UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C.  20549  FORM 10–Q  x
  Quarterly
  Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
  1934For Quarter Ended March 31, 2001ORo
  Transition
  Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of
  1934For the transition period from __________
  to ________
  Commission File No. 1-12714OSMONICS, INC(Exact name of registrant as specified in
  its charter)
  Minnesota
  41–0955759(State or other jurisdiction of
  Incorporation or organization)
  (I.R.S. Employer Identification Number)5951 Clearwater Drive, Minnetonka, MN
  55343(Address of principal executive offices)
  (Zip Code)(952) 933–2277(Registrant's telephone number, including
  area code)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. YesxNoo 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, 14,451,019 shares of the issuer's Common Stock, $0.01
par value, were outstanding.  
 OSMONICS,
INC.

INDEX

PART I. 
FINANCIAL INFORMATION

ITEM I.  FINANCIAL STATEMENTS

Consolidated Statements of Income - For
the Three Months Ended March 31, 2001 and 2000

Consolidated Balance Sheets - March 31, 2001 and December 31,
2000

Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2001 and 2000

Notes to Consolidated Financial Statements

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

PART II. 
OTHER INFORMATION

ITEM 6. 
EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

ITEM I – FINANCIAL STATEMENTS

OSMONICS,
INC.

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

(UNAUDITED)

Three
  Months Ended March 31,2001
  2000Sales
  $53,302
  $51,095Cost of sales
  35,604
  34,811Gross profit
  17,698
  16,284Less:Selling, general and administrative
  11,409
  11,573Research, development and engineering
  1,829
  2,096Special charges
  -
  250Income from operations
  4,460
  2,365Other income (expense)
  (259)
  47Income before income
  taxes
  4,201
  2,412Income taxes
  1,470
  820Net income
  $2,731
  $1,592Earnings per shareNet Income - basic
  $0.19
  $0.11Net Income - assuming dilution
  $0.19
  $0.11Average shares
  outstandingBasic
  14,419
  14,273Assuming dilution
  14,465
  14,333OSMONICS, INC.CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)

(UNAUDITED)

March
  31,
  2001
  December
  31,
  2000ASSETSCurrent assetsCash and cash equivalents
  $556
  $21Marketable securities
  172
  1,889Trade accounts receivable, net of
  allowance for doubtful accounts of $866 in 2001, and $1,008 in 2000
  37,510
  37,092Inventories
  32,879
  32,758Deferred tax assets
  4,554
  4,314Other current assets
  3,630
  2,487Total current assets
  79,301
  78,561Property and
  equipment, at costLand and land improvements
  5,056
  5,056Building
  30,237
  30,283Machinery and equipment
  78,048
  76,943113,341
  112,282Less accumulated
  depreciation
  (56,927)
  (55,381)56,414
  56,901Other assets
  52,577
  53,230Total assets
  $188,292
  $188,692LIABILITIES
  AND SHAREHOLDERS' EQUITYCurrent liabilitiesAccounts payable
  $12,239
  $15,262Notes payable and current portion of
  long-term debt
  18,986
  19,759Other accrued liabilities
  15,369
  13,784Total current liabilities
  46,594
  48,805Long–term debt
  24,069
  24,603Other liabilities
  2
  4Deferred income taxes
  6,335
  6,335Shareholders' equityCommon stock, $0.01 par valueAuthorized  --  50,000,000 sharesIssued  --  2001: 14,441,390 and
  2000: 14,408,634 shares
  144
  144Preferred stock: Authorized - 500,000
  shares; outstanding - none
  -
  -Capital in excess of par value
  23,910
  23,818Retained earnings
  88,325
  85,458Other comprehensive income
  (1,087)
  (475)Total shareholders equity
  111,292
  108,945Total liabilities and shareholders'
  equity
  $188,292
  $188,692OSMONICS,
INC.

CONSOLIDATED
STATEMENTS OF CASH FLOWS(In Thousands)

(UNAUDITED)

Three
  Months Ended
  March 31,2001
  2000Cash
  flows from operations:Net income
  $2,731
  $1,592Non–cash items included in net
  income:Depreciation and amortization
  2,533
  2,466Deferred income taxes
  (29)
  50Gain on sale of investments
  (972)
  (946)Changes in assets and liabilities:Accounts receivable
  (136)
  (4,717)Inventories
  (121)
  (1,951)Other current assets
  (1,718)
  (507)Accounts payable and other liabilities
  (1,440)
  1,109Net cash provided by (used in) operations
  848
  (2,904)Cash
  flows from investing activities:Purchase of investments
  -
  (959)Sale of investments
  2,088
  2,059Purchase of property and equipment
  (1,721)
  (1,386)Sales of property and equipment
  6
  94Other
  615
  31Cash provided by (used in) investing
  activities
  988
  (161)Cash
  flows from financing activities:Payments on long term debt and other
  (557)
  3,500Increase (decrease) in line of credit
  (750)
  (163)Issuance of common stock
  228
  316Net cash (used in) provided by financing
  activities
  (1,079)
  3,653Effect of exchange
  rate changes on cash
  (222)
  (182)Increase in cash and
  cash equivalents
  535
  406Cash and cash
  equivalents - beginning of year
  21
  1,807Cash and cash
  equivalents - end of quarter
  $556
  $2,213OSMONICS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Dollars in Thousands)

(UNAUDITED)

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.

