WATERLINK INC, S-1, 1998-02-04

WATERLINK INC
S-1, 1998-02-04
MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1998.

REGISTRATION NO. 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-1
REGISTRATION STATEMENT
UNDER

THE SECURITIES ACT OF 1933
------------------------

WATERLINK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 3590 34-1788678
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

4100 HOLIDAY STREET N.W. SUITE 201
CANTON, OHIO 44718-2532
(330) 649-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

CHET S. ROSS
WATERLINK, INC.
4100 HOLIDAY STREET N.W. SUITE 201
CANTON, OHIO 44718-2532
(330) 649-4000
FACSIMILE: (330) 649-4008
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
------------------------
COPY TO:

DOUGLAS E. HAAS, ESQ.
BENESCH, FRIEDLANDER, COPLAN & ARONOFF LLP
2300 BP TOWER
200 PUBLIC SQUARE
CLEVELAND, OHIO 44114-2378
(216) 363-4500
FACSIMILE: (216) 363-4588
------------------------
Approximate date of commencement of proposed sale to the public: From time
to time after this registration statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
========================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE OFFERING PRICE OFFERING PRICE REGISTRATION FEE
TO BE REGISTERED REGISTERED PER SHARE (2) (2) (2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share (1)..... 430,000 shares $15.00 $6,450,000 $1,903
========================================================================================================
</TABLE>

(1) Associated with the common stock, par value $.001 per share ("Common
Stock"), are preferred stock purchase rights that will not be exercisable or
evidenced separately from the Common Stock prior to the occurrence of
certain events.

(2) Estimated solely for the purposes of calculating the registration fee
pursuant to Section 6(b) of the Securities Act of 1933, as amended (the
"Securities Act"). Pursuant to Rule 457(c) promulgated under the Securities
Act, the offering price and registration fee are computed on the basis of
the high and low prices of the Common Stock on February 2, 1998, as reported
on The New York Stock Exchange, Inc. Composite Transactions Reporting
System.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2

THE INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED FEBRUARY 4, 1998

PROSPECTUS

430,000 SHARES

WATERLINK, INC. (SM) [LOGO]

COMMON STOCK
------------------------

This Prospectus relates to an aggregate of 430,000 shares (the "Shares") of
common stock, par value $.001 per share ("Common Stock"), of Waterlink, Inc., a
Delaware corporation (the "Company"), which may be offered (the "Offering") for
sale by persons (the "Selling Stockholders") who have acquired such shares in
certain acquisitions of businesses or certain private placements by the Company.
The Shares are being registered under the Securities Act of 1933, as amended
(the "Securities Act"), on behalf of the Selling Stockholders in order to permit
the public sale or other distribution of the Shares.

The Shares may be sold or distributed from time to time by or for the
account of the Selling Stockholders or their pledgees through dealers, brokers,
or other agents, or directly to one or more purchasers, including pledgees, at
market prices prevailing at the time of sale or at prices otherwise negotiated.
This Prospectus also may be used, with the Company's prior consent, by donees of
the Selling Stockholders, or by other persons acquiring Shares and who wish to
offer and sell such Shares under circumstances requiring or making desirable its
use. The Company will receive no portion of the proceeds from the sale of the
Shares offered hereby and will bear certain expenses incident to their
registration. See "Principal and Selling Stockholders" and "Plan of
Distribution."

As of January 31, 1998, 11,972,943 shares of Common Stock were issued and
outstanding. The Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "WLK." On February 2, 1998, the last reported sales
price of the Common Stock on the NYSE was $14 3/4 per share.

SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF
THE COMMON STOCK OFFERED HEREBY.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY SUCH STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

, 1998
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated by the context,
reference herein to (i) "Waterlink" means Waterlink, Inc., (ii) the "Company"
means Waterlink and its subsidiaries, and (iii) "fiscal 1995," "fiscal 1996" and
"fiscal 1997" mean, respectively, the period from December 7, 1994 (date of
incorporation) to September 30, 1995, the year ended September 30, 1996, and the
year ended September 30, 1997, with respect to Waterlink and certain of its
subsidiaries.

THE COMPANY

The Company is an international provider of integrated water purification
and wastewater treatment solutions, principally to industrial and municipal
customers. The Company believes its expertise is in the analysis of a customer's
water purification and wastewater treatment requirements and the customized
application of the Company's systems, equipment and services to provide cost
effective solutions. Waterlink was incorporated in Delaware on December 7, 1994
in order to participate in the consolidation of the highly fragmented water
purification and wastewater treatment industry. The Company has begun executing
this strategy through an acquisition program which targets businesses in four
markets: industrial process water, industrial wastewater, municipal drinking
water and municipal wastewater.

The Company has developed a strategic plan to:

- Provide a full range of systems, equipment and services, whether
independently or as part of a fully engineered water purification or
wastewater treatment solution

- Pursue growth through acquisitions that:

-- increase its geographic diversity

-- add complementary technologies, products and services

-- broaden its customer base and industries served

-- provide strategic, synergistic and corporate cultural fit

- Integrate its operations and marketing strategies in order to maximize
internal growth and increase profitability

- Strengthen market share for its design/build operations outside the
United States

Primarily due to its acquisition program, the Company's pro forma net sales
for fiscal 1997 (assuming the fiscal 1997 acquisitions had occurred as of
October 1, 1996) totaled $111 million. In addition, the Company has begun to
realize significant improvement in internal growth rates due to the
opportunities to cross-sell systems, equipment and services and as a result of
the increased financial, managerial and other resources provided by the Company
to its acquired businesses. For example, subsidiaries selling wastewater
treatment systems now have the ability to offer both aeration and mixing systems
and subsidiaries selling water treatment systems can now offer wastewater
treatment systems for the same projects. Additionally, the Company's
design/build capabilities allow it to design systems that utilize a broad array
of the Company's products and provide opportunities for its contract operation
services. The Company also experiences cross-selling opportunities from a
geographic and customer standpoint. For example, the Company believes that it
should benefit from the acquisition of the Nordic Group both from the Nordic
Group's ability to introduce the Company's existing systems, equipment and
services into the European market and from the Company's ability to introduce
the Nordic Group's systems, equipment and services into the Company's existing
markets. Pro forma net sales of the businesses acquired by the Company to date
grew 18.9% during fiscal 1997 compared to the prior year.

Through its acquisition program and internal development, the Company has
established a broad distribution system both geographically and within various
markets. In fiscal 1997, on an annualized pro forma basis, 42% of the Company's
pro forma net sales were derived from customers located in the United States
while approximately 58% were from outside the United States. Industrial
customers accounted for 55% of the Company's pro forma net sales for fiscal 1997
while municipal customers accounted for 45%. The Company's industrial customers
include a broad range of major corporations which require both purified water
for their manufacturing processes and treatment of their wastewater outflow.
Industries served include the pharmaceutical, electronic and microelectronic,
pulp and paper, chemical, petrochemical, food, beverage, automotive and other
heavy manufacturing industries. The Company serves large and small municipal
customers worldwide which provide purified water to, and wastewater treatment
for, their communities.

3
<PAGE> 4

THE OFFERING

Common Stock Offered by the
Selling Shareholders.......... 430,000 shares of Common Stock, par value $.001
per share.

Common Stock Outstanding
Before Offering(1)............ 11,972,943 shares of Common Stock, par value
$.001 per share.

Common Stock Outstanding After
Offering(1)................. 11,972,943 shares of Common Stock, par value
$.001 per share.

Use of Proceeds............... The Company will not receive any proceeds from
any sale of the Shares
- ---------------

(1) Excludes (i) 1,284,800 shares subject to outstanding options granted under
the Company's 1995 Stock Option Plan, (ii) 225,000 shares issuable upon
exercise of a warrant issued to a bank, (iii) 100,000 shares issuable upon
exercise of warrants issued in connection with commitments to purchase
subordinated indebtedness of the Company and (iv) 5,000,000 shares which may
be offered pursuant to a prospectus which is part of the acquisition shelf
registration statement filed by the Company for its use in connection with
future acquisitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources,"
"Management -- Benefit Plans," "Certain Transactions -- 1997 Notes, 1997
Warrants and Stockholder Guarantee" and "Description of Capital Stock."

4
<PAGE> 5

RISK FACTORS

The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."

SUMMARY SELECTED FINANCIAL DATA

The following table sets forth summary selected consolidated financial data
of the Company since its incorporation on December 7, 1994. The financial data
presented for and as of the end of fiscal 1995, fiscal 1996 and fiscal 1997 are
derived from the audited consolidated financial statements of the Company. The
financial data includes the operating results of each acquired business from the
date of acquisition in accordance with the purchase method of accounting. The
results of operations should be read in conjunction with the financial
information appearing elsewhere in this Prospectus. See "Consolidated Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1995 1996 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.................................................. $ 2,684 $ 19,801 $ 64,699
Gross profit............................................... 827 8,568 24,309
Selling, general and administrative expenses............... 1,178 7,029 18,683
Special management compensation(1)......................... -- -- 2,630
Amortization expense....................................... 15 307 751
Operating income (loss).................................... (366) 1,232 2,245
Income (loss) before extraordinary item(2)................. (512) 306 757
Net income (loss).......................................... (512) 306 372
Per common share:
Income (loss) before extraordinary item.................. $ (0.11) $ 0.05 $ 0.09
Net income (loss)........................................ (0.11) 0.05 0.04
Weighted average common and equivalent shares.............. 4,534 6,428 8,337
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ $ 2,064 $ 3,438 $ 19,430
Total assets............................................... 10,819 28,991 115,860
Total debt................................................. 6,039 12,145 18,961
Redeemable preferred stock................................. 3,900 8,500 --
Shareholders' equity (deficit)............................. (11) 2,407 70,873
</TABLE>

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

(1) In June 1997, the Company incurred a special charge to operations of
$2,630,000 resulting primarily from the issuance, concurrent with the
Company's initial public offering of Common Stock (the "IPO") which closed
on June 27, 1997, of a ten year option to purchase 100,000 shares of common
stock at a price of $0.10 per share to an officer of the Company pursuant to
terms of an employment agreement. Of this amount, approximately $1,138,000
is non-cash and the remainder represents cash obligations related
principally to the reimbursement of income taxes resulting from the stock
option issuance. This special charge after income taxes on a per share basis
was $0.20 for the year ended September 30, 1997.

(2) The Company used a portion of the proceeds from the IPO to repay
substantially all of its outstanding indebtedness. In addition, concurrent
with the IPO the Company canceled a note purchase agreement. In connection
with the early retirement of certain indebtedness and the cancellation of
the note purchase agreement, the Company realized an extraordinary charge of
$385,000, net of taxes of $257,000, related to the write-off of unamortized
debt issuance costs and discounts associated with this indebtedness. This
extraordinary item on a per share basis was $0.05 for the year ended
September 30, 1997.

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<PAGE> 6

RISK FACTORS

Prior to making an investment decision, prospective purchasers of the
Common Stock offered hereby should consider carefully all of the information set
forth in this Prospectus and, particularly, should evaluate the following risk
factors.

POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS

The Company has in the past experienced quarterly fluctuations in operating
results due to the contractual nature of its business and, to a lesser extent,
weather conditions. As part of its strategic plan, the Company expects that in
the future it may receive contracts that are significantly larger than those
received by the Company historically. In addition, certain of such contracts
will be subject to the customer's ability to finance, or fund from government
sources, the actual costs of completing the project as well as receiving any
necessary permits. Therefore, the Company expects that its future operating
results could fluctuate significantly, especially on a quarterly basis. The
recognition by the Company of revenues and profits therefrom can fluctuate due
to the timing of the awarding of such contracts and the ability to fund project
cost. In addition, the Company has historically operated with a moderate
backlog. As a result, quarterly sales and operating results depend in part on
the volume and timing of contracts received and performed within the quarter,
which are difficult to forecast. Any significant deferral or cancellation of a
contract could have a material adverse effect on the Company's operating results
in any particular period. Accordingly, the Company believes that
period-to-period comparisons of its operating results may not be necessarily
indicative of future performance. As a result, the Company's operating results
and stock price could prove to be volatile, particularly on a quarterly basis.

LIMITED COMBINED OPERATING HISTORY; RISKS OF INTEGRATION

Waterlink has grown by completing ten acquisitions consisting of seventeen
operating companies. The success of the Company will depend, in part, on the
Company's ability to integrate the operations of these businesses and other
companies it acquires, including centralizing certain functions to achieve cost
savings and developing programs and processes that will promote cooperation and
the sharing of opportunities and resources among its businesses. A number of the
businesses offer different services, utilize different capabilities and
technologies, target different markets and customer segments and utilize
different methods of distribution and sales representatives. While the Company
believes that there are substantial opportunities in integrating the businesses,
these differences increase the difficulty in successfully completing such
integration. In addition, there can be no assurance that such cross selling
opportunities will develop or that the operating results of the Company will
match or exceed the combined individual operating results achieved by the
businesses prior to their respective acquisition.

Waterlink's management group has been assembled only relatively recently.
There can be no assurance that the management group will be able to oversee the
combined entity and implement the Company's operating or growth strategies
effectively. Further, to the extent that the Company is able to implement its
acquisition strategy, the resulting growth of the Company will place significant
demands on management and on the Company's internal controls. There can be no
assurance that the management group will effectively be able to direct the
Company through a period of significant growth.

Further, there can be no assurance that the Company's strategy to become a
leading international provider of integrated water purification and wastewater
treatment solutions will be successful, or that the Company's targeted client
segments will accept the Company as a provider of such solutions. See "Business"
and "Management."

DEPENDENCE ON ACQUISITIONS FOR GROWTH

A part of the Company's strategic plan is to grow by acquiring existing
businesses. This acquisition strategy involves risks inherent in assessing the
values, strengths, weaknesses, risks and profitability of acquisition
candidates, including adverse short-term effects on the Company's reported
operating results, diversion of management's attention, dependence on retaining,
hiring and training key personnel, and risks associated with unanticipated
problems or latent liabilities. Although the Company generally has been
successful in acquiring

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companies it has pursued, there can be no assurance that acquisition
opportunities will continue to be available, that the Company will have access
to the capital required to finance potential acquisitions, that the Company will
continue to acquire businesses or that any business acquired by the Company will
be integrated successfully into the Company's operations and prove profitable.
In addition, to the extent that consolidation becomes more prevalent in the
industry, the prices for attractive acquisition candidates may be bid up to
higher levels and there can be no assurance that businesses acquired in the
future will achieve sales and profitability that justify the investment therein.
See "The Company" and "Business."

NEED FOR ADDITIONAL ACQUISITION FINANCING

The Company currently intends to use a combination of shares of its Common
Stock, cash, and debt obligations in making future acquisitions. In connection
with such acquisitions, the Company intends generally to seek to obtain the
agreement of the persons acquiring Common Stock not to offer, sell, contract to
sell or otherwise dispose of such Common Stock for a period of up to two years
from the date of acquisition. The extent to which the Company will be able or
willing to use the Common Stock for this purpose will depend on its market value
from time to time and the willingness of potential sellers of acquisition
targets to accept it as full or partial payment. To the extent the Company is
unable to use the Common Stock to make future acquisitions, its ability to grow
may be limited by the extent to which it is able to raise capital for this
purpose, as well as to expand existing operations, through debt or additional
equity financing. At September 30, 1997, the Company had approximately $33.2
million in the aggregate available to it, subject to certain requirements, under
the Credit Facility and the Canadian Line of Credit, to be used for
acquisitions, working capital and other corporate purposes. No assurance can be
given the Company will be able to obtain the capital it would need to finance a
successful acquisition program and its other cash needs. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

OPERATIONS OUTSIDE THE UNITED STATES

A substantial proportion of the Company's systems, equipment and services
are sold in Europe, Canada, Latin America and other regions outside the United
States and a number of the Company's subsidiaries operate outside of the United
States. The Company's net sales outside the United States were approximately 58%
of its pro forma fiscal 1997 net sales. Such sales pose certain risks associated
with doing business in foreign countries, resulting from certain political,
economic and other uncertainties, including, among others, risks of war,
expropriation or nationalization of assets, renegotiation or nullification of
existing contracts, changing political conditions, changing laws and policies
affecting trade and investment, overlap of different tax structures, and the
general hazards associated with the assertion of sovereignty over certain areas
in which operations are conducted. Additionally, various jurisdictions have laws
limiting the right and ability of subsidiaries and joint ventures to pay
dividends and remit earnings to affiliated companies, unless specified
conditions are satisfied.

Certain aspects of the Company's operations are subject to governmental
regulations in the countries in which the Company operates, including those
relating to currency conversion and repatriation, taxation of its earnings and
earnings of its personnel, and its use of local employees and suppliers. The
Company's operations are also subject to the risk of changes in laws and
policies in the various jurisdictions in which the Company operates which may
impose restrictions on the Company, including trade restrictions, that could
have a material adverse effect on the Company's business, financial condition
and results of operations. Other types of government regulation which could, if
enacted or implemented, materially and adversely affect the Company's operations
include expropriation or nationalization decrees, confiscatory tax systems,
primary or secondary boycotts directed at specific countries or companies,
embargoes and import restrictions or other trade barriers. The Company cannot
determine to what extent future operations and earnings of the Company may be
affected by new laws, new regulations, changes in or new interpretations of
existing laws or regulations or other consequences of doing business outside the
United States.

FOREIGN CURRENCY RISKS

Because the Company's functional currency is the United States dollar, its
operations outside the United States sometime face the additional risks of
fluctuating currency values and exchange rates, hard currency

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<PAGE> 8

shortages and controls on currency exchange. The Company has operations outside
the United States and is hedged, to some extent, from foreign exchange risks
because of its ability to purchase, manufacture and sell in the local currency
of those jurisdictions. In addition, the Company does enter into foreign
currency contracts under certain circumstances to reduce the Company's exposure
to foreign exchange risks. There can be no assurance, however, that the
attempted matching of foreign currency receipts with disbursements or hedging
activity will adequately moderate the risk of currency or exchange rate
fluctuations which could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, to the
extent the Company has operations outside the United States, the Company is
subject to the impact of foreign currency fluctuations and exchange rate charges
on the Company's reporting in its financial statements of the results from such
operations outside the United States. Since such financial statements are
prepared utilizing United States dollars as the basis for presentation, results
from any operations outside the United States reported in the financial
statements must be converted into dollars utilizing the appropriate foreign
currency exchange rate, and thereby subjecting such results to the impact of
currency and exchange rate fluctuations. See "Business."

DEPENDENCE ON KEY PERSONNEL

The Company's operations depend on the continuing efforts of its executive
officers and its senior management. Should the Company be unable to retain any
of its executive officers or senior management, the Company's prospects could be
adversely affected. In addition, the Company intends to grow through
acquisitions and internal expansion. The Company likely will depend on the
senior management of any significant businesses it acquires in the future and on
its ability to attract qualified management to support its internal expansion.
The business or prospects of the Company could be affected adversely if any of
these senior management of acquired businesses does not continue in his or her
management role after joining the Company and if the Company is unable to
attract and retain qualified replacements and additional members of management.
See "Management."

COMPETITION

The water purification and wastewater treatment industry is fragmented and
highly competitive due to the large number of businesses within certain product
areas. The Company competes with many companies, several of which have greater
market penetration, depth of product line, resources and access to capital,
which could be competitive advantages in securing certain projects. While the
Company believes it is well positioned to deliver technology and services at a
fair price, some competitors have developed product and service integration
capabilities beyond the current scope of the Company. In addition, some
competitors may have greater financial resources than the Company to finance
acquisition and internal growth opportunities. Consequently, the Company may
encounter significant competition in its efforts to achieve its objectives. See
"Business -- Competition."

CYCLICALITY OF DEMAND FOR WATER PURIFICATION AND WASTEWATER EQUIPMENT

Much of the water purification and wastewater equipment sold by the Company
requires significant capital expenditures by its customers. As such, the timing
of customer purchases may be affected by various economic factors, including
interest rate and business cycle fluctuations, which are beyond the control of
the Company. While the Company sells equipment across a broad cross section of
industry segments and customers, the cyclical nature of capital equipment sales
could have an adverse effect on the its revenues and profitability in general,
and on the its revenues and profitability in any individual financial reporting
period.

POTENTIAL ENVIRONMENTAL LIABILITIES

In the United States, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, and comparable state laws,
impose joint and several liability without fault for the releases of hazardous
substances into the environment. Potentially responsible parties include (i)
owners and operators of the site, (ii) parties which create the hazardous
substances released at the site, and (iii) parties which arrange for the
transportation or disposal of such hazardous substances. The Company is also
subject to applicable environmental laws in countries outside the United States
where it operates or in which its customers are located. These requirements and
their enforcement may vary by country but in general prescribe standards for the
protection of human health, safety and the environment. The Company could face
claims by governmental authorities, private

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<PAGE> 9

individuals and other persons alleging that hazardous substances were released
during the treatment process or from the use or disposal of end products and
by-products in violation of applicable law.

RELIANCE ON ENVIRONMENTAL REGULATION

Federal, state, local and foreign environmental laws and regulations impose
substantial standards for properly purifying water and treating wastewater, and
impose liabilities for noncompliance. Environmental laws and regulations are,
and will continue to be, a significant factor affecting the marketability of the
Company's solutions, systems and equipment. To the extent that demand for the
Company's solutions, systems and equipment is created by the need to comply with
such environmental laws and regulations, any modification of the standards
imposed by such laws and regulations may reduce demand, thereby adversely
affecting the Company's business and prospects. The relaxation or repeal of any
such laws or regulations or the strict enforcement thereof could adversely
affect the Company's business and prospects. See "Business -- Government
Regulation."

PROCESS AND PRODUCT WARRANTY AND PERFORMANCE GUARANTEES

In connection with providing certain services and products to its
customers, the Company sometimes is required to guarantee that the services and
products will attain specified levels of quality or performance. Should a
product fail to perform according to a performance guarantee, or should a
service fail to accomplish treatment levels which are guaranteed, and should the
Company be unable to remedy such failure within any applicable cure period, the
Company could incur financial penalties in the form of liquidated damages or
could be required to remove and/or replace the equipment or repeat the service
in order to meet the specifications. While the Company historically has
fulfilled all of its guarantee obligations, there can be no assurance the
Company will be able to fulfill its future guarantee obligations or that
fulfilling such obligations may not involve material costs that could have a
material adverse effect on the Company. See "Business -- Process and Product
Warranty and Performance Guarantees."

DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS

The Company currently intends to retain earnings to provide funds for the
operation and expansion of its business and, accordingly, does not anticipate
paying cash dividends in the foreseeable future. The Company's Credit Facility
prohibits the payment of dividends without the consent of the Bank. See
"Dividend Policy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK

On January 31, 1998, 11,972,943 shares of Common Stock were outstanding.
The 5,175,000 shares sold in the IPO which closed on June 27, 1997 (other than
shares that were purchased by affiliates of the Company) are freely tradable. Of
the remaining 6,797,943 shares outstanding, approximately 6,337,216 shares are
either presently freely tradable or eligible for sale pursuant to Rule 144 under
the Securities Act of 1933, as amended (the "Securities Act"), subject to
applicable volume limitations and other requirements. Substantially all of the
holders of those remaining shares which would be eligible for sale pursuant to
Rule 144 have certain rights to have their shares registered in the future under
the Securities Act. See "Description of Capital Stock -- Registration Rights
Agreements." Sales made pursuant to Rule 144 must comply with its applicable
volume and manner of sale limitations and other requirements.

9
<PAGE> 10

after the Effective Date. In addition, certain officers, directors and other
stockholders of the Company have agreed that, without the prior written consent
of the Company, they will not, and will not permit any member of their families
residing in their households to, sell, offer to sell, solicit an offer to buy,
contract to sell, grant any option to purchase, or otherwise transfer or dispose
of, any shares of Common Stock, or any securities convertible into or
exercisable or exchangeable for Common Stock, currently held or hereafter
acquired, until 90 days after the Effective Date. Collectively, these two types
of agreements restrict the transfer of an aggregate 4,626,585 shares of Common
Stock.

As of January 31, 1998 the Company also had outstanding options to purchase
up to a total of 1,284,800 shares of Common Stock. The Company has registered
all the shares subject to these options under the Securities Act. See
"Management -- Benefit Plans."

In addition, the Company has outstanding warrants to purchase 325,000
shares of Common Stock. Pursuant to the applicable warrant agreements, the
holders of such warrants have certain rights to require the Company to register
the shares of Common Stock to be issued upon exercise of the warrants. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources"; "Certain Transactions -- 1997
Notes, 1997 Warrants and Stockholder Guarantee" and "Description of Capital
Stock -- 1997 Warrants."

The Company intends to continue to issue Common Stock in connection with
certain of its acquisitions or in other transactions. Such securities may be
subject to resale restrictions in accordance with the Securities Act and the
regulations promulgated thereunder. As such restrictions lapse or if such shares
are registered for sale to the public, such shares may be sold to the public. To
facilitate the issuance of Common Stock in making acquisitions, the Company has
registered an additional 5,000,000 shares of Common Stock pursuant to an
acquisition shelf registration statement, none of which have been issued as of
the date of this Prospectus. In the event of the issuance and subsequent resale
of a substantial number of shares of Common Stock, or a perception that such
sales could occur, there could be a material adverse effect on the prevailing
market price of Common Stock.

POSSIBLE VOLATILITY OF STOCK PRICE

The Common Stock is listed on The New York Stock Exchange. The market price
of the Common Stock is subject to significant fluctuations from time to time in
response to numerous factors, including variations in the reported annual and
quarterly financial results of the Company, changes in financial projections or
failures by the Company to meet such projections and changing conditions in the
economy in general or in the Company's industry in particular. In addition, the
stock markets experience significant price and volume volatility from time to
time which may affect the market price of the Common Stock for reasons unrelated
to the Company's performance at that time. See "Price Range of Common Stock."

POTENTIAL ANTI-TAKEOVER EFFECTS

The Company has adopted a stockholder rights plan. The plan and provisions
of the Company's Certificate of Incorporation, as amended (the "Company
Certificate"), the Company's Bylaws, as amended (the "Company Bylaws"), and the
Delaware General Corporation Law (the "DGCL") may have the effect of delaying,
discouraging, inhibiting, preventing or rendering more difficult an attempt to
obtain control of the Company by means of a tender offer, business combination,
proxy contest or otherwise. These provisions include the charter authorization
of "blank check" preferred stock, classification of the Board of Directors, a
restriction on the ability of stockholders to take actions by written consent, a
"fair price" provision and a DGCL provision imposing restrictions on business
combinations with certain interested parties. See "Description of Capital
Stock."

OWNERSHIP AND CONTROL BY CERTAIN SHAREHOLDERS

On a fully diluted basis and assuming the vesting and exercise of all
outstanding options and the exercise of all outstanding warrants, the Company's
directors and management will own or control approximately 31.2% of the
Company's outstanding voting capital stock. Collectively, such shareholders may
be able to effectively control decisions of the Company, as the Company
Certificate, and the Company By-laws generally require a

10
<PAGE> 11

majority vote of holders of the outstanding shares of the Company to authorize
actions of the Company. This concentration of ownership by directors and
management may also have the effect of delaying or preventing a change in
control of the Company. See "Security Ownership" and "Description of Capital
Stock."

FORWARD-LOOKING STATEMENTS

With the exception of historical information, the matters discussed herein
may include forward-looking statements that involve risks and uncertainties.
While forward-looking statements are sometimes presented with numerical
specificity, they are based on a variety of assumptions made by management
regarding future circumstances over which the Company has little or no control.
A number of important factors, including those identified in this section as
well as factors discussed elsewhere herein, could cause the Company's actual
results to differ materially from those in forward-looking statements or
financial information. Actual results may differ from forward-looking results
for a number of reasons, including the following: (i) changes in world economic
conditions (including, but not limited to, the potential instability of
governments and legal systems in countries in which the Company conducts
business, and significant changes in currency valuations), (ii) changes in
customer demand as they affect sales and product mix (including, but not limited
to, the effect of strikes at customers' facilities, variations in backlog and
the impact of changes in industrial business cycles), (iii) competitive factors
(including, but not limited to, changes in market penetration and the
introduction of new products by existing and new competitors), (iv) changes in
operating costs (including, but not limited to, the effect of changes in the
Company's manufacturing processes; changes in costs associated with varying
levels of operations; changes resulting from different levels of customers
demands; the effects of unplanned work stoppages; changes in cost of labor and
benefits; and the cost and availability of raw materials and energy), (v) the
success of the Company's operating plan (including, but not limited to, its
ability to achieve the total planned benefits of its strategic plan, its ability
to find and integrate acquisitions into Company operations, and the ability of
recently acquired companies to meet satisfactory operating results), and (vi)
unanticipated litigation, claims or assessments (including, but not limited to,
claims or problems related to product warranty and environmental issues).

USE OF PROCEEDS

This Prospectus relates to Shares being offered and sold for the accounts
of the Selling Stockholders. The Company will not receive any proceeds from the
sale of the Shares but will pay all expenses related to the registration of the
Shares. See "Plan of Distribution."

