RECOVERY ENGINEERING INC, S-3/A, 1998-04-02

RECOVERY ENGINEERING INC
S-3/A, 1998-04-02
REFRIGERATION & SERVICE INDUSTRY MACHINERY

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As filed with the Securities and Exchange Commission on April 2, 1998
Registration No. 333-46833

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

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO. 1
TO
FORM S-3

REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

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

MINNESOTA 41-1557115
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)

9300 NORTH 75TH AVENUE
MINNEAPOLIS, MINNESOTA 55428
TELEPHONE: (612) 315-5500
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)

BRIAN F. SULLIVAN, CHIEF EXECUTIVE OFFICER
9300 NORTH 75TH AVENUE
MINNEAPOLIS, MINNESOTA 55428
TELEPHONE: (612) 315-5500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

COPIES OF COMMUNICATIONS TO:

Eric O. Madson, Esq. Edward S. Rosenthal, Esq.
Robins, Kaplan, Miller & Ciresi L.L.P. Fried, Frank, Harris, Shriver & Jacobson
2800 LaSalle Plaza 350 South Grand Avenue
800 LaSalle Avenue 32nd Floor
Minneapolis, MN 55402-2015 Los Angeles, CA 90071
Telephone: (612) 349-0822 Telephone: (213) 473-2000
Telecopier: (612) 339-4181 Telecopier: (213) 473-2222

Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

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, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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. [ ]

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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

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

<PAGE>

SUBJECT TO COMPLETION, DATED APRIL 2, 1998

1,000,000 SHARES

[LOGO] PUR(R)
Drinking Water Systems

RECOVERY ENGINEERING, INC.

COMMON STOCK

ALL OF THE SHARES OF COMMON STOCK ("COMMON STOCK") OFFERED HEREBY ARE
BEING SOLD BY RECOVERY ENGINEERING, INC. (THE "COMPANY").

THE COMPANY'S COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER
THE SYMBOL "REIN." ON APRIL 1, 1998, THE LAST REPORTED SALE PRICE OF THE COMMON
STOCK WAS $30.00 PER SHARE. SEE "PRICE RANGE OF COMMON STOCK."

SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN 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 STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)

PER SHARE ......... $ $ $
TOTAL (3) ......... $ $ $
================================================================================

(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING OFFERING EXPENSES PAYABLE BY THE COMPANY ESTIMATED TO BE
$300,000.
(3) THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
150,000 ADDITIONAL SHARES OF COMMON STOCK SOLELY TO COVER OVER-ALLOTMENTS,
IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO
PUBLIC WILL TOTAL $_______, THE UNDERWRITING DISCOUNT WILL TOTAL $_______
AND THE PROCEEDS TO COMPANY WILL TOTAL $_______. SEE "UNDERWRITING."

THE SHARES OF COMMON STOCK ARE OFFERED BY THE UNDERWRITERS NAMED HEREIN,
SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM AND SUBJECT TO THEIR RIGHT TO REJECT
ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE CERTIFICATES
REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT THE OFFICE OF
NATIONSBANC MONTGOMERY SECURITIES LLC ON OR ABOUT ___________, 1998.

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

NATIONSBANC MONTGOMERY SECURITIES LLC
DEUTSCHE MORGAN GRENFELL

____________, 1998.

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 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.

<PAGE>

PUR

SELF-MONITORING WATER FILTERS

THE LEADER IN DRINKING WATER FILTRATION TECHNOLOGY

NEWLY INTRODUCED PRODUCTS
[PHOTO OF PRODUCT]
The New PUR Plus
Walter Filtration Pitcher
and Replacement Filter
[PHOTO OF PRODUCT]
The New PUR Ultimate
Faucet Mount Water Filter
and Replacement Filter
[PHOTO OF PRODUCT]
The New PUR Plus
Water Filtration Dispenser
and Replacement Filter

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."

- ------------------
PUR(R), SELF-MONITORING WATER FILTER(R), ASM(R), AUTOMATIC SAFETY MONITOR(TM),
TRITEK(R), PIONEER(R), HIKER(R), VOYAGEUR(TM), SCOUT(R), EXPLORER(R) AND
SURVIVOR(R) ARE TRADEMARKS OF THE COMPANY.

<PAGE>

PUR OFFERS A BROAD LINE OF PRODUCTS

POUR-THROUGH FILTERS
- --------------------

[PHOTO OF PRODUCT]
PUR STANDARD PITCHER

Offers a unique Automatic Safety Monitor(TM) while removing high levels of
lead and chlorine.

[PHOTO OF PRODUCT]
PUR PLUS PITCHER

The only pour through pitcher water filter to remove microbiological cysts
- including Cryptosporidium and Giardia.

[PHOTO OF PRODUCT]
PUR PLUS DISPENSER

The only pour through dispenser water filter to remove microbiological
cysts - including Cryptosporidium and Giardia.

IN-LINE SYSTEMS
- ---------------

FAUCET MOUNTS

[PHOTO OF PRODUCT]
PUR STANDARD FAUCET MOUNT

Protects you from more contaminants than most pitcher water filters.

[PHOTO OF PRODUCT]
PUR PLUS FAUCET MOUNT

Higher contaminant removal.

[PHOTO OF PRODUCT]
PUR ULTIMATE FAUCET MOUNT

Our most advanced faucet mount filter provides protection from harmful
chemicals linked to cancer.

COUNTERTOP & UNDERSINK

[PHOTO OF PRODUCT]
PUR PLUS COUNTERTOP

Higher protection from contaminants and longer filter life.

[PHOTO OF PRODUCT]
PUR PLUS UNDERSINK

Only PUR provides superior contaminant removal and the Automatic Safety
Monitor Gauge in an undersink configuration.

<PAGE>

ALL PUR PRODUCTS USE ADVANCED TECHNOLOGY

[GRAPHIC] AUTOMATIC SAFETY MONITOR(TM) GAUGE
AUTOMATICALLY TELLS YOU WHEN TO CHANGE THE FILTER

ADVANCED MICROFILTER GIVES YOU DOUBLE FILTER
PROTECTION USING AN EXCLUSIVE TWO-LAYER
PROCESS.

[THIS CAPTION POINTS TO PHOTO AT RIGHT]
AUTOMATIC SAFETY MONITOR(TM)
Only PUR has an exclusive Automatic Safety
Monitor that shows how much filter life is
left, and automatically tells you when to
replace it.

[THIS CAPTION POINTS TO PHOTO AT RIGHT] PUR Plus Pitcher &
LAYER ONE Dispenser Filter
PLEATED MICROFILTER [PHOTO]
Only PUR has a pleated microfilter that
removes microbiological cysts as well as
asbestos. No other pitcher filter removes
these contaminants.