The Company has the following components
of comprehensive income:

1st
  Qtr.
  2001
  1st
  Qtr.
  2000Net income
  $2,731
  $1,592Other
  comprehensive income (loss), net of tax:Foreign currency translation adjustments
  (222)
  (182)Unrealized gains / (losses) on securities
  (390)
  177Other comprehensive income (loss), net of
  tax
  (612)
  (5)Comprehensive income
  $2,119
  $1,587The Company has $14,050 of goodwill
recorded as of March 31, 2001 associated with the 1998 acquisition of Membrex
Corp. (Membrex).  Safety Kleen (SK), the
principal customer for the Membrex products, filed for Chapter 11 bankruptcy in
June of 2000.  As a result, first
quarter 2001 sales to SK of $400 were substantially below first quarter 2000
sales of $2,100.  SK has continued to
order product and parts at reduced levels to support its installed base.  Future sales levels are uncertain and could
be minimal.

The Company has a contract with SK that
provides some exclusivity to SK for certain Membrex products.  The Company anticipates that the exclusivity
provisions of the contract will expire in the third quarter of 2001 due to
anticipated failure of SK to buy the required minimum amount of products and
continues discussions with SK to renegotiate the contract based on the current
situation.

The Company has determined that two-thirds
($9,400) of the Membrex goodwill is associated with the SK products.  Business activity in the first quarter of
2001 approximated the financial forecasts used to support the goodwill balance
at December 31, 2001; therefore, the Company has concluded there was no
impairment of goodwill at March 31, 2001.

Inventory related to the Membrex products
for SK was $1,700 while net receivables from SK were current at March 31,
2001.  The Company is monitoring the
Chapter 11 bankruptcy proceedings to determine any further financial impact to
the Company.

Operating results for the three months
ended March 31, 2001, are not necessarily indicative of the results that may be
expected for the full year 2001.

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, 2000.

ITEM II

  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS(Dollars in thousands, except share data)As an aid to understanding the Companys
operating results, the following table shows the percentage of sales that each
income statement item represents for the three months ended March 31, 2001 and
2000, respectively.

Percent
  of SalesThree
  Months Ended
  March 31,2001
  2000Sales
  100.0%
  100.0%Cost of sales
  66.8
  68.1Gross profit
  33.2
  31.9Selling, general and
  administrative
  21.4
  22.6Research, development
  and engineering
  3.4
  4.1Special charges
  0.0
  0.5Operating expenses
  24.8
  27.2Income from operations
  8.4
  4.6Other income (expense)
  (0.5)
  0.1Income from continuing
  operations before income taxes
  7.9
  4.7Income taxes
  2.8
  1.6Net income
  5.1%
  3.1%SALES

Sales for the first quarter ended March
31, 2001 of $53,302 increased 4.3% from sales for the first quarter of
2000.  The first quarter 2001 Filtration
& Separations, Process Water and Household Water segment sales were 42%,
41% and 17% of total sales, respectively. 
The first quarter 2001 sales increase is attributed to internal growth
of existing product offerings. 
Globally, the Americas market grew as a percentage of total Osmonics
sales in the first quarter of 2001, while the Asia/Pacific market dropped
slightly.

GROSS MARGIN

Gross margin for the first quarter of
2001 was 33.2% versus 31.9% for the corresponding period in 2000.  The increase in gross margins is primarily
due to increased sales within the Filtration and Separations segment which
carry higher margins and reduced overhead costs resulting from the company wide
Year 2000 restructuring, plant closures and cost reduction efforts.

Energy costs in California during the
first quarter of 2001 were approximately 32% above the levels experienced
during the second half of 2000. 
Management believes that due to product demand the Company has been able
to pass the additional costs onto its customers in the first quarter of 2001;
however, there is no assurance that this will continue.

Raw material costs in the first quarter
2001 remained comparable to costs incurred during Year 2000.

OPERATING EXPENSES

Operating expenses decreased to 24.8% of
sales in the first quarter of 2001 from 27.2% in the first quarter of
2000.  The 2001 decrease is primarily
attributed to the Year 2000 restructurings and continued consolidation of
administrative services.  First quarter
2000 also contained special charges of 0.5% (see Special Charges discussion).

SPECIAL CHARGES (RECOVERY)

In the first quarter of 2001, the Company
recorded no special charges.  In first quarter
2000, the Company recorded special charges and recoveries that netted to zero.
Special charges included a $250 recovery of inventory accruals primarily due to
gains recognized on the sale of inventory at the Companys Rockland,
Massachusetts manufacturing facility. 
The special charges also included $250 of workforce reduction severance
costs related to the first quarter 2000 restructuring of several corporate
functions.  The special charges
(recovery) are summarized below:

Corporate
  restructuring
  $250Special inventory
  recovery related to plant closings
  (250)Gross special charges (recovery)
  $-Less special inventory recovery  in COS
  (250)Special charge in operating expense
  $250OTHER INCOME (EXPENSE)

Other expense increased by $306 in the
first three months of 2001 versus the same period for 2000. Translation loss,
primarily from converting net assets of a foreign subsidiary to US dollars,
increased $460 to $463 in the first quarter 2001 from $3 in the first quarter
2000.  The Company recognized pretax
gains on the sale of securities of $972 and $946 in the first quarter of 2001
and 2000, respectively.  Net interest
expense decreased $159 to $761 in the first quarter of 2001 from $920 in the
first quarter of 2000.