11
<PAGE> 12

THE COMPANY

GENERAL

Waterlink, Inc. (the "Company") is an international provider of integrated
water purification and wastewater treatment solutions, principally to industrial
and municipal customers. The Company believes its expertise is in the analysis
of a customer's water purification and wastewater treatment requirements and the
customized application of the Company's systems, equipment and services to
provide cost effective solutions. Waterlink was incorporated in Delaware on
December 7, 1994 in order to participate in the consolidation of the highly
fragmented water purification and wastewater treatment industry. The Company has
begun executing this strategy through an acquisition program which targets
businesses in four markets: industrial process water, industrial wastewater,
municipal drinking water and municipal wastewater.

From its incorporation in December 1994 until its first acquisition in
March 1995, the Company focused on initial formation activities, attracting
certain initial employees and pursuing its analysis of potential acquisition
candidates. In March 1995, the Company acquired the assets of Sanborn, Inc.
(doing business as Sanborn Technologies ("Sanborn Technologies")), being
operated by the Company's subsidiary, SanTech Equipment, Inc. Sanborn
Technologies is a designer and builder of industrial separation systems which
are used by customers for environmental compliance, resource conservation and
production processes. Later in fiscal 1995, the Company acquired Great Lakes
Environmental, Inc. ("Great Lakes"), which enabled the Company to enter the
industrial wastewater market. Great Lakes is a designer and builder of
industrial wastewater pretreatment systems and custom high quality oil/water
separation products.

In fiscal 1996, Waterlink completed three acquisitions, comprised of the
assets of Mass Transfer Systems, Inc. ("Mass Transfer"), the assets of Aero-Mod
Incorporated and its affiliates ("Aero-Mod") and the capital stock of Water
Equipment Technologies, Inc. (now known as Waterlink Technologies, Inc.
("Waterlink Technologies")). The acquisition of Mass Transfer provided access to
additional technologies used primarily in the industrial wastewater market and,
to a lesser extent, in the municipal wastewater market. Mass Transfer is a
designer of customized jet aeration and mixing systems used to accelerate the
biological digestion process through the introduction of oxygen in the treatment
of wastewater. The acquisition of Aero-Mod expanded the Company's presence in
the municipal wastewater market and presented cross-selling opportunities with
Mass Transfer. Additionally, Aero-Mod expanded the Company's geographic presence
and scope of operations through its customer base outside of the United States,
especially in Latin America, and its contract operations business. Aero-Mod
designs wastewater treatment plants, provides clarifiers, filters and dewatering
equipment for the biological treatment of wastewater and biosolids and provides
contract operation services. The acquisition of Waterlink Technologies enabled
the Company to enter the industrial process water and municipal drinking water
markets and increased the Company's presence in markets outside the United
States. Waterlink Technologies is a designer and builder of water treatment
filters and membrane separation systems, including reverse osmosis systems, and
related treatment equipment.

During fiscal 1997, Waterlink completed five acquisitions, comprised of the
capital stock of the Nordic Water Products Group subsidiaries (the "Nordic
Group"), Bioclear Technology, Inc. ("Bioclear"), Lanco Environmental Products,
Inc. ("Lanco"), Mellegard V.A. Maskiner AB ("MEVA") and Hycor Corporation
("Hycor"). The Nordic Group provided the Company with numerous benefits
including a distribution channel for its existing businesses into Europe;
internationally recognized and accepted technologies and equipment used in both
the municipal and industrial markets; and the Company's first substantial
design/build operations, focused primarily in Europe. The Nordic Group
manufactures continuous recirculating sand filters, inclined plate settlers and
systems for nutrient removal, decanting centrifuges for dewatering biosolids and
hydraulic surface and bottom scrapers. The Nordic Group also installs mechanical
and electrical systems and designs and builds water purification and wastewater
treatment plants in Europe. Bioclear provides the Company with access to
sequential batch reactor technology, which expands its ability to treat
industrial and municipal wastewater biologically. The Company believes that this
technology presents various cross-selling opportunities, particularly with
Aero-Mod, Mass Transfer, Waterlink Technologies and the Nordic Group.
Additionally, Bioclear enhances the Company's design/build capabilities. Lanco
expands the Company's product offerings in the industrial wastewater treatment
market and is complementary with Great Lakes. Lanco fabricates small plate and
frame filter presses for

12
<PAGE> 13

dewatering biosolids and inclined plate clarifiers for heavy metal removal. MEVA
specializes in the design and installation of fine screens and related
accessories for sewage treatment applications. Hycor designs and manufactures
screening, dewatering and related residuals management equipment for
liquid/solid separation in municipal wastewater and industrial wastewater and
process applications. MEVA and Hycor extend the Company's product offerings and
present various cross-selling opportunities with the Company's design/build
operations.

The Company has developed a strategic plan to:

- Provide a full range of systems, equipment and services, whether
independently or as part of a fully engineered water purification or
wastewater treatment solution

- Pursue growth through acquisitions that:

-- increase its geographic diversity

-- add complementary technologies, products and services

-- broaden its customer base and industries served

-- provide strategic, synergistic and corporate cultural fit

- Integrate its operations and marketing strategies in order to maximize
internal growth and increase profitability

- Strengthen market share for its design/build operations outside the
United States

Primarily due to its acquisition program, the Company's pro forma net sales
for fiscal 1997 totaled $111 million. In addition, the Company has begun to
realize significant improvement in internal growth rates due to the
opportunities to cross-sell systems, equipment and services and as a result of
the increased financial, managerial and other resources provided by the Company
to its acquired businesses. For example, subsidiaries selling wastewater
treatment systems now have the ability to offer both aeration and mixing systems
and subsidiaries selling water treatment systems can now offer wastewater
treatment systems for the same projects. Additionally, the Company's
design/build capabilities allow it to design systems that utilize a broad array
of the Company's products and provide opportunities for its contract operation
services. The Company also experiences cross-selling opportunities from a
geographic and customer standpoint. For example, the Company believes that it
should benefit from the acquisition of the Nordic Group both from the Nordic
Group's ability to introduce the Company's existing systems, equipment and
services into the European market and from the Company's ability to introduce
the Nordic Group's systems, equipment and services into the Company's existing
markets. Pro forma net sales of the businesses acquired by the Company to date
grew 18.9% during fiscal 1997 compared to the prior year.

The Company's executive offices are located at 4100 Holiday Street, N.W.,
Suite 201, Canton, Ohio 44718-7532 and its telephone number is (330) 649-4000.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock has been listed on the New York Stock Exchange
(the "NYSE") under the symbol "WLK" since June 24, 1997 when the Company's
Common Stock commenced trading in connection with the IPO, in which the initial
per share price to the public was $11. The following table sets forth the high
and low composite sales prices as reported by the NYSE for the fiscal quarters
indicated.

<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Fiscal Year ended September 30, 1997
Third Quarter (from June 24, 1997)...................... $13 $11
Fourth Quarter.......................................... 20 3/16 13
Fiscal Year ended September 30, 1998
First Quarter........................................... 19 3/4 16 5/16
Second Quarter (through February 2, 1998)............... 17 1/8 14 3/4
</TABLE>

13
<PAGE> 14

The current quoted price of the Common Stock is listed daily in the Wall
Street Journal in the NYSE section. The number of holders of record of the
Company's Common Stock as of January 31, 1998 was approximately 70.

DIVIDEND POLICY

The Company has not declared or paid any cash dividends on its Common
Stock. It is the Company's current intention to retain earnings to finance the
expansion of its business. Any future dividends will be at the discretion of the
Board of Directors after taking into account various factors, including, among
others, the Company's financial condition, results of operations, cash flows
from operations, current and anticipated cash needs and expansion plans, the
income tax laws then in effect, the requirements of Delaware law, the
restrictions imposed under the Credit Facility (as defined herein) and any
restrictions that may be imposed by the Company's future credit facilities and
other indebtedness. The Company's Credit Facility prohibits its payment of
dividends without the consent of the lender. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

14
<PAGE> 15

CAPITALIZATION

The following table sets forth the historical capitalization of the Company
at September 30, 1997. This table should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Current maturities of long-term debt....................................... $ 2,538
Long-term debt, less current portion....................................... 12,502
Convertible subordinated notes-related parties............................. 3,921
-------
Total debt............................................................... 18,961
Shareholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized, none
issued and outstanding................................................ --
Common stock, $.001 par value, 40,000,000 shares authorized, 11,906,326
shares issued and outstanding(1)...................................... 12
Additional paid-in-capital............................................... 70,739
Foreign currency translation adjustment.................................. (44)
Retained earnings........................................................ 166
-------
Total shareholders' equity............................................ 70,873
-------
Total capitalization.................................................. $89,834
=======
</TABLE>

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

(1) Excludes (i) 1,290,800 shares subject to then outstanding options granted
under the Company's 1995 Stock Option Plan, (ii) 225,000 shares then
issuable upon exercise of a warrant issued to a bank, and (iii) 125,000
shares then issuable upon exercise of warrants issued in connection with
commitments to purchase subordinated indebtedness of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Management -- Benefit
Plans," "Certain Transactions -- 1997 Notes, 1997 Warrants and Stockholder
Guarantee" and "Description of Capital Stock."

15
<PAGE> 16

SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data of the
Company since its incorporation on December 7, 1994. The financial data
presented for and as of the end of fiscal 1995, fiscal 1996 and fiscal 1997 were
derived from the audited consolidated financial statements of the Company. The
financial data includes the operating results of each acquired business from the
date of acquisition in accordance with the purchase method of accounting. The
dates of each acquisition included in the operating results are shown below:

<TABLE>
<S> <C>
- Sanborn Technologies......................... March 31, 1995
- Great Lakes.................................. August 31, 1995
- Mass Transfer................................ January 31, 1996
- Aero-Mod..................................... April 26, 1996
- Waterlink Technologies....................... September 30, 1996
- Nordic Group................................. March 5, 1997
- Bioclear..................................... June 27, 1997
- Lanco........................................ June 27, 1997
- MEVA......................................... September 12, 1997
- Hycor........................................ September 30, 1997
</TABLE>

16
<PAGE> 17

The data presented below should be read in conjunction with the financial
information appearing elsewhere herein.

<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1995 1996 1997
------- ------- --------
(in thousands, except per share
data)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................... $ 2,684 $19,801 $ 64,699
Cost of sales................................ 1,857 11,233 40,390
------- ------- --------
Gross profit................................. 827 8,568 24,309
Selling, general and administrative
expenses.................................. 1,178 7,029 18,683
Special management compensation(1)........... -- -- 2,630
Amortization................................. 15 307 751
------- ------- --------
Operating income (loss)...................... (366) 1,232 2,245
Other income (expense):
Interest expense.......................... (144) (877) (1,281)
Interest income and other items-net....... 33 (44) 263
------- ------- --------
Income (loss) before income taxes............ (477) 311 1,227
Income taxes................................. 35 5 470
------- ------- --------
Income (loss) before extraordinary item...... (512) 306 757
Extraordinary item, net of taxes(2).......... -- -- (385)
------- ------- --------
Net income (loss)............................ $ (512) $ 306 $ 372
======= ======= ========
Net income (loss) per common share:
Income (loss) before extraordinary item... $ (0.11) $ 0.05 $ 0.09
Extraordinary item........................ -- -- (0.05)
------- ------- --------
$ (0.11) $ 0.05 $ 0.04
======= ======= ========
Weighted average common and equivalent
shares.................................... 4,534 6,428 8,337
======= ======= ========
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................. $ 2,064 $ 3,438 $ 19,430
Total assets................................. 10,819 28,991 115,860
Total debt................................... 6,039 12,145 18,961
Redeemable preferred stock................... 3,900 8,500 --
Shareholders' equity (deficit)............... (11) 2,407 70,873
</TABLE>

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

(1) In June 1997, the Company incurred a special charge to operations of
$2,630,000 resulting primarily from the issuance, concurrent with the IPO,
of a ten year option to purchase 100,000 shares of common stock at a price
of $0.10 per share to an officer of the Company pursuant to terms of an
employment agreement. Of this amount, approximately $1,138,000 is non-cash
and the remainder represents cash obligations related principally to the
reimbursement of income taxes resulting from the stock option issuance. This
special charge after income taxes on a per share basis was $0.20 for the
year ended September 30, 1997.

17
<PAGE> 18

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

OVERVIEW

The Company is an international provider of integrated water purification
and wastewater treatment solutions, principally to industrial and municipal
customers. Waterlink was incorporated in Delaware on December 7, 1994 and has
grown through numerous acquisitions.

On June 27, 1997, the Company consummated the IPO of 4,500,000 shares of
its common stock at a price of $11 per share, before the underwriters' discount,
and received approximately $43.0 million of net proceeds. On July 16, 1997, the
Company sold 675,000 shares of its common stock pursuant to the exercise of the
underwriters' over-allotment option granted in connection with the IPO, and
received approximately $6.9 million. These net proceeds from the IPO were
primarily used to pay the cash portion of the purchase prices of Bioclear, Lanco
and MEVA, to repay indebtedness of the Company and for general working capital
purposes.

The Company's acquisitions have enabled it to build its technical
capabilities and geographical presence. Through September 30, 1997, the Company
completed the following ten acquisitions at the following effective dates:

<TABLE>
<S> <C>
- - Sanborn Technologies......................... March 31, 1995
- - Great Lakes.................................. August 31, 1995
- - Mass Transfer................................ January 31, 1996
- - Aero-Mod..................................... April 26, 1996
- - Waterlink Technologies....................... September 30, 1996
- - Nordic Group................................. March 5, 1997
- - Bioclear..................................... June 27, 1997
- - Lanco........................................ June 27, 1997
- - MEVA......................................... September 12, 1997
- - Hycor........................................ September 30, 1997
</TABLE>

As part of its strategic plan, the Company intends to continue an
aggressive acquisition program. The Company's acquisition program has targeted
businesses which have provided the Company with complementary systems, equipment
and services and broadened its customer and geographic base. The Company has
sought companies which provide the potential for synergies with existing
businesses. With respect to the acquisitions completed prior to fiscal 1997, the
Company has begun to realize significant improvement in internal growth rates
due to the opportunities to cross-sell systems, equipment and services and as a
result of the increased financial, managerial and other resources provided by
the Company to its acquired businesses. The Company expects that it will
continue to benefit from such synergies as it more fully integrates the acquired
businesses into its operations.

The acquisitions were accounted for under the purchase method of accounting
and are included in the results of operations for the period subsequent to the
effective date of acquisition. Due to the timing and magnitude of these
acquisitions, results of operations for the periods presented are not
necessarily comparable or indicative of operating results for current or future
periods.

The majority of the Company's systems and equipment are custom designed and
take a number of months to produce. Revenues from large contracts are recognized
using the percentage of completion method of accounting in the proportion that
costs bear to total estimated costs at completion. Revisions of estimated costs
or potential contract losses, if any, are recognized in the period in which they
are determined. Revenues from remaining systems and equipment sales are
recognized when shipped.

18
<PAGE> 19

government sources, the actual costs of completing the project as well as
receiving any necessary permits to commence the project. Therefore, the Company
expects that its future operating results could fluctuate significantly,
especially on a quarterly basis. The recognition by the Company of revenues and
profits therefrom can fluctuate due to the timing of the awarding of such
contracts and the ability to fund project costs. In addition, the Company has
historically operated with a moderate backlog. However, as a result of its
strategic plan, the Company anticipates that both the dollar volume and number
of contracts in its backlog will increase significantly. As of September 30,
1997, the Company's backlog was approximately $30.5 million. Therefore,
quarterly sales and operating results may be affected by the volume and timing
of contracts received and performed within the quarter, which are difficult to
forecast. Any significant deferral or cancellation of a contract could have a
material adverse effect on the Company's operating results in any particular
quarter. Because of these factors, the Company believes that period-to-period
comparisons of its operating results are not necessarily indicative of future
performances.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated, statements of
operations data as a percentage of net sales:

<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net sales....................................................... 100.0% 100.0% 100.0%
Cost of sales................................................... 69.2 56.7 62.4
----- ----- -----
Gross profit.................................................... 30.8 43.3 37.6
Selling, general and administrative expenses.................... 43.9 35.5 28.9
Special management compensation................................. -- -- 4.1
Amortization.................................................... 0.5 1.6 1.1
----- ----- -----
Operating income (loss)......................................... (13.6) 6.2 3.5
Other income (expense):
Interest expense.............................................. (5.4) (4.4) (2.0)
Interest income and other items--net.......................... 1.2 (0.2) 0.4
----- ----- -----
Income (loss) before income taxes............................... (17.8) 1.6 1.9
Income taxes.................................................... 1.3 0.1 0.7
----- ----- -----
Income (loss) before extraordinary item......................... (19.1) 1.5 1.2
Extraordinary item, net of tax.................................. -- -- 0.6
----- ----- -----
Net income (loss)............................................... (19.1)% 1.5% 0.6%
===== ===== =====
</TABLE>

Year Ended September 30, 1997 Compared to Year Ended September 30, 1996

Net Sales

Net sales for the year ended September 30, 1997 were $64,699,000, an
increase of $44,898,000 from the prior year. The increase was primarily due to
the acquisition of Mass Transfer on January 31, 1996, Aero-Mod on April 26,
1996, Waterlink Technologies, Inc. on September 30, 1996, the Nordic Group on
March 5, 1997, Bioclear and Lanco on June 27, 1997 and MEVA on September 12,
1997. In addition, internal growth accounted for $6,830,000 of the increase,
which represented an internal growth rate of 34.5%, primarily due to expansion
in overseas markets and to the greater levels of resources provided by the
Company to the businesses subsequent to the acquisitions. The Company measures
internal growth by comparing each subsidiary's net sales from the months
subsequent to their respective acquisition dates during the prior year to those
same months in the current year.

Gross Profit

Gross profit for the year ended September 30, 1997 was $24,309,000, an
increase of $15,741,000 from the prior year. The increase was primarily due to
the aforementioned acquisitions and internal growth. Gross margin

19
<PAGE> 20

was 37.6% for 1997 as compared to 43.3% for 1996. Gross margins have been
impacted by the March 1997 acquisition of the Nordic Group which historically
experiences lower margins as compared to other Waterlink companies, as well as
by a large, lower-margin, design/build project in Germany that is near
completion at the end of the fiscal year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended
September 30, 1997 were $18,683,000, an increase of $11,654,000 from the prior
year. The increase was primarily due to the aforementioned acquisitions.
Selling, general and administrative expenses as a percentage of net sales was
28.9% for 1997 as compared to 35.5% for 1996. This decrease primarily reflects
the spreading of selling, general and administrative expenses over a larger
revenue base.

Special Management Compensation

Special management compensation of $2,630,000 for the year ended September
30, 1997 resulted primarily from the issuance, concurrent with the IPO, of a ten
year option to purchase 100,000 shares of common stock at a price of $0.10 per
share to an officer of the Company pursuant to terms of an employment agreement.
Of this amount, approximately $1,138,000 is non-cash and the remainder
represents cash obligations related principally to the reimbursement of income
taxes resulting from the stock option issuance.

Amortization

Amortization expense for the year ended September 30, 1997 was $751,000, an
increase of $444,000 from the prior year. The increase was primarily due to the
goodwill resulting from the aforementioned acquisitions.

Interest Expense

Interest expense for the year ended September 30, 1997 was $1,281,000, an
increase of $404,000 from the prior year. This increase was primarily related to
increased borrowings required to finance the aforementioned acquisitions.

Extraordinary Item

During the year ended September 30, 1997, the Company recorded an
extraordinary charge of $385,000, net of taxes of $257,000, related to the
write-off of unamortized debt issuance costs associated with certain
indebtedness retired with the net proceeds from, and discounts associated with a
note purchase agreement terminated in connection with, the IPO.

Year Ended September 30, 1996 Compared to Fiscal Period Ended September 30, 1995

Net Sales

Net sales for 1996 were $19,801,000, an increase of $17,117,000 from the
prior period. Substantially all of the increase was attributable to the timing
of the acquisition of Great Lakes in fiscal 1995 and, Mass Transfer and Aero-Mod
in fiscal 1996.

Gross Profit

Gross profit for 1996 was $8,568,000, an increase of $7,741,000 from the
prior period. The increase was primarily due to the timing of the aforementioned
acquisitions. Gross margin was 43.3% for 1996 as compared to 30.8% in 1995.
Sanborn Technologies, which comprised the majority of 1995 net sales, has
historically experienced a lower gross margin that the Company's other operating
subsidiaries owned during 1996.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 1996 were $7,029,000, an
increase of $5,851,000 from the prior period. The increase was primarily due to
the timing of the aforementioned acquisitions. Selling, general and
administrative expenses as a percentage of net sales was 35.5% for 1996 as
compared to 43.9% for 1995.

20
<PAGE> 21

This decrease primarily reflects the spreading of selling, general and
administrative expenses over a larger revenue base.

Amortization

Amortization expense for 1996 was $307,000, an increase of $292,000 from
the prior period. The increase was primarily due to the goodwill resulting from
the aforementioned acquisitions.

Interest Expense

Interest expense for 1996 was $877,000, an increase of $733,000 from the
prior period. This increase primarily related to increased borrowings required
to consummate the aforementioned acquisitions and fund working capital
expansion.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company's primary sources of liquidity have been
(i) borrowings available under its Credit Facility (as defined below) and prior
credit facilities, (ii) net proceeds from the sale of the Company's common and
preferred stock, and (iii) issuance of common stock and seller financing
incurred in connection with the Company's completed acquisitions. Historically,
the Company's primary uses of capital have been the funding of its acquisition
program and working capital expansion. The Company does not currently anticipate
making significant capital investments in plant and equipment due to its focus
on partnering with vendors which manufacture most of the components used in the
Company's systems and equipment.

For the year ended September 30, 1997, net cash used by operating
activities was $6,708,000, purchases of equipment totaled $1,072,000 and cash
outlays for the purchases of businesses, net of cash acquired, totaled
$42,597,000. These cash outlays, financed primarily by long-term borrowings and
the IPO, reflect the Company's continued acquisition program and expansion of
existing operations.

In June 1997, the Company recorded a special management compensation charge
of $2,630,000 resulted primarily from the issuance, concurrent with the IPO, of
a ten year option to purchase 100,000 shares of common stock at a price of $0.10
per share to an officer of the Company pursuant to terms of an employment
agreement. Of this amount, approximately $1,138,000 is non-cash and the
remainder represents cash obligations related principally to the reimbursement
of income taxes resulting from the stock option issuance.

The net proceeds from the IPO were used primarily to pay the cash portion
of the purchase prices of Bioclear, Lanco and MEVA, and for the repayment of
outstanding indebtedness and for general working capital purposes. Such
applications enabled the Company to reduce its leverage and will enable it to
expand its product offerings, which together are anticipated to improve its
financial flexibility and enhance the implementation of its strategic plan.

The Company intends to continue pursuing attractive acquisition
opportunities. The timing, size or success of any acquisition effort and the
associated potential capital commitments are unpredictable. The Company believes
that through the end of fiscal 1998, (i) future cash flow from operations, (ii)
borrowings under its Credit Facility and (iii) issuances of Common Stock and
seller financing incurred in connection with future acquisitions will be
sufficient to fund its working capital needs, additional acquisitions and
additional contingent consideration related to acquisitions.

Acquisitions

As part of its strategic plan, the Company has implemented an acquisition
program, which has significantly impacted liquidity and capital resources. As of
September 30, 1997, the Company has made ten acquisitions for an aggregate
consideration of $81,837,000, comprised of $59,026,000 of cash, $7,468,000 of
Common Stock, and $15,343,000 of seller financing and assumed debt, including
convertible debt. Of the $15,343,000 of seller financing and assumed debt,
$6,765,000 was outstanding at September 30, 1997.

The Company may be required to make additional purchase consideration
payments of up to $6,545,000, contingent upon the achievement of certain
operating results through fiscal 2000. The payments that may be

21
<PAGE> 22

required in fiscal 1998, 1999 and 2000 are $4,100,000, $1,713,000 and $732,000,
respectively. In connection with two of the Company's acquisitions, the Company
also may be required to make other additional purchase consideration payments in
the form of cash and Common Stock, in an amount equal to a fixed percentage of
the excess of certain specified annual earnings targets through fiscal 2000.
Since such additional purchase consideration payments, if any, are based on a
fixed percentage of such excess amount, there is no maximum amount for such
payments. Any such additional purchase consideration payments will be treated as
additional goodwill for accounting purposes. As of September 30, 1997,
additional purchase consideration payments of $1,760,000 is accrued on the
Company's balance sheet and is expected to be paid before March 31, 1998.

Credit Availability

On February 19, 1997, the Company entered into a credit facility with Bank
of America National Trust & Savings Association. This credit facility provided
the Company with a revolving line of credit of up to $8,000,000 and a term loan
of $11,000,000. The term loan was used to acquire the Nordic Group and to
refinance certain indebtedness in connection with the acquisition.

In connection with this credit facility, two of the overseas subsidiaries
of the Company had separate facilities of $2,200,000 and $3,800,000,
respectively, for borrowings in local currencies. Each separate facility is
guaranteed by the Company, with outstanding amounts that bear interest based on
a designated London interbank offering rate plus a spread of 250 basis points.

As additional consideration for this credit facility, the Company granted
the bank, pursuant to a certain warrant agreement dated February 19, 1997, a
warrant, expiring in 2002, to purchase 225,000 shares of Common Stock at a
purchase price of $4.50 per share.

On June 27, 1997, concurrent with the closing of the IPO, the Company
terminated this credit facility and entered into a new $40,000,000 three year,
secured, domestic, revolving credit facility with Bank of America National Trust
& Savings Association as agent. In connection with the domestic revolving credit
facility, the separate facilities of the two overseas subsidiaries were amended
to change availability to $4,000,000 and $3,000,000, respectively. The
$40,000,000 domestic revolving credit facility and the $7,000,000 overseas
facilities (the "Credit Facility") will be utilized to fund operating activities
of the Company as well as future acquisitions.

Loans under the Credit Facility will bear interest at a designated variable
base rate plus spreads ranging from 0 to 25 basis points depending on the ratio
of total consolidated indebtedness to the Company's earnings before interest,
taxes, depreciation and amortization. At the Company's option, the domestic
revolving credit facility will bear interest based on a designated London
interbank offering rate plus spreads ranging from 100 to 200 basis points. At
September 30, 1997, approximately $32,404,000 was available under the Credit
Facility.

The Credit Facility restricts or prohibits the Company from many actions,
including paying dividends and incurring or assuming other indebtedness or
liens. The Company's obligations under the Credit Facility are secured by liens
on substantially all of the Company's domestic assets, including equipment,
inventory, accounts receivable and general intangibles and pledge of most of the
stock of the Company's subsidiaries. The Company has guaranteed the payment by
its two overseas subsidiaries of their obligations under the overseas
facilities. The two overseas subsidiaries have given a negative pledge of their
assets in connection with the overseas facilities.

In September 1997 the Company entered into a $3,000,000 credit facility
("Canadian Line of Credit") with Royal Bank of Canada, a participant in the
Credit Agreement above, to fund Canadian working capital requirements including
bankers acceptances and letters of credit. Interest rates are negotiated on an
individual borrowing basis and are related to the Royal Bank of Canada's prime
rate. Borrowings are payable upon demand and are guaranteed by Bioclear. At
September 30, 1997, approximately $802,000 was available under the Canadian Line
of Credit.

In March 1997, the Company entered into a note purchase agreement pursuant
to which the Company could issue, and several purchasers had committed to
purchase, five year subordinated notes in the principal amount of up to
$10,000,000. The notes were not drawn on by the Company and upon the
consummation of the IPO the note purchase agreement was terminated in accordance
with its terms. In consideration of entering into the note

22
<PAGE> 23

purchase agreement, parties agreeing to be purchasers of the notes received
125,000 warrants to purchase shares of Common Stock at a purchase price of $4.50
per share.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share,
and SFAS No. 129, Disclosure of Information about Capital Structure. The Company
is required to adopt both standards during the first quarter of fiscal 1998.
SFAS No. 128 replaces the presentation of primary earnings per share (EPS) under
Accounting Principle Board Opinion No. 15 and related Interpretations, with the
presentation of basic EPS (which primarily gives effect only to common shares
actually outstanding) and requires dual presentation of basic and diluted EPS on
the face of the income statement for all entities with complex capital
structures. Under SFAS No. 128, the Company's 1997 basic and diluted EPS would
be $.05 per share and $.04 per share, respectively. SFAS No. 129's primary focus
is to expand the number of entities subject to certain capital structure
disclosure requirements, particularly nonpublic entities, and accordingly, will
not have a significant impact on the Company's disclosures.

In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which changes the way public companies
report segment information in annual financial statements. The statement also
requires public companies to report selected segment information in interim
financial reports to shareholders. The statement is effective for the Company in
fiscal 1999 and restatement of comparative information for earlier years is
required in the initial year of adoption. Management does not expect the
adoption of SFAS No. 131 to have a material impact on the Company's financial
statement disclosures.