[THIS CAPTION POINTS TO PHOTO AT RIGHT]
LAYER TWO
ION EXCHANGE RESIN
AND ACTIVATED CARBON
Reduces Lead, Copper, Zinc, chlorine, bad
taste and odor for great-tasting water.

[THIS CAPTION POINTS TO PHOTO AT RIGHT]
AUTOMATIC SAFETY MONITOR(TM)
The Automatic Safety Monitor(TM) gauge for
in-line systems automatically shuts off when
the filter needs changing in addition to
indicating remaining filter life.

[THIS CAPTION POINTS TO PHOTO AT RIGHT] PUR Standard Faucet
ADVANCED MICROFILTER Mount Filter
The PUR one-micron carbon filter offers [PHOTO]
superior protection by reducing lead and
removing even the smallest elements such as
Cryptosporidium and Giardia.

[THIS CAPTION POINTS TO PHOTO AT RIGHT]
BYPASS FEATURE
With a twist of the wrist the faucet mount
unit bypasses the filter for unfiltered water
and provides convenient access to the faucet
for washing dishes.

POINT-OF-SALE EDUCATION

[PHOTO]
These displays help educate consumers on the different safety levels, as well as
features and benefits. They are used by a number of PUR's national accounts.

<PAGE>

PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS OF THE COMPANY, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE
INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION.

THE COMPANY

Recovery Engineering, Inc. (the "Company") designs, manufactures and
markets proprietary small-scale drinking water systems under the PUR(R) brand
name for the household, recreational and military markets. These products
include a line of self-monitoring water filters for household use, a rugged line
of portable drinking water systems for outdoor enthusiasts and international
travelers and a line of low-energy, reverse osmosis desalinators for offshore
marine, commercial life raft and military use. PUR household water filters are
offered in a variety of configurations, including pitchers and dispensers which
are filled from the tap ("pour-through" systems) and faucet-mounted, countertop
and under-sink filter systems which are connected to the water lines ("in-line"
systems). PUR household water filter systems and replacement cartridges, which
together accounted for more than 80% of the Company's net sales in 1997, are
distributed through approximately 26,000 retail outlets in the United States and
Canada, including Wal-Mart, Sears, Target, Costco, Kmart, Macy's and Walgreens.

The United States Environmental Protection Agency ("EPA") and other
organizations have identified a number of harmful contaminants that many
municipal water authorities do not or cannot remove from drinking water. For
example, municipal drinking water available in many homes in the United States
contains dangerous contaminants such as lead, microbiological cysts,
agricultural pesticides and herbicides, and carcinogenic chlorine byproducts.
The Company believes that increasing awareness and concern in the United States
about tap water quality has contributed significantly to a steady increase in
the size of the market for tap water substitutes and filtration systems. The
United States market for bottled water is currently estimated to be over $3.0
billion annually, with approximately 35% of U.S. households purchasing bottled
water. The Company estimates that the overall annual market for household
drinking water systems, services and supplies (such as water filters, water
softeners and whole house systems) is more than $1.7 billion, with the Company's
current segments of this overall market representing approximately $400 million.
Based on consumer research conducted in 1993, the Company determined that this
market offered an opportunity for a company with significant technological
expertise to achieve a leading position by developing water filtration products
with superior performance capabilities.

The Company launched its first PUR water filters for the household market
in 1994 with the intent of establishing a large installed base of PUR water
filter systems to support recurring sales of replacement filter cartridges. To
date, the Company has sold more than 2.5 million household water filter systems
and has obtained a significant share of this market. According to survey
information from Intelect, a third party market research firm, PUR is the number
one brand of in-line water filters and the second leading brand of all household
water filters sold in the United States. To accomplish this, the Company has
invested significant resources during the past three years to develop advanced
filtration and monitoring technologies, launch a broad range of products at a
variety of price points, expand distribution aggressively, and provide high
levels of consumer and trade advertising support.

The Company's internally developed proprietary filtration technologies
reduce a wide range of contaminants, such as microbiological cysts, lead,
pesticides, volatile organic compounds ("VOCs") and other impurities, while
improving water taste and odor. Each PUR household water filter system
incorporates a replaceable filtration cartridge which has a capacity from 40 to
200 gallons and provides the typical consumer with one to six months of filtered
water, depending on the system and the consumer's usage. To ensure that
consumers do not overuse their filtration cartridges, the Company developed a
proprietary technology, known as the Automatic Safety Monitor(TM) ("ASM(R)"),
that measures the filter's usage and indicates its remaining capacity. The
Company believes that this visible indication of when to replace the filter
cartridge encourages consumers to purchase replacement cartridges more
frequently than they otherwise would. The sale of the Company's replacement
cartridges is expected to comprise an increasing portion of sales of household
water filter products as the installed base of filter systems continues to
increase.

<PAGE>

The Company's objective is to establish and maintain PUR as the leading
brand of consumer water filter products and to obtain a leading position in each
market segment it enters. The Company's key strategies to accomplish this
objective are:

* DEVELOP PROPRIETARY TECHNOLOGIES TO ADDRESS CONSUMER CONCERNS.
Research and development efforts are focused on creating innovative
and technologically superior products that provide performance
characteristics exceeding those of competing products. The Company
conducts consumer research to identify consumer concerns that can be
addressed with innovative products. For example, in 1998 the Company
introduced two new pour-through systems, the PUR PLUS pitcher and the
PUR PLUS dispenser, which are the first gravity-fed water filter
systems capable of removing potentially harmful microorganisms as
small as CRYPTOSPORIDIUM and GIARDIA LAMBLIA.

* OFFER A BROAD LINE OF SUPERIOR PRODUCTS WHICH CATER TO A WIDE CONSUMER
SEGMENT. The Company has established a leading position in its
consumer drinking water treatment categories by developing a broad
range of products with superior performance characteristics at a
number of retail price points.

* ESTABLISH A BROAD DISTRIBUTION NETWORK. Since entering the household
water filter market in 1994, the Company has expanded its distribution
network aggressively. PUR household products are currently sold
throughout the United States and Canada through approximately 26,000
retail outlets (an increase from approximately 15,000 retail outlets
at the end of 1996), including department stores, mass merchants, drug
stores, grocery stores, hardware stores and warehouse clubs.

* PROMOTE BRAND AWARENESS THROUGH EFFECTIVE MARKETING. The Company
invests significant resources in advertising and promotional
activities to increase awareness of its products and build recognition
of the PUR brand. These activities include point-of-sale displays and
cooperative advertising programs for retailers, television commercials
and infomercials, and print and radio advertisements.

