SECURITIES AND EXCHANGE COMMISSION
                                    WASHINGTON, D.C.  20549

                                                                    

                                           FORM 10-Q

                        Quarterly Report Pursuant to Section 13 or 15 (d)
                            of the Securities Exchange Act of 1934
                             For Quarter Ended September 30, 1996

                                              OR

                        Transition Report Pursuant to Section 13 or 15 (d)
                            of the Securities Exchange Act of 1934
                         For the transition period from       to      

                                 Commission File No.  1-12714 


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

           Minnesota                                    41-0955759       
   (State or other jurisdiction of                   (I.R.S. Employer
    Incorporation or organization)                Identification Number)

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

Registrant's telephone number, including area code  (612) 933-2277       


                                   N/A                                   
                 Former name, former address and former
               fiscal year, if changed since last report


     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 at least 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 
October 22, 1996, 14,184,091 shares of the issuer's Common Stock, 
$0.01 par value, were outstanding.  

<P1>
                                        OSMONICS, INC.

                                             INDEX




PART I.  FINANCIAL INFORMATION                                      PAGE

     ITEM I.  FINANCIAL STATEMENTS

              Consolidated Statements of Income -  . . . . . . . .     2
              For the Three and Nine Month Periods
                  Ended September 30, 1996 and 1995

              Consolidated Balance Sheets -  . . . . . . . . . . .     3
              September 30, 1996 and December 31, 1995

              Consolidated Statements of Cash Flows  . . . . . . .     4
              For the Nine Months Ended 
              September 30, 1996 and 1995

              Notes to Consolidated Financial Statements . . . . .     5

     ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF  . . . . . .   6-9
              FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PART II. OTHER INFORMATION

        ITEM 5. OTHER INFORMATION  . . . . . . . . . . . . . . . . 10-32

        ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . .    33


SIGNATURES   . . . . . . . . . . . . . . . . . . . . . . . . . .      34

<P2>
ITEM I - FINANCIAL STATEMENTS

<TABLE>
                                        OSMONICS, INC.

                               CONSOLIDATED STATEMENTS OF INCOME
                             (In Thousands Except Per Share Data)


<CAPTION>
                                   Three Months Ended             Nine Months Ended
                                      September 30,                 September 30,  

                                     1996            1995           1996            1995
<S>                                  <C>             <C>           <C>              <C>    
Sales                                $39,493         $31,995       $115,271         $94,829  

Cost of sales                         23,247          18,533         67,776          53,864
 
Gross profit                          16,246          13,462         47,495          40,965  
Less:

    Selling, general and 
    administrative                     8,771           7,504         25,664          22,824

    Research, development 
    and engineering                    2,750           2,446          7,930           7,101

Income from operations                 4,725           3,512         13,901          11,040

Other income                             297             502            912           1,228

Income before income
 taxes                                 5,022           4,014         14,813          12,268

Income taxes                           1,708           1,301          4,803           3,808

Net income                           $ 3,314         $ 2,713       $ 10,010         $ 8,460

Net income per common
 share                               $  0.23         $  0.19       $  0.69          $  0.59  
 
Average common shares
 outstanding                          14,470          14,371         14,442          14,274
</TABLE>

<P3>
<TABLE>
                                        OSMONICS, INC.
                                  CONSOLIDATED BALANCE SHEETS
                               (In Thousands Except Share Data)

<CAPTION>
                                                         September 30,  December 31,
                                                               1996          1995        

<S>                                                        <C>                   <C>                                         
ASSETS
 
Current assets                                                       
  Cash and cash equivalents                                 $  2,344             $  4,729 
  Marketable securities                                       21,237               26,307 
  Trade accounts receivable, net of  
    allowance for doubtful accounts of  
    $967 in 1996, and $1,177 in 1995                          24,789               23,552 
  Inventories                                                 32,639               28,973 
  Deferred tax assets                                          3,907                4,271 
  Other current assets                                         3,638                2,181 

    Total current assets                                      88,554               90,013 
Property and equipment, at cost 
  Land and land improvements                                   4,457                4,558 
  Building                                                    26,793               18,928 
  Machinery and equipment                                     43,913               41,592 
  Construction in progress                                     7,724                8,009 
                                                              82,887               73,087 

  Less accumulated depreciation and 
    amortization                                             (33,506)             (30,598)
                                                              49,381               42,489 
Other assets                                                  10,814               12,181 

                                                            $148,749             $144,683 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
  Accounts payable                                          $ 10,815             $ 13,957 
  Notes payable and current portion 
    of long-term debt                                          6,454                3,811 
  Reserve for discontinued operations                          1,957                1,957 
  Other accrued liabilities                                   13,358               14,330 

    Total current liabilities                                 32,584               34,055 

Long-term debt                                                16,205               20,919 
Deferred compensation and other liabilities                      224                  450 
Deferred income taxes                                          4,840                4,986 
Shareholders' equity
  Common stock, $0.01 par value
    Authorized -- 50,000,000
    Issued -- 1996: 14,184,091 and 
              1995: 14,086,007 shares                            142                  141 
  Capital in excess of par value                              22,966               21,805 
  Retained earnings                                           68,324               58,314 
  Unrealized gain on marketable securities                     3,387                3,694 
  Foreign currency translation adjustments                        77                  319 
   Total shareholders' equity                                 94,896               84,273 

                                                            $148,749             $144,683 
</TABLE>

<P4>
<TABLE>
                                         OSMONICS,INC.
                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                        (In Thousands)
<CAPTION>

                                                                   Nine Months Ended
                                                                   September 30,    


                                                                  1996               1995  
<S>                                                            <C>                  <C> 
Cash flows from:
     
Operations:                                                                                 
   Net income                                                   $ 10,010            $ 8,460 
   Non-cash items included in net income:                                
     Depreciation and amortization                                 3,672              2,992 
     Gain on sale of investments                                  (1,328)              (702)
     Gain on sale of land                                           (640)                 - 
   Deferred income taxes                                             366                117 
   Accounts receivable                                            (1,237)            (2,758)
   Inventories and other current assets                           (5,123)            (3,376)
   Accounts payable and accrued liabilities                       (4,340)             1,478 
     
