paola
                                     Title: Treasurer



                              FIDELITY WATER SYSTEMS, INC.



                              By: /s/Anthony Di Paola
                                     Name: Anthony Di Paola
                                     Title: Treasurer




                              IONICS KOREA, INC.



                              By: /s/Arthur L. Goldstein
                                     Name: Arthur L. Goldstein
                                     Title: President




                              IONICS LIFE SCIENCES, INC.



                              By: /s/Theodore G. Papastavros
                                     Name: Theodore G. Papastavros
                                     Title: Treasurer




                              IONICS  ULTRAPURE  WATER CORPORATION



                              By: /s/Stephen Korn
                                     Name: Stephen Korn
                                     Title: Secretary



                              RESOURCES  CONSERVATION  CO. INTERNATIONAL



                              By: /s/Stephen Korn
                                     Name: Stephen Korn
                                     Title: Secretary



                              SEPARATION TECHNOLOGY INC.



                              By: /s/Stephen Korn
                                     Name: Stephen Korn
                                     Title: Secretary



                              SIEVERS INSTRUMENTS, INC.



                              By: /s/Stephen Korn
                                     Name: Stephen Korn
                                     Title: Secretary


<PAGE>


                                       -2-


                                   SCHEDULE 1
                                Bank Commitments

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

                    Banks                                 Commitment
   ---------------------------------------- -----------------------------------

   Fleet National Bank                            $65,000,000 through 9/29/01
   100 Federal Street
   Boston, Massachusetts  02110                    $50,000,000 as of 9/30/01
   Attn: John C. Dunne,  Senior Vice
   President

        Percentage:                                           100%
   ---------------------------------------- -----------------------------------