* GENERATE RECURRING SALES OF REPLACEMENT FILTER CARTRIDGES. The
Company's strategy is to build brand name recognition for PUR products
and develop an installed base of its products to promote recurring
sales of replacement cartridges. In addition, all PUR household
products incorporate the Company's ASM technology to indicate when a
filter cartridge needs to be replaced. The Company anticipates that an
increasing portion of its revenues in the household market will be
derived from recurring sales of replacement cartridges, which on
average have higher margins than the Company's other products.

* DEVELOP LOW-COST, HIGH-VOLUME FLEXIBLE MANUFACTURING PROCESSES. The
Company continues to make substantial investments in automating the
manufacturing and assembly processes for its household water filters,
including the development of several proprietary, automated processes
for manufacturing filter elements. These automated processes enable
the Company to improve its manufacturing efficiencies while enhancing
its ability to provide high volumes of differentiated products to
retailers.

The Company was originally incorporated in the State of Delaware in March
1986 and was reincorporated in the State of Minnesota in March 1996. Its
principal office is located at 9300 North 75th Avenue, Minneapolis, Minnesota
55428, and its telephone number is (612) 315-5500.

THE OFFERING

Common Stock offered............ 1,000,000 shares

Common Stock to be outstanding
after the offering.............. 5,558,704 shares (1)

Use of proceeds................. To repay certain existing indebtedness and
for general corporate purposes, including
working capital. See "Use of Proceeds."

Risk factors.................... Investors should carefully consider the
factors discussed under "Risk Factors."

Nasdaq National Market symbol... REIN

- -------------------
(1) Does not include 2,094,051 shares of Common Stock issuable upon exercise of
options and warrants or conversion of convertible debt outstanding at
December 31, 1997. See "Dilution."

<PAGE>

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>

STATEMENT OF OPERATIONS DATA:
Net sales ............................................ $ 10,292 $ 16,671 $ 22,921 $ 33,277 $ 71,243
Gross profit ......................................... 5,304 8,774 8,962 12,521 33,826
Income (loss) from operations ........................ 2,057 2,470 (7,751) (12,262) (2,071)
Income (loss) before income taxes .................... 2,202 2,926 (7,326) (12,499) (3,455)
Income tax expense (benefit) ......................... 705 907 (2,564) -- --
Net income (loss) .................................... 1,497 2,019 (4,762) (12,499) (3,455)
======== ======== ======== ========= ==========
Net income (loss) per share (basic) (1)(2) ........... $ 0.53 $ 0.57 $ (1.12) $ (2.90) $ (0.77)
======== ======== ======== ========= ==========
Weighted average shares (basic) ...................... 2,843 3,531 4,239 4,307 4,471
Net income (loss) per share (diluted) (1)(2) ......... $ 0.45 $ 0.50 $ (1.12) $ (2.90) $ (0.77)
======== ======== ======== ========= ==========
Weighted average shares (diluted) .................... 3,321 4,029 4,239 4,307 4,471
OPERATING DATA:
Estimated number of retail outlets at end of
period (3) .......................................... 1,200 2,200 9,900 16,900 28,000
Number of replacement cartridges shipped
during year ......................................... 4,500 51,000 186,000 716,000 3,135,000

</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------
ACTUAL AS ADJUSTED (4)
--------- ----------------
<S> <C> <C>

BALANCE SHEET DATA:
Working capital .............. $ 2,144 $30,044
Total assets ................. 42,700 63,439
Long-term debt ............... 15,000 15,000
Shareholders' equity ......... 4,231 32,131

</TABLE>

- -----------------
(1) All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to FASB Statement 128 requirements.

(2) Pro forma basic and diluted net income (loss) per share was a loss of
$(0.59) per share in 1997. The pro forma information assumes the retirement
of short-term debt of $6.6 million (the average short-term debt outstanding
in 1997) with proceeds from the sale of 235,000 shares of Common Stock
offered hereby at an assumed public offering price of $30.00 per share.
Interest related to short-term debt was $677,000 in 1997.

(3) Represents the Company's estimate of the number of outlets at which one or
more of the Company's household and outdoor products were sold. The
approximate numbers of retail outlets at which the Company's household
products were sold at the end of such periods were none in 1993, 1,000 in
1994, 8,000 in 1995, 15,000 in 1996 and 26,000 in 1997.

(4) Adjusted to give effect to the sale of the 1,000,000 shares of Common Stock
offered hereby at an assumed public offering price of $30.00 per share and
the application of the estimated net proceeds therefrom. Does not include
2,094,051 shares of Common Stock issuable upon exercise of options and
warrants or conversion of convertible debt outstanding at December 31,
1997. See "Use of Proceeds," "Capitalization" and "Dilution."

FORWARD-LOOKING STATEMENTS

Except for historical information contained in this Prospectus, the
matters discussed herein contain forward-looking statements that involve risks
and uncertainties that could cause actual results to differ materially from
those suggested in the forward-looking statements, including without limitation
the effects of economic conditions, product demand, competitive products and
other risks detailed herein. See "Risk Factors."

<PAGE>

RISK FACTORS

PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW AND CONSIDER THE FOLLOWING
RISK FACTORS AND OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.

RECENT HISTORY OF OPERATING LOSSES

The Company has experienced a net loss in each of the last three years due
primarily to costs associated with entering the household market including,
among other things, costs of creating brand name awareness, developing broader
product line offerings, and establishing a wide distribution network for its
products. The net losses were incurred despite substantial increases in net
sales that resulted from the Company's entry into the household water filter
market. The Company intends to continue investing significant amounts in
development of additional extensions of its product lines, advertising and
promotional activities to support existing products and new product
introductions, and continued development of enhanced manufacturing processes and
expanded production capacity. Thus, the Company may continue to generate losses
even if revenues increase, and there can be no assurance that the Company will
become consistently profitable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."

CONTINUED ACCEPTANCE OF PRODUCTS

The Company's ability to continue to increase its sales and return to
consistent profitability will depend to a significant degree on the continued
successful retail sell-through of new and existing household drinking water
treatment products for consumer markets in the United States and other
countries. The success of the Company's products will depend in part on the
Company's continued ability to educate consumers about the advantages of such
products over other means of addressing drinking water concerns, including
bottled water and alternative products for water filtration. Additionally, there
can be no assurance that the Company's household water filtration products will
continue to be successfully sold through the Company's established network of
retail outlets or that the Company will be able to maintain its distribution
network. The Company's performance will also depend on consumers' willingness to
continue using the Company's products and to buy replacement filter cartridges.
See "Business -- Industry Overview -- Household Market" and "Business --
Products -- Household Water Filters."