23
<PAGE> 24

BUSINESS

GENERAL

The Company is an international provider of integrated water purification
and wastewater treatment solutions, principally to industrial and municipal
customers. The Company believes its expertise is in the analysis of a customer's
water purification and wastewater treatment requirements and the customized
application of the Company's systems, equipment and services to provide cost
effective solutions. Since its formation in December 1994, the Company has grown
significantly by completing ten acquisitions consisting of seventeen operating
companies. As a result of its acquisition program and internal development, the
Company has increased its ability to provide integrated water purification and
wastewater treatment solutions and has expanded its geographic presence.

The Company has developed a strategic plan to:

- Provide a full range of systems, equipment and
services, whether independently or as part of a
fully engineered water purification or wastewater
treatment solution

- Pursue growth through acquisitions that:

-- increase its geographic diversity

-- add complementary technologies, products and
services

-- broaden its customer base and industries served

-- provide strategic, synergistic and corporate
cultural fit

- Integrate its operations and marketing strategies
in order to maximize internal growth and increase
profitability

- Strengthen market share for its design/build
operations outside the United States

ACQUISITION STRATEGY

In order to achieve its objective of becoming a leading international
provider of integrated water purification and wastewater treatment solutions,
the Company has pursued an aggressive acquisition-based growth program. In
connection with this program, the Company targets acquisitions that will expand
the Company's market share, broaden its customer and geographic base, provide
the Company with new products, technologies and services (including those which
generate recurring revenues), and enhance the Company's design/build
capabilities. The Company seeks well-managed, established companies that provide
a strategic fit, synergies with existing businesses and the potential for
accelerated revenue and earnings growth. Assuming that a potential acquisition
is complementary to, and synergistic with, the operation of the Company's
existing subsidiaries, the candidate company is evaluated for cultural fit,
which the Company considers to be critically important. The Company

24
<PAGE> 25

believes that its future success depends substantially upon collaboration and
teamwork among its operating companies and therefore upon common operating
philosophies.

The Company believes that it is an attractive partner to potential
acquirees because the Company can facilitate their continued growth through
enhanced availability of working capital, surety credit, and borrowing capacity,
as well as through introduction to new customers and markets. The Company also
offers smaller acquisition candidates the ability to remain competitive by
becoming part of a larger, more diversified organization. As customers
frequently seek integrated water treatment solutions, companies with one or a
few product lines are increasingly excluded from projects because they do not
have the capability of meeting customers' requirements either from a product or
financial standpoint. The Company offers acquisition candidates access to a
developed international distribution system and significant management
experience. Additionally, the Company's operating subsidiaries have
cross-selling opportunities which enable them to be considerably more
competitive, thereby increasing sales potential significantly. Finally, and of
utmost importance to some candidates, it is the Company's philosophy generally
to maintain an acquired company's culture and retain its management through
appropriate incentives. The Company's decentralized operating strategy offers an
environment in which initiative and entrepreneurial spirit can thrive.

The Company believes that there is a substantial number of attractive
acquisition candidates in the United States and abroad due to the highly
fragmented nature of the overall industry. These candidates include water
purification equipment and wastewater equipment manufacturers, design/build
companies, point-of-use/point-of-entry equipment providers, contract operations
companies, specialty chemical solution providers, small unit replacement part
companies, and regional service companies.

As consideration for future acquisitions the Company intends to continue to
use various combinations of its Common Stock, cash and notes. In connection with
such acquisitions, the Company intends generally to seek to obtain the agreement
of the persons acquiring Common Stock not to offer, sell, contract to sell or
otherwise dispose of such Common Stock for a period of up to two years from the
date of acquisition. The consideration for each future acquisition will vary on
a case-by-case basis depending on the financial interests of the Company and the
historic operating results and future prospects of the business to be acquired.
The Company will finance future acquisitions through funds provided by
operations and by the Credit Facility and from the proceeds of future equity and
debt financing.

SYSTEMS, EQUIPMENT AND SERVICES

The Company provides integrated water purification and wastewater treatment
solutions, principally to its industrial customers for treatment of process
water and wastewater and to its municipal customers for treatment of drinking
water and wastewater. To this end, the Company provides a broad range of systems
and equipment as well as design/build and operating capabilities.

Systems and Equipment. The Company designs and engineers solutions for the
water purification and wastewater treatment industry. The Company believes its
expertise is in the analysis of a customer's water purification and wastewater
treatment requirements and the application of the Company's systems, equipment
and services to provide cost effective solutions. The Company's equipment can be
provided to a customer either as a separate component or as part of a
customized, fully engineered water purification or wastewater treatment system
or subsystem. The Company generally does not make significant capital
investments in plant and equipment, focusing instead on partnering with vendors
which manufacture the components used in the Company's systems and equipment.
The Company completes the final assembly of its systems and tests its systems
prior to final delivery to the customer in order to maintain quality control.
The Company manufactures equipment when its manufacturing process is determined
to add a significant value to the final product.

Design/Build Services. The Company's design/build services include
prescribing water purification and wastewater treatment solutions, designing and
engineering necessary facilities, arranging for construction when required and
installing necessary equipment. The Company's strategy is to expand its presence
in the design/build segment of the water purification and wastewater treatment
industry, particularly in the small and medium sized

25
<PAGE> 26

municipal markets outside the United States. During the past five years, the
Company has completed more than 50 design/build projects.

The Company anticipates that it will expand its activities in this area due
to the trend toward outsourcing in the industry. The Company uses many of its
own products in its design/build operations as well as products manufactured by
others where appropriate.

Contract Operations. The Company operates water purification and wastewater
treatment facilities for municipal customers under contract for varying time
periods. The Company currently operates three small municipal wastewater
treatment facilities in the United States and one in Chile. The Company's
strategy is to leverage its design/build services to offer its contract
operations capability as part of a total solution. The Company is becoming more
involved in the operation and remote monitoring of water purification and
wastewater treatment facilities for both its industrial and municipal customers.

Replacement Parts, Repairs and Consumables. The Company manufactures and
sells replacement parts and consumables, such as membranes, ion exchange resin
and filter cartridges, manufactured both by the Company and other suppliers.
This equipment is required to support water treatment systems. In addition, the
Company performs maintenance and repair services on equipment manufactured by
both the Company and others.

The following table sets forth the Company's significant systems, equipment
and services, identifying both the customer base and the type of treatment
serviced. The Company is committed to expanding its range of systems, equipment
and services and increasing its sales throughout its available markets.
Management believes that companies with broad product and service offerings and
wide distribution capabilities will be able to capitalize on the major trends
that are affecting the water purification and wastewater treatment industry.

<TABLE>
<CAPTION>
INDUSTRIAL MUNICIPAL
MARKET MARKET
------------------- -------------------
PROCESS WASTE DRINKING WASTE
SYSTEMS, EQUIPMENT AND SERVICES WATER WATER WATER WATER
-------------------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Aeration systems........................................ X X
Jet aeration
Submerged mechanical mixers
Clarifiers.............................................. X X X X
ClarAtor(R)/Split ClarAtor(TM)
Inclined parallel plate
Contract operations..................................... X X X
Cutting fluid recovery systems.......................... X
Design/build............................................ X X X X
Dewatering systems -- biosolids......................... X X X X
Decanting centrifuges
DRAIMAD(TM) dewatering-bag systems
MONOBELT(TM) filter presses
Plate and frame filter presses
Filters................................................. X X X X
Cartridge-replacement filters
Continuous recirculating sand
Rotary vacuum pre-coat
Tertiary polishing
Ion exchange media...................................... X X
Media recharge
Systems
Membrane separation systems............................. X X X X
Desalination
Reverse osmosis
Nutrient removal systems................................ X X
Deni process
Oxy process
SEQUOX(TM) process
Oil/water separators.................................... X
Sequential batch reactors (SBRs)........................ X X
Screens................................................. X X X X
Sludge scrapers and skimmers............................ X X X X
</TABLE>

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<PAGE> 27

OPERATING STRATEGY

The Company has adopted a decentralized approach to the operational
management of its subsidiaries. While functions such as financial reporting,
treasury, communications and risk management are centralized in the Company's
corporate headquarters, local management is primarily responsible for the
day-to-day operation of its business. The Company also provides its subsidiaries
with financial resources, management expertise, customer and market access which
would be unavailable to each subsidiary individually. With respect to
acquisitions already completed, the Company has begun to realize significant
improvement in internal growth rates due to the availability of capital and
bonding capacity, and the opportunities to "cross-sell" products. As customers
increasingly seek integrated solutions, the ability of each of the Company's
subsidiaries to offer complementary equipment and services of other subsidiaries
increases the competitiveness of each company. For example, subsidiaries selling
wastewater treatment systems now have the ability to offer both aeration and
mixing systems and subsidiaries selling water treatment systems can now offer
wastewater treatment systems for the same projects. Additionally, the Company's
design/build capabilities allow it to design systems that utilize a broad array
of the Company's products and provide opportunities for its contract operation
services. The Company also experiences cross-selling opportunities from a
geographic and customer standpoint. For example, the Company believes that it
should benefit from the acquisition of the Nordic Group both from the Nordic
Group's ability to introduce the Company's existing systems, equipment and
services into the European market and from the Company's ability to introduce
the Nordic Group's systems, equipment and services into the Company's existing
markets.

A representative from each subsidiary, along with the Company's executive
officers and other key employees, form the Company's operating committee, which
meets on a frequent basis to facilitate the interchange of information and
enhance cross-selling opportunities. As the Company's capabilities have grown,
acquired subsidiaries within the Company have enjoyed growth opportunities far
beyond those that exist for stand-alone companies concentrated in only one area
of the industry.

SALES AND DISTRIBUTION

The Company sells its systems, equipment and services primarily through
approximately 60 direct sales personnel and approximately 250 independent sales
organizations. To a lesser extent, the Company sells through water treatment
distributors which take title to equipment for resale to the end-user. The
Company seeks to have a single sales organization within a particular market in
order to foster a close relationship with its sales representatives and present
a cohesive image to the marketplace. The independent sales representatives
typically will identify sales opportunities, and then work together as a team
with the Company's direct sales force, which has greater technical and product
knowledge, to complete the sale and service the customer. The Company's direct
sales force generally plays a more primary role in sales of the Company's
design/build solutions. The Company also sells through licensees, principally in
the Asia-Pacific region as well as in Europe.

CUSTOMERS

The Company markets its products and services to two primary categories of
customers; industrial users which require water for their manufacturing
processes and treat their wastewater, and municipal customers which produce
drinking water and treat wastewater. The Company has a diverse customer base,
with no customer representing 10% or more of the Company's fiscal 1997 pro forma
net sales.

The Company's industrial customers include many "Fortune 500" companies and
their counterparts outside of the United States. Industries served include the
pharmaceutical, electronic and microelectronic, pulp and paper, chemical,
petrochemical, food, beverage, automotive and other heavy manufacturing
industries. In fiscal 1997 approximately 55% of the Company's pro forma net
sales were derived from industrial sales.

The municipal market is highly competitive. Municipal markets in the United
States, Canada and Europe are more regulatory driven than municipal markets in
other regions. The Company utilizes specialized distribution channels to service
the municipal market and is skilled at participating in the municipal bidding
process. The Company focuses its efforts on smaller municipal projects which the
Company believes its product lines are best suited to serve. The Company
believes that the municipal business is important to its overall success by
virtue of its large market size. In fiscal 1997 approximately 45% of the
Company's pro forma net sales were derived from municipal sales.

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<PAGE> 28

BACKLOG

The Company had a backlog, consisting of written purchase orders received
by the Company of $25.8 million as of December 31, 1997 as compared to $10.4
million as of December 31, 1996. The Company expects that virtually all of the
backlog at the beginning of a fiscal year will be filled during that year.
Backlog, and therefore sales, may vary from quarter to quarter as a result of
large projects being booked during any quarter and varying project delivery
schedules. In addition, the orders have varying delivery schedules and the
Company's backlog as of any particular date may not be representative of actual
net sales for any succeeding period.

PROCESS AND PRODUCT WARRANTY AND PERFORMANCE GUARANTEES

Consistent with market practices, the Company generally offers a warranty
on finished products for one year or in some cases 18 months from sale and 12
months from installation. The costs associated with warranty expense have not
been material. In connection with providing certain products and design/build
services to its customers, the Company is sometimes required to guarantee that
the products or services will attain specified levels of quality or performance,
based on a defined set of parameters. Should a product fail to perform according
to a warranty, or should a project fail to attain the guaranteed level of
quality, and should the Company be unable to effect a satisfactory replacement
or cure within the prescribed period of time, the Company could incur financial
penalties in the form of liquidated damages or could be required to remove and
replace the equipment or repeat the service in order to meet the specifications.
To date, the Company has not incurred any material payment or other obligations
pursuant to such performance guarantees.

RAW MATERIAL AND SUPPLIES

The raw materials and components used in the Company's products are
commonly available commodities such as stainless steel, carbon steel, plastic,
tubing, wiring, electrical components, pumps, valves, compressors, pressure
vessels, oleophilic media, reverse osmosis membranes and sand. The Company's
systems are fabricated from these materials and assembled together with products
bought from other companies to form an integrated system. The Company is not
dependent upon any single supplier, and if any supplier were to become unable to
perform, the Company believes a substitute source could readily be found. The
Company has generally been able to pass on price increases for raw materials and
components to its customers. The Company is not a party to any material
long-term fixed price supply contracts.

GOVERNMENT REGULATION

Federal, state, local and foreign environmental laws and regulations
necessitate substantial expenditures and compliance with water quality standards
by generators of wastewater and wastewater by-products and impose liabilities on
such entities for noncompliance. Environmental laws and regulations and their
enforcement are, and will continue to be, a significant factor affecting the
marketability of the solutions, systems and equipment provided by the Company.

Many of the countries in which the Company operates or in which its
customers are located, including the United States, Canada and countries in
Europe, Latin America, and the Asia-Pacific region, have adopted requirements
that govern water quality, wastewater treatment, and wastewater by-products and
the solutions, systems and equipment provided by the Company. These requirements
and their enforcement vary by country, but in general establish water quality
use and disposal standards, set wastewater effluent discharge limits, and
prescribe standards for the protection of human health and safety and the
environment. In each such country, the Company monitors the status and impact of
local environmental regulation and enforcement as it relates to the
marketability of the solutions, systems and equipment provided by the Company.

Any changes in applicable environmental standards and requirements or their
enforcement may affect the operations of the Company by imposing additional
regulatory compliance costs on the Company's customers, requiring the
modification of and/or affecting the market for the Company's solutions, systems
and equipment. To the extent that demand for the Company's solutions, systems
and equipment is created by the need to comply with such enhanced standards and
requirements or their enforcement, any modification of the standards and

28
<PAGE> 29

requirements or their enforcement may reduce demand, thereby adversely affecting
the Company's business prospects. Conversely, changes in applicable
environmental laws imposing additional regulatory compliance standards and
requirements or causing stricter enforcement of these laws or regulations could
increase the demand for the Company's systems, equipment and services.

COMPETITION

Despite an accelerating trend toward consolidation, the water purification
and wastewater treatment industry remains fragmented and highly competitive due
to the large number of competitors within each product area. The Company has a
significant number of competitors, including a number of integrated suppliers
and equipment manufacturers, some of which are larger and have greater resources
than the Company. The Company believes that success in this market is based on
the ability to offer appropriate technology, influence specifications, have
strong distribution, maintain respect within the consulting and engineering
community, finance and bond projects awarded, provide timely delivery, and
maintain a reputation for service and parts support after the sale.
Additionally, in the municipal arena, the ability to meet bid specifications and
pricing are often primary considerations. The Company believes that its
technologies and cost structures as well as its strong local presence in
international markets enable it to compete effectively against these companies.
The Company's primary competitors include United States Filter Corporation,
Parkson Corporation, Alpha Laval and Humbolt KHD.

PATENTS, TRADEMARKS AND LICENSES

The Company currently owns a number of United States and foreign patents,
and registrations for United States service marks and trademarks. While each is
of value, the Company generally does not consider any of them to be material to
its business, although, as the Company has grown and its presence has been
extended, its Waterlink(SM) mark has become more widely known and the goodwill
associated with it has increased.

EMPLOYEES

At January 31, 1998, the Company and its subsidiaries had approximately 400
employees at its various locations. None of the Company's employees in the
United States are covered under collective bargaining agreements. The Company's
hourly employees in Europe are covered by collective bargaining agreements.
Management believes that the Company's relationship with its employees is good.

PROPERTIES

The Company leases its corporate offices, consisting of approximately 6,000
square feet located in Canton, Ohio pursuant to a lease agreement dated July 9,
1996 and amended October 1, 1997. In addition, its subsidiaries lease facilities
for office space and manufacturing in the United States in San Diego,
California; Clearwater, Sarasota, and West Palm Beach, Florida; Addison and Lake
Bluff, Illinois; Manhattan, Kansas; Medway, Massachusetts; and Grand Rapids,
Michigan; and outside the United States in Holstebro, Denmark; Ludlow, England;
Vanda, Finland; Neuss-Grimlinghausen, Germany; and Frolunda, Kungsbacka,
Mariestad, Nynashamn and Vastra, Sweden; and own facilities for office space and
manufacturing in Fall River, Massachusetts; Winnipeg, Manitoba, Canada; and
Fjaras, Sweden. The expiration dates for these leases range from March 31, 1998
to March 31, 2011.

The Company believes that each of its facilities is in good condition and
will continue to remain suitable for its current purpose. The Company may add
improvements to the properties listed above. The Company anticipates using its
properties for purposes consistent with their present use. In the event any of
the facilities becomes unavailable upon termination of the existing lease, the
Company believes it would be able to find a suitable alternative facility
without resulting in any significant adverse impact to the Company or its
operations. In the opinion of management of the Company, the properties
described above are adequately covered by insurance.

LEGAL PROCEEDINGS

The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for personal injury
or property damage incurred in connection with its operations. The Company is
not a party to any material litigation. Management believes none of the
litigation will have a material adverse effect on the Company's financial
position or results of operations.

29
<PAGE> 30

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The Company's current directors and executive officers are as follows (ages
are as of January 31, 1998):

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- --- -------------------------------------
<S> <C> <C>
Theodore F. Savastano.......................... 60 Director, Chairman of the Board
Chet S. Ross................................... 58 Director, President and Chief
Executive Officer
Robert P. Pinkas............................... 44 Director
Michael J. Vantusko............................ 41 Chief Financial Officer
L. Dean Hertert, Jr............................ 51 Vice President
Dr. Hans F. Larsson............................ 54 Vice President
Dr. Paul M. Sutton............................. 49 Director
Rollin S. Reiter............................... 69 Director
John R. Miller................................. 60 Director
</TABLE>

Theodore F. Savastano is the founder of the Company and has been Chairman
of the Board since its inception in December 1994. He served as Chief Executive
Officer of Hunter Environmental Services, Inc., a multi-disciplined
environmental company from August 1985 to January 1988 and as Chief Executive
Officer and founder of Summit Environmental Group, Inc., a full-service
environmental consulting engineering company from August 1988 to May 1994.

Chet S. Ross joined the Company in June 1995 as President and Chief
Executive Officer and was elected to the Board on August 1, 1995. Mr. Ross has
over 30 years of experience in the water industry. Mr. Ross and others acquired
the operations of Wallace and Tiernan Group, Inc., a water and wastewater
disinfection and chemical treatment company in May 1989, and he served as
Chairman, President and Chief Executive Officer of Wallace and Tiernan until it
was sold in 1991 to North West Water Group, PLC, a privatized water utility
company in the United Kingdom. He then was President and Chief Executive Officer
of North West Water's North American operations from 1991 to 1994 and was a
private consultant to North West Water from 1994 to 1995.

Robert P. Pinkas, a Director since the inception of the Company, is
Chairman of the Board, Chief Executive Officer, Treasurer and a director of
Brantley Capital Corporation, a business development corporation, and Chairman
of the Board, Chief Executive Officer, Treasurer and a manager of Brantley
Capital Management, L.L.C., an investment adviser. Mr. Pinkas also serves as
managing general partner of Brantley Venture Partners, a venture capital firm
that makes investments through its various partnership funds. Mr. Pinkas founded
and has been affiliated with the Brantley entities for more than the past five
years. Additionally, Mr. Pinkas is a director of Quad Systems Corporation,
Gliatech, Inc., Pediatric Services of America, Inc. and Medirisk, Inc.

Michael J. Vantusko, a certified public accountant, joined the Company on
January 1, 1997 as Chief Financial Officer. From October 1995 to December 1996,
he served as Chief Financial Officer of Waxman Industries, Inc., a packager and
distributor of plumbing, electrical and hardware products. From February 1994 to
September 1995, Mr. Vantusko served as President, Chief Operating Officer, and
Chief Financial Officer of Overdrive Systems, Inc., an emerging software
developer of electronic books. From 1979 to 1994, he was employed by The
Fairchild Corporation (formerly Banner Industries, Inc.) where he held several
positions, including Chief Financial Officer of Fairchild's largest wholly-owned
operating division from 1990 to 1994 and Vice President of Fairchild from 1986
to 1990.

L. Dean Hertert, Jr. joined the Company as a Vice President in August 1996
and currently directs most of the Company's operations in the United States,
Canada and Latin America. Mr. Hertert joined the Company from Capital Controls,
Inc. where he was Vice President and General Manager from December 1988 to July
1996. Capital Controls Co., Inc. is a manufacturer of equipment and instruments
for municipal water, industrial process water and wastewater treatment. Mr.
Hertert has 20 years of business and multinational experience in the areas of
marketing, sales and general management.

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<PAGE> 31

Dr. Hans F. Larsson joined the Company as a Vice President upon completion
of the acquisition in March 1997 of the Nordic Group. Dr. Larsson directs the
Company's operations in Europe and serves as the Managing Director of Nordic
Water Products AB, a wholly-owned subsidiary of the Company. Dr. Larsson has
served as the Managing Director of the Nordic Group since 1987.

Dr. Paul M. Sutton was elected to the Board on January 2, 1997. Since 1987,
Dr. Sutton has served as President of P.M. Sutton & Associates, Inc., an
environmental process engineering company providing services to private industry
and government organizations.

Rollin S. Reiter was elected to the Board on March 13, 1997. Mr. Reiter was
Vice President of Sales and Marketing, Dairy, for Dean Foods Co., a grocery and
food service company in Franklin Park, Illinois from 1990 through 1993, when he
retired. Prior to that, Mr. Reiter was President of the Reiter Dairy Company in
Akron, Ohio from 1968 through 1990.

John R. Miller was elected to the Board on March 13, 1997. Since 1988, Mr.
Miller has been President and Chief Executive Officer of TBN Holdings Inc., a
resource recovery and recycling company. Mr. Miller has previously served as a
director and Chairman of the Board of the Federal Reserve Bank of Cleveland and
as President, Chief Operating Officer and a director of The Standard Oil
Company. Mr. Miller serves on the Board of Directors of Eaton Corporation, a
global manufacturer of highly engineered products which serve industrial,
vehicle, construction, commercial and aerospace markets.

DIRECTORS

Pursuant to the Company Certificate and the Company By-laws, the Board of
the Company is divided into three classes with each director serving a
three-year term (after the initial term). Pursuant to the Company's Certificate
and Company By-laws, the directors of Class I (Messrs. Savastano and Miller)
hold office until the first scheduled annual meeting of stockholders following
the IPO, the directors of Class II (Messrs. Ross and Reiter) hold office until
the second scheduled annual meeting of stockholders following the IPO and the
directors of Class III (Messrs. Pinkas and Sutton) hold office until the third
scheduled annual meeting of stockholders following the IPO. Stockholders then
elect the directors of each Class for three-year terms at the appropriate
succeeding annual meetings of stockholders. At the first scheduled annual
meeting of the Company's stockholders following the IPO, held on January 15,
1998, Messrs. Savastano and Miller were elected to serve as directors of Class I
for three-year terms, until the Company's annual meeting of stockholders to be
held in 2001.

The Board has established an Audit Committee consisting of Messrs. Sutton,
Reiter and Miller, a Compensation Committee consisting of Messrs. Pinkas,
Sutton, Reiter and Miller and a Nominating Committee consisting of Messrs.
Pinkas, Sutton and Miller.

DIRECTOR REMUNERATION

Directors who are employees of the Company receive no compensation, as
such, for service as members of the Board or any committees of the Board.

Directors who are not employees of the Company receive an annual retainer
of $10,000, payable in equal quarterly installments. In addition, non-employee
directors receive compensation of $750 for each meeting of the Board (in excess
of the four regularly scheduled meetings) or any committee of the Board attended
by them (other than with respect to any meetings of any committee on a day on
which the Board also meets), and compensation of $250 for each additional
telephonic meeting of the Board or any committee of the Board. All directors
will be reimbursed for out of pocket expenses incurred in attending meetings of
the Board or committees and for other expenses incurred in their capacity as
directors.

In addition, directors who are not employees of the Company receive for
each year of service on the Board, options under the Company's 1997 Non-Employee
Director Stock Option Plan (the "Director Plan"). The per share exercise price
of options granted under the Director Plan is the fair market value of the
Common Stock on the date of grant. The exercise price of options granted under
the Director Plan is payable in cash or in shares of Common Stock valued at fair
market value at the time of exercise, or a combination of cash and shares;
however, the Company may establish "cashless exercise" procedures, subject to
applicable laws, rules and regulations,

31
<PAGE> 32

pursuant to which a director may exercise an option and arrange for a
simultaneous sale of the underlying Common Stock, with the exercise price being
paid from the proceeds of such sale. Options granted under the Director Plan
will expire ten years after the date of grant, subject to earlier termination,
and may be exercised as follows: 25% after one year from the date of grant, 50%
after two years from the date of grant, 75% after three years from the date of
grant and 100% after four years from the date of grant.

Each non-employee director was granted an option to purchase 3,000 shares
of Common Stock concurrently with the IPO. In addition, on May 23 of each year,
the anniversary of the date the Director Plan became effective, each of the
Company's then non-employee directors who have served as directors for at least
six months shall automatically be granted an option to purchase 5,000 shares of
Common Stock.

The Director Plan is administered by the Compensation Committee. The
principal terms of the option grants are set forth in the Director Plan.
Therefore, the Compensation Committee has no discretion to select which
directors receive options, the number of shares of Common Stock subject to
options or the exercise price of options.

EXECUTIVE COMPENSATION

The following table sets forth, for each of the years indicated, the
compensation paid by the Company to the Company's Chief Executive Officer and
all other executive officers of the Company as of September 30, 1997 who
received annual compensation from or on behalf of the Company in excess of
$100,000 (together, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------- ------------------------------
OTHER ANNUAL RESTRICTED STOCK SECURITIES
NAME AND PRINCIPAL COMPENSATION AWARDS UNDERLYING ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) ($) (1) ($) OPTIONS (#) COMPENSATION ($)
- ---------------------- ----- ---------- --------- ------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Theodore F.
Savastano........... 1997 $234,013 $125,000 $1,055,277(2) -- 100,000 $1,658,750(3)
Chairman of the 1996 $225,800 -- $ 4,977 -- 100,000 --
Board of Directors 1995 $126,989 -- -- -- -- --
Chet S. Ross.......... 1997 $234,013 $125,000 $ 768 -- 300,000 $ 620(4)
Chief Executive 1996 $225,800 -- $ 262 -- 220,000 --
Officer and
President 1995 $ 95,267(5) -- -- -- 180,000 --
Michael J. Vantusko... 1997 $123,500(6) $ 50,000 -- -- 225,000 $ 390(4)
Chief Financial 1996 -- -- -- -- -- --
Officer 1995 -- -- -- -- -- --
L. Dean Hertert,
Jr.................. 1997 $137,675 $ 25,000 $ 288 -- 90,000 $ 365(4)
Vice President 1996 $ 21,833(7) -- -- -- 25,000 --
1995 -- -- -- -- -- --
Dr. Hans F. Larsson... 1997 $ 64,489(8) -- -- -- 20,000 --
Vice President 1996 -- -- -- -- -- --
1995 -- -- -- -- -- --
</TABLE>

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

(1) Certain incidental personal benefits to executive officers of the Company
may result from expenses incurred by the Company in the interest of
attracting and retaining qualified personnel. These incidental personal
benefits made available to the Named Executive Officers during 1997 are not
described herein because the incremental cost to the Company of such
benefits is below the SEC disclosure threshold.

(2) Includes $1,050,000 of gross-up payment for tax liabilities incurred by Mr.
Savastano upon exercise of the non-qualified stock options described in
footnote 3, below, which was paid to Mr. Savastano pursuant to his 1994
employment agreement with the Company.

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<PAGE> 33

(3) Compensation related to the exercise of 100,000 non-qualified stock options
received by Mr. Savastano pursuant to the terms of his 1994 employment
agreement with the Company, which were exercisable upon consummation of the
IPO. Compensatory amount was determined by multiplying the number of
options exercised by the difference between the market value at the date of
exercise ($16.6875) and the exercise price of $.10 per share.

(4) Represents the Company's "match" payment relating to the Company's 401(k)
Plan.

(5) Represents salary from June 1, 1995 (date of employment with the Company).

(6) Represents salary from January 1, 1997 (date of employment with the
Company).

(7) Represents salary from August 1, 1996 (date of employment with the
Company).

(8) Represents salary from March 5, 1997 (date of acquisition of the Nordic
Group).