   Net cash provided by operations                                 1,380              6,211 

Investing activities:                                                                       
   Purchase of investments                                          (608)            (4,012)
   Sale of investments                                             6,311              6,374 
   Purchase of property and equipment                            (12,167)           (15,327)
   Sale of property and equipment                                  2,398                  - 
   Other                                                            (841)                (5)

   Cash provided (used) in investing 
     activities                                                   (4,907)           (12,970)
     
Financing activities:                                                                       
   Notes payable and current debt                                      -             14,956 
   Reduction of debt                                              (2,071)            (7,170)
   Issuance of common stock                                        1,162                548 
   Application of restricted cash to
     property and equipment                                        2,034                  - 

   Net cash provided (used) in financing 
     activities                                                    1,125              8,334 

   Effect of exchange rates on cash                                   17                (89)
     
(Decrease)/increase in cash and 
  cash equivalents                                                (2,385)             1,486 
Cash and cash equivalents -
   beginning of year                                               4,729              9,705 
Cash and cash equivalents -
   end of quarter                                                        
                                                                 $ 2,344            $11,191 
</TABLE>

<P5>
                                       OSMONICS, INC.

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements.  In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.  

Operating results for the nine months ended September 30, 1996, are not
necessarily indicative of the results that may be expected for the
year 1996.

These statements should be read in conjunction with the financial
statements and related notes included in the Company's Annual Report to
shareholders and Form 10-K for the year ended December 31, 1995.

<P6>
ITEM II.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and Notes incorporated by
reference in this Prospectus and the other financial information.

Results of Operations:

In July 1996, the Company acquired Desalination Systems, Inc. ("Desal")
in a transaction accounted for as a pooling of interests.  Accordingly,
the historical consolidated financial data for all periods presented
here have been restated to include the operations of Desal.

The following table sets forth certain statement of operations data as a
percentage of net sales for the periods indicated.

<TABLE>
<CAPTION>
                                Three Months Ended              Nine Months Ended
                                   September 30                    September 30

                                   1995          1996            1995          1996
<S>                                <C>           <C>             <C>           <C> 
Net Sales                          100.0%        100.0%          100.0%        100.0%

Cost of Goods Sold                  57.9          58.9            56.8          58.8
                                      
Gross Profit                        42.1          41.1            43.2          41.2

SG&A                                23.5          22.2            24.1          22.3

RD&E                                 7.6           7.0             7.5           6.9

Operating Profit                    11.0          11.9            11.6          12.0

Other Income                         1.6           0.8             1.3           0.8

Income Taxes                         4.1           4.3             4.0           4.2

Net Income                           8.5           8.4             8.9           8.6

</TABLE>

Comparison of Three Months Ended September 30, 1996, and Three Months
Ended September 30, 1995.

Sales for the quarter ended September 30, 1996, of $39,493 increased 23%
over sales for the third quarter of 1995.  The increase was in both
capital and replaceable products.  The sales growth reflects the
Company's recent and continued investment in expanded sales efforts, and
the general strength of the economy.

Gross Margin for the third quarter of 1996 was 41.1% versus 42.1% in the
corresponding period of 1995.  The lower gross margin was primarily due
to a less favorable product mix, as well as some raw material cost
increases and more aggressive pricing.

<P7>
Operating Expenses decreased from 31.1% of sales in the third quarter of
1995 to 29.2% in the third quarter of 1996.  The decrease in operating
expense is primarily attributable to improved operating efficiency
realized in the integration of the Company's recent acquisitions.

Other Income decreased by $0.2 million from the third quarter of 1995 to
the third quarter of 1996.  The decrease is due to lower interest income
and higher acquisition-related expense.

Net Income for the quarter ended September 30, 1996, was $3,314, up
22.2% from $2,713 in the corresponding quarter last year.  Net income
per common share for the quarter increased to $0.23 from $0.19 in the
prior year.

Comparison of Nine Months Ended September 30, 1996, and Nine Months
Ended September 30, 1995

Net Sales for the nine months ended September 30, 1996, increased $20.4
million or 21.6% to $115.3 million as compared to net sales of $94.8
million for the nine months ended September 30, 1995.  The sales
increase was realized across nearly all product lines, and for both
domestic and international markets.

Gross Profit increased $6.5 million or 15.9% to $47.5 million in the
nine months ended September 30, 1996, compared to $41.0 million in the
nine months ended September 30, 1995.  As a percentage of net sales,
gross profit decreased to 41.2% from 43.2%.  The reduction in gross
profit was due to a less favorable sales mix, more aggressive pricing in
certain product lines, and some effect of higher material costs.  Sales
in 1996 included some order backlog acquired from Western Filter in
October 1995, which was at lower gross margins than other of the
Company's products.

Selling, General and Administrative Expenses increased $2.8 million or
12.4% to $25.7 million in the nine months ended September 30, 1996,
compared to $22.8 million in the nine months ended September 30, 1995. 
As a percentage of sales, SG&A expense decreased to 22.3% from 24.1%,
primarily reflecting improved productivity of both sales and
administrative personnel.

Research, Development and Engineering Expenses increased $0.8 million to
$7.9 million in the nine months ended September 30, 1996, from $7.1
million in the nine months ended September 30, 1995.  As a percentage of
sales, these expenses were 6.9% of sales in the nine months ended
September 30, 1996, compared to 7.5% in the nine months ended September
30, 1995.  The Company believes the current level of funding is adequate
to support its product development program.

The effective tax rate for each of the nine months ended September 30,
1996 and 1995 were 32.4% and 31.0%, respectively.  The increase in the
tax rate is primarily due to the reduced availability of tax loss
carryforwards and credits from Autotrol and its subsidiaries.