RELIANCE ON PROPRIETARY TECHNOLOGY

The Company's ability to compete depends in part on its proprietary
technology, which it seeks to protect with patents and trademarks. The Company
is the owner of 12 United States utility patents, five United States design
patents, and 12 United States registered trademarks related to its desalinator,
recreational, and household water filtration products. Additionally, the Company
has applied for 11 patents related to its new and existing household water
filtration products and recreational products. The Company has also applied for
and received various corresponding foreign patents where it deemed such
applications necessary. The laws of certain foreign countries do not protect the
Company's intellectual property rights to the same extent as do the laws of the
United States. The Company intends to vigorously defend and protect its patents
and other proprietary technology against infringement or misappropriation by
others. There can be no assurance, however, that steps taken by the Company will
prevent misappropriation of its technology, that any patents from pending patent
applications or from any future patent application will be issued, that the
scope of any patent protection will provide competitive advantages to the
Company or preclude competitors from developing products similar to the
Company's products, that any of the Company's patents will be held valid if
subsequently challenged, or that others will not claim rights in or ownership of
the patents and other proprietary rights held by the Company. In addition, there
can be no assurance that third parties will not assert infringement claims with
respect to the Company's current or future products or that any such claims will
not require the Company to enter into license arrangements or result in
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses could be obtained on commercially reasonable terms,
or at all. Litigation or regulatory proceedings may also be necessary to enforce
patent or other intellectual property rights of the Company or to determine the
scope and validity of other parties' proprietary rights. Such litigation could
be expensive and time consuming and could have a

<PAGE>

material adverse effect on the Company's business, financial condition or
results of operations regardless of the outcome of such litigation. See
"Business -- Patents."

PATENT LITIGATION

The Company is currently engaged in litigation with respect to certain
aspects of its technology. The Company and several other water filtration
companies are defendants in a civil proceeding initiated in January 1997 by
Brita U.S.A. (a subsidiary of Clorox Company) which asserts that the defendants'
pitcher products, including the Company's PUR Pitcher product, infringe one of
Brita's patents. Brita's lawsuit, now pending in the United States District
Court for the Northern District of Illinois, seeks injunctive relief and
unspecified monetary damages. The litigation is still in the initial stages. The
Company is also a defendant in a civil proceeding initiated in April 1997 by
UltraPure Systems, Inc. ("UltraPure"), a subsidiary of Culligan Water
Technologies, Inc., which asserts that the Company's faucet-mounted filter
systems have infringed an UltraPure patent. UltraPure's lawsuit, now pending in
the United States District Court for the District of Minnesota, seeks injunctive
relief and unspecified monetary damages. This litigation is also still in the
initial stages. The Company believes it has meritorious defenses to both of
these disputes and is vigorously defending these actions. The Company is unable
to predict the outcome of these proceedings. An adverse decision in either
proceeding could have a material adverse effect on the Company's business,
prospects and financial condition. See "Business -- Litigation."

TECHNOLOGICAL CHANGE AND PRODUCT OBSOLESCENCE

The water treatment markets in which the Company competes are subject to
technological changes, and the Company's business strategy is based to a
substantial extent on the Company's ability to offer technologically superior
products. The ability of the Company to compete successfully will depend in part
on its ability to continue to respond effectively to technological changes,
enhance its technology and develop and market new products and new applications
for its existing technology. Although the Company expends a significant portion
of its revenues on research and development and product enhancement efforts,
there can be no assurance that the Company can successfully develop and bring
any new products to the market in a timely manner, that such products will be
commercially successful, or that competitors' technologies or services will not
render the Company's products or services non-competitive or obsolete. The
Company relies on product effectiveness certifications from the National
Sanitation Foundation ("NSF"), a nationally recognized not-for-profit agency for
the certification of water filters, to support its claims to consumers. NSF
certification is currently pending for the Company's new PUR PLUS dispenser and
PUR FM ULTIMATE faucet mounted products. There can be no assurance that these or
other future products will receive anticipated certification or that the failure
to receive anticipated certification would not impair the Company's ability to
market such products. See "Business -- Products" and "Business -- Research and
Development."

MANAGEMENT OF GROWTH

During the last three years, as a result of higher than forecast sales of
the Company's household water filter systems, the Company was not able at all
times to adjust its production capacity quickly enough to keep pace with the
demand for its products. However, the Company believes that any resulting
delivery delays did not materially adversely affect the Company's total net
sales over this period or its relationships with its principal customers. To
manage further growth successfully, the Company will be required to continue
improving its operations, management and financial systems and controls and
expand its facilities and its employee workforce. Any future growth can be
expected to place significant additional responsibilities on the Company's
management, operations, employees and resources. There can be no assurance the
Company will be able to maintain or accelerate its current growth, effectively
manage its expanding operations or achieve planned growth on a timely or
profitable basis. To the extent that the Company is unable to manage its growth
efficiently and effectively, the Company's business, financial condition and
results of operations could be materially adversely affected. Furthermore, in
pursuing its growth strategy, the Company may need to incur additional debt or
issue additional equity securities, resulting in increased financial leverage or
potential dilution to holders of Common Stock. See "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Business Strategy."

<PAGE>

RISKS OF INTERNATIONAL OPERATIONS

The Company's international sales efforts are and will continue to be
conducted principally through third party distributors and accordingly the
Company is dependent on the efforts of such distributors for the majority of its
international sales. There can be no assurance that the Company will be
successful in establishing and maintaining such distribution relationships, or
that such distributors will promote the Company's products aggressively or
achieve greater market awareness and penetration for the Company's products than
for competing products. In addition, because of this distribution strategy, the
Company is dependent upon the financial viability, reputation and success of its
distributors, with the result that the Company's business and financial
condition could be adversely affected by factors unrelated to the Company's
performance. The Company's international business may also be adversely affected
by governmental, political and economic conditions, including import quotas and
other factors. While foreign sales are expected to be priced in dollars,
fluctuation in currency exchange rates may reduce the demand for the Company's
products by increasing the price of these products in the currency of the
countries in which the products are sold. See "Business -- Marketing and
Distribution."

COMPETITION

The Company encounters and expects to continue to encounter intense
competition in the sale of its products. The Company believes that the principal
competitive factors affecting the market for its products include product
features, product performance and reputation, price and service. The Company's
competitors include companies with established reputations in the consumer,
household water filtration and purification field and substantially greater
financial, technical, marketing and other resources than the Company. As a
result, such companies may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the promotion and sale of their products than the Company. Competition could
increase if new companies enter the market or if existing competitors expand
their product lines or intensify efforts within existing product lines. The
Company also indirectly competes on the retail consumer level with suppliers of
prepackaged bottled water and bulk water dispensing systems. There can be no
assurance that the Company's current products, products under development or
ability to discover new technologies will be sufficient to enable it to compete
effectively. See "Business -- Competition."