STOCK OPTION GRANTS

The following table sets forth information regarding options to purchase
Common Stock granted to the Named Executive Officers during fiscal 1997.

OPTION(1)/SAR(2) GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
NUMBER OF TOTAL VALUE AT
SECURITIES OPTIONS EXERCISE ASSUMED ANNUAL
UNDERLYING GRANTED TO OR RATES OF STOCKS
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRICE APPRECIATION
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE FOR OPTION TERM (3)
- ------------------------------ ---------- ------------ ---------- ---------- -----------------------
5%($) 10%($)
---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Theodore F. Savastano......... 100,000 9.8% $ 0.10 6/24/07 $1,781,784 $2,843,117
Chet S. Ross.................. 300,000 29.3% $11.00 5/23/07 $2,075,352 $5,259,350
Michael J. Vantusko........... 75,000 7.3% $ 4.25 1/2/07 $ 200,460 $ 508,005
50,000 4.9% $ 4.25 6/24/97 $ 133,640 $ 338,670
100,000 9.8% $11.00 5/23/07 $ 691,784 $1,753,117
L. Dean Hertert, Jr........... 15,000 1.5% $ 4.25 12/16/06 $ 40,092 $ 101,601
25,000 2.4% $ 4.25 6/24/97 $ 66,820 $ 169,335
50,000 4.9% $11.00 5/23/07 $ 345,892 $ 876,558
Dr. Hans F. Larsson........... 20,000 2.0% $11.00 6/24/07 $ 138,357 $ 350,623
</TABLE>

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

(1) The per share exercise price of options granted under the Company's stock
option plans is the fair market value of the Common Stock on the date of
grant, with the exception of the 100,000 non-qualified stock options
granted to Mr. Savastano described in footnote 3 of the Summary
Compensation Table, above, which had an exercise price of $.10.

(2) There have been no stock appreciation rights ("SARs") granted by the
Company to date.

(3) The potential realizable values represent future opportunity and have not
been reduced to present value in 1997 dollars. The dollar amounts included
in these columns are the result of calculations at assumed rates set by the
Commission for illustration purposes. These rates are not intended to be a
forecast of the Common Stock price and are not necessarily indicative of
the values that may be realized by the Named Executive Officers. The
potential realizable values are based on arbitrarily assumed annualized
rates of stock price appreciation of 5% and 10% over the full ten-year term
of the options.

33
<PAGE> 34

STOCK OPTION AND SAR EXERCISES

The following table sets forth certain information concerning exercises of
stock options during 1997 by each of the Named Executive Officers and their
stock options outstanding as of September 30, 1997.

AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES(1)

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR-END (#) YEAR-END ($)(2)
SHARES ----------------- -----------------
ACQUIRED ON VALUE EXERCISABLE (E)/ EXERCISABLE (E)/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE (U) UNEXERCISABLE (U)
- --------------------------------- ------------ ------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Theodore F. Savastano............ 100,000 $ 1,658,750 100,000(E) $ 1,435,000(E)
-- (U) -- (U)
Chet S. Ross..................... 135,000 $ 1,758,375 220,000(E) $ 3,245,000(E)
300,000(U) $ 2,325,000(U)
Michael J. Vantusko.............. 50,000 -- 75,000(E) $ 1,087,500(E)
100,000(U) $ 775,000(U)
L. Dean Hertert, Jr.............. 25,000 -- 40,000(E) $ 586,250(E)
50,000(U) $ 387,500(U)
Dr. Hans F. Larsson.............. -- -- -- (E) -- (E)
20,000(U) $ 155,000(U)
</TABLE>

(1) There have been no SARs granted by the Company to date.

(2) Values are calculated for options "in-the-money" by subtracting the
exercise price paid per share of the options from the per share New York
Stock Exchange consolidated closing price of $18.75 of the Common Stock on
September 30, 1997.

EMPLOYMENT AGREEMENTS

The terms of the employment arrangements between the Company and the Named
Executive Officers are described below.

Mr. Savastano's employment agreement with the Company, which became
effective as of May 23, 1997, provides for him to serve as Chairman of the Board
of the Company for an initial term of three years, subject to automatic one year
extensions upon each anniversary of the date of the employment agreement until
mandatory retirement at age 65. The employment agreement provides for an initial
annual base salary of $240,000. Mr. Savastano will be entitled to participate in
an annual incentive bonus plan (the "Bonus Plan") that the Company has agreed,
pursuant to Mr. Savastano's employment agreement, to establish. The Bonus Plan
will entitle Mr. Savastano to earn, in each year during the term of the
employment agreement, commencing with fiscal 1998, an amount ranging from 0% to
150% of his base salary, subject to achievement of certain performance goals to
be established by the Board. In the event that Mr. Savastano's employment is
terminated without cause (as defined in the employment agreement) or in the
event he terminates his employment for good reason (as defined in the employment
agreement), he will be entitled to receive (in a lump sum if such termination
occurs within one year after a change of control (as defined in the employment
agreement) of the Company) an amount equal to the present value of the product
of (i) the sum of (x) the base salary in effect on the date of termination and
(y) the annual bonus compensation paid to Mr. Savastano with respect to the
fiscal year in which Mr. Savastano's employment is terminated provided that such
bonus is calculable as of such date, and if not so calculable, then the bonus,
if any, paid to Mr. Savastano with respect to the fiscal year immediately
preceding the year in which his employment is terminated (which for fiscal 1997
was deemed to be $240,000) and (ii) two; provided, however, that if any portion
of such compensation would constitute an "excess parachute payment" under
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), the
Company will pay to Mr. Savastano an additional amount to offset any taxes
payable with respect to the excess parachute payment and

34
<PAGE> 35

the additional payment. The employment agreement also contains provisions which
restrict Mr. Savastano from competing with the Company during the term of the
agreement and for 24 months following termination thereof. In addition, on
June 24, 1997 Mr. Savastano received options exercisable to purchase 100,000
shares of Common Stock at an exercise price of $.10 per share pursuant to his
1994 employment agreement. Such options became exercisable upon the consummation
of the IPO on June 27, 1997, and were exercised on September 2, 1997. The
Company is required to hold Mr. Savastano harmless from, and shall pay to Mr.
Savastano, any taxes payable by Mr. Savastano as a result of the grant of the
options. The amount of such taxes is approximately $1,117,000, of which
$1,050,000 was paid during fiscal 1997.

Mr. Ross's employment agreement with the Company, which became effective as
of May 23, 1997, provides for Mr. Ross to serve as President and Chief Executive
Officer of the Company for an initial term of three years, subject to automatic
one year extensions upon each anniversary of the date of the employment
agreement until mandatory retirement at age 65. The employment agreement
provides for an initial annual base salary of $240,000. Pursuant to his
employment agreement, Mr. Ross will be entitled to participate in the Bonus
Plan, which will entitle him to earn, in each year during the term of his
employment agreement, commencing with fiscal 1998, an amount ranging from 0% to
150% of his base salary, subject to achievement of certain performance goals to
be established by the Board. In the event that Mr. Ross' employment is
terminated without cause (as defined in the employment agreement) or in the
event he terminates his employment for good reason (as defined in the employment
agreement), Mr. Ross will be entitled to receive (in a lump sum if such
termination occurs within one year after a change of control (as defined in the
employment agreement) of the Company) an amount equal to the present value of
the product of (i) the sum of (x) the base salary in effect on the date of
termination and (y) the annual bonus compensation paid to Mr. Ross with respect
to the fiscal year in which his employment is terminated, provided that such
bonus is calculable as of such date, and if not so calculable, then the bonus,
if any, paid to him with respect to the fiscal year immediately preceding the
year in which his employment is terminated (which for fiscal 1997 was deemed to
be $240,000) and (ii) two; provided, however, that if any portion of such
compensation would constitute an "excess parachute payment" under Section 280G
of the Code, the Company will pay to Mr. Ross an additional amount to offset any
taxes payable with respect to the excess parachute payment and the additional
payment. The employment agreement also contains provisions which restrict Mr.
Ross from competing with the Company during the term of the agreement and for 24
months following termination thereof. Additionally, pursuant to his employment
agreement, under the terms of the 1995 Stock Option Plan of the Company, Mr.
Ross was granted a non-qualified option to purchase 300,000 shares of Common
Stock at $11 per share, the initial offering price of the Common Stock sold in
the IPO. The ability to exercise this option vests in four equal annual
installments, commencing upon the first anniversary of the date of grant subject
to acceleration in certain circumstances.

Mr. Vantusko's employment agreement with the Company, which became
effective as of May 23, 1997, provides for Mr. Vantusko to serve as Chief
Financial Officer of the Company for an initial term of three years, subject to
automatic one year extensions upon each annual anniversary of the date of the
employment agreement, unless either party notifies the other of his or its
intent not to extend the agreement not less than one year prior to the then
scheduled expiration date. The employment agreement provides for an initial
annual base salary of $150,000. Mr. Vantusko will be entitled to participate in
the Bonus Plan, which will entitle him to earn, in each year during the term of
his employment agreement, commencing with fiscal 1998, an amount ranging from 0%
to 150% of his base salary, subject to achievement of certain performance goals
to be established by the Board. In the event that Mr. Vantusko's employment is
terminated without cause (as defined in the employment agreement) or in the
event he terminates his employment for good reason (as defined in the employment
agreement), Mr. Vantusko will be entitled to receive (in a lump sum if such
termination occurs within one year after a change of control (as defined in the
employment agreement) of the Company) an amount equal to the present value of
the sum of (x) the base salary in effect on the date of termination and (y) the
annual bonus compensation paid to Mr. Vantusko with respect to the fiscal year
in which his employment is terminated, provided that such bonus is calculable as
of such date, and if not so calculable, then the bonus, if any, paid to him with
respect to the fiscal year immediately preceding the year in which his
employment is terminated (which for fiscal 1997 was deemed to be $150,000). The
employment agreement also contains provisions which restrict Mr. Vantusko from
competing with the Company during the term of the agreement and for 12 months
following termination thereof. Additionally, pursuant to his employment
agreement, under the terms of the 1995 Stock Option Plan of the

35
<PAGE> 36

Company, Mr. Vantusko was granted a non-qualified option to purchase 100,000
shares of Common Stock at $11 per share, the initial offering price of the
Common Stock sold in the IPO. The ability to exercise this option vests in four
equal annual installments, commencing upon the first anniversary of the date of
grant, subject to acceleration in certain circumstances.

Mr. Hertert's employment agreement with the Company, which became effective
as of May 23, 1997, provides for Mr. Hertert to serve as the Vice President of
Operations of the Company for an initial term of three years, subject to
automatic one year extensions upon each annual anniversary of the date of the
employment agreement, unless either party notifies the other of his or its
intent not to extend the agreement at least one year prior to the then scheduled
expiration date. The employment agreement provides for an initial annual base
salary of $140,000. Mr. Hertert will be entitled to participate in the Bonus
Plan, which will entitle him to earn, in each year during the term of his
employment agreement, commencing with fiscal 1998, an amount ranging from 0% to
150% of his base salary, subject to achievement of certain performance goals to
be established by the Board. In the event that Mr. Hertert's employment is
terminated without cause (as defined in the employment agreement) or in the
event he terminates his employment for good reason (as defined in the employment
agreement), Mr. Hertert will be entitled to receive (in a lump sum if such
termination occurs within one year after a change of control (as defined in the
employment agreement) of the Company) an amount equal to the present value of
the product of (i) the sum of (x) the base salary in effect on the date of
termination and (y) the annual bonus compensation paid to Mr. Hertert with
respect to the fiscal year in which his employment is terminated, provided that
such bonus is calculable as of such date, and if not so calculable, then the
bonus, if any, paid to him with respect to the fiscal year immediately preceding
the year in which his employment is terminated (which for fiscal 1997 was deemed
to be $140,000) and (ii) one and one-half. The employment agreement also
contains provisions which restrict Mr. Hertert from competing with the Company
during the term of the agreement and for 12 months following termination
thereof. Additionally, pursuant to his employment agreement, under the terms of
the 1995 Stock Option Plan of the Company, Mr. Hertert was granted a
non-qualified option to purchase 50,000 shares of Common Stock at $11 per share,
the initial offering price of the Common Stock sold in the IPO. The ability to
exercise this option vests in four equal annual installments, commencing upon
the first anniversary of the date of grant, subject to acceleration in certain
circumstances.

Dr. Larsson's employment agreement with Nordic Water Products AB ("Nordic
AB"), which became effective as of July 1, 1987, provides for Dr. Larsson to
serve as Managing Director of Nordic AB, for an indefinite term. If Nordic AB
terminates the employment agreement within 12 months after Nordic AB changes
ownership, Nordic AB must provide Dr. Larsson at least 18 months notice of its
intent to terminate the agreement. The employment agreement provided for an
initial annual base salary of 336,000 Swedish krona (approximately $43,693). Dr.
Larsson's current base salary is $110,000. The employment agreement contains
provisions which restrict Dr. Larsson from competing with Nordic AB, without
Nordic AB's consent, during the term of the agreement.

BENEFIT PLANS

The Company's Omnibus Incentive Plan

General Information. The Company's Omnibus Incentive Plan (the "Omnibus
Plan") provides for compensatory equity based awards (each an "Award"). There
are reserved for issuance pursuant to, or by reason of, stock awards and
stock-based awards an aggregate number of shares of Common Stock equal to the
lesser of (x) the greater of (i) 1,750,000 shares or (ii) 12.5% of the number of
shares of Common Stock outstanding, from time to time, (calculated on a fully
diluted basis (including the maximum number of shares that may be issued, or
subject to awards, under the Omnibus Plan and the Stock Option Plan (as defined
below) (collectively, the "Employee Stock Plans"))); in either case (i) or (ii)
above less the number of shares that are issued under the Employee Stock Plans
after the effective date of the Omnibus Plan or are subject to outstanding
awards under the Employee Stock Plans plus the number of any shares surrendered
to the Company in payment of the exercise price of options issued under either
of the Employee Stock Plans or (y) 5,000,000 shares of Common Stock. The
foregoing amount is referred to herein as the "Employee Stock Plan Share
Amount." Awards may be granted for no consideration and consist of stock
options, stock awards, SARs, dividend equivalents, other stock based awards
(such as phantom stock) and performance awards consisting of any combination of
the foregoing. The

36
<PAGE> 37

Omnibus Plan is designed to provide an incentive to the officers and certain
other key employees of the Company by making available to them an opportunity to
acquire a proprietary interest or to increase their proprietary interest in the
Company. Any Award issued under the Omnibus Plan which is forfeited, expires or
terminates prior to vesting or exercise will again be available for Award under
the Omnibus Plan. No participant may receive stock or stock-based awards to
acquire more than 500,000 shares in any one year.

The Compensation Committee administers the Omnibus Plan and has the full
power and authority, subject to the provisions of the Omnibus Plan, to designate
participants, grant Awards and determine the terms of all Awards. Members of the
Compensation Committee are not eligible to receive Awards under the Omnibus
Plan.

The Omnibus Plan was approved by the Company's Board and shareholders in
May 1997, and again by the shareholders in January 1998 and will terminate on
the tenth anniversary of the date approved by the Board.

Stock Awards. The Compensation Committee has the right to grant Awards of
shares of Common Stock which are subject to such restrictions (including
restrictions on transferability and limitations on the right to vote or receive
dividends with respect to the restricted shares) and such terms regarding the
lapse of restrictions as the Compensation Committee deems appropriate.
Generally, upon termination of employment for any reason during the restriction
period, restricted shares will be forfeited to the Company.

SARs. An Award may consist of SARs. Upon exercising an SAR, the holder will
be paid by the Company the difference between the fair market value of the
Common Stock on the date of exercise and the fair market value of the Common
Stock on the date of the grant of the SAR, less applicable withholding of
Federal and state taxes. The Company may, at its election, pay such difference
in cash or in shares of Common Stock valued at the fair market value of the
Common Stock on the day preceding the date of payment. In no event may (i) an
aggregate payment by the Company during any fiscal year upon the exercise of
SARs exceed $100,000, or (ii) a holder of an SAR, who is also an employee of the
Company or its subsidiaries, exercise an SAR if the aggregate amount to be
received as a result of his or her exercise of SARs in the preceding 12 month
period exceeds such employee's current base salary, in each case except as may
otherwise be permitted by the Compensation Committee.

Options Issued Under the Omnibus Plan. The terms of specific options are
determined by the Compensation Committee. Generally, options will be granted at
an exercise price equal to at least 100% of fair market value of the Common
Stock on the date of grant. Each option will be exercisable after the period or
periods specified in the option agreement, which will generally not exceed 10
years from the date of grant. Options may be issued in tandem with SARs ("Tandem
Options") as a performance award. Upon the exercise of an option, the option
holder will pay to the Company the exercise price plus the amount of the
required Federal and state withholding taxes, if any.

Performance Awards Consisting of Options and SARs Issued in Tandem Under
the Omnibus Plan. Upon exercise of a Tandem Option, the optionee will be
entitled to a credit toward the exercise price equal to the value of the SARs
issued in tandem with the option exercised, but not to exceed the amount of the
Federal income tax deduction allowed to the Company in respect of such SAR and
not in an amount which would reduce the amount of payment by the optionee below
the par value of the shares being purchased. Upon exercise of a Tandem Option,
the related SAR will terminate, the value being limited to the credit which can
be applied only toward the purchase price of Common Stock. In all cases, full
payment of the net purchase price of the shares must be made in cash or its
equivalent at the time the Tandem Option is exercised, together with the amount
of the required Federal and State withholding taxes, if any. When a SAR issued
as part of a Tandem Option is exercised, the option to which it relates will
cease to be exercisable to the extent of the number of shares with respect to
which the SAR was exercised.

Other Performance Awards Issued Under the Omnibus Plan. The Omnibus Plan
authorizes the Compensation Committee to grant, to the extent permitted under
Rule 16b-3 promulgated by the SEC under the Exchange Act, and applicable law,
other Awards that are denominated or payable in, valued by reference to, or
otherwise based on or related to shares of Common Stock. Furthermore, the amount
or terms of an Award may be related to the performance of the Company or to such
other criteria or measure of performance as the Compensation Committee may
determine.

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<PAGE> 38

The Company's 1995 Stock Option Plan

The Company's 1995 Stock Option Plan (the "Stock Option Plan") is intended
to encourage ownership of Common Stock by officers and other key employees and
advisors of the Company, to encourage their continued employment with the
Company and to provide them with additional incentives to promote the success of
the Company.

The Stock Option Plan authorizes the grant to officers, key employees, and
directors of awards ("Awards") consisting of "incentive stock options," as that
term is defined under the provisions of Section 422 of the Code, and
non-qualified stock options. There were 1,600,000 shares of Common Stock
available for granting Awards under the Stock Option Plan. The Compensation
Committee of the Board (the "Committee") administers the Stock Option Plan and
has sole discretion to determine those employees to whom Awards will be granted,
the number of Awards granted, the provisions applicable to each Award and the
time periods during which Awards may be exercisable.

The Committee may grant incentive stock options, non-qualified stock
options, or a combination of the two. The exercise price of each incentive stock
option may not be less than the fair market value of the Common Stock at the
date of grant. Under the Stock Option Plan, fair market value is generally
determined in accordance with procedures established by the Committee. The
option price per share of any non-qualified stock option is determined by the
Committee on the date the option is granted. The exercise price of each
incentive stock option granted to any stockholder possessing more than 10% of
the combined voting power of all classes of capital stock of the Company, or, if
applicable, a parent or subsidiary of the Company, on the date of grant must not
be less than 110% of the fair market value on that date, and no such option may
be exercisable more than five years after the date of grant.

Options granted are exercisable for a term of not more than ten years from
the date of grant. In addition, no employee may be granted an incentive stock
option to the extent the aggregate fair market value, as of the date of grant,
of the stock with respect to which incentive stock options are first exercisable
by such employee during any calendar year exceeds $100,000.

Awards granted under the Stock Option Plan are subject to adjustment upon a
recapitalization, stock split, stock dividend, merger, reorganization,
liquidation, extraordinary dividend, or other similar event affecting the Common
Stock. An Award is not transferable, other than by will or the laws of descent
and distribution or, in certain circumstances, pursuant to a qualified domestic
relations order, and an Award may be exercised, during the lifetime of the
holder of the Award, only by the holder, or the holder's personal representative
in the event of disability.

The Stock Option Plan terminates on February 1, 2005, and Awards will not
be granted under the Stock Option Plan after that date, although the terms of
any Award may be amended in accordance with the Stock Option Plan at any date
prior to the end of the term of such Award. Any Awards outstanding at the time
of termination of the Stock Option Plan continue in full force and effect
according to the terms and conditions of the Award and the Stock Option Plan.

The Stock Option Plan may be amended by the Committee, subject to approval
of the Board, but no amendment may impair any rights of any holder of an Award
previously granted under the Stock Option Plan without the holder's consent. As
of December 31, 1997, options for 1,289,800 shares were outstanding, options for
235,500 shares had been granted and exercised, and options for 74,700 shares
were unissued.

The Company's Employee Stock Purchase Plan

The Company's Employee Stock Purchase Plan (the "Stock Purchase Plan") was
approved by the Company's Board and shareholders in May 1997. There are reserved
for issuance upon the exercise of Options to be granted under the Stock Purchase
Plan an aggregate of 500,000 shares of Common Stock, subject to adjustment upon
the occurrence of certain specific capitalization events.

The Stock Purchase Plan is intended to encourage ownership of Common Stock
by eligible employees of the Company, to encourage their continued employment
with the Company and to provide them with additional

38
<PAGE> 39

incentives to promote the success of the Company. Except as discussed below,
eligible employees are employees who have been employed by the Company or any of
its subsidiaries for at least six months and who customarily work more than 20
hours per week and five months per calendar year.

The Stock Purchase Plan authorizes the Compensation Committee to grant
options to purchase shares of Common Stock to eligible employees pursuant to one
or more offerings to be made under the Stock Purchase Plan. The Compensation
Committee administers the Stock Purchase Plan and has sole discretion to
determine when offerings will be made under the Stock Purchase Plan, the number
of shares of Common Stock to be made available in any such offering, the length
of the period pursuant to which employees can elect to participate in any
offering (the "Subscription Period") and the period pursuant to which
installment obligations of the option price must be paid (the "Purchase
Period"). The Subscription Period and Purchase Period of any offering made under
the Stock Purchase Plan may not together exceed 27 months.

The Compensation Committee may exclude the employees of any specific
subsidiary from any offering made under the Stock Purchase Plan and may
determine not to include certain highly compensated employees. In addition, no
option may be granted to an employee who, immediately after the option is
granted, owns 5% or more of the value or voting power of all classes of stock of
the Company or its parent, if any, or subsidiary corporations, after taking into
account certain attribution rules. Subject to these provisions, all eligible
employees must be given the right to participate in any offering made under the
Stock Purchase Plan.

Prior to any offering made under the Stock Purchase Plan, the Company will
grant to each employee eligible to participate in the offering the right to
subscribe for an option to purchase on the last business day of the Purchase
Period applicable to such offering at a price determined by the Compensation
Committee, the number of full shares of Common Stock which such employee's
accumulated payroll deductions will purchase as of the last business day of the
Purchase Period. Unless the Compensation Committee determines otherwise, the
option price will equal 85% of the fair market value of the Common Stock on the
first day of the Purchase Period. Employees may elect to subscribe for options
to purchase shares of Common Stock for an aggregate purchase price up to a
specified percentage of their annual compensation as determined by the
Compensation Committee for a particular offering.

On the first day of the Purchase Period, eligible employees who elect to
participate in an offering will receive, subject to certain limitations set
forth in the Stock Purchase Plan, an option to purchase the number of shares for
which such employee has subscribed. These options will be automatically
exercised as of the last business day of the Purchase Period.

Subject to certain limitations set forth in the Stock Purchase Plan, an
employee is permitted, at any time prior to the end of the Purchase Period
applicable to such offering, to terminate or reduce his or her payroll
deductions, to reduce his or her options to purchase or to withdraw all or part
of the amount in his or her account, without interest. Upon the termination of
the employee's employment with the Company prior to the last day of the Purchase
Period for any reason other than death or retirement, the employee's only right
will be to receive the amount of cash then in such employee's account, without
interest.

Options granted under the Stock Purchase Plan will be subject to adjustment
upon a recapitalization, stock split, stock dividend, merger, reorganization,
liquidation, extraordinary dividend or other similar event affecting the Common
Stock. Options will not be transferable, other than by will or the laws of
descent and the distribution, or if permitted pursuant to the Code, and the
Regulations thereunder without affecting the option's qualification under
Section 423 of the Code, pursuant to a qualified domestic relations order, and
an option may be exercised, during the lifetime of the holder of the option,
only by such option holder, or his or her personal representative in the event
of disability.

In the case of an unusual corporate event such as liquidation, merger,
reorganization (other than a reorganization as defined by Section 368(a)(1)(F)
of the Code), or other business combination, acquisition or change in control of
the Company through a tender offer or otherwise, the Board may, in its sole
discretion, determine to terminate the Purchase Period of any offering made
under the Stock Purchase Plan as of the last day of the month during which such
unusual corporate event occurs, but in the event of any such termination, an
option holder will have the right, commencing at least five days prior to the
unusual corporate event, to either

39
<PAGE> 40

make a lump sum payment equal to the remaining portion of the purchase price
payable under his or her option or to cancel his or her election to purchase
shares pursuant to such option.

The Stock Purchase Plan will terminate ten years from the date of adoption,
and an option shall not be granted under the plan after such date. Any options
outstanding at the time of termination of the Stock Purchase Plan will continue
in full force and effect according to the terms and conditions of the Stock
Purchase Plan. As of December 31, 1997, 42,384 shares of Common Stock were
purchased pursuant to the Stock Purchase Plan. The shareholders approved the
Stock Purchase Plan in January 1998.

1997 Non-Employee Director Stock Option Plan

The Company's 1997 Non-Employee Director Stock Option Plan (the "Director
Plan") was approved by the Company's Board and shareholders in May 1997. An
aggregate of 150,000 shares of Common Stock have been reserved for issuance
under the Director Plan, subject to adjustment upon the occurrence of certain
specified capitalization events.

The Director Plan is intended to encourage non-employee directors of the
Company to acquire or increase their ownership of Common Stock on reasonable
terms and to foster a strong incentive for non-employee directors to put forth
maximum effort for the continued success and growth of the Company. The Director
Plan became effective as of June 27, 1997 and will terminate ten years from that
date.

Each non-employee director who becomes a member of the Board shall
automatically be granted an option to purchase 3,000 shares of Common Stock. In
addition, on each anniversary of the date the Director Plan became effective,
each of the Company's then non-employee directors who has served as a director
for at least six (6) months shall automatically be granted an option to purchase
5,000 shares of Common Stock. The per share exercise price of options granted
under the Director Plan will be the fair market value of the Common Stock on the
date of grant. The exercise price of options granted under the Director Plan is
payable in cash or in shares of Common Stock valued at fair market value at the
time of exercise, or a combination of cash and shares; however, the Company may
establish "cashless exercise" procedures, subject to applicable laws, rules and
regulations, pursuant to which a director may exercise an option and arrange for
a simultaneous sale of the underlying Common Stock, with the exercise price
being paid from the proceeds of such sale. Options granted under the Director
Plan will expire ten years after the date of grant, subject to earlier
termination, and may be exercised as follows: twenty-five percent (25%) after
one (1) year from the date of grant, fifty percent (50%) after two (2) years
from the date of grant, seventy-five percent (75%) after three (3) years from
the date of grant and one hundred percent (100%) after four (4) years from the
date of grant.

In the event that a director ceases to be a member of the Board (other than
by reason of death or disability), an option may be exercised by the director
(to the extent the director was entitled to do so at the time he or she ceased
to be a member of the Board) at any time within three months after he or she
ceases to be a member of the Board, but not beyond the term of the option. If
the director dies or becomes disabled while he or she is a member of the Board,
or within three months after he or she ceases to be a member of the Board, the
option may be exercised (to the extent the director was entitled to do so at the
time of his or her death) in full by his or her personal representative or
distributees at any time within one year after his or her death or disability,
but not beyond the term of the option. In the event of the occurrence of a
Change in Control (as defined in the Director Plan) a director would be entitled
to exercise the option in full, but such option would terminate 90 days after
the Change in Control.

The Director Plan is administered by the Compensation Committee. The
principal terms of the option grants are set forth in the Director Plan,
therefore, the Compensation Committee will have no discretion to select which
directors receive options, the number of shares of Common Stock subject to
options or the exercise price of options.

Each of the above plans may be amended at any time and from time to time by
the Board of Directors, but no amendment without the approval of the
shareholders of the Company shall be made if shareholder approval would be
required under applicable law. No amendment may, however, impair the rights or
obligations of the holder of any option granted under the Omnibus Plan, the
Stock Purchase Plan or the Director Plan without his or her consent.

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<PAGE> 41

CERTAIN TRANSACTIONS

The following summarizes certain material agreements between the Company
and its executive officers, directors and certain of its existing shareholders.
The summary is not a complete description of such agreements and therefore this
discussion is qualified in its entirety by reference to the agreements, copies
of which will be made available for inspection upon written request to the
Company. It is the Company's intention that transactions with directors,
executive officers, employees or affiliates of the Company will be minimal and
will be approved in advance by a majority of the disinterested members of the
Board.