<P8>
Net Earnings increased $1.6 million or 18.3% to $10.0 million or $0.69
per share for the nine months ended September 30, 1996, compared to 
$8.5 million or $0.59 per share for the nine months ended September 30,
1995.  As a percentage of net sales, net earnings were 8.6% in the nine
months ended September 30, 1996, compared to 8.9% in the nine months
ended September 30, 1995.

Liquidity and Capital Resources

At September 30, 1996, the Company had cash and marketable securities of
$23.6 million as compared to $31.0 million at December 31, 1995.  The
reduction in cash and marketable securities was primarily the result of
investments of $12.2 million in facilities and equipment during the
first nine months of 1996.

Cash provided by operating activities was $1.4 million, $8.4 million,
and $10.1 million for the nine month period ended September 30, 1996,
and the years ending December 31, 1995 and 1994 respectively.  The
decrease in cash provided by operating activities in 1996 and 1995 was
principally due to increased working capital requirements to support the
Company's sales growth.  The current ratio was 2.7 at September 30,
1996, compared to 2.6 at year-end 1995.

Capital expenditures for the nine months ended September 30, 1996, and
the years ending December 31, 1995, and 1994 were $12.2 million, $20.8
million, $4.2 million, respectively.  During 1995, the Company purchased
its previously leased Milwaukee facility for $3.1 million and invested
$4.6 million in the expansion of its Minnetonka facility.  For the year
ending December 31, 1996, capital expenditures are expected to be
$15.0 million.  The level of capital expenditures in 1997 is expected to
be less than the levels of 1996 and 1995.

The Company has negotiated a new $7 million unsecured revolving line of
credit for working capital needs.  The revolving line of credit is for
two years with an annual interest rate of LIBOR plus 50 basis points. 
This revolving line of credit replaces a $1 million line of credit.  At
September 30, 1996, the Company had $6.7 million available under the
revolving line of credit.

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

<P9>
Private Securities Litigation Reform Act

The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements.  Certain information included in
this Form 10-Q and other materials filed or to be filed with the
Securities and Exchange Commission (as well as information included in
oral or other written statements made or to be made by the Company)
contains statements that are forward-looking.  Such statements may
relate to plans for future expansion, business development activities,
other capital spending, financing, or the effects of regulation and
competition.  Such information involves important risks and
uncertainties that could significantly affect anticipated results in the
future and, accordingly, such results may differ from those expressed in
any forward-looking statements made by or on behalf of the Company. 
These risks and uncertainties include, but are not limited to, those
relating to product development activities, dependence on existing
management, global economic and market conditions, and changes in
federal or state laws.

<P10>
                                        OSMONICS, INC.

                                            PART II

                                       OTHER INFORMATION

Item 5.     Other Information

            On July 24, 1996, the Registrant acquired Desalination Systems,
            Inc. ("Desal") in a transaction accounted for as a pooling-of-
            interests.  The following information has been restated for all
            periods presented to give effect to the acquisition as though
            the companies had operated together from the beginning of the
            earliest period presented.  

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
Osmonics, Inc.
Minnetonka, Minnesota

We have audited the accompanying consolidated balance sheets of Osmonics, Inc.
and subsidiaries (the Company) as of December 31, 1995 and 1994 and the 
related consolidated statements of income, changes in shareholders' equity, 
and cash flows for each of the three years in the period ended December 31,
1995.  Our audits also included the financial statement schedule Valuation
and Qualifying Accounts for each of the three years in the period ended
December 31, 1995.  These financial statements are the responsibility
of the Company's management.  Our responsibility is to express an opinion
on the financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards.  Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement.  An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 
financial statements.  An audit also includes assessing the accounting
principles used and signifigant estimates made by management, as well 
as evaluating the overall financial statement presentation.  We believe
that our audits and the report of the other auditors provide a reasonable
basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Osmonics, Inc. and subsidiaries at December 31, 1995 and 1994 and the 
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.  Also, in our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material 
respects the information set forth therin.

As discussed in Note 4 to the financial statements, in 1994 the Company
adopted Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities.

/s/ Deloitte & Touche LLP
    Deloitte & Touche LLP

    Minneapolis, Minnesota
    October 22, 1996

<P11>
<TABLE>
                                        OSMONICS, INC.
                               CONSOLIDATED STATEMENTS OF INCOME


                               (In thousands, except share data)

<CAPTION>
                    
                                                         Year ended December 31,             
                                                1995                1994              1993   
<S>                                           <C>                 <C>               <C>                   
Sales                                         $130,783            $112,908          $108,212 

Cost of sales                                   74,670              62,503            59,885 

Gross profit                                    56,113              50,405            48,327 

Operating expenses:

   Selling, general and administrative          31,377              27,967            26,831 
   Research, development and engineering         9,399               8,989             8,322 
   Embezzlement recovery  (Note 3)                   -                   -              (562)
   Merger and transition expense                     -                   -             1,644 
                                                40,776              36,956            36,235 
Income from operations                          15,337              13,449            12,092 

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

   Interest income                               1,649               1,543             1,279 
   Interest expense                             (1,565)               (878)           (1,017)
   Other                                         1,412                 148               476 
                                                 1,496                 813               738 
Income before income taxes                      16,833              14,262            12,830 

Income taxes (Note 11)                           4,954               3,808             3,536 

Net income                                    $ 11,879             $10,454           $ 9,294 


Net income per common and                      $   0.83            $  0.74           $  0.66
   common equivalent share

Weighted average number of common and       14,365,000          14,206,000        14,075,000 
   common equivalent shares outstanding