PRODUCT LIABILITY

The Company could be liable for personal injuries allegedly caused by a
defect in one of the Company's products. While to date the Company has not
experienced any such claims, there can be no assurance that such claims will not
be made in the future. The Company currently carries product liability insurance
covering its products with policy limits of $2.0 million in the aggregate and
$1.0 million per occurrence. The Company also maintains umbrella coverage over
this amount to $15.0 million. It cannot be predicted, however, whether such
insurance is sufficient to adequately cover the Company's product liability
risk. Lack of sufficient insurance could expose the Company to substantial
damages in connection with product liability claims or product recalls. In
addition, the costs related to defending any claim, and/or the negative
publicity resulting from any liability action could have a material adverse
effect on the Company's sales and profitability.

CUSTOMER CONCENTRATION

Sales of PUR household water filtration products to the Company's five
largest customers accounted for more than 45% of the Company's net sales in
1997, with Wal-Mart (12.8%) and Costco (10.1%) each representing more than 10%
of net sales. A reduction, delay or cancellation of orders from one or more of
these customers, or the loss of one or more of such customers, could have a
material adverse effect on the Company's operating results. See "Business --
Marketing and Distribution."

DEPENDENCE ON KEY PERSONNEL

The Company's future success depends in significant part upon the continued
service of its key senior management and technical personnel, including Brian F.
Sullivan, President and Chief Executive Officer and Richard D. Hembree, Vice
President -- Engineering. The Company's future success also depends on its
continuing ability to attract and retain highly qualified managerial and
technical personnel. There can be no assurance that the Company will be able to
retain key employees or attract and retain other qualified personnel in the
future.

<PAGE>

SEASONALITY; QUARTERLY FLUCTUATIONS; POSSIBLE VOLATILITY OF STOCK PRICE

Management believes that the Company's business is to some extent seasonal,
with its highest sales levels occurring during the fourth quarter, although its
recent sales growth may have masked seasonal patterns. Results for any quarter
are not necessarily indicative of the results that the Company may achieve for
any subsequent quarter or a full fiscal year. Quarterly results may fluctuate as
a result of the timing of merchandise shipments, timing of expenditures for
product development and other factors. There can be no assurance that results in
future periods will not fluctuate on a quarterly basis. In addition, the market
price for the Common Stock may be highly volatile depending on various factors,
including the general economy, stock market conditions, the establishment or
loss of major customer relationships, technological innovations, new product
introductions by the Company or its competitors, and fluctuations in the
Company's operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

POTENTIAL ADVERSE EFFECT OF STOCK OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES

A substantial number of shares of Common Stock are issuable upon the
exercise of outstanding stock options and warrants or the conversion of the
Company's 5% Convertible Notes due 2003 (the "Convertible Notes") at exercise or
conversion prices that are significantly less than recent market prices for the
Common Stock. When issued, such shares may become available for sale in the
public market. Sales of substantial amounts of such shares in the public market
could adversely affect the market price of the Common Stock. See "Dilution." The
Company, its officers, directors and certain other shareholders, including the
holders of the Convertible Notes, have agreed that, for a period of 180 days
from the date of this Prospectus (120 days in the case of the holders of the
Convertible Notes), they will not, without the prior written consent of
NationsBanc Montgomery Securities LLC, offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or securities convertible into,
or exercisable or exchangeable for, Common Stock. Such shareholders beneficially
own an aggregate of 1,261,829 shares of Common Stock currently outstanding and
options exercisable for or securities convertible into an aggregate of 1,293,651
shares of Common Stock.

EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS

The Company has adopted a Shareholder Rights Plan and is subject to certain
anti-takeover provisions of the Minnesota Business Corporation Act. Such
provisions could have the effect of discouraging a takeover proposal or tender
offer not approved by management and the Board of Directors of the Company.
Accordingly, shareholders may be denied the opportunity to participate in a
transaction which offers a premium to the prevailing market price of the Common
Stock. Furthermore, the Company's Board of Directors is authorized, without
further action by the holders of Common Stock, to establish various series of
Preferred Stock from time to time and to determine the rights, preferences and
restrictions of any wholly unissued series, including, among other matters,
dividend, liquidation and voting rights. Thus, the Board of Directors may,
without shareholder approval, issue shares of a class or series of Preferred
Stock with voting and conversion rights which could adversely affect the voting
power of the holders of the Common Stock and could have the effect of delaying,
deferring or preventing a change in control of the Company. The creation and
issuance of shares of such a class or series of Preferred Stock could also
adversely affect the market price of the Common Stock.

DILUTION

Purchasers of the shares of Common Stock offered hereby will experience
immediate substantial dilution in net tangible book value estimated at $24.34
per share, assuming a public offering price of $30.00. See "Dilution."

DISCRETIONARY USE OF PROCEEDS

Approximately $12.9 million, or 46%, of the net proceeds to be received by
the Company in this offering have been designated for expansion of the Company's
business and for general corporate purposes. Management and the Board of
Directors of the Company will have broad discretion in determining the uses to
which these proceeds will be applied. See "Use of Proceeds."

<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered hereby at an assumed public offering price of $30.00 per
share will be approximately $27.9 million ($32.1 million if the Underwriters'
over-allotment option is exercised in full), after deducting estimated
underwriting discounts and offering expenses.

The Company currently intends to apply the net proceeds of this offering to
repay bank debt and support the continued expansion of the Company's business.
Approximately $15 million of the net proceeds will be used to repay borrowings
under the Company's credit facility with First Bank National Association ("First
Bank"). The remainder of the net proceeds of this offering (approximately $12.9
million) will be used to expand its consumer water treatment systems business
and for general corporate purposes. Pending the use of the net proceeds of this
offering, the Company will invest the funds in short-term interest bearing
securities.

Borrowings under the Company's credit facility with First Bank are expected
to be approximately $15 million at April 15, 1998, with approximately $8.0
million being used to finance equipment purchases, and the remainder being used
for working capital and general corporate purposes. Borrowings under the credit
facility bear interest at (i) the bank's reference rate plus 1.25% (9.75% at
March 31, 1998) on borrowings for equipment purchases, and (ii) the bank's
reference rate plus 0.75% (9.25% at March 31, 1998) on the working capital
portion of the borrowings. Borrowings for equipment purchases are made in
increments of $2.0 million and are payable over a 48-month period commencing the
first full month following each separate advance. Other borrowings under the
credit facility are due on demand.