INCOME TAXES

The effective tax rate for the three
months ended March 31, 2001 was 35.0% based on the forecast for the full
year.  This rate is comparable to 34.0%
in the same period of 2000.

NET INCOME

Net income for the quarter ended March
31, 2001 was $2,731 versus $1,592 for the quarter ended March 31, 2000.  Net income per diluted share for the quarter
was $0.19 versus $0.11 for the same period last year.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2001, the Company had
cash, cash equivalents and marketable securities of $728 versus $1,910 at
December 31, 2000.  The current ratio at
March 31, 2001 was 1.7 versus 1.6 at year end 2000.

The Companys long-term and current debt
decreased $1,307 from $44,362 at December 31, 2000 to $43,055 at March 31,
2001. The Companys borrowings outstanding against its $24,000 revolving line
of credit decreased to $14,250 as of March 31, 2001 compared to $15,000 as of
December 31, 2000.

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

REVIEW OF INDUSTRY SEGMENTS

The Company designs, manufactures and
markets equipment, systems and components used in the processing and handling
of fluids. In 2000, the Company changed the focus of its reporting structure
from a two-segment, product-focused structure to a three-segment,
market-focused structure.

The three-market-segment structure was
established to provide strategic leadership within the three major market
segments in which the Company conducts business. The new structure was
implemented on January 1, 2000.

The Filtration and Separations segment
includes products such as filter cartridges, membrane elements, membranes,
instruments and laboratory products. The Process Water segment includes
products such as pumps, housings, valves, controls, reverse
osmosis/ultrafiltration (RO/UF) machines, ozonators and water treatment systems
used for industrial, commercial and municipal applications. The Household Water
segment includes products such as valves, controls and home reverse osmosis
membranes and filters used for the residential water purification and water softening
market segments. Each segment is currently supported by several manufacturing
facilities, a sales force and various corporate functions. The segments do not
have separate accounting, administration or research and development functions.

The reportable segment information for
the first quarter of 2001 and 2000 is as follows (all segment information
excludes the impact of special charges in 2000):

First
  Quarter Ended
  March 31,2001
  2000Sales:Filtration and
  Separations
  $22,099
  $21,326Process Water
  22,006
  19,579Household Water
  9,197
  10,190Net Sales
  53,302
  51,095Gross
  Profit:Filtration and
  Separations
  8,896
  7,565Process Water
  5,944
  5,154Household Water
  2,858
  3,315Gross Profit
  17,698
  16,034Operating
  Income:Filtration and
  Separations
  3,422
  1,491Process Water
  727
  (68)Household Water
  311
  942Operating Income
  $4,460
  $2,365Net sales in the Filtration and
Separations and Process Water segments increased in the first quarter ended
March 31, 2001 compared to the same quarter in 2000. Filtration and Separations
and Process Water segments sales growth was organic.  Net sales in the Household Water segment decreased in the first
quarter ended March 31, 2001, compared to the same quarter in 2000.  Management believes this decrease was the
result of the continued consumer led economic slowdown.

Gross profit margins and operating income
in the Filtration and Separations and Process Water segments were higher in the
first quarter 2001 than the same quarter in 2000.  This was primarily related to increased sales volume, improved
utilization of manufacturing capacity, and cost reductions resulting from the
Year 2000 restructuring and plant closures.

Gross profit margins and operating income
in the Household Water segment were lower in the first quarter 2001 than the
same quarter in 2000.  This was
primarily related to lower utilization of manufacturing capacity as a result of
reduced sales.

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

PRIVATE SECURITIES LITIGATION REFORM ACT

The Private Securities Litigation Reform
Act 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
statements made or to be made by the Company) contains statements that are
forward looking.  Such statements may
relate to plans for future expansion and acquisitions, business development
activities, capital spending, operating expenses, financing, or the effects of
regulation and competition.  Such
information involves important risks and uncertainties that could significantly
affect results in the future.  Such
results may differ from those expressed in any forward-looking statements made
by the Company.  These risks and
uncertainties include, but are not limited to, those relating to product
development, computer systems development, dependence on existing management,
global economic and market conditions and changes in federal or state
laws.  Investors are referred to the
discussion of certain risks and uncertainties associated with forward looking
statements contained in the Companys report on Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 2000.

OSMONICS,
INC.

PART
II

OTHER
INFORMATION

Item
6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  During the quarter ended March 31, 2001 the
Registrant did not file a Form 8-K report.

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:
  May  10, 2001OSMONICS, INC.(Registrant)/s/   Keith B. RobinsonKeith B. RobinsonChief Financial
  Officer/s/   D. Dean SpatzD. Dean SpatzChief Executive
  Officer