</TABLE>

<P12>
<TABLE>
                                        OSMONICS, INC.
                                  CONSOLIDATED BALANCE SHEETS
                               (In thousands, except share data)
<CAPTION>
                                                          December 31,       
                                                     1995             1994  
<S>                                                  <C>              <C>
ASSETS                                                                  
Current assets
   Cash and cash equivalents                           4,729           $  9,705 
   Marketable securities (Note 4)                     26,307             27,623 
   Trade accounts receivable, net of allowance for doubtful
    accounts of $1,177 in 1995 and $1,329 in 1994     23,552             18,324 
   Inventories (Note 5)                               28,973             21,743 
   Deferred tax assets (Note 12)                       4,271              3,685 
   Other current assets                                2,181              1,483 
    Total current assets                              90,013             82,563 
Property and equipment, at cost                                          
   Land and land improvements                          4,558              1,951 
   Buildings                                          18,928             13,093 
   Machinery and equipment                            41,592             36,886 
   Construction in progress                            8,009                818 
                                                      73,087             52,748 
   Less accumulated depreciation and amortization    (30,598)           (27,933)
                                                      42,489             24,815 
Cash restricted for purchase and 
   construction of equipment (Note 6)                  2,034                  - 
Goodwill, net of accumulated amortization of 
   $289 in 1995 and $170 in 1994                       7,655              1,695 
Other assets, net of accumulated amortization of intangible 
   assets of $230 in 1995 and $145 in 1994             2,492              1,642 
    Total assets                                    $144,683           $110,715 
LIABILITIES AND SHAREHOLDERS' EQUITY                                     
Current liabilities                                                      
   Accounts payable                                 $ 13,957           $  7,319 
   Line of credit advances (Note 8)                    1,619              1,312 
   Notes payable and current portion of 
    long-term debt (Note 9)                            2,192                961 
   Accrued compensation and employee benefits          4,231              4,860 
   Reserve for discontinued operations                 1,957              2,088 
   Other accrued liabilities (Note 7)                 10,099              7,311 
    Total current liabilities                         34,055             23,851 
Long-term debt (Note 9)                               20,919             14,475 
Deferred income taxes (Note 12)                        4,986              2,774 
Other liabilities                                        450                689 
Commitments and contingencies (Note 14)                    -                  - 
Shareholders' equity                                                     
   Common stock, $0.01 par value
    Authorized -- 50,000,000
    Issued -- 1995: 14,086,007 and 1994: 13,999,457      141                140 
   Capital in excess of par value                     21,805             21,045 
   Retained earnings                                  58,314             46,525 
   Unrealized gain on marketable securities (Note 4)   3,694              1,038 
   Cumulative effect of foreign currency 
    translation adjustments                              319                178 
    Total shareholders' equity                        84,273             68,926 
    Total liabilities and shareholders' equity      $144,683           $110,715 

</TABLE>

<P13>
<TABLE>
                                        OSMONICS, INC.
                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                        (In thousands)
<CAPTION>
                                                         Year ended December 31,        
                                                     1995           1994          1993  
<S>                                                <C>            <C>           <C>       
Cash flows from operations:
  Net income                                       $11,879        $10,454       $ 9,294 
  Non-cash items included in net income:                                     
    Depreciation and amortization                    3,795          3,523         3,449 
    Deferred income taxes                              (71)          (231)          112 
    Gain on sale of land and investments              (810)             -          (484)
  Changes in assets and liabilities 
    (net of business acquisitions)
    Reserve for VAT tax                                  -         (1,605)       (1,030)
    Accounts receivable                             (4,494)        (1,902)         (518)
    Inventories                                     (6,517)        (2,617)        2,778 
    Other current assets                              (727)         1,479          (287)
    Accounts payable and accrued liabilities         5,798          1,074           289 
    Reserve for deferred compensation                 (432)            78            72 
    Reserves for losses of discontinued operations        -            -           (471)
       Net cash provided (used) by operations        8,421         10,097        13,204 

Cash flows from investing activities:
  Business acquisitions (net of cash acquired)      (5,380)          (673)            - 
  Purchase of investments                           (6,633)       (17,467)      (15,253)
  Maturities and sales of investments               13,228         11,225         8,680 
  Purchase of property and equipment               (20,818)        (4,212)       (4,074)
  Proceeds from sale of subsidiary                       -              -           798 
  Other                                               (367)           367          (111)
       Net cash provided (used) for investing
       activities                                  (19,970)       (10,760)       (9,960)

Cash flows from financing activities:
  Notes payable and current debt                    13,928          1,674           784 
  Reduction of long-term debt                       (5,898)        (1,365)         (833)
  Cash restricted for purchase and construction
  of equipment                                      (2,034)             -             - 
  Issuance of common stock                             761            680           295 
  Re-acquisition and retirement of common stock          -              -          (893)
  Dividends paid by a pooled company                   (90)          (180)         (240)
       Net cash provided (used) in financing
       activities                                     6,667           809          (887)

Effect of exchange rate changes on cash                (94)          (444)          143 
Increase (decrease) in cash and cash equivalents    (4,976)          (298)        2,500 
Cash and cash equivalents - beginning of year        9,705         10,003         7,503 
Cash and cash equivalents - end of year            $ 4,729        $ 9,705       $10,003 
</TABLE>

<P14>
<TABLE>

                                        OSMONICS, INC.
              RESTATED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                               (In thousands, except share data)
<CAPTION>  
                                                                        Unrealized
                                                  Capital in            Gain on    Cumulative
                                  Common Stock    Excess of   Retained  Marketable Translation
                                Shares    Amount  Par Value   Earnings  Securities Adjustment

<S>                         <C>           <C>     <C>        <C>         <C>           <C>                  
Balance, January 1, 1993 as
   previously reported      12,607,707    $126    $20,026    $23,558     $    -        $133

Restatement for pooling of
   interests                 1,368,665      14         50      4,526                       
                                                                                                    

Balance, January 1, 1993 
   as restated              13,976,372     140     20,076     28,084          0         133
  Net income                                                   9,294                       
  Translation adjustment                                                                 37
  Dividend of pooled company                                    (240)                      
  Employee stock purchase
    plan                        29,766                295                                  
  Re-acquisition and retirement
    of common shares of pooled
    company                    (70,249)     (1)        (5)      (887)                      
                                                                                                     