DIVIDEND POLICY

The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to do so in the foreseeable future. The Company
presently expects to retain its earnings to finance the development and
expansion of its business. The payment by the Company of cash dividends, if any,
on its Common Stock in the future is subject to the discretion of the Company's
Board of Directors and will depend on the Company's earnings, financial
condition, capital requirements and other relevant factors. In addition, the
Company is prohibited from paying cash dividends on its Common Stock by the
terms of its current credit facility with First Bank and the terms of a
Securities Purchase Agreement dated July 19, 1996, between the Company and
certain investment partnerships, of which affiliates of The Goldman Sachs Group,
L.P. ("GS Group") are the general partner, managing general partner, managing
partner or investment manager, pursuant to which such investment partnerships
purchased $15.0 million principal amount of Convertible Notes from the Company.

<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company at
December 31, 1997 on an actual basis and as adjusted to give effect to the sale
of the 1,000,000 shares of Common Stock offered hereby at an assumed public
offering price of $30.00 per share, and the application of the estimated net
proceeds therefrom. This table should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>

Short-term debt (1) ................................................ $ 7,161 $ --
========= =========
Long-term debt ..................................................... $ 15,000 $ 15,000
Shareholders' equity:
Capital Stock, 100,000,000 shares authorized:
Common Stock, $.01 par value; 4,548,249 shares issued and
outstanding (actual); 5,548,249 shares (as adjusted) (2) ......... 45 55
Additional paid-in capital ........................................ 21,364 49,254
Note receivable from sale of stock ................................ (498) (498)
Retained earnings (deficit) ....................................... (16,680) (16,680)
--------- ---------
Total shareholders' equity ....................................... 4,231 32,131
--------- ---------
Total capitalization ............................................ $ 19,231 $ 47,131
========= =========

</TABLE>

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

(1) Short-term debt is expected to be approximately $15 million at April 15,
1998.

(2) Does not include 2,094,051 shares of Common Stock issuable upon exercise of
options and warrants or conversion of Convertible Notes outstanding at
December 31, 1997. See "Dilution."

DILUTION

The net tangible book value of the Company's Common Stock at December 31,
1997 was $3.5 million, or $0.77 per share. Net tangible book value per share of
Common Stock represents the tangible assets (total assets less intangible
assets) reduced by total liabilities, divided by the number of outstanding
shares of Common Stock. After giving effect to the sale of the 1,000,000 shares
offered by the Company hereby at an assumed public offering price of $30.00 per
share and the application of the estimated net proceeds therefrom, and after
deducting estimated underwriting discounts and offering expenses payable by the
Company, the net tangible book value of the Company's Common Stock at December
31, 1997, would have been approximately $31.4 million, or $5.66 per share. This
represents an immediate dilution in net tangible book value to new investors of
$24.34 per share and an immediate increase in net tangible book value to
existing shareholders of $4.89 per share as illustrated by the following table:

<TABLE>
<S> <C> <C>
Assumed Price to Public .......................................... $ 30.00
Net tangible book value per share at December 31, 1997 ........... $ 0.77
Increase per share attributable to new investors ................. 4.89
-------
Pro forma net tangible book value per share after this offering .. 5.66
--------
Dilution per share to new investors .............................. $ 24.34
========
</TABLE>

The foregoing table assumes no exercise of stock options or warrants. As of
December 31, 1997, the Company had 946,450 shares of Common Stock issuable upon
the exercise of outstanding incentive and non-qualified stock options under the
Company's stock option plans, with a weighted average exercise price of $12.49
per share; and 137,500 shares issuable upon the exercise of outstanding warrants
at a weighted average exercise price of $7.59 per share. The foregoing table
also excludes 1,010,101 shares of Common Stock issuable upon the conversion of
$15.0 million principal amount of Convertible Notes at a conversion price of
$14.85 per share. See "Principal Shareholders" and Notes 5 and 6 of Notes to
Financial Statements.

<PAGE>

PRICE RANGE OF COMMON STOCK

The Company's Common Stock has been quoted on the Nasdaq National Market
under the symbol "REIN" since March 1993. The following table sets forth, for
the periods indicated, the range of high and low prices for the Company's Common
Stock as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
----------- ----------
<S> <C> <C>
1996:
First Quarter .................................. $ 15.75 $ 8.25
Second Quarter ................................. 17.50 10.25
Third Quarter .................................. 14.75 11.50
Fourth Quarter ................................. 12.38 6.50

1997:
First Quarter .................................. $ 8.75 $ 6.75
Second Quarter ................................. 16.50 6.25
Third Quarter .................................. 30.50 15.00
Fourth Quarter ................................. 31.50 23.00

1998:
First Quarter .................................. $ 31.00 $ 22.00
Second Quarter (through April 1, 1998) ......... 30.25 29.50

</TABLE>

On April 1, 1998, the last sale price of the Common Stock as reported on
the Nasdaq National Market was $30.00 per share. As of April 1, 1998, there were
175 shareholders of record and approximately 2,200 beneficial owners of the
Company's Common Stock.

<PAGE>

SELECTED FINANCIAL DATA

The statement of operations data for the years ended December 31, 1995,
1996 and 1997, and the balance sheet data at December 31, 1996 and 1997, are
derived from the Company's financial statements included elsewhere in this
Prospectus, which have been audited by Ernst & Young LLP, independent auditors.
The statement of operations data for the years ended December 31, 1993 and 1994
and the balance sheet data at December 31, 1993, 1994 and 1995 are derived from
audited financial statements not included herein. The selected financial data
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ------------ ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>

STATEMENT OF OPERATIONS DATA:
Net sales ............................................ $10,292 $16,671 $ 22,921 $ 33,277 $ 71,243
Cost of products sold ................................ 4,988 7,897 13,959 20,756 37,417
------- ------- -------- --------- ----------
Gross profit ......................................... 5,304 8,774 8,962 12,521 33,826
Operating expenses:
Selling, general and administrative ................. 2,446 5,240 14,692 21,803 32,815
Research and development ............................ 801 1,064 2,021 2,007 3,082
Facility relocation costs ........................... -- -- -- 973 --
------- ------- -------- --------- ----------
3,247 6,304 16,713 24,783 35,897
------- ------- -------- --------- ----------
Income (loss) from operations ........................ 2,057 2,470 (7,751) (12,262) (2,071)
Other income (expense):
Interest income ..................................... 167 508 551 220 43
Interest expense .................................... (22) (52) (126) (457) (1,427)
------- ------- -------- --------- ----------
Income (loss) before income taxes .................... 2,202 2,926 (7,326) (12,499) (3,455)
Income tax expense (benefit) ......................... 705 907 (2,564) -- --
------- ------- -------- --------- ----------
Net income (loss) .................................... $ 1,497 $ 2,019 $ (4,762) $ (12,499) $ (3,455)
======= ======= ======== ========= ==========
Net income (loss) per share (basic) (1)(2) ........... $ 0.53 $ 0.57 $ (1.12) $ (2.90) $ (0.77)
======= ======= ======== ========= ==========
Weighted average shares (basic) ...................... 2,843 3,531 4,239 4,307 4,471
Net income (loss) per share (diluted) (1)(2) ......... $ 0.45 $ 0.50 $ (1.12) $ (2.90) $ (0.77)
======= ======= ======== ========= ==========
Weighted average shares (diluted) .................... 3,321 4,029 4,239 4,307 4,471