REGISTRATION RIGHTS AGREEMENTS

Several of the Company's officers, directors and holders of more than 5% of
the Common Stock have entered into a certain registration rights agreement (the
"Registration Rights Agreement") relating to shares of the Company's preferred
stock (which were converted in accordance with the terms of such preferred stock
into shares of Common Stock in connection with the IPO), the Common Stock issued
prior to the IPO(other than upon exercise of stock options) and securities of
the Company convertible into or exchangeable for shares of Common Stock (other
than a stock option), including the warrants (the "1997 Warrants") issued
pursuant to a certain warrant purchase agreement executed in March 1997 between
the Company and the other signatories thereto (the "1997 Warrant Agreement").
Pursuant to the Registration Rights Agreement, the Company granted to the
signatories thereto certain rights relating to registering the Common Stock
under the Securities Act of 1933, as amended (the "Securities Act").

In general, the "Investors," as that term is defined in the Registration
Rights Agreement (generally defined as substantially all holders of the 1997
Warrants) and Mr. Savastano may demand registration under the Securities Act of
the Common Stock issued upon the conversion of outstanding shares of the
Company's preferred stock and the exercise of the 1997 Warrants upon the request
of the Investors (treated as a single class and calculated on an "as converted
basis"). The Company will pay all registration expenses relating to such
registration. The Registration Rights Agreement otherwise contains such terms
and conditions ordinarily and customarily found in registration rights
agreements, including, without limitation, piggyback registration rights,
indemnification provisions, and holdback agreements.

1997 NOTES, 1997 WARRANTS AND STOCKHOLDER GUARANTEE

In March 1997, the Company entered into a certain note purchase agreement
(the "1997 Note Purchase Agreement") pursuant to which the Company could have
issued, and several purchasers could have committed to purchase, certain
subordinated notes (the "1997 Notes") and entered into the 1997 Warrant
Agreement with respect to the 1997 Warrants. The parties to the 1997 Note
Purchase Agreement and the holders of the 1997 Warrants include: Brantley
Capital Corporation, River Cities Capital Fund Limited Partnership and
Environmental Opportunities Management Co., LLC. These stockholders and the
other parties to the 1997 Note Purchase Agreement (other than the Company) have
received 125,000 1997 Warrants issued in accordance with the 1997 Warrant
Agreement, of which, as of January 31, 1998, 100,000 1997 warrants remained
outstanding. No 1997 Notes were issued and the obligation to make advances under
the 1997 Note Purchase Agreement has terminated.

Brantley Venture Partners III, L.P. ("Brantley"), guaranteed through June
1, 1997 up to $2,000,000 of the Company's indebtedness under a certain Credit
Facility with the Bank of America, Illinois (the "Credit Facility"), in the
event the Company defaulted on its payment obligations thereunder. The Company
paid no consideration to Brantley for this guarantee. To the extent that
Brantley would have been required to make a payment under its guarantee of the
Company's indebtedness under the Credit Facility, the amount of such payments
would have been deemed to be an advance under the 1997 Notes from the date of
such payment. No such payment was required and the guarantee has terminated.
Robert P. Pinkas, a director of the Company, is an affiliate of Brantley Capital
Corporation and Brantley.

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<PAGE> 42

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of January 31,
1998 by (i) each person known by the Company to own beneficially more than 5% of
the Company's Common Stock, (ii) each of the Company's directors, (iii) each of
the Company's executive officers, (iv) all executive officers and directors of
the Company as a group, and (v) each of the beneficial owners of the 430,000
shares of Common Stock registered in the Registration Statement, of which this
Prospectus is part, covering the Shares offered hereby (the "Selling
Stockholders"). The Shares offered hereby will be sold, if at all, solely by and
at the discretion of the Selling Stockholders, and the Company will not receive
any proceeds from any such sales. See "Plan of Distribution". Except as
otherwise indicated, the Company believes that the beneficial owners of the
Common Stock listed below, based on information furnished by such owners, have
sole investment and voting power with respect to such shares.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO SHARES SHARES BENEFICIALLY
OFFERING REGISTERED OWNED AFTER OFFERING
NAME AND ADDRESS -------------------- --------- --------------------
OF BENEFICIAL OWNER NUMBER PERCENT NUMBER NUMBER PERCENT
- --------------------------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Brantley Venture Partners III, L.P........... 2,026,250(3) 16.89% -- 2,026,250(3) 16.89%
20600 Chagrin Blvd
Suite 1150
Cleveland, OH 44122

Environmental Opportunities Management Co.,
LLC........................................ 650,000(4) 5.42% 400,000 250,000(4) 2.08%
3100 Texas Commerce Tower
Houston, TX 77002

River Cities Capital Fund Limited
Partnership................................ 636,250(5) 5.31% -- 636,250(5) 5.31%
221 East 4th Street
Suite 2250
Cincinnati, OH 45202

Dr. Lawrence A. Schmid....................... 100,695 * 30,000 70,695 *
3107 Harahey Ridge
Manhattan, KS 66503

Theodore F. Savastano........................ 1,000,000(6) 8.28% -- 1,000,000(6) 8.28%
Chet S. Ross................................. 400,962(7) 3.29% -- 400,962(7) 3.29%
Michael J. Vantusko.......................... 125,000(8) 1.04% -- 125,000(8) 1.04%
L. Dean Hertert.............................. 66,497(9) * -- 66,497(9) *
Dr. Hans F. Larsson.......................... 385 * -- 385 *
Robert P. Pinkas............................. 2,126,250(10) 17.57% -- 2,126,250(10) 17.57%
Dr. Paul M. Sutton........................... 13,000(11) * -- 13,000(11) *
Rollin S. Reiter............................. 28,000(11) * -- 28,000(11) *
John R. Miller............................... 8,000(11) * -- 8,000(11) *

All directors, nominees and executive
officers as a group (9 persons)............ 3,768,094 31.15% -- 3,768,094 31.15%
</TABLE>

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

*Less than 1%

(1) Beneficial ownership includes shares of Common Stock subject to options,
warrants, rights, or similar obligations exercisable within 60 days for
purposes of computing the percentage of the person or group holding such
options or warrants. Except as noted, each stockholder has sole voting
power and sole investment power with respect to all shares beneficially
owned by such stockholder.

(2) Based upon 11,972,943 shares outstanding.

(3) Includes 26,250 warrants to purchase shares of Common Stock held by
Brantley Capital Corporation, an affiliate of Brantley Venture Partners
III, L.P. Robert P. Pinkas, a director of the Company, is managing general
partner of Brantley Venture Partners III, L.P. and has sole voting and
investment power with respect to these shares.

42
<PAGE> 43

(4) Includes an aggregate of 25,000 warrants issued to such entities to
purchase shares of Common Stock, as to which entities Environmental
Opportunities Management Co., LLC ("EOM") is the general partner and has
sole voting and investment power with respect to these shares. The Company
has been advised that Sanders Morris Mundy, one of the underwriters of the
Company's IPO, owns a 75% interest in, and thereby controls, EOM.

(5) Includes 11,250 warrants to purchase shares of Common Stock. The Company
has been advised that Mayson, Inc. ("Mayson"), an Ohio corporation, is the
general partner of the partnership which is the general partner of River
Cities Capital Fund Limited Partnership and that Mr. Edwin T. Robinson and
Mr. R. Glen Mayfield (both of 221 East 4th Street, Suite 2250, Cincinnati,
OH 45202) are the sole officers, directors and shareholders of Mayson, and
each has sole voting and investment power with respect to these shares.

(6) Includes 100,000 options to purchase shares of Common Stock which are fully
vested.

(7) Includes 220,000 options to purchase shares of Common Stock which are fully
vested.

(8) Includes 75,000 options to purchase shares of Common Stock which are fully
vested.

(9) Includes 40,000 options to purchase shares of Common Stock which are fully
vested.

(10) Includes shares, including securities referred to in footnote 3 above,
which are held by Brantley Venture Partners III, L.P., of which Mr. Pinkas
is managing general partner, and 100,000 options to purchase shares of
Common Stock which are fully vested.

(11) Includes options to purchase 3,000 shares of Common Stock which are fully
vested.

SHARES ELIGIBLE FOR FUTURE SALE

As of January 31, 1998, 11,972,943 shares of Common Stock were outstanding.
Of such shares, the 5,175,000 shares sold in the IPO are tradable by persons
other than "affiliates" of the Company, as that term is defined in Rule 144
under the Securities Act. Of the remaining 6,797,943 shares outstanding,
approximately 6,337,216 shares are either presently freely tradable or eligible
for sale pursuant to Rule 144. To the extent they are not presently freely
tradable, such shares of Common Stock are "restricted securities" within the
meaning of Rule 144 (collectively, the "Restricted Shares"). The Restricted
Shares may not be sold unless they are registered under the Securities Act or
sold pursuant to an applicable exemption from registration, including an
exemption pursuant to Rule 144 under the Securities Act.

In connection with this offering, each of the Selling Stockholders has
agreed that, without the prior written consent of the Company, it will not sell,
offer to sell, solicit an offer to buy, contract to sell, grant any option to
purchase, or otherwise transfer or dispose of (i) the Shares until 45 days after
the Effective Date, except for Shares sold pursuant to the Offering and sold in
accordance with the rules and regulations of the Securities Act and the "Plan of
Distribution" section hereof; or (ii) any shares of Common Stock, or any
securities convertible into or exercisable or exchangeable for Common Stock,
currently held or hereafter acquired, except for the Shares, until 90 days after
the Effective Date. In addition, certain officers, directors and other
stockholders of the Company have agreed that, without the prior written consent
of the Company, they will not, and will not permit any member of their families
residing in their households to, sell, offer to sell, solicit an offer to buy,
contract to sell, grant any option to purchase, or otherwise transfer or dispose
of, any shares of Common Stock, or any securities convertible into or
exercisable or exchangeable for Common Stock, currently held or hereafter
acquired, until 90 days after the Effective Date. Collectively, these two types
of agreements restrict the transfer of an aggregate 4,626,585 shares of Common
Stock.

The Company has registered the shares of Common Stock reserved or to be
available for issuance pursuant to the Stock Option Plan. Shares of Common Stock
issued pursuant to the Stock Option Plan generally will be available for sale in
the open market by holders who are not affiliates of the Company and, subject to
the volume and other limitations of Rule 144, by holders who are affiliates of
the Company. In addition, each director who is not an employee of the Company
has been granted an option to purchase shares of Common Stock. See "Management
- -- Director Remuneration."

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<PAGE> 44

In connection with entering into the Credit Facility and commitments to
purchase subordinated indebtedness, the Company issued warrants to purchase
350,000 shares of Common Stock, of which warrants to purchase 325,000 shares of
Common Stock were outstanding as of January 31, 1998. Pursuant to the applicable
warrant agreements, the holders of such warrants have certain rights to require
the Company to register the shares of Common Stock to be issued upon exercise of
the warrants.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year, including persons who may be deemed to be "affiliates" of the
Company, as that term is defined under Rule 144, may sell within any three-month
period a number of Restricted Shares that does not exceed the greater of one
percent of the then outstanding shares of Common Stock or the average weekly
trading volume of the Common Stock on the open market during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
manner-of-sale limitations, notice requirements, and the availability of current
public information about the Company. Pursuant to Rule 144(k), a person (or
persons whose shares are aggregated) who is deemed not to have been an
"affiliate" of the Company during the three months preceding a sale, and who has
beneficially owned Restricted shares for at least two years, would be entitled
to sell such shares under Rule 144 without regard to the volume limitations,
manner-of-sale provisions or notice requirements. Restricted Shares properly
sold in reliance upon Rule 144 are thereafter freely tradable without
restrictions or registration under the Securities Act, unless thereafter held by
an "affiliate" of the Company. The foregoing summary of Rule 144 is not intended
to be a complete description thereof.

The Company has registered 5,000,000 shares of Common Stock under the
Securities Act pursuant to an acquisition shelf registration statement for its
use in connection with future acquisitions. These shares generally will be
freely tradable after their issuance by persons not affiliated with the Company

The effect if any, the availability for sale, or sale, of the shares of
Common Stock eligible for future sale will have on the market price of the
Common Stock prevailing from time to time is unpredictable, and no assurance can
be given the effect will not be adverse.

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<PAGE> 45

DESCRIPTION OF CAPITAL STOCK

GENERAL

As of January 31, 1998, the authorized capital stock of the Company will
consist of 40,000,000 shares of Common Stock, par value $.001 per share, and
10,000,000 shares of preferred stock, par value $.001 per share (the "Preferred
Stock"), of which 11,972,943 shares of Common Stock are issued and outstanding
and no shares of Preferred Stock will be issued and outstanding.

The following summary of certain provisions of the Common Stock does not
purport to be complete and is subject to, and qualified in its entirety by, the
provisions of the Company Certificate and the Company Bylaws, each of which is
included as an exhibit to the registration statement of which this Prospectus is
a part, and by the provisions of applicable law.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share held of
record by them upon all matters to be voted on by the holders of Common Stock.
The holders of Common Stock are entitled to participate equally in all dividends
payable with respect to the Common Stock subject to any preferences or rights of
any outstanding preferred stock. In the event of liquidation, dissolution or
winding up of the affairs of the Company, the holders of Common Stock are
entitled to share ratably in all assets of the Company remaining available for
distribution to them after payment of liabilities and after provision has been
made for each class of stock, including any preferred stock, that has preference
over the Common Stock. Holders of shares of Common Stock, as such, have no
conversion rights, and there are no redemption or sinking fund provisions
applicable to the Common Stock. All of the outstanding shares of Common Stock
are fully paid and nonassessable.

PREFERRED STOCK

The Board of Directors has the authority, without any further vote or
action by the stockholders, to provide for the issuance of up to 10,000,000
shares of Preferred Stock from time to time in one or more series and to fix
such designations, rights, preferences and limitations as the Board of Directors
may determine, including the consideration received therefor, the number of
shares comprising each series, dividend rates, redemption provisions,
liquidation preferences, sinking fund provisions, conversion rights and voting
rights, including Series 1 Preferred Stock (the "Series 1 Preferred Stock")
authorized in connection with the Stockholders Rights Plan described below.
Although it is not possible to state the effect that any issuance of Preferred
Stock might have on the rights of holders of Common Stock, the issuance of
Preferred Stock may have one or more of the following effects: (i) restrict
Common Stock dividends if Preferred Stock dividends have not been paid; (ii)
dilute the voting power and equity interests of holders of Common Stock to the
extent that any Preferred Stock series has voting rights or is convertible into
Common Stock; or (iii) prevent current holders of Common Stock from
participating in the Company's assets upon liquidation until any liquidation
preferences granted to holders of Preferred Stock are satisfied. In addition,
the issuance of Preferred Stock may, under certain circumstances, have the
effect of discouraging a change in control of the Company by, for example,
granting voting rights to holders of Preferred Stock that require approval by
the separate vote of the holders of Preferred Stock for any amendment to the
Company Certificate or any reorganization, consolidation or merger (or other
similar transaction involving the Company). As a result, the issuance of such
Preferred Stock may discourage bids for the Company's Common Stock at a premium
over the market price therefor and could have a material adverse effect on the
market value of the Common Stock. The Board of Directors does not presently
intend to issue any shares of Preferred Stock, other than in connection with the
stockholders rights plan, referred to below.

REGISTRATION RIGHTS AGREEMENTS

In connection with the issuance by the Company of all of the outstanding
shares of the Company's preferred stock prior to the IPO (with the exception of
25,000 shares of the Company's preferred stock issued to one particular
shareholder), the Common Stock issued prior to the IPO (other than upon exercise
of stock options) and any securities of the Company convertible into or
exchangeable for shares of Common Stock (other than a

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stock option), including the 1997 Warrants, the Company granted to holders
thereof certain rights relating to registering the Common Stock under the
Securities Act.

In general, the "Investors" as defined in the Amended and Restated
Registration Rights Agreement dated March 6, 1997 (the "Registration Rights
Agreement") (generally defined as substantially all holders of the Company's
preferred stock issued prior to the IPO and 1997 Warrants) and Mr. Savastano may
demand registration under the Securities Act of the Common Stock issued upon the
conversion of outstanding shares of the Company's preferred stock and the
exercise of the 1997 Warrants upon the request of the Investors (treated as a
single class and calculated on an "as converted basis"). The Company will pay
all registration expenses relating to such registration. Each of the
registration rights agreements otherwise contain such terms and conditions
ordinarily and customarily found in registration rights agreements, including,
without limitation, piggyback registration rights, indemnification provisions,
and holdback agreements.

STOCKHOLDER RIGHTS PLAN

Each share of Common Stock, including those offered hereby, includes one
Right. Each Right entitles the registered holder to purchase from the Company
one one-hundredth of a share of Series 1 Preferred Stock at a price of $65.00
per one one-hundredth of a share of Series 1 Preferred Stock (the "Purchase
Price"), subject to adjustment. The following summary description of the Rights
does not purport to be complete and is qualified in its entirety by reference to
the Rights Agreement (the "Rights Agreement"), between the Company and American
Stock Transfer & Trust Company, as Rights Agent (the "Rights Agent"), a copy of
which is filed as an exhibit to the registration statement of which this
Prospectus is a part and is incorporated herein by reference. See "Description
of Capital Stock -- Preferred Stock."

Until the earliest to occur of (i) the first date of public announcement
that a person (other than the Company, any subsidiary of the Company, an
employee benefit plan of the Company or a subsidiary of the Company, or an
Exempt Person (defined below)) or group of affiliated or associated persons has
acquired, or obtain the right to acquire, beneficial ownership of 15% or more of
the outstanding shares of Common Stock (an "Acquiring Person") and (ii) the
tenth day (or such later date as may be specified by the Board prior to such
time as any person or group of affiliated or associated persons becomes an
Acquiring Person) after the date any person commences or announces its intention
to commence a tender offer or exchange offer, the consummation of which would
result in such person, together with its affiliates or associates becoming an
Acquiring Person (the earlier of such dates being hereinafter called the
"Distribution Date"), the Rights are evidenced by the certificates for shares of
Common Stock. "Exempt Persons" include any person who prior to the IPO was the
beneficial owner of 15% or more of the outstanding shares of Common Stock for so
long as (a) such person, together with all affiliates and associates thereof,
does not increase its percentage beneficial ownership by 1% or more of the
outstanding shares of Common Stock (b) there is no change of control of such
person, (c) such person, together with its affiliates or associates does not
commence a tender offer or exchange offer for Common Stock and (d) the Company
does not consolidate or merge with or into such person, or any of its affiliates
or associates, or sell, mortgage or otherwise transfer to such person, or any of
its affiliates or associates, assets or earning power representing 50% or more
of the assets or earning power of the Company.

The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with shares of Common Stock. Until the
Distribution Date (or earlier redemption or expiration of the Rights),
certificates for shares of Common Stock issued after the date of the Rights
Agreement will contain a notation incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption or expiration of
the Rights), the surrender for transfer of any certificates for shares of Common
Stock in respect of which Rights have been issued will also constitute the
transfer of the Rights associated with the shares of Common Stock represented by
such certificates. As soon as practicable following the Distribution Date,
separate certificates evidencing the Rights (the "Right Certificates") will be
mailed to holders of record of the shares of Common Stock as of the close of
business on the Distribution Date and such separate Right Certificates alone
will evidence the Rights.

No Right will be exercisable at any time prior to the Distribution Date.
The Rights will expire on the tenth anniversary of the date of the Rights
Agreement (the "Final Expiration Date"), unless earlier redeemed or

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exchanged by the Company as described below. Until a Right is exercised, the
holder thereof, as such, will have no rights as a stockholder of the Company,
including without limitation the right to vote or to receive dividends.

The Purchase Price payable, and the number of shares of Series 1 Preferred
Stock or other securities issuable, upon exercise of the Rights will be subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Series 1
Preferred Stock, (ii) upon the grant to holders of shares of Series 1 Preferred
Stock of certain rights or warrants to subscribe for or purchase shares of
Series 1 Preferred Stock at a price, or securities convertible into shares of
Series 1 Preferred Stock with a conversion price, less than the then current
market price of the shares of Series 1 Preferred Stock or (iii) upon the
distribution to holders of the shares of Series 1 Preferred Stock of evidences
of indebtedness or cash (excluding regular periodic cash dividends), assets,
stock (excluding dividends payable in shares of Series 1 Preferred Stock) or of
subscription rights or warrants (other than those referred to above).

The number of outstanding Rights and the number of one one-hundredth of a
share of Series 1 Preferred Stock issuable upon the exercise of each Right also
will be subject to adjustment in the event of a stock dividend on the Common
Stock payable in shares of Common Stock or subdivision, combination or
reclassification of the Common Stock occurring, in any such case, prior to the
Distribution Date.

Shares of Series 1 Preferred Stock issuable upon exercise of the Rights
will not be redeemable. Each share of Series 1 Preferred Stock will be entitled
to a minimum preferential quarterly dividend payment equal to the greater of (i)
$1.00 per share and (ii) an amount equal to 100 times the aggregate dividends
declared per share of Common Stock during the related quarter. In the event of
liquidation, the holders of the shares of Series 1 Preferred Stock will be
entitled to a preferential liquidation payment equal to accrued and unpaid
dividends thereon, plus the greater of (a) $100 per share and (b) an amount
equal to 100 times the liquidation payment made per share of Common Stock.
Finally, in the event of any merger, consolidation or other transaction in which
shares of Common Stock are exchanged, each share of Series 1 Preferred Stock
will be entitled to receive 100 times the amount received per share of Common
Stock. These rights are protected by customary antidilution provisions. Each
share of Series 1 Preferred Stock will have 100 votes, voting together with the
shares of Common Stock. In addition, in the event that the amount of accrued and
unpaid dividends on the Series 1 Preferred Stock is equivalent to six full
quarters dividends or more, the holders thereof shall have the right, voting as
a class, to elect two directors in addition to the directors elected by the
holders of the Common Stock.

In the event that any person or group or affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights that are or were owned beneficially by the
Acquiring Person (which, from and after the later of the Distribution Date and
the date of the earliest of any such events, will be void), will thereafter have
the right to receive, upon exercise thereof at the then current exercise price
of the Right, that number of shares of Common Stock (or, under certain
circumstances, an economically equivalent security or securities of the Company)
having a market value of two times the exercise price of the Right.

To illustrate the operation of such an adjustment, at a Purchase Price of
$40.00, assuming the current market price (as determined pursuant to the
provisions of the Rights Agreement) per share of Common Stock was $4.00, each
Right not owned beneficially by an Acquiring Person at or after the time of such
an occurrence would entitle its holder to purchase (after the Distribution Date)
from the Company 20 shares of Common Stock (having an aggregate market value of
$80.00) for $40.00.

In the event that, at any time after a person or group of affiliated or
associated persons has become an Acquiring Person, (i) the Company merges with
or into any person and the Company is not the surviving corporation, (ii) any
person merges with or into the Company and the Company is the surviving
corporation, but the shares of Common Stock are changed or exchanged, or (iii)
50% or more of the Company's assets or earning power are sold, proper provision
shall be made so that each holder of a Right will thereafter have the right to
receive, upon the exercise thereof at the then current exercise price of the
Right, that number of shares of common stock (or, under certain circumstances,
an economically equivalent security or securities) of such other person which at
the time of such transaction would have a market value of two times the exercise
price of the Right.

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<PAGE> 48

At any time after the first date of public announcement that an Acquiring
Person has become such and prior to the acquisition by any person or group of
affiliated or associated persons of 50% or more of the outstanding shares of
Common Stock, the Board may exchange the Rights (other than any Rights which
have become void) for shares of Common Stock, in whole or in part, at an
exchange ratio of one share of Common Stock per Right (subject to adjustment).

With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment in the Purchase
Price of at least 1%. The Company is not required to issue fractional shares of
Series 1 Preferred Stock (other than fractions which are integral multiples of
one one-hundredth of a share of Series 1 Preferred Stock, which may, at the
option of the Company, be evidenced by depositary receipts) or fractional shares
of Common Stock or other securities issuable upon the exercise of Rights. In
lieu of issuing such securities, the Company may make a cash payment, as
provided in the Rights Agreement.

The Company may redeem all, but not less than all, the Rights at a price of
$.01 per Right (the "Redemption Price"), payable in cash or Common Stock, at any
time prior to such time as a person or group of affiliated or associated persons
becomes an Acquiring Person. Immediately upon any redemption of the Rights, the
right to exercise the Rights will terminate and the only right of the holders of
Rights will be to receive the Redemption Price.

Prior to the Distribution Date, the Rights Agreement may be amended by the
Company without the approval of any holders of Rights. From and after the
Distribution Date, the Rights Agreement may be amended by the Company without
the approval of any holders of Rights in any manner which does not, in the good
faith determination of the Board, adversely affect the holders of the Rights
(other than an Acquiring Person), including amendments which add other events
requiring adjustment to the purchase price payable and the number of shares of
Series 1 Preferred Stock or other securities issuable upon the exercise of the
Rights or which modify procedures relating to the redemption of the Rights.
Under no circumstances may the Rights Agreement be amended to decrease the
stated Redemption Price or the period of time remaining until the Final
Expiration Date or to modify a time period relating to when the Rights may be
redeemed at such time as the Rights are not then redeemable.

The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board, except pursuant to an offer conditioned on a
substantial number of Rights being acquired. The Rights should not interfere
with any merger or other business combination approved by the Board since
(subject to the limitations described above) the Rights may be redeemed by the
Company at the Redemption Price prior to the time that a person or group has
become an Acquiring Person.

1997 WARRANTS

In March 1997, in connection with its entering into the Note Purchase
Agreement relating to the 1997 Notes, the Company entered into a warrant
agreement (the "1997 Warrant Agreement") pursuant to which it agreed to issue
warrants (the "1997 Warrants") to persons agreeing to be purchasers of the 1997
Notes. Each 1997 Warrant entitles the holder to purchase one share of Common
Stock at an initial purchase price per share of $4.50 ("Exercise Price"). None
of the 1997 Notes were issued but 125,000 Warrants were issued, of which 100,000
were outstanding as of January 31, 1998. The Exercise Price of the 1997 Warrants
is subject to adjustment upon the occurrence of certain events such as the
issuance of securities at prices less than the Exercise Price then in effect, or
upon stock splits, stock dividends, reorganizations, mergers or consolidations.
The Note Purchase Agreement terminated upon the closing of the IPO.

CERTAIN ANTI-TAKEOVER CONSIDERATIONS

The Company Certificate and the Company Bylaws, contain certain provisions
which operate only with respect to an extraordinary corporate transaction
involving the Company (or any of its subsidiaries) and which are designed to
encourage any person who desires to take control of and/or acquire the Company
to enter into negotiations with the Board, thereby making more difficult the
acquisition of the Company by means of a tender offer, a proxy contest or other
non-negotiated means. In general, these provisions (i) provide for a classified

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Board from which directors may only be removed for cause, by the affirmative
vote of 80% of all of the stockholders (ii) provide that only a majority of the
Board shall have the authority to fill vacancies on the Board, (iii) limit the
right of stockholders to amend the Company Certificate and the Company Bylaws,
(iv) eliminate the right of stockholders to call special meetings and to take
action without a meeting, (v) establish an advance notice procedure regarding
the nomination of directors by stockholders and stockholder proposals to be
brought before an annual meeting, and (vi) require that certain business
combinations either meet certain minimum price and procedural requirements, be
approved by the members of the Board who are unaffiliated with the persons
seeking to effect such business combinations or be approved by a supermajority
stockholder vote. In addition to encouraging any person intending to attempt a
takeover of the Company to negotiate with the Board, these provisions also
curtail such person's use of a dominant equity interest to control any
negotiations with the Board. Under such circumstances, the Board may be better
able to make and implement reasoned business decisions and protect the interests
of all of the Company's stockholders. A copy of the Company Certificate and the
Company Bylaws are filed as exhibits to the registration statement of which this
Prospectus is a part.

Classified Board of Directors

The Company Certificate provides for the Board to be divided into three
classes serving staggered terms so that directors' initial terms will expire at
the first, second or third scheduled annual meeting of stockholders. Starting
with the first scheduled annual meeting of the Company's stockholders following
the IPO, one class of directors will be elected each year for a three-year term.
See "Management -- Directors and Executive Officers." The classes will be as
nearly equal in number as possible. The classification of directors makes it
more difficult for a significant stockholder to change the composition of the
Board in a relatively short period of time and, accordingly, provides the Board
and stockholders time to review any proposal that a significant stockholder may
make and to pursue alternative courses of action which are fair to all the
stockholders of the Company.

Removal of and Filling Vacancies on the Board of Directors of the Company

The Company Certificate provides that, subject to any rights of the holders
of Preferred Stock of the Company, only a majority of the Board then in office
or the sole remaining director shall have the authority to fill any vacancies on
the Board, including vacancies created by an increase in the number of
directors. Moreover, because the Company Certificate provides for a classified
board, Delaware law provides that the stockholders may remove a member of the
Board only for cause. The Company Certificate provides that the affirmative vote
of the holders of at least 80% of the voting power of stock entitled to vote
generally in the election of directors is required to remove a director for
cause. These provisions relating to removal and filling of vacancies on the
Board preclude stockholders from enlarging the Board or removing incumbent
directors and filling the vacancies with their own nominees.