Balance - December 31, 1993            
   as restated              13,935,889     139     20,366     36,251          0         170
  Net income                                                  10,454                       
  Translation adjustment                                                                  8
  Unrealized gain on
    marketable securities                                                 1,038            
  Dividend of pooled company                                    (180)                      
  Business combinations          7,000                102                                  
  Employee stock purchase
    plans                       56,568       1        577                                  
                                                                                                    
Balance - December 31, 1994            
   as restated              13,999,457     140     21,045     46,525      1,038         178
  Net income                                                  11,879                       
  Translation adjustment                                                                141
  Unrealized gain on
    marketable securities                                                 2,656            
  Dividend of pooled company                                     (90)                      
  Employee stock purchase
    plans                       86,550      1         760                                  
                                                                                                     
Balance - December 31, 1995 14,086,007    $141    $21,805    $58,314     $3,694        $319
   as restated
</TABLE>
       
<P15>
<TABLE>  
                                  SELECTED FINANCIAL DATA
                           (In thousands, except per share amounts)


<CAPTION>
INCOME DATA:  
                                             Year ended December 31, 

                              1995         1994       1993         1992        1991  
<S>                        <C>          <C>         <C>          <C>         <C>                   
Sales                      $130,783     $112,908    $108,212     $99,992     $90,242

Income from continuing 
  operations                 11,879       10,454       9,294       4,482       6,174

Income from continuing 
  operations per share        $0.83        $0.74       $0.66       $0.32       $0.44

Average shares 
  outstanding                14,365       14,206      14,075      14,036      13,926



BALANCE SHEET DATA:  

Total assets               $144,683     $110,715     $96,812     $89,730     $87,708  

Long-term debt               20,919       14,475      14,532      14,705      15,940  
</TABLE>

<P16>
<TABLE>
                                     QUARTERLY INCOME DATA
                           (In thousands, except per share amounts)
<CAPTION>

Quarterly Income Data - 1995

                                                 Quarter Ended                

                           March 31      June 30     September 30    December 31
<S>                        <C>          <C>            <C>             <C>      
Sales                       $31,412      $31,422        $31,995         $35,954 

Gross profit                 13,700       13,803         13,462          15,148 
  
Net income                    2,926        2,821          2,713           3,419 

Net income per share          $0.20        $0.20          $0.19           $0.24 

<CAPTION>
Quarterly Income Data - 1994

                                              Quarter Ended                     

                           March 31      June 30     September 30    December 31
<S>                         <C>          <C>            <C>             <C>
Sales                       $27,252      $29,293        $27,581         $28,782 

Gross profit                 12,077       12,853         12,181          13,294 

Net income                    2,435        2,647          2,468           2,904 

Net income per share          $0.17        $0.19          $0.17           $0.21 
</TABLE>

<P17>
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       (Dollars in thousands, except per share amounts)

1.   Summary of Significant Accounting Policies

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

     The consolidated financial statements include the accounts of 
     Osmonics, Inc. and its wholly and majority owned subsidiaries (the
     Company).  Significant intercompany accounts and transactions have
     been eliminated.

     Sales are recorded when the product is shipped.

     The estimated fair value for cash and cash equivalents, trade
     accounts receivable, accounts payable, notes payable, and long-term
     debt approximates carrying value due to the relatively short-term
     nature of the instruments and/or due to the short-term floating
     interest rates on the borrowing.  The estimated fair value of notes
     receivable approximates the net carrying value, as management
     believes the respective interest rates are commensurate with the
     credit, interest rate, and prepayment risks involved.  

     The Company considers highly liquid debt instruments purchased with
     a maturity of three months or less to be cash equivalents.  

     Inventories are stated at lower of cost (FIFO method) or market for
     all operations except the Autotrol subsidiary domestic operations
     which have historically valued inventory on the LIFO method.  

     Depreciation and amortization of property and equipment are provided
     on the straight-line method over estimated lives of 3 to 40 years.

     Deferred income taxes have been provided for income and expenses
     which are recognized in different accounting periods for financial
     reporting purposes than for income tax purposes.

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

     The excess of cost over the fair market value of assets acquired in
     acquisitions is amortized over not more than 40 years, with the
     majority at 30 years.  The carrying values of these intangibles are
     reviewed quarterly based on the sales and profitability of the
     acquired assets.  Other intangibles are carried at cost and
     amortized using the straight-line method over their estimated lives
     of 5 to 17 years.  

<P18>
     Net income per common and common equivalent share is based on the
     weighted average number of shares outstanding during each year and,
     when applicable, those outstanding options that are dilutive.  Fully
     diluted earnings per share did not differ significantly from primary
     earnings per share in any period presented.    

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates
     that affect the reported amounts of assets and liabilities, the
     disclosure of contingent assets and liabilities, and the reported
     amounts of revenues and expenses during the reporting period. 
     Actual results could differ from those estimates.

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

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

2.   Business Acquisitions

     On July 24, 1996, Desalination Systems, Inc. (DSI) merged with the
     Company through an exchange of 144.070 shares of the Company's
     common stock for each share of Class A common stock of DSI and
     157.107 shares of the Company's common stock for each share of 
     pooling-of-interests.  DSI's principal business is the manufacture
     of membrane used for reverse osmosis, nanofiltration,
     ultrafiltration, and microfiltration.  

     The historical financial statements of the Company have been
     restated to give effect to the acquisition as though the companies
     had operated together from the beginning of the earliest period
     presented.  

     Separate results of operations of the combined entities for the
     years ended December 31, 1995, 1994, and 1993 were as follows:

<TABLE>
                                                  1995           1994           1993   
     <S>                                       <C>           <C>              <C>                  
     Sales:
         Osmonics 
         (as previously reported)               $111,610       $96,180         $89,043 
         DSI                                      20,348        17,610          19,721 
         Eliminations                             (1,175)         (882)           (552)
            Combined                            $130,783      $112,908        $108,212 

     Net income:                                                       
         Osmonics
         (as previously reported)                $11,212       $ 9,955         $ 7,895 
         DSI                                         667           499           1,399 
            Combined                             $11,879       $10,454          $ 9,294
</TABLE>

<P19>
     The eliminations represent sales between the combined entities prior
     to the combination.  The sales elimination had no significant effect
     on net income in the years presented.  