OPERATING DATA:
Estimated number of retail outlets at end of
period (3) .......................................... 1,200 2,200 9,900 16,900 28,000
Number of replacement cartridges shipped
during year ......................................... 4,500 51,000 186,000 716,000 3,135,000

BALANCE SHEET DATA (at end of period):
Working capital ...................................... $ 7,458 $14,754 $ 10,051 $ 9,743 $ 2,144
Total assets ......................................... 10,025 25,054 23,622 33,257 42,700
Long-term debt ....................................... -- -- -- 15,000 15,000
Shareholders' equity ................................. 8,667 22,895 19,430 7,131 4,231

</TABLE>

- --------------------
(1) All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to FASB Statement 128 requirements.

<PAGE>

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

EXCEPT FOR HISTORICAL INFORMATION CONTAINED IN THIS PROSPECTUS, THE
MATTERS DISCUSSED HEREIN CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE SUGGESTED IN THE FORWARD-LOOKING STATEMENTS, INCLUDING WITHOUT LIMITATION
THE EFFECTS OF ECONOMIC CONDITIONS, PRODUCT DEMAND, COMPETITIVE PRODUCTS AND
OTHER RISKS DETAILED HEREIN. SEE "RISK FACTORS."

OVERVIEW

The Company designs, manufactures and markets proprietary small-scale
drinking water systems under the PUR(R) brand name for the household,
recreational and military markets. These products include a line of
self-monitoring water filters for household use, a rugged line of portable
drinking water systems for outdoor enthusiasts and international travelers and a
line of low-energy, reverse osmosis desalinators for offshore marine, commercial
life raft and military use, including the world's only hand-operated
desalinators. PUR household water filter systems and replacement filter
cartridges, which together accounted for more than 80% of the Company's net
sales in 1997, are distributed through approximately 26,000 retail outlets in
the United States and Canada, including Wal-Mart, Sears, Target, Costco, Kmart,
Macy's and Walgreens.

Since its formation in 1986, the Company has utilized its mechanical and
chemical engineering expertise to develop new water filtration and purification
products that provide solutions to a variety of problems that have historically
prevented the adequate treatment of drinking water in a number of settings.
Initially, the Company developed a line of reverse osmosis desalinators for the
United States Navy and other military and offshore marine users. The Company
subsequently developed a line of PUR antimicrobial water purifiers and
microfilters for use by outdoor enthusiasts and international travelers. The
Company has a leading position in each of these markets.

The Company entered the retail water filter market in late 1994 with the
intent of establishing PUR as the leading brand of household water filters.
Recognizing that a significant portion of revenues in the household market would
be derived from recurring sales of replacement cartridges, the Company pursued a
strategy of building brand name recognition for PUR products and developing an
installed base of its products to promote recurring sales of replacement
cartridges. To implement this strategy, the Company invested significant
resources to develop advanced filtration and monitoring technologies, launch a
broad range of products at a variety of price points, expand distribution of its
products, and provide high levels of consumer and trade advertising support. The
Company has also developed and implemented automated manufacturing and assembly
processes for its household products, which enables it to manufacture nearly all
of the filter elements for such products, reducing the Company's costs and
enhancing its ability to respond to retailers' needs. The Company currently
offers eight different types of household water filters at suggested retail
prices ranging from $24.99 to $119.99, as well as replacement cartridges for
each product at suggested retail prices ranging from $7.99 to $29.99, and has a
distribution network of approximately 26,000 retail outlets. This strategy of
investing heavily to build the PUR brand name and establish a large installed
base, coupled with the resulting rapid growth in production and sales, led to
reduced profit margins and net losses in each of the last three years. The
Company believes it is now well positioned to benefit from these investments, as
evidenced by the Company's results of operations for the fourth quarter of 1997,
in which it had net sales of $23.1 million, a gross margin of 52.4%, and its
first quarterly profit since the first quarter of 1995.

The Company's net sales increased from $10.3 million in 1993 to $71.2
million in 1997. The increase in net sales was primarily the result of the
Company's successful entry in late 1994 into the household water filter market.
Future increases in net sales are also expected to be derived principally from
the sale of household water filter systems and replacement cartridges. Sales of
the Company's household water filter systems have increased with (i) the
introduction of additional products for this market, (ii) an increase in the
number of retail outlets at which the Company's household products are sold,
(iii) an increase in the number of units sold at existing outlets, and (iv) the
overall growth in the market for household water filter systems. The Company
believes that its aggressive campaign to build brand name recognition for PUR
products has contributed significantly to the increase in net sales. Net sales
have

14
<PAGE>

also increased as a result of the sale of replacement filter cartridges to the
growing installed base of owners of PUR water filter systems. The sale of
replacement cartridges is expected to constitute an increasing portion of the
net sales in future periods as the size of the installed base continues to
increase. Revenues from the sale of outdoor systems to consumers have also
increased, but at a significantly lower rate than revenues from the sale of
household water filters.

Cost of products sold is significantly affected by (i) costs of raw
materials, such as engineered thermoplastics, stainless steel and filtration
media, most of which are purchased from third party vendors, (ii) costs of
assembly, testing, quality control and packaging, which are performed by the
Company, and (iii) the mix of products sold. During 1995, 1996 and the first
half of 1997, gross margins were adversely affected by costs related to entering
the household water filter market, including investments made by the Company in
designing and implementing automated manufacturing and assembly processes for
PUR household water filters, together with the cost of conducting manual
assembly operations pending the installation of such automated processes. During
this period, the Company also took steps to reduce its material costs, including
development of a process to produce internally nearly all of its own filter
elements for its household products at significantly lower cost than purchasing
them from third party vendors. Following implementation of enhanced
manufacturing processes, the Company's household products generally carry a
higher gross margin than its other products, with replacement cartridges on
average carrying the highest gross margin of products within the household
category. The sale of household water filters and, in particular, the sale of
replacement cartridges is expected to constitute an increasing portion of net
sales in future periods.