Amendment of the Company Certificate and the Company Bylaws

The Company Certificate contains provisions requiring the affirmative vote
of the holders of at least 80% of the voting power of the stock entitled to vote
generally in the election of directors to amend certain provisions of the
Company Certificate and the Company Bylaws (including certain of the provisions
discussed above). These provisions make it more difficult for stockholders to
make changes in the Company Certificate or the Company Bylaws, including changes
designed to facilitate the exercise of control over the Company.

Limitations on Stockholder Action by Written Consent; Special Meetings

Meetings. The Company Certificate provides that stockholder action can be
taken only at an annual or special meeting of stockholders and prohibits
stockholder action by written consent in lieu of a meeting. The Company
Certificate and the Company Bylaws provide that, subject to the rights of
holders of any series of Preferred Stock, special meetings of stockholders can
be called only by a majority of the entire Board or by the President or Chairman
of the Board. Stockholders are not permitted to call a special meeting or to
require that the Board call a special meeting of stockholders. Moreover, the
business permitted to be conducted at any special meeting of stockholders is
limited to the business brought before the meeting by or at the direction of the
Board. These provisions prohibit a significant stockholder from proposing a
stockholder vote on issues not approved by

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the Board or from authorizing stockholder action without a meeting at which all
stockholders would be entitled to participate.

Nominations of Directors and Stockholder Proposals. The Company Bylaws
establish an advance notice procedure with regard to the nomination other than
by, or at the direction of, the Board of candidates for election as directors
(the "Nomination Procedure") and with regard to stockholder proposals to be
brought before an annual meeting of stockholders (the "Business Procedure"). The
Nomination Procedure provides that only persons who are nominated by, or at the
direction of, the Board, or by a stockholder who has given timely written notice
to the Secretary of the Company prior to the meeting at which directors are to
be elected, are eligible for election as directors of the Company. The Business
Procedure provides that to be properly brought before an annual meeting,
business must be specified in the notice of the annual meeting given by or at
the direction of the Board (or any duly authorized committee thereof) or brought
before the meeting by, or at the direction of, the Board (or any duly authorized
committee thereof) or by a stockholder who has given timely written notice to
the Secretary of the Company of such stockholder's intention to bring such
business before such meeting. The notice from the stockholder must also meet
certain information requirements, as further set forth in the Company Bylaws.

If the officer of the Company presiding at the meeting determines that a
person was not nominated in accordance with the Nomination Procedure, or that
other business was not brought before the meeting in accordance with the
Business Procedure, such person is not eligible for election as a director, or
such business is not to be conducted at such meeting, as the case may be.

The purpose of the Nomination Procedure is, by requiring advance notice of
nomination by stockholders, to afford the Board a meaningful opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the Board, to inform stockholders about such
qualifications. The purpose of the Business Procedure is, by requiring advance
notice of stockholder proposals, to provide a more orderly procedure for
conducting annual meetings of stockholders and, to the extent deemed necessary
or desirable by the Board, to provide the Board with a meaningful opportunity to
inform stockholders, prior to such meetings, of any proposal to be introduced at
such meetings, together with any recommendation as to the Board's position or
belief as to action to be taken with respect to such proposal, so as to enable
stockholders better to determine whether they desire to attend such meeting or
grant a proxy to the Board as to the disposition of any such proposal. Although
the Company Bylaws do not give the Board any power to approve or disapprove
stockholder nominations for the election of directors or of any other proposal
submitted by stockholders, the Company Bylaws may have the effect of precluding
a nomination for the election of directors or precluding the conducting of
business at a particular stockholder meeting if the proper procedures are not
followed, and may discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of the Company, even if the conduct of such
solicitation or such attempt might be beneficial to the Company and its
stockholders.

Fair Price Provision

Article Sixth of the Company Certificate (the "Fair Price Provision")
requires the approval by the holders of 80% of the voting power of the
outstanding capital stock of the Company entitled to vote on all matters
submitted to the stockholders, generally (the "Voting Stock") as a condition for
mergers and certain other business combinations ("Business Combinations")
involving the Company and any holder of more than ten percent (10%) of such
voting power (an "Interested Stockholder"), excluding Voting Stock beneficially
owned by the Interested Stockholder, unless the transaction is either (i)
approved by a majority of the members of the Board who are not affiliated with
the Interested Stockholder and who were directors before the Interested
Stockholder became an Interested Stockholder (the "Continuing Directors") or
(ii) certain minimum price and procedural requirements are met. These
requirements include that the aggregate amount of cash and the fair market value
(as defined), as of the date of the consummation of the Business Combination, of
consideration other than cash to be received per share by holders of capital
stock in such Business Combination shall be at least equal to the highest of (i)
the highest per share price paid by or on behalf of the Interested Stockholder
for any share of such capital stock in connection with the acquisition by the
Interested Stockholder of beneficial ownership of shares of such capital stock
(x) within the two-year period immediately prior to the first public
announcement of the proposed Business

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Combination (the "Announcement Date") or (y) in the transaction in which it
became an Interested Stockholder, or (ii) the fair market value per share of
such capital stock on the Announcement Date or on the date on which the
Interested Stockholder became an Interested Stockholder (the "Determination
Date"); or (iii) as to capital stock other than Common Stock, the highest
preferential amount per share to which the holders of shares of such class or
series of capital stock would be entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the Company
regardless of whether the Business Combination to be consummated constitutes
such an event. Also, the consideration to be received by holders of a particular
class or series of outstanding capital stock must be in cash or in the same form
as previously paid by or on behalf of the Interested Stockholder in connection
with its direct or indirect acquisition of beneficial ownership of shares of
such class or series of capital stock. If the consideration so paid for shares
of any class or series of capital stock varied as to form, the form of
consideration for such class or series of capital stock must be either cash or
the form used to acquire beneficial ownership of the largest number of shares of
such class or series of capital stock previously acquired by the Interested
Stockholder. In addition, there cannot be any of several specified changes in
the payment of regular dividends or in the holdings of capital stock by such
Interested Stockholders after the Determination Date, nor can the Interested
Stockholders make any major change in the Company's business or equity capital
structure.

The Fair Price Provision is designed to prevent a third party from
utilizing two-tier pricing and similar inequitable tactics in a takeover
attempt. The Fair Price Provision is not designed to prevent or discourage
tender offers for the Company. However, the separate provisions contained in the
Company Certificate and the Company Bylaws relating to "Classified Board of
Directors" and "Limitations on Stockholder Action by Written Consent; Special
Meetings" discussed above will, as therein indicated, curtail an Interested
Stockholder's ability to exercise control in several respects, including such
stockholder's ability to change incumbent directors who may oppose a Business
Combination or to implement a Business Combination by written consent without a
stockholder meeting. In addition, the Fair Price Provision would discourage some
takeover attempts by persons intending to acquire the Company in two steps and
to eliminate remaining stockholder interests by means of a Business Combination
involving less consideration per share than the acquiring person would propose
to pay for its initial interest in the Company.

In addition, the Company is subject to certain anti-takeover provisions of
the DGCL which prohibit the Company from engaging in any Business Combination
with any Interested Stockholder unless certain conditions are satisfied.

PLAN OF DISTRIBUTION

The Selling Stockholders or pledgees may sell or distribute some or all of
the Shares from time to time through dealers or brokers or other agents or
directly to one or more purchasers, including pledgees, in transactions (which
may involve crosses and block transactions) on the NYSE or other exchanges on
which the Common Stock may be listed for trading, in privately negotiated
transactions (including sales pursuant to pledges) or in the over-the-counter
market, or in brokerage transactions, or in a combination of such transactions.
Such transactions may be effected by the Selling Stockholders at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices, or at fixed prices, which may be changed. Brokers,
dealers, or their agents participating in such transactions as agent may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders (and, if they act as agent for the purchaser of such
shares, from such purchaser.) Such discounts, concessions or commissions as to a
particular broker, dealer or other agent might be in excess of those customary
in the type of transaction involved. This Prospectus also may be used, with the
Company's consent, by donees of the Selling Stockholders, or by other persons
acquiring Shares and who wish to offer and sell such Shares under circumstances
requiring or making desirable its use. To the extent required, the Company will
file, during any period in which offers or sale are being made, one or more
supplements to this Prospectus to set forth the names of donees of Selling
Stockholders and any other material information with respect to the plan of
distribution not previously disclosed.

The Selling Stockholders and any such brokers, dealers or other agents that
participate in such distribution may be deemed to be "underwriters" within the
meaning of the Securities Act, and any discounts, commissions

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<PAGE> 52

or concessions received by any such brokers, dealers or other agents might be
deemed to be underwriting discounts and commissions under the Securities Act.

In connection with the offer and sale of the Shares, various state
securities laws and regulations require that any such offer and sale should be
made only through the use of a broker-dealer registered as such in any state
where a Selling Stockholder engages such broker-dealer and in any state where
such broker-dealer intends to offer and sell the Shares.

Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of any of the Shares may not simultaneously engage in
market activities with respect to the Common Stock for the applicable period
under Regulation M prior to the commencement of such distribution. In addition
and without limiting the foregoing, the Selling Stockholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation Rule 10B-5 and Regulation M, which
provisions may limit the timing of purchases and sale of any of the Shares by
the Selling Stockholders. All of the foregoing may affect the marketability of
the Shares.

In connection with this offering, each of the Selling Stockholders has
agreed that, without the prior written consent of the Company, it will not sell,
offer to sell, solicit an offer to buy, contract to sell, grant any option to
purchase, or otherwise transfer or dispose of (i) the Shares until 45 days after
the Effective Date, except for Shares sold pursuant to the Offering and sold in
accordance with the rules and regulations of the Securities Act and this "Plan
of Distribution" section; or (ii) any shares of Common Stock, or any securities
convertible into or exercisable or exchangeable for Common Stock, currently held
or hereafter acquired, except for the Shares, until 90 days after the Effective
Date. In addition, certain officers, directors and other stockholders of the
Company have agreed that, without the prior written consent of the Company, they
will not, and will not permit any member of their families residing in their
households to, sell, offer to sell, solicit an offer to buy, contract to sell,
grant any option to purchase, or otherwise transfer or dispose of, any shares of
Common Stock, or any securities convertible into or exercisable or exchangeable
for Common Stock, currently held or hereafter acquired, until 90 days after the
Effective Date. Collectively, these two types of agreements restrict the
transfer of an aggregate 4,626,585 shares of Common Stock.

The Company will pay substantially all of the expenses incident to this
Offering of the Shares by the Selling Stockholders to the public other than
commissions, concessions and discounts of brokers, dealers or other agents. Each
Selling Stockholder may indemnify any broker, dealer, or other agent that
participates in transactions involving sales of the Shares against certain
liabilities, including liabilities arising under the Securities Act. The Company
may agree to indemnify the Selling Stockholders and any such statutory
"underwriters" and controlling persons of such "underwriters" against certain
liabilities, including certain liabilities under the Securities Act.

LEGAL MATTERS

The validity of the issuance of the Shares offered hereby will be passed
upon for the Company by Benesch, Friedlander, Coplan & Aronoff LLP of Cleveland,
Ohio.

EXPERTS

The consolidated financial statements of Waterlink, Inc. and subsidiaries
at September 30, 1997 and 1996 and for the years ended September 30, 1997 and
1996 and the period from December 7, 1994 to September 30, 1995, appearing in
this Prospectus and Registration Statement (as defined below) have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company is subject to the reporting requirements of the Exchange Act,
and, in accordance therewith, files reports, proxy statements and other
information with the SEC. These reports, proxy statements and other

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information, once filed, may be inspected, without charge, at the public
reference facilities of the SEC at its principal office at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and its regional offices
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and at 7 World Trade Center, 13th Floor, New York, New York 10048. Copies
of all or any portion of these documents can be obtained at prescribed rates
from the Public Reference Section of the SEC at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The
SEC maintains an Internet web site that contains such reports, proxy statements
and other information regarding issuers (including the Company) that file
electronically with the SEC. The address of that site is http://www.sec.gov.

The Company has filed this Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with the SEC with respect to
this offering. This Prospectus, filed as a part of the Registration Statement,
does not contain all the information set forth therein, or the exhibits and
schedules thereto, in accordance with the rules and regulations of the SEC, and
reference hereby is made to that omitted information. The statements made in
this Prospectus concerning documents filed or incorporated by reference as
exhibits to the Registration Statement accurately describe the material
provisions of those documents and are qualified in their entirety by reference
to those exhibits for complete statements of their provisions. The Registration
Statement and the exhibits and schedules thereto may be inspected and copied at
the principal office of the SEC in Washington, D.C., as described above, and are
also available at the SEC's Internet web site described above.

Proxy statements, reports and other information concerning the Company that
are filed under the Exchange Act also can be inspected at the offices of the New
York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.

53
<PAGE> 54

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
WATERLINK, INC. AND SUBSIDIARIES
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets at September 30, 1997 and 1996............................ F-3
Consolidated Statements of Operations for the years ended September 30, 1997 and 1996
and the period from December 7, 1994 (date of incorporation) to September 30,
1995................................................................................ F-5
Consolidated Statements of Shareholders' Equity for the years ended September 30, 1997
and 1996 and the period from December 7, 1994 (date of incorporation) to
September 30, 1995.................................................................. F-6
Consolidated Statements of Cash Flows for the years ended September 30, 1997 and 1996
and the period from December 7, 1994 (date of incorporation) to September 30, 1995.. F-7
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>

F-1
<PAGE> 55

REPORT OF INDEPENDENT AUDITORS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
WATERLINK, INC.

We have audited the accompanying consolidated balance sheets of Waterlink,
Inc. and subsidiaries as of September 30, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended September 30, 1997 and 1996 and the period from December 7, 1994
(date of incorporation) to September 30, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Waterlink, Inc. and subsidiaries at September 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years
ended September 30, 1997 and 1996 and the period from December 7, 1994 to
September 30, 1995 in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP
Canton, Ohio
November 11, 1997

F-2
<PAGE> 56

WATERLINK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 2,482 $ 119
Trade accounts receivable, less allowance of $775 in 1997 and $101 in
1996.............................................................. 24,625 5,699
Other receivables.................................................... 1,320 378
Inventories.......................................................... 10,143 3,231
Costs in excess of billings.......................................... 6,413 1,447
Refundable income taxes.............................................. 635 --
Other current assets................................................. 1,177 172
-------- --------
Total current assets................................................... 46,795 11,046
Property, plant and equipment, at cost:
Land, building and improvements...................................... 2,366 750
Machinery and equipment.............................................. 2,536 383
Office equipment..................................................... 1,463 747
-------- --------
6,365 1,880
Less accumulated depreciation........................................ 554 103
-------- --------
5,811 1,777
Other assets:
Goodwill, net of amortization of $929 in 1997 and $287 in 1996....... 60,419 15,029
Patents, net of amortization of $63 in 1997 and $18 in 1996.......... 1,484 749
Deferred income taxes................................................ 611 --
Other assets......................................................... 740 390
-------- --------
63,254 16,168
-------- --------
Total assets........................................................... $115,860 $ 28,991
======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE> 57

WATERLINK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1997 1996
-------- --------
(In thousands,
except share data)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade............................................ $ 9,597 $ 2,076
Accrued expenses..................................................... 9,447 1,931
Additional purchase consideration payable............................ 1,760 1,013
Billings in excess of cost........................................... 3,425 559
Accrued income taxes................................................. 490 60
Deferred income taxes................................................ 108 --
Current portion of long-term obligations............................. 2,538 1,969
-------- --------
Total current liabilities.............................................. 27,365 7,608
Long-term obligations:
Long-term debt....................................................... 12,502 4,676
Notes payable -- related parties..................................... -- 3,100
Convertible subordinated notes -- related parties.................... 3,921 2,400
Other................................................................ 1,199 300
-------- --------
17,622 10,476
Redeemable Preferred Stock............................................. -- 8,500
Shareholders' equity:
Preferred Stock, $.001 par value, 10,000,000 shares authorized, none
issued and outstanding
Common Stock, voting, $.001 par value
Authorized -- 40,000,000 shares
Issued and outstanding -- 11,906,326 shares in 1997 and 1,999,996
shares in 1996................................................... 12 2
Additional paid-in capital........................................... 70,739 2,611
Foreign currency translation adjustment.............................. (44) --
Retained earnings (deficit).......................................... 166 (206)
-------- --------
Total shareholders' equity............................................. 70,873 2,407
-------- --------
Total liabilities and shareholders' equity............................. $115,860 $ 28,991
======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE> 58

WATERLINK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, PERIOD FROM
------------------- DECEMBER 7, 1994 TO
1997 1996 SEPTEMBER 30, 1995
------- ------- -------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net sales............................................. $64,699 $19,801 $ 2,684
Cost of sales......................................... 40,390 11,233 1,857
------- ------- -------
Gross profit.......................................... 24,309 8,568 827
Selling, general and administrative expenses.......... 18,683 7,029 1,178
Special management compensation....................... 2,630 -- --
Amortization.......................................... 751 307 15
------- ------- -------
Operating income (loss)............................... 2,245 1,232 (366)
Other income (expense):
Interest expense.................................... (1,281) (877) (144)
Interest income and other items -- net.............. 263 (44) 33
------- ------- -------
Income (loss) before income taxes..................... 1,227 311 (477)
Income taxes.......................................... 470 5 35
------- ------- -------
Income (loss) before extraordinary item............... 757 306 (512)
Extraordinary item, net of income taxes of $257....... (385) -- --
------- ------- -------
Net income (loss)..................................... $ 372 $ 306 $ (512)
======= ======= =======
Net income (loss) per common share:
Income (loss) before extraordinary item............. $ 0.09 $ 0.05 $ (0.11)
Extraordinary item.................................. (0.05) -- --
------- ------- -------
$ 0.04 $ 0.05 $ (0.11)
======= ======= =======
Weighted-average common and equivalent shares
outstanding......................................... 8,337 6,428 4,534
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE> 59

WATERLINK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
FOREIGN TOTAL
ADDITIONAL CURRENCY RETAINED SHAREHOLDERS'
COMMON PAID-IN TRANSLATION EARNINGS EQUITY
STOCK CAPITAL ADJUSTMENT (DEFICIT) (DEFICIT)
------ ---------- ----------- -------- -------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
PERIOD FROM DECEMBER 7, 1994 TO
SEPTEMBER 30, 1995
Sale of 1,200,000 shares (initial
capitalization)........................ $ 1 $ 1
Issuance of 250,000 shares in connection
with acquisition of subsidiary......... $ 500 500
Net loss................................. $ (512) (512)
---- -------- ----- ------ -------
Balance at September 30, 1995............ 1 500 (512) (11)
YEAR ENDED SEPTEMBER 30, 1996
Exercise of 50,000 stock options......... 5 5
Issuance of 499,996 shares in connection
with acquisition of subsidiary......... 1 2,124 2,125
Net income............................... 306 306
Other.................................... (18) (18)
---- -------- ----- ------ -------
Balance at September 30, 1996............ 2 2,611 (206) 2,407
YEAR ENDED SEPTEMBER 30, 1997
Conversion of subordinated notes for
600,000 shares......................... 1 2,516 2,517
Issuance of 481,830 shares in connection
with acquisition of subsidiaries....... 1 4,843 4,844
Sale of 5,175,000 shares in connection
with the initial public offering and
the exercise of the underwriters
overallotment.......................... 5 49,935 49,940
Conversion of 3,250,000 shares of
Preferred Stock........................ 3 8,497 8,500
Issuance of warrants in connection with
debt agreements........................ 413 413
Exercise of 399,500 stock options........ 583 583
Net income............................... 372 372
Other.................................... 1,341 (44) 1,297
---- -------- ----- ------ -------
Balance at September 30, 1997............ $ 12 $ 70,739 $ (44) $ 166 $70,873
==== ======== ===== ====== =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE> 60

WATERLINK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, PERIOD FROM
--------------------- DECEMBER 7, 1994 TO
1997 1996 SEPTEMBER 30, 1995
-------- -------- -------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................... $ 372 $ 306 $ (512)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Extraordinary item.............................. 385 -- --
Special management compensation................. 1,138 -- --
Deferred income taxes (credit).................. (549) -- --
Depreciation and amortization................... 1,229 442 30
Changes in working capital:
Accounts receivable........................... (8,951) (700) (1,258)
Inventories................................... (827) 432 290
Cost in excess of billings.................... (13) (1,390) --
Refundable income taxes....................... (123) -- --
Other assets.................................. 462 (80) (112)
Accounts payable.............................. 2,265 390 229
Accrued expenses.............................. 5 896 295
Billings in excess of cost.................... (2,725) (276) 168
Accrued income taxes.......................... 624 (34) 26
-------- -------- --------
Net cash used by operating activities................ (6,708) (14) (844)
INVESTING ACTIVITIES
Purchases of equipment............................... (1,072) (423) (93)
Purchases of subsidiaries, net of cash acquired...... (42,597) (5,557) (6,508)
-------- -------- --------
Net cash used in investing activities................ (43,669) (5,980) (6,601)
FINANCING ACTIVITIES
Proceeds from long-term borrowings................... 33,110 1,841 4,539
Payments on long-term borrowings..................... (30,866) (1,304) --
Proceeds from sale of Common Stock................... 50,523 5 1
Proceeds from sale of Preferred Stock................ -- 4,576 3,900
-------- -------- --------
Net cash provided by financing activities............ 52,767 5,118 8,440
Effect of exchange rate changes on cash.............. (27) -- --
Increase (decrease) in cash and cash equivalents..... 2,363 (876) 995
Cash and cash equivalents at beginning of period..... 119 995 --
-------- -------- --------
Cash and cash equivalents at end of period........... $ 2,482 $ 119 $ 995
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-7
<PAGE> 61

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1997

1. ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Waterlink,
Inc. and its wholly-owned subsidiaries (the "Company"). All significant
intercompany accounts and transactions have been eliminated upon consolidation.

FISCAL YEAR END

The Company's fiscal year ends on September 30th. References in the notes
to the financial statements to the years 1997 and 1996 refer to the fiscal years
ended September 30, 1997 and 1996, respectively. References in the notes to the
financial statements to 1995 refer to the period from December 7, 1994 (date of
incorporation) to September 30, 1995.

CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

REVENUE RECOGNITION

The majority of the Company's systems and equipment are custom designed and
take a number of months to produce. Revenues from large contracts are recognized
using the percentage of completion method of accounting in the proportion that
costs bear to total estimated costs at completion. Revisions of estimated costs
or potential contract losses, if any, are recognized in the period in which they
are determined. Revenues from the remaining equipment and product sales are
recognized when shipped.

CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents and trade
receivables. The Company places its cash equivalents with high quality financial
institutions.

Concentrations of credit risk with respect to trade receivables are limited
due to the Company's large number of customers and their dispersion across many
different regions and industries. The Company grants credit to customers based
on an evaluation of their financial condition and collateral is generally not
required. Losses from credit sales are provided for in the financial statements
and have historically been within management's expectations.

INVENTORIES

Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.

FINANCIAL INSTRUMENTS

The carrying values of cash, cash equivalents, accounts receivable and
accounts payable are a reasonable estimate of fair value due to the short-term
nature of these instruments. Substantially all of the Company's long-term debt
obligations, except for the convertible subordinated notes -- related parties,
have variable rates and cost approximates fair value at September 30, 1997. The
convertible subordinated notes -- related parties do not have

F-8
<PAGE> 62

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1997

1. ACCOUNTING POLICIES (CONTINUED)

a ready market and cost is assumed to approximate fair value. The carrying value
of these notes is $3,921,000 at September 30, 1997, with interest rates of 3%
and 5.81% and maturity dates through September 1999.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is valued at cost. Expenditures for repairs
and maintenance are charged to operations as incurred, while expenditures for
additions and improvements are capitalized. Depreciation is computed principally
using the straight-line method over the estimated useful lives of assets. The
useful lives range from 30 to 40 years for building and improvements; 5 to 10
years for machinery and equipment and 3 to 7 years for office equipment.

GOODWILL

Goodwill represents costs in excess of net assets of acquired businesses
which are amortized using the straight-line method over a period of 40 years.
The Company evaluates the realizability of goodwill based on the undiscounted
cash flows of the applicable businesses acquired over the remaining amortization
period. Should the review indicate that goodwill is not recoverable, the
Company's carrying value of goodwill would be reduced by the estimated shortfall
of the cash flows. No reduction of goodwill for impairment has been necessary to
date.

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of subsidiaries are translated at the rate of
exchange in effect on the balance sheet date; income and expenses are translated
at the average rates of exchange prevailing during the year. The related
translation adjustments are reflected as a separate component of shareholders'
equity. Foreign currency gains and losses resulting from transactions are
included in the results of operations and amounted to a gain of $167,000 in
1997.

EMPLOYEE BENEFIT PLAN

Effective February 1, 1996, the Company implemented a defined contribution
plan which covers substantially all employees. Company contributions to the plan
in 1997 totaled $13,000. No Company contributions were made in 1996.

NET INCOME (LOSS) PER SHARE

Net income (loss) per share is computed by dividing net income (loss) by
the weighted-average number of shares of Common Stock and common stock
equivalents outstanding during the year. These shares include common shares
outstanding, convertible Preferred Stock (all of which converted, according to
their terms, upon completion of the Company's initial public offering ("IPO") in
June 1997) and common shares which are issuable upon exercise of outstanding
stock options and warrants.

Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
(SAB) No. 83, stock options and warrants granted by the Company during the
twelve months preceding the Company's IPO date have been included as common
stock equivalents as if they were outstanding for all periods presented prior to
the Company's IPO, using the treasury stock method.

F-9
<PAGE> 63

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1997

1. ACCOUNTING POLICIES (CONTINUED)

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share,and SFAS No. 129, Disclosure of Information about Capital Structure. The
Company is required to adopt both standards during the first quarter of fiscal
1998. SFAS No. 128 replaces the presentation of primary earnings per share (EPS)
under Accounting Principle Board Opinion No. 15 and related Interpretations,
with the presentation of basic EPS (which primarily gives effect only to common
shares actually outstanding) and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. Under SFAS No. 128 and SAB No. 83, the Company's 1997 basic and
diluted EPS would be $.05 per share and $.04 per share, respectively. SFAS No.
129's primary focus is to expand the number of entities subject to certain
capital structure disclosure requirements, particularly nonpublic entities, and
accordingly, will not have a significant impact on the Company's disclosures.

In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which changes the way public companies
report segment information in annual financial statements. The Statement also
requires public companies to report selected segment information in interim
financial reports to shareholders. The Statement is effective for the Company in
fiscal 1999 and restatement of comparative information for earlier years is
required in the initial year of adoption. Management does not expect the
adoption of SFAS No. 131 to have a material impact on the Company's financial
statement disclosures.

2. ACQUISITIONS

On March 5, 1997, the Company acquired the Nordic Water Products Group
("Nordic Group") for approximately $11,256,000, consisting of $10,721,000 in
cash and $535,000 of seller notes. The Nordic Group manufactures continuous
recirculating sand filters, included plate settlers and systems for nutrient
removal, decanting centrifuges for dewatering biosolids and hydraulic surface
and bottom scrappers. The Nordic Group also designs and builds water
purification and wastewater treatment plants in Europe. The purchase price
includes approximately $5,731,000 of goodwill, which is being amortized on a
straight-line basis over 40 years.

Concurrent with the closing of the Company's IPO, on June 27, 1997, the
Company acquired Bioclear Technology, Inc. ("Bioclear") and Lanco Environmental
Products, Inc. ("Lanco"), for approximately $22,591,000, consisting of
$16,688,000 in cash, $2,285,000 of assumed debt and 328,947 shares of Common
Stock valued at $11 per share. Bioclear designs and builds sequential batch
reactor systems to biologically treat industrial and municipal wastewater, and
Lanco fabricates small plate and frame filter presses for dewatering biosolids
and inclined plate clarifiers for heavy metal removal. The amount of goodwill
recorded in connection with these acquisitions was approximately $19,682,000 and
is being amortized on a straight-line basis over 40 years.

On September 12, 1997, the Company acquired Mellegard V.A. Maskiner AB
("Meva") for approximately $6,838,000; consisting of $5,167,000 in cash and
$1,671,000 of convertible subordinated notes. Meva specializes in the design and
installation of fine screens and related accessories for wastewater treatment
applications. The purchase price includes approximately $4,952,000 of goodwill,
which is being amortized on a straight-line basis over 40 years.

F-10
<PAGE> 64

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1997

2. ACQUISITIONS (CONTINUED)

On September 30, 1997, the Company acquired Hycor Corporation ("Hycor") for
approximately $16,002,000; consisting of $12,500,000 in cash, $2,250,000 in
convertible subordinated notes, $502,000 of assumed debt and 41,095 shares of
Common Stock at $18.25 per share. Hycor designs and manufactures screening and
dewatering equipment for liquid/solid separation in industrial and municipal
wastewater and process applications. The purchase price includes approximately
$13,871,000 of goodwill, which will be amortized on a straight-line basis over
40 years.