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

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

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

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

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

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

3.   Embezzlement

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

<P20>
     Autotrol's investigation of the embezzlement revealed that
     approximately $4,750 was embezzled from 1988 to 1992.  The prior
     years' financial statements reflect embezzlement losses in the year
     the embezzlement initially occurred.  The Company had net recoveries
     of $562 in 1993 from insurance and reductions in VAT payable.  

4.  Marketable Securities

     Effective January 1, 1994, the Company adopted Statement of
     Financial Accounting Standard No. 115 (SFAS 115), "Accounting for
     Certain Investments in Debt and Equity Securities," which requires
     the Company to report certain marketable securities at fair market
     value.  The Company considers all of its marketable securities
     available-for-sale.  Marketable securities at December 31, 1995
     consisted of the following:

<TABLE>                                                                                      
                                                                                        Fair
                                           Amortized    Unrealized     Unrealized      Market
                                            Cost          Gain           (Loss)        Value 
     <S>                                   <C>          <C>            <C>            <C>              
     U.S. government securities
         0-5 year maturity                 $ 4,784      $   60         $ (23)         $ 4,821
         6 year or greater maturity            648          24             -              672

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

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

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

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

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

     Unrealized gain (loss) on marketable 
         securities                                     $3,799         $(105)
</TABLE>

<P21>
<TABLE>
     Marketable securities at December 31, 1994 consisted of the
     following:
<CAPTION>                                                                         
                                                                                       Fair
                                          Amortized    Unrealized     Unrealized      Market
                                            Cost          Gain           (Loss)        Value 
     <S>                                   <C>          <C>            <C>            <C>   
     U.S. government securities
         0-5 year maturity                 $ 6,479      $     -        $  (318)       $ 6,161
         6 year or greater maturity          1,748            -           (101)         1,647

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

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

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

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

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

     Unrealized gain (loss) on marketable 
         securities                                     $1,593         $  (555)
</TABLE>

     Market values are based on quoted market prices. 

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

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

5.   Inventories

     Inventories consist of the following:

                                            December 31,   
                                       1995            1994 

     Finished goods                   $ 4,979         $ 3,409 

     Work in process                    7,759           5,946 

     Raw materials                     16,884          13,037 

                                       29,622          22,392 
     Less adjustment to reduce 
         inventories of $4,728 and $3,475 
         to last-in, first-out method 
         (See Note 1)                    (649)           (649)

                                      $28,973         $21,743 

<P22>
6.   Cash Restricted for Purchase and Construction of Equipment

     Cash restricted for purchase and construction of equipment at
     December 31, 1995 represents proceeds received from the issuer of
     Industrial Development Revenue Bonds (see Note 8) restricted to use
     in the purchase and construction of property and equipment used in
     the Company's operations.  

7.   Other Accrued Liabilities

     Other accrued liabilities consist of the following:

                                                        December 31,   
                                                    1995            1994 

     Warranty and start-up                         $1,868          $1,981

     Professional fees and other accruals           4,252           2,395

     Customer deposits                              2,258           1,074

     Accrued property taxes, income
       taxes and other taxes                        1,721           1,861

                                                  $10,099          $7,311

8.   Line of Credit

     Prior to the merger with the Company, DSI had an available bank line
     of credit which provided for borrowings up to $4,000.  Advances
     under the line were repaid after the merger and the line has been
     terminated.  Advances under the line bore interest at 25 b.p. over
     the bank's prime rate (the bank's prime rate was 8.5% at December
     31, 1995).  Advances under the line were collateralized by trade
     receivables, inventories and equipment of DSI.  Under the terms of
     the agreement, DSI was required to maintain certain minimum
     financial ratios and a minimum amount of working capital and
     tangible net worth.  At December 31, 1995 and 1994 DSI had
     outstanding borrowings under the line of $1,619 and $1,312,
     respectively.  

9.   Debt

     Long-term debt is as follows:
                                                           December 31,   
                                                       1995            1994   

     Promissory Notes; interest payable 
         quarterly at the three month LIBOR 
         rate plus 80 b.p.; due 1996 through 
         2001.  The interest rate on 
         December 31, 1995 was 6.64%.                 $10,000         $10,000 

<P23>

                                                           December 31,   
                                                       1995            1994  
     Industrial development revenue bonds,
         (IDB's) secured by a bank letter of credit 
         under which all assets of the Company 
         have been pledged as collateral, 
         principal due in varying annual 
         payments over 30 years, interest 
         payable monthly at a variable rate 
         determined periodically by the bond 
         remarketing agent (5.45% at 
         December 31, 1995).                            8,550               - 

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

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

     Note payable to a bank, collateralized by 
         the Company's accounts receivable, 
         inventory and equipment, due in monthly 
         installments of $18 with interest at 
         the bank's prime rate plus 75 b.p. 
         (9.5% at December 31, 1995).                     425             642 

     Other notes                                          408           1,001 

                                                       23,111          15,436 

     Less current portion                              (2,192)           (961)
                                                      $20,919         $14,475 


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

     The aggregate maturities of outstanding long-term debt are:  
     1996 - $2,192; 1997 - $4,987; 1998 - $2,159; 1999 - $2,159; 
     2000 - $2,250; beyond 2000 - $9,364.

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

     The Company has a $1,000 line of credit with a bank, with interest
     at the bank reference rate (8.5% at December 31, 1995) and which

<P24>
     requires a 5% compensating cash balance.  The line of credit was
     unused at year end and the $50 compensating balance is included in
     the balance of cash and cash equivalents.

     Subsequent to December 31, 1995, the Company negotiated a new 
     $7 million unsecured revolving line of credit for working capital
     needs.  The revolving line of credit is for two years with an annual
     interest rate of LIBOR plus 50 basis points.  This revolving line of
     credit replaces a $1 million line of credit.  

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

     Cash payments for interest related to all debts of the Company were
     $1,409, $865, and $1,029, for 1995, 1994, and 1993, respectively.

10.  Stock Options

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

                                                 Year ended December 31,  
                                            1995          1994          1993

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

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

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

     The Company also has reserved 299,313 common shares at December 31,
     1995 for issuance to key employees under a 1993 Stock Option Plan. 
     Options are granted at a price not less than market value on the
     date of the grant and become exercisable over a period of up to ten
     years, after which they expire.  The following is a summary of
     activity under the 1993 Stock Option Plan.  

<P25>
                                                Year ended December 31,  
                                           1995          1994          1993

     Options held by employees
      at December 31                       34,163        12,633        2,250
     Exercise price range on               $13.67 to     $13.67 to  $13.67
      options held at December 31          $18.25        $14.50

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

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

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

                                                      1985 Plan
                                        1995             1994           1993

     Number of shares                 14,548           34,048         23,380

     Average price per share          $13.58           $12.80         $10.62

     The 1985 Plan was superseded by the 1995 Employee Stock Purchase
     Plan, approved by the shareholders at the 1995 Annual Meeting and
     effective June 1, 1995.  Employees may purchase common shares of the
     Company at 85% of market price.  In 1995, 22,175 shares were issued
     under the 1995 Plan at an average price per share of $14.79.  At
     December 31, 1995, 377,825 shares remain unissued in the 1995 Plan. 
     
     Desalination Systems, Inc. (DSI), a pooled company (Note 2), has a
     stock option plan for which 386,298 equivalent shares of the
     Company's common stock are reserved.  Options issued under the plan
     vest in varying periods of up to 5 years and expire on various dates
     through March 2003.  The following is a summary of activity under
     the plan.  No additional options can be granted under the DSI plan.

<P26>
                                                Year ended December 31,  
                                            1995          1994          1993

     Options held by employees
      at December 31                       371,841       386,248       229,142
     Exercise price range on               $3.18 to      $3.18 to      $3.18 to
      options held at December 31          $6.94         $6.94         $6.94

     Number of options exercised
      during the year                      14,407        -             -
     Price range of options                        
      exercised during the year            $3.47         -             -

     Exercisable options held at
      December 31                          351,672       354,553       185,921
     Exercise price range of               $3.18 to      $3.18 to      $3.18 to
      exercisable options                  $6.94         $6.94         $6.94

     The Company had 500,000 authorized and unissued shares of preferred
     stock at December 31, 1995 and 1994.

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

     In 1995, the Board of Directors adopted a 1995 Director Stock Option
     Plan.  The plan provides that each director of the Company shall
     automatically receive, as of the date of each Annual Meeting of
     Shareholders, a non-qualified option to purchase 3,000 shares of the
     Company's common stock.  The options have a ten year term and are
     exercisable one year after the grant date at an exercise price equal
     to the fair market value of the shares on the grant date.  In 1995,
     options to purchase 18,000 shares at a price of $17.13 were issued
     under this plan.  No options were exercisable at December 31, 1995.

<P27>
11.  Income taxes

     Income tax expense consists of:

                                               Year ended December 31,   
                                         1995           1994          1993  
     Current:

        Federal                        $4,219         $3,520        $3,292 

        State                             429            370           282 

        Foreign                           372            156          (250)

     Deferred:                                                               

        Depreciation                      144           (204)         (129)

        Valuation allowance adjustment   (197)             0             0 

        Allowance for doubtful 
          accounts, start-up, warranty, 
          inventory and other accruals    314           (223)           10 

        Discontinued operations           228            350           524 

        Other                            (555)          (161)         (193) 

                                       $4,954         $3,808        $3,536 

     Cash payments for income taxes were $5,382, $3,195, and $3,700 for
     1995, 1994, and 1993, respectively.

<P28>
     A reconciliation of the income taxes computed at the Federal
     statutory rate to the Company's income tax expense is as follows:

                                                    Year ended December 31,    
                                            1995           1994           1993  

     Taxes at federal rate (35% in         $5,892         $4,992         $4,362 
        1995 and 1994, and 34% in 1993)
     
     Increase (decrease) resulting from:

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

     State taxes, net of Federal tax
       benefit                                201            231             81 

     Foreign Sales Corp. benefit             (248)          (223)          (243)

     Tax credits                             (273)          (312)          (265)

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

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

     Nondeductibility of merger costs           -              -            363 
     
     Other                                   (192)           245            210 

                                           $4,954         $3,808         $3,536 

     During 1992, the Financial Accounting Standards Board issued
     Statement of Financial Accounting Standard No. 109, "Accounting for
     Income Taxes," which requires the Company to adjust its deferred tax
     assets and liabilities to reflect current tax rates.  Autotrol
     Corporation and its subsidiaries adopted SFAS 109 in 1993, prior to
     the merger of Osmonics, Inc. and Autotrol Corporation.  As a result
     of the adoption of SFAS 109, Autotrol Corp. increased its current
     deferred tax assets from zero to $4,328 and its long-term deferred
     tax assets from zero to $14.  These increases in deferred tax assets
     were accompanied by increases in offsetting valuation reserves for
     the same amounts, thus creating no increase or decrease in income
     for the year ending December 31, 1993.