During fiscal 1996, the Company completed the acquisition of three
companies that design and produce water and wastewater treatment systems. Mass
Transfer Systems, Inc. was purchased effective January 31, 1996 for
approximately $8,000,000, consisting of $3,500,000 in cash, $4,100,000 in seller
notes and $400,000 of assumed debt. Aero-Mod, Inc. and affiliates was purchased
effective April 26, 1996 for approximately $2,700,000, consisting of $1,300,000
in cash, $700,000 in seller notes and $700,000 in assumed debt. Water Equipment
Technologies, Inc. was purchased effective September 30, 1996 for approximately
$5,200,000, consisting of $2,600,000 in cash and 611,784 shares of Common Stock
valued at $4.25 per share. The aggregate purchase price of the 1996 acquisitions
included approximately $9,328,000 of goodwill (Mass Transfer Systems,
Inc. -- $5,737,000; Aero-Mod, Inc. -- $78,000 and Water Equipment Technologies,
Inc. -- $3,513,000), which is being amortized on a straight-line basis over 40
years.

During fiscal 1995, the Company acquired SanTech Equipment, Inc. and Great
Lakes Environmental, Inc. which design and produce industrial separation
systems, wastewater pretreatment systems and oil/water separation products.
SanTech Equipment, Inc. was purchased effective March 31, 1995 for cash of
approximately $750,000. Great Lakes Environmental, Inc. was purchased effective
August 31, 1995 for approximately $8,500,000, consisting of $5,800,000 of cash,
$2,200,000 of seller obligations and 250,000 shares of Common Stock at $2.00 per
share. The purchase price of the Great Lakes Environmental, Inc. acquisition
included approximately $7,784,000 of goodwill, which is amortized on a
straight-line basis over 40 years.

All of the acquisitions were accounted for as purchases. The purchase price
allocations for certain of the Company's 1997 acquisitions have been based on
preliminary estimates, which may be revised at a later date. The consolidated
statement of operations of the Company includes the results of operations of the
acquired businesses for the period subsequent to the effective date of these
acquisitions.

Under the terms of certain of the purchase agreements, the Company may be
required to make additional purchase consideration payments of up to $6,545,000,
contingent upon the achievement of specified operating results through fiscal
2000. The payments that may be required in fiscal 1998, 1999 and 2000 are
$4,100,000, $1,713,000 and $732,000, respectively. In connection with two of the
Company's acquisitions, the Company also may be required to make other
additional purchase consideration payments in the form of cash and common stock,
in an amount equal to a fixed percentage of the excess of certain specified
annual earnings targets through fiscal 2000. Since such additional purchase
consideration payments, if any, are based on a fixed percentage of such excess
amount, there is no maximum amount for such payments. Any such additional
purchase consideration payments will be treated as additional goodwill for
accounting purposes.

F-11
<PAGE> 65

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1997

2. ACQUISITIONS (CONTINUED)

The following unaudited pro forma information presents the consolidated
results of operations of the Company assuming the acquisitions discussed above
were completed on October 1, 1995:

<TABLE>
<CAPTION>
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Net sales.............................................. $111,026 $ 93,384
Operating profit....................................... 6,861 5,977
Income before taxes.................................... 3,052 627
Income before extraordinary item....................... 1,740 357
Net income............................................. 1,355 357
Per common share:
Income before extraordinary item..................... $ 0.21 $ 0.05
Net income........................................... 0.16 0.05
</TABLE>

The pro forma results of operations are not indicative of the actual
results of operations that would have occurred had the acquisitions been made on
the date indicated, or the results that may be obtained in the future. The above
pro forma operating results do not reflect the use of proceeds of the IPO and
the resulting reduction of indebtedness. Pro forma operating results for the
year ended September 30, 1997 reflect the $2,630,000 special compensation charge
and the extraordinary item of $385,000 incurred in connection with the IPO, as
described in Notes 8 and 9.

3. INVENTORIES

Inventories consisted of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Raw materials and supplies............................... $ 4,821 $ 1,864
Work in process and finished goods....................... 5,322 1,367
------- -------
$10,143 $ 3,231
======= =======
</TABLE>

4. CONTRACT BILLING STATUS

Information with respect to the billing status of contracts in process is
as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Contract costs incurred to date.......................... $17,033 $ 1,957
Estimated profits........................................ 7,793 1,864
------- -------
Contract revenue earned to date.......................... 24,826 3,821
Less billings to date.................................... 21,838 2,933
------- -------
Cost and estimated earnings in excess of billings, net... $ 2,988 $ 888
======= =======
</TABLE>

F-12
<PAGE> 66

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1997

4. CONTRACT BILLING STATUS (CONTINUED)

The above amounts are included in the accompanying consolidated balance
sheet as:

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Costs in excess of billings.............................. $ 6,413 $ 1,447
Billings in excess of costs.............................. 3,425 559
------- -------
$ 2,988 $ 888
======= =======
</TABLE>

Amounts receivable include retainage which has been billed, but is not due
pursuant to retainage provisions in construction contracts until completion of
performance and acceptance by the customer. This retainage aggregated $1,294,000
at September 30, 1997, and $528,000 at September 30, 1996. Substantially all
retained balances are collectible within one year.

5. LONG-TERM DEBT OBLIGATIONS

Long-term debt obligations consisted of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
------- -------
(In thousands)
<S> <C> <C>
LONG-TERM DEBT
Revolving credit agreements with a bank, due June 27, 2000.
Interest is payable monthly at designated variable rates.
(6.69% at September 30, 1997)............................... $12,000 $ --
Subordinated note to former parent of acquired business due
November 24, 1997. Interest is payable at maturity at a rate
of 7% per annum............................................. 535 --
Note payable to a bank, due January 14, 1998. Interest is
payable at maturity at a rate of 4.4%....................... 1,807 --
Note payable in annual installments of $100,000, including
interest at 9.25%, commencing June 1999 through June 2005... 502 --
Note payable to a bank, interest payable monthly at a rate of
4.75%....................................................... 196 --
Term notes payable to banks.................................... -- 5,093
Revolving credit agreement..................................... -- 672
Other notes payable to various parties......................... -- 80
NOTES PAYABLE -- RELATED PARTIES
Subordinated notes payable to former shareholders of acquired
companies................................................... -- 3,900
</TABLE>

F-13
<PAGE> 67

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
------- -------
(In thousands)
<S> <C> <C>

5. LONG-TERM DEBT OBLIGATIONS (CONTINUED)
CONVERTIBLE SUBORDINATED NOTES -- RELATED PARTIES
Note payable to former shareholders of Meva, due September 12,
1999. Interest accrues at 3% per annum and is payable on a
quarterly basis............................................. 1,671 --
Note payable to a former shareholder of Hycor, due September
30, 1999. Interest accrues at 5.81% per annum and is payable
on a quarterly basis........................................ 2,250 --
Notes payable to former shareholders of acquired companies..... -- 2,400
------- -------
18,961 12,145
Less current maturities.......................................... 2,538 1,969
------- -------
$16,423 $10,176
======= =======
</TABLE>

Future maturities of long-term debt obligations for the five years
subsequent to September 30, 1997 are as follows: 1998 -- $2,538,000;
1999 -- $3,924,000; 2000 -- $12,054,000; 2001 -- $59,000 and 2002 -- $64,000.

Interest paid approximated $1,605,000 in 1997 and $631,000 in 1996.

On February 19, 1997, the Company entered into a credit facility with Bank
of America National Trust & Savings Association ("Credit Facility"). Proceeds
from the Credit Facility were used to acquire the Nordic Group and to refinance
certain indebtedness in connection with the acquisition. As additional
consideration for the Credit Facility, the Company granted the Bank, pursuant to
an agreement dated February 19, 1997, a warrant, expiring in 2002, to purchase
225,000 shares of Common Stock at a purchase price of $4.50 per share. The
aggregate fair value of the 225,000 warrants issued of $265,500 ($1.18 per
share) was treated as an original issue discount and was subsequently written
off in connection with the extraordinary charge discussed in Note 9.

On June 27, 1997, concurrent with the closing of its IPO, the Company
terminated its Credit Facility and entered into a new $40,000,000 three year,
secured, domestic revolving credit facility with Bank of America National Trust
& Savings Association as agent. This facility permits the Company's overseas
subsidiaries to incur up to $10,000,000 of additional unsecured indebtedness. In
connection with entering into the domestic revolving credit facility, the
existing separate facilities of the two overseas subsidiaries were amended to
provide availability of $4,000,000 and $3,000,000, respectively. The $40,000,000
domestic revolving credit facility and the $7,000,000 overseas facilities (the
"New Credit Facility") will be utilized to fund operating activities of the
Company as well as future acquisitions.

Loans under the domestic revolving credit facility will bear interest at a
designated variable base rate plus spreads ranging from 0 to 25 basis points
depending on the ratio of total consolidated indebtedness to the Company's
earnings before interest, taxes, depreciation and amortization. At the Company's
option, the domestic revolving credit facility will bear interest based on a
designated London interbank offering rate plus spreads ranging from 100 to 200
basis points. At September 30, 1997, approximately $32,404,000 was available
under the New Credit Facility.

The New Credit Facility restricts or prohibits the Company from many
actions, including paying dividends and incurring or assuming other indebtedness
or liens. The Company's obligations under the New Credit Facility are secured by
liens on substantially all of the Company's domestic assets, including
equipment, inventory,

F-14
<PAGE> 68

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1997

5. LONG-TERM DEBT OBLIGATIONS (CONTINUED)

accounts receivable and general intangibles and pledge of most of the stock of
the Company's subsidiaries. The two overseas subsidiaries have given a negative
pledge of their assets in connection with the overseas facilities.

In September 1997, the Company entered into a $3,000,000 credit facility
("Canadian Line-of-Credit") with Royal Bank of Canada, a participant in the
Credit Agreement above, to fund Canadian working capital requirements including
bankers acceptances and letters of credit. Interest rates are negotiated on an
individual borrowing basis and are related to the Royal Bank of Canada's prime
rate. Borrowings are payable upon demand and are guaranteed by Bioclear. At
September 30, 1997, approximately $802,000 was available under the Canadian
Line-of-Credit.

Convertible subordinated notes payable to former shareholders of acquired
companies of $2,400,000, plus accrued interest, were converted into 600,000
shares of Common Stock in 1997.

In March 1997, the Company entered into a note purchase agreement (the
"Note Purchase Agreement") pursuant to which the Company could issue, and
several purchasers had committed to purchase, five year subordinated notes (the
"1997 Notes"). The 1997 Notes were not drawn on by the Company and upon the
consummation of the IPO the Note Purchase Agreement terminated in accordance
with its terms. In consideration for entering into the Note Purchase Agreement,
parties agreeing to be purchasers of the 1997 Notes received 125,000 warrants to
purchase shares of common stock at a purchase price of $4.50 per share. The
aggregate fair value of the 125,000 warrants issued of $148,000 ($1.18 per
share) was initially capitalized as deferred financing costs and was
subsequently written off in connection with the extraordinary charge discussed
in Note 9.

6. LEASES

The Company leases certain facilities and equipment under operating leases,
some of which are with an entity controlled by former shareholders of certain
acquired businesses. The Company believes that the rents due under the related
party leases are comparable to those which would be charged by an unrelated
party. Rent expense totaled $959,000 in 1997, $241,000 in 1996 and $64,000 in
1995. Related party rent expense included in these totals amounted to $438,000
in 1997 and $116,000 in 1996. Aggregate future minimum lease payments under
noncancelable operating leases at September 30, 1997 are as follows:

<TABLE>
<CAPTION>
RELATED
PARTY OTHER
LEASES LEASES TOTAL
------- ------ ------
(In thousands)
<S> <C> <C> <C>
1998............................................. $ 677 $ 588 $1,265
1999............................................. 687 471 1,158
2000............................................. 697 357 1,054
2001............................................. 573 349 922
2002............................................. 259 198 457
Thereafter....................................... 3,295 195 3,490
------- ------ ------
$ 6,188 $2,158 $8,346
======= ====== ======
</TABLE>

7. REDEEMABLE PREFERRED STOCK

Redeemable Preferred Stock at September 30, 1996 consisted of 400,000
shares of Series A Preferred Stock (issued in 1995), 1,700,000 shares of Series
B Preferred Stock (issued in 1995) and 1,150,000 shares of Series C

F-15
<PAGE> 69

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1997

7. REDEEMABLE PREFERRED STOCK (CONTINUED)

Preferred Stock (issued in 1996). These shares had a par value of $.001 per
share and a base liquidation price of $1.25 per share for Series A Preferred
Shares, $2.00 per share for Series B Preferred Shares, and $4.00 per share for
Series C Preferred Shares.

In accordance with the terms of the shareholder agreements, all outstanding
shares of Preferred Stock were converted into shares of Common Stock on a
one-for-one basis concurrent with the Company's IPO in June 1997.

8. SPECIAL MANAGEMENT COMPENSATION

In June 1997, the Company incurred a special charge to operations of
$2,630,000 resulting primarily from the issuance, concurrent with the IPO, of a
ten year option to purchase 100,000 shares of common stock at a price of $0.10
per share to an officer of the Company pursuant to terms of an employment
agreement. Of this amount, approximately $1,138,000 is non-cash and the
remainder represents cash obligations related principally to the reimbursement
of income taxes resulting from the stock option issuance. This special charge
after income taxes on a per share basis was $0.20 for the year ended September
30, 1997.

9. EXTRAORDINARY ITEM

The Company used a portion of the proceeds from its IPO to repay
substantially all of its outstanding indebtedness. In addition, concurrent with
the IPO the Company canceled the Note Purchase Agreement discussed in Note 5. In
connection with the early retirement of certain indebtedness and the
cancellation of the Note Purchase Agreement, the Company realized an
extraordinary charge of $385,000, net of taxes of $257,000, related to the
write-off of unamortized debt issuance costs and discounts associated with this
indebtedness. This extraordinary item on a per share basis was $0.05 for the
year ended September 30, 1997.

10. INCOME TAXES

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Current:
U.S. federal................................... $ 807 $ -- $ --
State and local................................ (48) 5 35
Foreign........................................ 214 -- --
------ ------ ------
973 5 35
Deferred......................................... (549) 99 --
Increase (reduction) in valuation allowance...... 46 (99) --
------ ------ ------
$ 470 $ 5 $ 35
====== ====== ======
</TABLE>

The Company made income tax payments of approximately $220,000 in 1997,
$40,000 in 1996 and $9,000 in 1995.

F-16
<PAGE> 70

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1997

10. INCOME TAXES (CONTINUED)

Following is the reconciliation between the provision (credit) for income
taxes and the amount computed by applying the statutory U.S. federal income tax
rate of 34% to income before income taxes:

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Provision (credit) for income taxes at the
statutory federal rate......................... $ 417 $ 106 $ (162)
Adjustments:
State and local income taxes................ (32) 5 35
Non-deductible goodwill amortization........ 71 -- --
Difference in rates on foreign
subsidiaries.............................. (46) -- --
Change in valuation allowance............... 46 (99) 163
Other....................................... 14 (7) (1)
------ ------ ------
Provision for income taxes....................... $ 470 $ 5 $ 35
====== ====== ======
Effective income tax rate........................ 38% 2% (7)%
====== ====== ======
</TABLE>

Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of the
net operating loss carryforward and temporary differences are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward................ $ 771 $ 152 $ 85
Other.......................................... 645 133 78
Valuation allowance............................ (110) (64) (163)
------ ------ ------
1,306 221 --
Deferred tax liabilities:
Amortization of goodwill....................... (261) (164) --
Revenue recognition............................ (485) -- --
Other.......................................... (57) (57) --
------ ------ ------
(803) (221) --
------ ------ ------
Net deferred tax asset........................... $ 503 $ -- $ --
====== ====== ======
</TABLE>

For tax purposes, the Company has U.S. federal loss carryforwards of
$1,193,000 which expire in the year 2012 and foreign net operating loss
carryforwards of $1,175,000 that expire in 2003 . A valuation allowance has been
established for certain net operating loss carryforwards for which realization
is uncertain.

11. STOCK OPTION PLANS

During 1997, the Board of Directors approved the Omnibus Incentive Plan
(the "Omnibus Plan") which provides for compensatory equity based awards to
officers and certain other key employees of the Company. Awards may be granted
for no consideration and consist of stock options, stock awards, SARs, dividend
equivalents, other stock based awards (such as phantom stock) and performance
awards consisting of any combination of the foregoing. There have been no awards
granted under this plan.

F-17
<PAGE> 71

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1997

11. STOCK OPTION PLANS (CONTINUED)

The Company's 1995 Stock Option Plan (the "Stock Option Plan") provides
grants to officers, key employees, and directors of awards consisting of
"incentive stock options" as defined under the provisions of Section 422 of the
Code, and non-qualified stock options. There are 1,600,000 shares of Common
Stock available for granting of awards under the Stock Option Plan. All options
granted under the Stock Option Plan expire ten years after the date of grant
(see Note 12).

The Company's 1997 Non-Employee Director Stock Option Plan (the "Director
Plan") is authorized to issue up to 150,000 shares of Common Stock. Each
non-employee director is automatically granted an option to purchase 3,000
shares of Common Stock. In addition, on each anniversary date of the Director
Plan, each of the Company's then non-employee directors who have served at least
six-months shall automatically be granted an option to purchase 5,000 shares of
Common Stock. The per share exercise price of options granted under the Director
Plan will be the fair market value of the Common Stock on the date of grant.
Options granted under the Director Plan will expire ten years after the date of
grant (see Note 12).

Under the Company's Employee Stock Purchase Plan (the "Plan"), the Company
is authorized to issue up to 500,000 shares of Common Stock. Under the terms of
the Plan, employees can choose to have up to 20% of their annual compensation
withheld to purchase Common Stock. The exercise price for shares subject to
purchase under options granted shall be 85% of the fair market value of the
Common Stock on the first day of the purchase period, unless otherwise
determined by the compensation committee. On the last day of the purchase period
of any offering of shares made under the Plan, each outstanding option shall
automatically be exercised. At any time prior to the end of the purchase period
applicable to each offering, an employee is permitted to terminate or reduce his
or her payroll deductions, to reduce his or her options to purchase or to
withdraw all or part of the amount in his or her account. The employee has the
right to receive in cash the amount accumulated in such account. The Plan will
terminate ten years from the date of adoption.

12. STOCK BASED COMPENSATION

It is the Company's policy to generally grant stock options for a fixed
number of shares to employees with the exercise price approximating fair value.
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations and accordingly,
recognizes no compensation expense for stock options granted at fair value.
Management believes that the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting For Stock Based Compensation" ("SFAS
123"), requires use of option valuation methods that were not developed for use
in valuing employee stock options. Under APB 25, compensation expense has been
recognized for all options granted at less than the fair market value of the
Company's common shares on the date of grant (see Note 8).

Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value of these options and the options granted as part of the Plan were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1997 and 1996: risk-free interest
rate of 6.0%, dividend yield rate of 0%, volatility factor of the expected
market price of the Company's stock of 30% and a weighted-average expected life
of the options of 5 years. Using the Black-

F-18
<PAGE> 72

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1997

12. STOCK BASED COMPENSATION (CONTINUED)

Scholes model, the weighted-average grant-date fair value of options granted
during 1997 and 1996 in the Stock Option Plan follows:

<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
FAIR EXERCISE FAIR EXERCISE
VALUE PRICE VALUE PRICE
------ -------- ------ --------
<S> <C> <C> <C> <C>
Stock price equals exercise price................. $ 4.28 $11.20 $ 1.53 $ 3.92
Stock price is greater than exercise price........ -- -- 4.18 .10
Stock price is less than exercise price........... -- -- 1.54 4.40
</TABLE>

The weighted-average grant-date fair value of the options granted during
1997 under the Plan was $4.86.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated value of the options
is amortized to expense over the options' vesting period. The pro forma results
are not necessarily indicative of what would have occurred had the Company
adopted SFAS 123. The Company's pro forma information follows:

<TABLE>
<CAPTION>
1997 1996
----- -----
(In thousands,
except per share
data)
<S> <C> <C>
Pro forma net (loss) income....................................... $(331) $ 268
Pro forma earnings (loss) per share............................... (.04) .04
</TABLE>

A summary of the Company's stock option activity and related information
follows:

<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year............................ 666,500 $ 2.96 215,000 $ .10 -- --
Granted........................... 808,800 9.98 501,500 3.88 215,000 $ .10
Exercised......................... (184,500) .33 (50,000) .10 -- --
--------- ------ ------- ------ ------- ------
Outstanding at end of year........ 1,290,800 $ 8.48 666,500 $ 2.96 215,000 $ .10
========= ====== ======= ====== ======= ======
Exercisable at end of year........ 583,000 $ 3.98 3,750 -- -- --
========= ====== ======= ====== ======= ======
Available for future options...... 74,700 83,500 185,000
========= ======= =======
</TABLE>

The Company has reserved 1,715,500 shares of Common Stock for possible
exercise of outstanding stock options and warrants.

F-19
<PAGE> 73

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 1997

13. GEOGRAPHIC AREA DATA

The Company operates in a single industry, providing integrated water and
wastewater treatment solutions to industry and municipalities worldwide. The
Company has a strategy of acquisition and internal growth to provide integrated
products, technologies and services to water users globally. Export sales
represented approximately one-third of U.S. sales in 1997 and 1996.

Revenue transfers between geographic areas and other intergeographic
eliminations are not material. The Company does not derive more than 10% of its
total revenue from any individual customer.

Prior to 1997, the Company's operations were all domestic. Information by
geographic area for the year ended September 30, 1997 follows:

<TABLE>
<CAPTION>
UNITED STATES SWEDEN GERMANY OTHER CONSOLIDATED
------------- -------- -------- -------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net sales............................ $ 43,015 $ 12,440 $ 7,840 $ 1,404 $ 64,699
Operating income (1)................. 787 1,276 137 45 2,245
Income before income taxes (1)....... 431 763 14 19 1,227
Assets employed at year end.......... 62,489 25,127 5,972 22,272 115,860
</TABLE>

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

(1) The special management compensation charge of $2,630,000 is included under
the United States.

F-20
<PAGE> 74

=============================================

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 6
Use of Proceeds......................... 11
The Company............................. 12
Price Range of Common Stock............. 13
Dividend Policy......................... 14
Capitalization.......................... 15
Selected Financial Data................. 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 18
Business................................ 24
Management.............................. 30
Certain Transactions.................... 41
Principal and Selling Shareholders...... 42
Shares Eligible for Future Sale......... 43
Description of Capital Stock............ 45
Plan of Distribution.................... 51
Legal Matters........................... 52
Experts................................. 52
Additional Information.................. 52
Index to Financial Statements........... F-1
</TABLE>

==============================================

======================================================

430,000 SHARES

WATERLINK, INC. (SM) [LOGO]

COMMON STOCK

---------------------
PROSPECTUS
---------------------

, 1998
======================================================
<PAGE> 75

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth expenses in connection with the issuance of
the Common Stock being registered. All of the amounts shown are estimates,
except the registration fee:

<TABLE>
<S> <C>
SEC registration fee.................................... $ 1,903
Accounting fees and expenses............................ 5,000
Legal fees and expenses................................. 20,000
Printing expenses....................................... 10,000
Miscellaneous expenses.................................. 3,097
----------
Total................................................... $ 40,000
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law (the "DGCL") permits
the indemnification of the directors and officers of the Company. The Company
Bylaws provide that it will indemnify the officers, directors, employees and
agents of the Company to the extent permitted by the DGCL.

The Company Certificate provides for the indemnification of directors and
officers of the Company, and persons who serve or served at the request of the
Company as a director, officer, employee or agent of another corporation,
including service with respect to employee benefit plans, against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties in amounts paid or to be paid in settlement) reasonably
incurred with respect to any action, suit or proceeding, whether civil,
criminal, administrative, or investigative, provided, however, the Company shall
indemnify any such person seeking indemnification in connection with a
proceeding initiated by such person only if such proceeding was authorized by
the Company's Board. In the event a claim for indemnification by any person has
not been paid in full by the Company after written request has been received by
the Company, the claimant may at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim and, if successful in whole or
in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. The right to indemnification conferred in the Company
Certificate is a contract right and shall include the right to be paid by the
Company the expenses incurred in defending any such proceeding in advance of its
final disposition. The Company maintains insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Company against any
such expense, liability or loss, whether or not the Company would have the power
to indemnify such person against such expense, liability or loss under state
law.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

During the past three years the Company issued and sold shares of its
capital stock without registration under the Securities Act of 1933, as amended
(the "Act"), in reliance on the exemption provided therefrom by Section 4(2) of
the Act, in the transactions described below. In each transaction, the Company
did not engage any underwriter, broker or placement agent. In connection with
each such transaction, the Company obtained appropriate investment
representations supporting its reliance on such exemption from registration. In
such transactions (other than in connection with the Water Equipment
Technologies, Inc. acquisition), the Company obtained representations from the
investors that each was an "accredited investor," as defined in Regulation D
under the Act. In such transactions, appropriate disclosure was provided to each
investor to support the Company's reliance on the exemption from registration
provided by Section 4(2) of the Act.

On August 30 and September 15, 1995, the Company issued and sold 1,700,000
shares of the Series B Preferred Stock in a private placement to three
accredited investors: (i) Brantley Venture Partners III, L.P.

II-1
<PAGE> 76

(950,000 shares), (ii) River Cities Capital Fund Limited Partnership (375,000
shares), and (iii) IPP95, L.P. (375,000 shares). The total offering price was
$3,400,000.

On August 31, 1995, the Company issued 250,000 shares of the Common Stock
in connection with its acquisition of substantially all of the assets and
properties of Great Lakes Environmental, Inc. ("GLE"). The portion of the
purchase price attributable to the shares received by GLE as $500,000.

On June 27, 1996, the Company issued and sold 1,150,000 shares of the
Series C Preferred Stock in a private placement to five accredited investors:
(i) Brantley Venture Partners, III L.P. (250,000 shares), (ii) River Cities
Capital Fund Limited Partnership (250,000 shares), (iii) Environmental
Opportunities Fund, L.P. (556,062 shares), (iv) Environmental Opportunities Fund
(Cayman) L.P. (68,938 shares) and (v) Bruce Cummings (25,000 shares). The total
offering price was $4,600,000.

On September 30, 1996, the Company issued 499,996 shares of the Common
Stock in connection with its acquisition of all of the issued and outstanding
capital stock of Water Equipment Technologies, Inc. ("WET"). The shares of the
Common Stock were issued to 11 shareholders of WET upon the merger of WET with
and into a wholly-owned subsidiary of the Company (the "Merger"). The total
dollar value of the 499,996 shares of the Common Stock issued to the
shareholders of WET in the Merger was $2,124,983. On February 28, 1997, the
Company issued 111,788 additional shares of the Common Stock to the shareholders
of WET in payment of an adjustment to the purchase price paid by the Company for
the issued and outstanding shares of WET. The total dollar value of the 111,788
shares of Common Stock issued to the shareholders of WET as purchase price
adjustment was $475,099 (or $4.25 per share).

On October 15, 1996, the Company issued 100,000 shares of the Common Stock
to Lawrence M. Schmid ("Schmid") on Schmid's conversion of a convertible
subordinated promissory note in the principal amount of $400,000 (the "Schmid
Note") at a conversion price of $4.00 per share of the Common Stock. The Schmid
Note was issued to Schmid as part of the purchase price for the Company's
acquisition of certain patents and related know-how owned by Schmid and acquired
by the Company as part of its acquisition of all of the business, assets and
goodwill of Aero-Mod Incorporated and Resi-Tech Inc.

On January 6, 1997, the Company issued 500,000 shares of the Common Stock
to Mark E. Neville (350,000 shares) and Frederick J. Siino (150,000 shares) on
their conversion of a convertible subordinated promissory note in the principal
amount of $2,000,000 (the "Mass Transfer Note") at a conversion price of $4.00
per share of the Common Stock. The Mass Transfer Note was issued to Mass
Transfer Systems, Inc. ("Mass Transfer") as part of the purchase price for the
Company's acquisition of all of the business assets and goodwill of Mass
Transfer. The Mass Transfer Note was distributed to Messrs. Neville and Siino,
the sole shareholders of Mass Transfer, following completion of the acquisition.

On February 19, 1997, the Company issued 25,000 shares of the Common Stock
to Wheat First Securities, Inc., a Custodian for L. Dean Hertert, IRA. Mr.
Hertert is a Vice President of the Company. Mr. Hertert paid $106,250 for these
shares.

On February 19, 1997, the Company granted Bank of America a warrant to
purchase 225,000 shares of the Common Stock at a purchase price of $4.50 per
share (the "Bank Warrant"). The Bank Warrant was issued as additional
consideration for the provision of the Company's credit facility with Bank of
America. The Bank Warrant expires on February 19, 2002.

On March 12, 1997, in connection with its potential issuance of
subordinated notes in the principal amount of up to $10,000,000, the Company
issued to the potential purchasers (Brantley Capital Corporation, IPP95, L.P.,
River Cities Capital Fund Limited Partnership, National City Capital Corporation
and Environmental Opportunities Management Co., LLC) of the notes warrants to
purchase 125,000 shares of the Common Stock. Each warrant entitles the holder to
purchase one share of Common Stock at an initial purchase price per share of
$4.50, as adjusted on the occurrence of certain events. On January 9, 1998,
IPP95, L.P. purchased 18,233 shares of Common Stock pursuant to its exercise of
1997 Warrants, for which it delivered 6,767 1997 Warrants valued at $82,048.50
(or $12.125 per share, representing the excess of $16.625 per share (the closing
price of the Common Stock on the NYSE on January 8, 1998) over $4.50 per share
(the initial purchase price for such delivered 1997 Warrants).

II-2
<PAGE> 77

On March 14, 1997, the Company issued 50,000 shares of the Common Stock to
Michael J. Vantusko. Mr. Vantusko is Chief Financial Officer of the Company. Mr.
Vantusko paid $212,500 (or $4.25 per share) for these shares.

On April 3, 1997, the Company issued 25,000 shares of the Common Stock to
Rollin S. Reiter. Mr. Reiter is a director of the Company. Mr. Reiter paid
$106,250 (or $4.25 per share) for these shares.

On April 11, 1997, the Company issued 10,000 shares of the Common Stock to
Dr. Paul N. Sutton. Dr. Sutton is a director of the Company. Dr. Sutton paid
$42,500 (or $4.25 per share) for these shares.

On April 14, 1997, the Company issued 5,000 shares of the Common Stock to
Mr. John R. Miller. Mr. Miller is a director of the Company. Mr. Miller paid
$21,250 (or $4.25 per share) for these shares.

On June 27, 1997, the Company issued 328,947 shares of the Common Stock to
the four shareholders of Bioclear (David Romanow, Joe Romanow, Brian Topnik and
Robert Jenkyns) as part of the purchase price for the Company's acquisition of
all of the capital stock of Bioclear. The shares represented $5,000,000
(Canadian), valued at the initial public offering price of $11.00 per share.

On September 12, 1997, the Company issued convertible promissory notes in
the aggregate original principal amount of SEK 12,980,000 Swedish Kronor
(approximately US $1,671,000) to the shareholders of MEVA (Krister Lundberg,
Soren Andersson and Per Mellegard) as part of the purchase price for the
Company's acquisition of all the capital stock of MEVA. The principal amount of
the promissory notes is payable on September 12, 1999, with interest accruing at
the rate of three percent per annum, payable quarterly. The promissory notes are
convertible by their holders, at any time, into shares of Common Stock at an
conversion price of $21.38 per share.

On September 30, 1997, the Company issued 41,095 shares of the Common Stock
to a shareholder of Hycor (Philip A. Thompson) as part of the purchase price for
the Company's acquisition of all of the capital stock of Hycor. The shares
represented $750,000, valued at $18.25, the closing price of the Common Stock on
the NYSE on September 29, 1997, the day immediately preceding the acquisition.
The Company also issued a promissory note in the aggregate original principal
amount of $2,250,000 to Philip A. Thompson as part of the purchase price for
such acquisition. The principal amount of the promissory note is payable on
September 30, 1999, with interest accruing at the rate of 5.81% per annum,
payable quarterly. The promissory note is convertible by its holder, at any
time, into shares of Common Stock at an conversion price of $22.25 per share.

As of the date of this Registration Statement, the Company has granted
options to acquire an aggregate 1,525,300 shares of the Common Stock pursuant to
its 1995 Stock Option Plan. In addition, the Company issued 122,500 shares of
the Common Stock to three employees of the Company upon the exercise of stock
options granted to them under the 1995 Stock Option Plan: (i) on March 1, 1996,
Nancy A. Hamerly, the former chief financial officer of the Company, purchased
5,000 shares of the Common Stock for an aggregate purchase price of $500 (or
$.10 per share), (ii) on June 1, 1996 Chet S. Ross purchased 45,000 shares of
the Common Stock for an aggregate purchase price of $4,500 (or $.10 per share),
(iii) on January 3, 1997, Nancy A. Hamerly purchased 15,000 shares of the Common
Stock for an aggregate purchase price of $1,500 (or $.10 per share), (iv) on
March 10, 1997 Donald A. Weidig purchased 2,500 shares of Common Stock for an
aggregate purchase price of $250 (or $.10 per share), (v) on March 31, 1997,
Nancy A. Hamerly purchased 10,000 shares of the Common Stock for an aggregate
purchase price of $40,000 ($4.00 per share) and (vi) on June 1, 1997, Chet S.
Ross purchased 45,000 shares of Common Stock for an aggregate purchase price of
$4,500 (or $.10 per share).

II-3
<PAGE> 78

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ----------------------------------------------------------------------------------
<S> <C>
*3.1 Form of Fifth Amended and Restated Certificate of Incorporation of the Company
(filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997, File No. 1-13041).
*3.2 Form of Amended and Restated By-Laws of the Company (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1997, File No. 1-13041).
*4.1 Form of Rights Agreement, dated as of May 23, 1997, between the Company and
American Stock Transfer & Trust Company (filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997, File
No. 1-13041).
*4.2 Amended and Restated Registration Rights Agreement, dated as of March 6, 1997, by
and among the Company, Brantley Venture Partners III, L.P., Theodore F. Savastano,
River Cities Capital Fund limited Partnership, IPP95, L.P., Environmental
Opportunities Fund, L.P., Environmental Opportunities Fund (Cayman), L.P.,
Brantley Capital Corporation and National City Capital Corporation (filed as an
exhibit to the Company's Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*4.3 Registration Rights Agreement, dated as of January 31, 1996, between the Company
and Mass Transfer Systems, Inc (filed as an exhibit to the Company's Registration
Statement on Form S-1, filed April 16, 1997, Registration No. 333-25249).
*4.4 Registration Rights Agreement, dated as of April 26, 1996, between the Company and
Lawrence A. Schmid (filed as an exhibit to the Company's Registration Statement on
Form S-1, filed April 16, 1997, Registration No. 333-25249).
*4.5 Registration Rights Agreement dated as of September 30, 1996, between the Company,
Lawrence Stenger, Theresa Stenger, Ronald Jaworski, Christine Jaworski, John
Stenger, Dawn P. Stenger, Scott Stenger, Kristie D. Stenger, Jorg Menningman,
Michael Mudrick, Robert Young and Gary Prae (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
*10.1 Employment Agreement, dated May 23, 1997, between the Company and Chet S. Ross
(filed as an exhibit to the Company's Amendment No. 1 to Registration Statement on
Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.2 Employment Agreement, dated May 23, 1997, between the Company and Theodore F.
Savastano (filed as an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.3 Employment Agreement, dated May 23, 1997, between the Company and Michael J.
Vantusko (filed as an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.4 Employment Agreement, dated May 23, 1997, between the Company and L. Dean Hertert,
Jr. (filed as an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.5 Employment Agreement, dated July 1, 1987, between Nordic Water Products AB and Dr.
Hans F. Larsson (filed as an exhibit to the Company's Amendment No. 1 to
Registration Statement on Form S-1, filed May 23, 1997, Registration No.
333-25249).
*10.6 Credit Agreement, dated as of February 19, 1997 among the Company, Bank of America
Illinois, as agent, and the other financial institutions party thereto (filed as
an exhibit to the Company's Registration Statement on Form S-1, filed April 16,
1997, Registration No. 333-25249).
*10.7 Brantley Guaranty, dated as of February 19, 1997, by Brantley Venture Partners,
III, L.P. in favor of Bank of America Illinois, as agent, on behalf of the other
financial institutions party to the Credit Agreement, dated as of February 19,
1997 (filed as an exhibit to the Company's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249).
</TABLE>

II-4
<PAGE> 79

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ----------------------------------------------------------------------------------
<S> <C>
*10.8 Credit Agreement, dated as of June 27, 1997, among the Company, Bank of America
National Trust & Savings Association (successor by merger to Bank of America
Illinois), as agent, and for other financial institutions party thereto (filed as
an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1997, File No. 1-13041).
*10.9 Credit Agreement, dated as of March 4, 1997, among Gigantissimo 2061 AB (to be
known as Waterlink (Sweden) AB), the Company, as guarantor, and Bank of America
National Trust & Savings Association, London Branch (filed as an exhibit to the
Company's Registration Statement on Form S-1, filed April 16, 1997, Registration
No. 333-25249).
*10.10 First Amendment, dated as of June 27, 1997, to Credit Agreement, dated March 4,
1997, among Waterlink (Sweden) AB, the Company, as guarantor, and Bank of America
National Trust & Savings Association, London Branch (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1997, File No. 1-13041).
*10.11 Credit Agreement, dated as of March 4, 1997 among Provista Einhundertsechs
[sigma]undfunfzigste Verwaltungsgesellschaft mbH (to be known as Waterlink
(Germany) GmbH), Waterlink, Inc., as guarantor, and Bank of America National Trust
& Savings Association, Frankfurt Branch (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.12 First Amendment, dated as of June 27, 1997, to Credit Agreement, dated March 4,
1997, among Waterlink (Germany) GmbH, the Company, as guarantor, and Bank of
America National Trust & Savings Association, Frankfurt Branch (filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1997, File No. 1-13041).
*10.13 Common Stock Warrant Agreement, dated as of February 19, 1997, between the Company
and Bank of America Illinois (filed as an exhibit to the Company's Registration
Statement on Form S-1, filed April 16, 1997, Registration No. 333-25249).
*10.14 The Company's 1995 Stock Option Plan (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.15 Subordinated Note Purchase Agreement and Credit Facility, dated as of March 6,
1997, among the Company, Brantley Venture Partners III, L.P. and the purchasers
named therein, along with the Form of Subordinated Note due 2002 attached thereto
as Exhibit A (filed as an exhibit to the Company's Registration Statement on Form
S-1, filed April 16, 1997, Registration No. 333-25249).
*10.16 Warrant Agreement, dated as of March 6, 1997, among the Company and each of the
purchasers named therein, along with the Form of Warrant to Purchase Common Stock,
attached thereto as Exhibit A (filed as an exhibit to the Company's Registration
Statement on Form S-1, filed April 16, 1997, Registration No. 333-25249).
*10.17 The Company's 1997 Omnibus Incentive Plan (filed as an exhibit to the Company's
Amendment No. 1 to Registration Statement on Form S-1, filed May 23, 1997,
Registration No. 333-25249).
*10.18 Asset Purchase Agreement, dated January 31, 1996, among the Company, Waterlink
Acquisition Corporation, Mass Transfer Systems, Inc., Mark E. Neville and
Frederick J. Siino (filed as an exhibit to the Company's Registration Statement on
Form S-1, filed April 16, 1997, Registration No. 333-25249).
*10.19 Asset Purchase Agreement, dated April 26, 1996, among the Company, A-M
Acquisitions Corp., Aero-Mod Incorporated, Resi-Tech, Inc. and Lawrence A. Schmid
(filed as an exhibit to the Company's Registration Statement on Form S-1, filed
April 16, 1997, Registration No. 333-25249).
*10.20 Asset Purchase Agreement, dated April 26, 1996, among the Company, B-W Acquisition
Corp., Blue Water Services, Inc. and Lawrence A. Schmid (filed as an exhibit to
the Company's Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*10.21 Agreement and Plan of Merger, dated September 27, 1996, by and among the Company,
Wet Acquisition Corp. and Water Equipment Technologies, Inc. and the shareholders
of Water Equipment Technologies, Inc (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
</TABLE>

II-5
<PAGE> 80

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ----------------------------------------------------------------------------------
<S> <C>
*10.22 Share Purchase Agreement, dated March 4, 1997, among Waterlink (Sweden) AB,
Waterlink (Germany) GmbH, Awpe Svenska AB and Anglian Water Holding GmbH (filed as
an exhibit to the Company's Registration Statement on Form S-1, filed April 16,
1997, Registration No. 333-25249).
*10.23 Purchase and Sale Agreement, dated March 14, 1995, among Santech, Inc. (as
assignee from the Company pursuant to an Assignment of Purchase and Sale Agreement
dated March 28, 1995) and Sanborn, Inc (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.24 Asset Purchase Agreement, dated August 28, 1995, among Great Lakes Environmental,
Inc., a Delaware corporation (as assignee from the Company pursuant to an
Assignment dated August 31, 1995), Great Lakes Environmental, Inc., an Illinois
corporation, Lawrence Field and David Field (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.25 The Company's Employee Stock Purchase Plan (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.26 First Amendment, dated as of June 23, 1997, to the Company's Employee Stock
Purchase Plan (filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997, File No. 1-13041).
*10.27 The Company's 1997 Non-Employee Director Stock Option Plan (filed as an exhibit to
the Company's Amendment No. 1 to Registration Statement on Form S-1, filed May 23,
1997, Registration No. 333-25249).
*10.28 Stock Purchase Agreement among Waterlink (Sweden) AB, Waterlink, Inc. and the
shareholders of Mellegard V.A. Maskiner AB dated September 12, 1997 (filed as an
exhibit to the Company's Current Report on Form 8-K, filed September 26, 1997,
File No. 1-13041).
*10.29 Stock Purchase Agreement dated September 30, 1997 among Waterlink, Inc., Philip A.
Thompson and the Hycor Corporation Employee Stock Ownership Trust (filed as an
exhibit to the Company's Current Report on Form 8-K, filed October 14, 1997, File
No. 1-13041).
*10.30 Stock Purchase Agreement between Waterlink, Inc., and David Romanow, Joe Romanow,
Brian Topnik and Robert Jenkyns dated as of April 15, 1997 (filed as an exhibit to
the Company's Current Report on Form 8-K, filed July 9, 1997, File No. 1-13041).
*10.31 Stock Purchase Agreement between Great Lakes Environmental, Inc. and David M. Rice
dated as of April 14, 1997 (filed as an exhibit to the Company's Amendment No. 1
to Registration Statement on Form S-1, filed May 23, 1997, Registration No.
333-25249).
*10.32 Letter Agreement among Waterlink, Inc., Bioclear Technology, Inc. and Royal Bank
of Canada dated September 24, 1997(filed as an exhibit to the Company's Annual
Report on Form 10-K, filed December 3, 1997, File No. 1-13041).
*11.1 Computation of per share earnings (filed as an exhibit to the Company's Annual
Report on Form 10-K, filed December 3, 1997, File No. 1-13041).
*21.1 List of Subsidiaries of the Company (filed as an exhibit to the Company's Annual
Report on Form 10-K, filed December 3, 1997, File No. 1-13041).
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Benesch, Friedlander, Coplan & Aronoff LLP (contained in its Opinion
filed as Exhibit 5.1 hereto).
24.1 Powers of Attorney (included on signature page).
</TABLE>

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

* Incorporated herein by reference as indicated.

(b) Financial Statement Schedules.

None.

II-6
<PAGE> 81

ITEM 17. UNDERTAKINGS

(a) The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the Effective Time of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;

(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

(b) The undersigned registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
by a director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

II-7
<PAGE> 82

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 4TH DAY OF
FEBRUARY, 1998.

WATERLINK, INC.

By: /s/ CHET S. ROSS
------------------------------------
Chet S. Ross
President and Chief Executive
Officer

KNOW ALL MEN BY THESE PRESENTS, that each of the individuals whose
signature appears below constitutes and appoints Chet S. Ross and Michael J.
Vantusko, or any of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact, agent, or his substitute may lawfully do or cause to be done
by virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------- ----------------
<S> <C> <C>

/s/ THEODORE F. SAVASTANO Chairman of the Board February 4, 1998
- -------------------------------------
Theodore F. Savastano

/s/ CHET S. ROSS President, Chief Executive February 4, 1998
- ------------------------------------- Officer and Director
Chet S. Ross (Principal Executive Officer)

/s/ MICHAEL J. VANTUSKO Chief Financial Officer February 4, 1998
- ------------------------------------- (Principal Financial and
Michael J. Vantusko Accounting Officer)

/s/ ROBERT P. PINKAS Director February 4, 1998
- -------------------------------------
Robert P. Pinkas

/s/ JOHN R. MILLER Director February 4, 1998
- -------------------------------------
John R. Miller

/s/ ROLLIN S. REITER Director February 4, 1998
- -------------------------------------
Rollin S. Reiter

/s/ DR. PAUL M. SUTTON Director February 4, 1998
- -------------------------------------
Dr. Paul M. Sutton
</TABLE>

II-8
<PAGE> 83

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- -------- ---------------------------------------------------------------------------------------------
<S> <C> <C>

*3.1 Form of Fifth Amended and Restated Certificate of Incorporation of the Company
(filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997, File No. 1-13041).
*3.2 Form of Amended and Restated By-Laws of the Company (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1997, File No. 1-13041).
*4.1 Form of Rights Agreement, dated as of May 23, 1997, between the Company and
American Stock Transfer & Trust Company (filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997, File
No. 1-13041).
*4.2 Amended and Restated Registration Rights Agreement, dated as of March 6, 1997, by
and among the Company, Brantley Venture Partners III, L.P., Theodore F. Savastano,
River Cities Capital Fund limited Partnership, IPP95, L.P., Environmental
Opportunities Fund, L.P., Environmental Opportunities Fund (Cayman), L.P.,
Brantley Capital Corporation and National City Capital Corporation (filed as an
exhibit to the Company's Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
*4.3 Registration Rights Agreement, dated as of January 31, 1996, between the Company
and Mass Transfer Systems, Inc (filed as an exhibit to the Company's Registration
Statement on Form S-1, filed April 16, 1997, Registration No. 333-25249).
*4.4 Registration Rights Agreement, dated as of April 26, 1996, between the Company and
Lawrence A. Schmid (filed as an exhibit to the Company's Registration Statement on
Form S-1, filed April 16, 1997, Registration No. 333-25249).
*4.5 Registration Rights Agreement dated as of September 30, 1996, between the Company,
Lawrence Stenger, Theresa Stenger, Ronald Jaworski, Christine Jaworski, John
Stenger, Dawn P. Stenger, Scott Stenger, Kristie D. Stenger, Jorg Menningman,
Michael Mudrick, Robert Young and Gary Prae (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP.
*10.1 Employment Agreement, dated May 23, 1997, between the Company and Chet S. Ross
(filed as an exhibit to the Company's Amendment No. 1 to Registration Statement on
Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.2 Employment Agreement, dated May 23, 1997, between the Company and Theodore F.
Savastano (filed as an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.3 Employment Agreement, dated May 23, 1997, between the Company and Michael J.
Vantusko (filed as an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.4 Employment Agreement, dated May 23, 1997, between the Company and L. Dean Hertert,
Jr. (filed as an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form S-1, filed May 23, 1997, Registration No. 333-25249).
*10.5 Employment Agreement, dated July 1, 1987, between Nordic Water Products AB and Dr.
Hans F. Larsson (filed as an exhibit to the Company's Amendment No. 1 to
Registration Statement on Form S-1, filed May 23, 1997, Registration No.
333-25249).
*10.6 Credit Agreement, dated as of February 19, 1997 among the Company, Bank of America
Illinois, as agent, and the other financial institutions party thereto (filed as
an exhibit to the Company's Registration Statement on Form S-1, filed April 16,
1997, Registration No. 333-25249).
*10.7 Brantley Guaranty, dated as of February 19, 1997, by Brantley Venture Partners,
III, L.P. in favor of Bank of America Illinois, as agent, on behalf of the other
financial institutions party to the Credit Agreement, dated as of February 19,
1997 (filed as an exhibit to the Company's Registration Statement on Form S-1,
filed April 16, 1997, Registration No. 333-25249).
</TABLE>
<PAGE> 84

EXHIBIT INDEX -- CONTINUED

<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
- -------- ---------------------------------------------------------------------------------------------
<S> <C> <C>
*10.8 Credit Agreement, dated as of June 27, 1997, among the Company, Bank of America
National Trust & Savings Association (successor by merger to Bank of America
Illinois), as agent, and for other financial institutions party thereto (filed as
an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1997, File No. 1-13041).
*10.9 Credit Agreement, dated as of March 4, 1997, among Gigantissimo 2061 AB (to be
known as Waterlink (Sweden) AB), the Company, as guarantor, and Bank of America
National Trust & Savings Association, London Branch (filed as an exhibit to the
Company's Registration Statement on Form S-1, filed April 16, 1997, Registration
No. 333-25249).
*10.10 First Amendment, dated as of June 27, 1997, to Credit Agreement, dated March 4,
1997, among Waterlink (Sweden) AB, the Company, as guarantor, and Bank of America
National Trust & Savings Association, London Branch (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1997, File No. 1-13041).
*10.11 Credit Agreement, dated as of March 4, 1997, among Provista
Einhundertsechs[sigma]undfunfzigste Verwaltungsgesellschaft mbH (to be known as
Waterlink (Germany) GmbH), Waterlink, Inc., as guarantor, and Bank of America
National Trust & Savings Association, Frankfurt Branch (filed as an exhibit to the
Company's Registration Statement on Form S-1, filed April 16, 1997, Registration
No. 333-25249).
*10.12 First Amendment, dated as of June 27, 1997, to Credit Agreement, dated March 4,
1997, among Waterlink (Germany) GmbH, the Company, as guarantor, and Bank of
America National Trust & Savings Association, Frankfurt Branch (filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1997, File No. 1-13041).
*10.13 Common Stock Warrant Agreement, dated as of February 19, 1997, between the Company
and Bank of America Illinois (filed as an exhibit to the Company's Registration
Statement on Form S-1, filed April 16, 1997, Registration No. 333-25249).
*10.14 The Company's 1995 Stock Option Plan (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.15 Subordinated Note Purchase Agreement and Credit Facility, dated as of March 6,
1997, among the Company, Brantley Venture Partners III, L.P. and the purchasers
named therein, along with the Form of Subordinated Note due 2002 attached thereto
as Exhibit A (filed as an exhibit to the Company's Registration Statement on Form
S-1, filed April 16, 1997, Registration No. 333-25249).
*10.16 Warrant Agreement, dated as of March 6, 1997, among the Company and each of the
purchasers named therein, along with the Form of Warrant to Purchase Common Stock,
attached thereto as Exhibit A (filed as an exhibit to the Company's Registration
Statement on Form S-1, filed April 16, 1997, Registration No. 333-25249).
*10.17 The Company's 1997 Omnibus Incentive Plan (filed as an exhibit to the Company's
Amendment No. 1 to Registration Statement on Form S-1, filed May 23, 1997,
Registration No. 333-25249).
*10.18 Asset Purchase Agreement, dated January 31, 1996, among the Company, Waterlink
Acquisition Corporation, Mass Transfer Systems, Inc., Mark E. Neville and
Frederick J. Siino (filed as an exhibit to the Company's Registration Statement on
Form S-1, filed April 16, 1997, Registration No. 333-25249).
*10.19 Asset Purchase Agreement, dated April 26, 1996, among the Company, A-M
Acquisitions Corp., Aero-Mod Incorporated, Resi-Tech, Inc. and Lawrence A. Schmid
(filed as an exhibit to the Company's Registration Statement on Form S-1, filed
April 16, 1997, Registration No. 333-25249).
*10.20 Asset Purchase Agreement, dated April 26, 1996, among the Company, B-W Acquisition
Corp., Blue Water Services, Inc. and Lawrence A. Schmid (filed as an exhibit to
the Company's Registration Statement on Form S-1, filed April 16, 1997,
Registration No. 333-25249).
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EXHIBIT INDEX -- CONTINUED

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*10.21 Agreement and Plan of Merger, dated September 27, 1996, by and among the Company,
Wet Acquisition Corp. and Water Equipment Technologies, Inc. and the shareholders
of Water Equipment Technologies, Inc (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.22 Share Purchase Agreement, dated March 4, 1997, among Waterlink (Sweden) AB,
Waterlink (Germany) GmbH, Awpe Svenska AB and Anglian Water Holding GmbH (filed as
an exhibit to the Company's Registration Statement on Form S-1, filed April 16,
1997, Registration No. 333-25249).
*10.23 Purchase and Sale Agreement, dated March 14, 1995, among Santech, Inc. (as
assignee from the Company pursuant to an Assignment of Purchase and Sale Agreement
dated March 28, 1995) and Sanborn, Inc (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.24 Asset Purchase Agreement, dated August 28, 1995, among Great Lakes Environmental,
Inc., a Delaware corporation (as assignee from the Company pursuant to an
Assignment dated August 31, 1995), Great Lakes Environmental, Inc., an Illinois
corporation, Lawrence Field and David Field (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.25 The Company's Employee Stock Purchase Plan (filed as an exhibit to the Company's
Registration Statement on Form S-1, filed April 16, 1997, Registration No.
333-25249).
*10.26 First Amendment, dated as of June 23, 1997, to the Company's Employee Stock
Purchase Plan (filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997, File No. 1-13041).
*10.27 The Company's 1997 Non-Employee Director Stock Option Plan (filed as an exhibit to
the Company's Amendment No. 1 to Registration Statement on Form S-1, filed May 23,
1997, Registration No. 333-25249).
*10.28 Stock Purchase Agreement among Waterlink (Sweden) AB, Waterlink, Inc. and the
shareholders of Mellegard V.A. Maskiner AB dated September 12, 1997 (filed as an
exhibit to the Company's Current Report on Form 8-K, filed September 26, 1997,
File No. 1-13041).
*10.29 Stock Purchase Agreement dated September 30, 1997 among Waterlink, Inc., Philip A.
Thompson and the Hycor Corporation Employee Stock Ownership Trust (filed as an
exhibit to the Company's Current Report on Form 8-K, filed October 14, 1997, File
No. 1-13041).
*10.30 Stock Purchase Agreement between Waterlink, Inc., and David Romanow, Joe Romanow,
Brian Topnik and Robert Jenkyns dated as of April 15, 1997 (filed as an exhibit to
the Company's Current Report on Form 8-K, filed July 9, 1997, File No. 1-13041).
*10.31 Stock Purchase Agreement between Great Lakes Environmental, Inc. and David M. Rice
dated as of April 14, 1997 (filed as an exhibit to the Company's Amendment No. 1
to Registration Statement on Form S-1, filed May 23, 1997, Registration No.
333-25249).
*10.32 Letter Agreement among Waterlink, Inc., Bioclear Technology, Inc. and Royal Bank
of Canada dated September 24, 1997(filed as an exhibit to the Company's Annual
Report on Form 10-K, filed December 3, 1997, File No. 1-13041).
*11.1 Computation of per share earnings (filed as an exhibit to the Company's Annual
Report on Form 10-K, filed December 3, 1997, File No. 1-13041).
*21.1 List of Subsidiaries of the Company (filed as an exhibit to the Company's Annual
Report on Form 10-K, filed December 3, 1997, File No. 1-13041).
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Benesch, Friedlander, Coplan & Aronoff LLP (contained in its Opinion
filed as Exhibit 5.1 hereto).
24.1 Powers of Attorney (included on signature page).
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* Incorporated herein by reference as indicated.

<PAGE> 1
Exhibit 5.1

February 4, 1998

Board of Directors
Waterlink, Inc.
4100 Holiday Street N.W.
Suite 201
Canton, OH 44718-2532

Gentlemen:

We understand that Waterlink, Inc., a Delaware corporation (the
"Company"), intends to file with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, a Registration Statement on Form S-1
(the "Registration Statement") relating to a proposed public offering of an
aggregate of up to 430,000 shares (the "Shares") of the Company's common stock,
par value $.001 per share.

You have requested our opinion in connection with the Company's filing
of the Registration Statement. In this connection, we have examined and relied
upon originals or copies, certified or otherwise identified to our satisfaction
as being true copies, of all such records of the Company, all such agreements,
certificates of officers of the Company and others, and such other documents,
certificates and corporate or other records as we deemed necessary as a basis
for the opinion expressed in this letter.

In our examination, we have assumed the genuineness of all signatures,
the legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals and the conformity to authentic original documents
of all documents submitted to us as certified or photostatic copies.

We have investigated such questions of law for the purpose of rendering
the opinion in this letter as we have deemed necessary. We express no opinion
in this letter concerning any law other than the General Corporation Law of the
State of Delaware and the federal law of the United States of America.

On the basis of and in reliance on the foregoing, we are of the opinion
that the Shares have been legally issued and are fully paid and non-accessable.

<PAGE> 2
Board of Directors
Waterlink, Inc.
February 4, 1998
Page 2

The opinion in this letter is rendered only to the Company in
connection with the filing of the Registration Statement. We consent to the
filing of this letter as an exhibit to the Registration Statement and to being
named in the Prospectus under the heading "Legal Matters" as counsel for the
Company. The opinion may not be relied upon by the Company for any other
purpose. This letter may not be paraphrased, quoted or summarized, nor may it
be duplicated or reproduced in part.

Very truly yours,

BENESCH, FRIEDLANDER,
COPLAN & ARONOFF LLP

<PAGE> 1
Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated November 11, 1997, in the Registration Statement (Form
S-1 No. 333-00000) and related Prospectus of Waterlink, Inc. for the
registration of 430,000 shares of its common stock.

/s/ Ernst & Young LLP
ERNST & YOUNG LLP

Canton, Ohio
February 2, 1998