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

<P29>
12.  Deferred Tax Assets and Liabilities

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

                                                     1995            1994 
     Current assets:

         Allowance for doubtful
          accounts, start-up, warranty, 
          inventory and other accruals              $3,863          $3,699 

         Inventory costs capitalized for tax           363             179 

         Net operating loss and credit
          carryforwards                                 61             335 

         Other                                         (16)             (3)

         Less valuation allowance                        -            (525)

         Total current deferred assets              $4,271          $3,685 

     Noncurrent liabilities:                                           

         Depreciation                               $2,641          $2,562 

         Unrealized gain on marketable
          securities                                 2,264             566 

         Investment in business transferred 
          under contractual arrangement               (334)           (306)

         Other                                         415             (48)

         Total non-current deferred 
          tax liabilities                           $4,986          $2,774 

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

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

<P30>
13.  Sales and Segment Information                     

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

                                            1995         1994          1993  

     Sales to unaffiliated customers from:

        United States                     $116,964     $100,632      $ 96,381 
        Foreign operations                  13,819       12,276        11,831 

     Transfers from (to) geographic areas:

        United States                        7,936        6,696         7,139 
        Foreign operations                  (7,936)      (6,699)       (7,139)

                                          $130,783     $112,908      $108,212 

     Pretax income from continuing operations:

        United States                     $ 16,190     $ 12,950      $ 12,311 
        Foreign operations                     643        1,312           519 

                                          $ 16,833     $ 14,262      $ 12,830 

     Identifiable assets:                                                     

        United States                     $136,672     $103,184      $ 87,443 
        Foreign operations                   8,011        7,531         9,369 

                                          $144,683     $110,715      $ 96,812 

     NOTE:  Transfers are made at market value.

     Sales by United States operations to unaffiliated customers in
     foreign geographic areas are as follows:

                                          Year ended December 31,  
                                       1995         1994          1993 

     Asia/Pacific                    $10,915      $ 8,187       $ 7,403

     Europe                            7,798        7,853         6,044

     Rest of the World                 9,641        7,841         9,478

                                     $28,354      $23,881       $22,925

     Total international sales for the Company were as follows:  
     1995 - $42,173; 1994 - $36,157; and 1993 - $34,756.

<P31>
14.  Commitments and Contingencies

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

     Future minimum lease payments on all operating leases of $3,715 are
     as follows:  1996 - $1,254; 1997 - $733; 1998 - $500; 1999 - $281;
     2000 - $256; and beyond 2000 - $727.  Rent expense for the past
     three years was:  1995 - $1,718; 1994 - $1,851; and 1993 - $1,995.

     The Company is involved in certain legal actions arising in the
     ordinary course of business.  In the opinion of management, based on
     the advice of legal counsel, such litigation and claims will be
     resolved without a material effect on the Company's financial
     position or results of operations.  

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

15.  Stock Split

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

16.  Employee Benefit Plans

     The Company has a noncontributory discretionary profit sharing plan
     covering certain employees meeting age and length of service
     requirements.  The Company contributes annually to the plan an
     amount established at the discretion of the Board of Directors.  

     Total expense recognized by the Company under these plans amounted
     to $996, $1,077, and $1,115 in 1995, 1994, and 1993, respectively.  

<P32>
<TABLE>
                                OSMONICS, INC. AND SUBSIDIARIES
                               VALUATION AND QUALIFYING ACCOUNTS
                                        (In thousands)

                         Years Ended December 31, 1995, 1994 and 1993

<CAPTION>
            Column A                   Column B         Column C          Column D    Column E

                                                        Additions     
                                        Balance    Charged    Charged                 Balance
                                          at          to        to                      at
                                       Beginning   Cost and    Other                  End of
          Description                  of Period   Expensed   Accounts   Deductions   Period  

<S>                                    <C>        <C>         <C>        <C>          <C>                                         
Year Ended December 31, 1995:                                                         
   Current Operations:                                                                
   Allowance for Doubtful Accounts     $1,329      $   80     $109(F3)   $  341(F1)   $1,177
   Warranty and Start-up Reserve       $1,981      $1,406                $1,519(F2)   $1,868
                                                                         
   Discontinued Operations:                                                           
   Allowance for Doubtful Accounts     $   46                            $   46(F1)   $    0
   Warranty Reserve                    $1,961                            $    4(F2)   $1,957
   Reserve for Discontinued Operations $  127                            $  127       $    0
                                                                         
Year Ended December 31, 1994:                                                         
   Current Operations:
   Allowance for Doubtful Accounts     $1,276      $  134                $   81(F1)   $1,329
   Warranty and Start-up Reserve       $1,996      $1,350                $1,365(F2)   $1,981
   Discontinued Operations:                                                           
   Allowance for Doubtful Accounts     $   87                            $   41(F1)   $   46
   Warranty Reserve                    $1,972                            $   10(F2)   $1,961
   Reserve for Discontinued Operations $  240                            $  113       $  127
                                                                         
Year Ended December 31, 1993:                                                         
   Current Operations:                                                                
   Allowance for Doubtful Accounts     $  803      $  556                $   83(F1)   $1,276
   Warranty and Start-up Reserve       $1,901      $1,257                $1,162(F2)   $1,996

   Discontinued Operations:                                                           
   Allowance for Doubtful Accounts     $  149                            $   62(F1)   $   87
   Warranty Reserve                    $2,134                            $  162(F2)   $1,972
   Reserve for Discontinued Operations $  549                            $  309       $  240
                                                                         
<FN>
<F1>  
Uncollectible accounts charged against allowance.
<F2>  
Actual warranty claims and start-up costs charged against reserve.
<F3>  
Addition due to acquisition.
</FN>
</TABLE>

<P33>
Item 6.     Exhibits and Reports on Form 8-K

            (a)   Exhibit 23 - Consent of Deloitte & Touche, LLP
                  Exhibit 27 - Financial Data Schedule

            (b)   Form 8-K was filed on July 25, 1996, reporting on Items 2
                  and 7.  The 8-K reported on Financial Statements
                  previously reported on the S-3 Registration Statement,
                  File Number 33-05029.

<P34>
                                          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.

      Dated:  October 25, 1996









                                                 OSMONICS, INC.        
                                                 (Registrant)




                                          /s/ L. Lee Runzheimer              
                                              L. Lee Runzheimer
                                              Chief Financial Officer




                                          /s/ Howard W. Dicke                
                                              Howard W. Dicke
                                              Treasurer and Vice President
                                              Corporate Development




                                          /s/ D. Dean Spatz                  
                                              D. Dean Spatz
                                              Chief Executive Officer