Selling, general and administrative expenses include advertising and
promotional expenses. To implement its strategy of building brand name
recognition for PUR products and developing an installed base of its products to
promote the sale of replacement filter cartridges, the Company has invested
heavily in advertising and promotional programs. Advertising and promotional
activities in 1995 and 1996 were designed to create an initial awareness of the
Company's products, establish recognition of the PUR brand name and build an
installed base supporting recurring sales of replacement cartridges. In 1997,
such expenses were incurred in connection with the introduction and promotion of
several new products for the household market. The Company expects that, as a
percentage of net sales, its advertising and promotional expenses in 1998 will
be essentially unchanged from 1997 as it continues to expand its position in the
household market, and will decline as a percentage of net sales in subsequent
years. However, the Company expects that advertising and promotional expenses
related to the introduction of new products may, from time to time, result in an
increase in such expenses as a percentage of net sales on a quarterly basis,
including in the first quarter of 1998.

The Company intends to continue expanding its distribution network and seek
additional distribution channels to solidify its position in the growing
household water filter market. While such activities would be undertaken to
increase net sales and net income, they could affect the Company's gross profit
or selling, general and administrative expenses as a percentage of net sales.
For example, the sale of the PUR PLUS pitcher through infomercials, which
commenced in February 1998, is expected to result in different levels of gross
profit and selling, general and administrative expenses as a percentage of net
sales than the sale of the PUR products through retail outlets. The impact of
such differences will depend on the extent to which the Company determines to
use such distribution channels and the relative volumes of sales in the
respective channels.

The Company's results of operations on a quarterly basis are subject to
fluctuation due to the seasonal nature of sales for its household products, with
highest sales levels occurring during the fourth quarter, and the periodic
introduction of new products. The Company believes that these seasonal patterns
may have been masked by its recent sales growth and by the mix of sales of
outdoor systems and household systems. The Company's results of operations are
also affected by the timing of the introduction of new products, product
enhancements and related advertising and promotional expenses. Product
development expenses are incurred and advertising and promotional efforts
typically are commenced prior to the initial shipments of new products and
product enhancements. As a result, product development expenses and advertising
and promotional expenses are incurred in periods before any revenues are
recognized from the sale of new products and enhancements, and therefore, gross
margins are relatively lower and operating expenses are relatively higher during
such periods. For

<PAGE>

example, the Company expects that its gross margin and results of operations in
the first quarter of 1998 will be adversely affected by its recent introduction
of the PUR PLUS pitcher, PUR PLUS dispenser and PUR ULTIMATE faucet-mounted
products. Accordingly, the Company expects that its gross margin for the first
quarter of 1998 will be similar to that in the third quarter of 1997. The
Company also anticipates that variations in its quarterly results of operations
will occur from time to time in future periods.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items
from the Company's statements of operations, expressed as a percentage of net
sales.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales ............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold ................... 48.5 47.4 60.9 62.4 52.5
----- ----- ----- ----- -----
Gross profit ............................ 51.5 52.6 39.1 37.6 47.5
Operating expenses:
Selling, general and administrative..... 23.8 31.4 64.1 65.5 46.1
Research and development ............... 7.8 6.4 8.8 6.0 4.3
Facility relocation .................... -- -- -- 2.9 --
----- ----- ----- ----- -----
31.6 37.8 72.9 74.4 50.4
----- ----- ----- ----- -----
Income (loss) from operations ........... 19.9 14.8 (33.8) (36.8) ( 2.9)
Other income (expense):
Interest income ........................ 1.6 3.0 2.4 0.7 0.1
Interest expense ....................... ( 0.2) ( 0.3) ( 0.6) ( 1.4) ( 2.0)
----- ----- ----- ----- -----
Income (loss) before income taxes ....... 21.3 17.5 (32.0) (37.5) ( 4.8)
Income tax expense (benefit) ............ 6.8 5.4 (11.2) -- --
----- ----- ----- ----- -----
Net income (loss) ....................... 14.5% 12.1% (20.8)% (37.5)% ( 4.8)%
===== ===== ===== ===== =====
</TABLE>

YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996

Net sales increased 114.1% to $71.2 million in 1997 from $33.3 million in
1996. This $37.9 million increase in net sales was attributable primarily to an
increase of $38.4 million in sales of the Company's PUR household water filter
products, offset by a decrease of $1.5 million in sales of reverse osmosis
desalinators to military customers. Sales of household products, including OEM
water filters, increased 173.5% to $60.5 million in 1997 from $22.1 million in
1996, reflecting increased sales of filter systems and replacement cartridges,
and the introduction of the PUR PLUS faucet-mounted filter and the PUR
under-sink models. Revenues from the sale of outdoor systems to consumers also
increased, but at a significantly lower rate than revenues from the sale of
household water filters. Sales of OEM water filters to Braun AG were
discontinued upon expiration of the Company's contract with Braun AG in December
1997. The expiration of this contract is not expected to have a material adverse
effect on the Company's operations. Price increases did not have a significant
impact on net sales for 1997.

Gross profit as a percentage of net sales increased to 47.5% in 1997 from
37.6% in 1996. The increase in gross profit as a percentage of net sales in 1997
was due to the implementation of automated manufacturing and assembly processes,
reductions in costs of materials, and an increase in sales of higher margin
household products and replacement filter cartridges as a percentage of net
sales.

Selling, general and administrative expenses increased to $32.8 million in
1997 from $21.8 million in 1996, representing 46.1% and 65.5% of net sales,
respectively. The increase in selling, general and administrative expenses was
attributable primarily to advertising and promotional expenses related to the
continued roll-out and expansion of the Company's line of household water
filters. Advertising costs increased to $14.6 million in 1997 from $9.5 million
in 1996, and accounted for 46.0% of the increase in selling, general and
administrative expenses in 1997 relative to 1996. Due to continued investment in

16
<PAGE>

marketing and advertising expenditures relating to new product introductions,
the Company believes that selling, general and administrative expenses will
remain flat as a percentage of net sales in 1998.

Research and development expenses increased to $3.1 million in 1997 from
$2.0 million in 1996, representing 4.3% and 6.0% of net sales, respectively. The
Company expects that research and development expenses will continue to increase
in 1998 as it develops new technology and product line extensions.

Interest income decreased to $43,000 in 1997 from $220,000 in 1996 due to
decreased balances of cash, cash equivalents and marketable securities. Interest
expense increased to $1.4 million in 1997 from $457,000 in 1996 due to interest
on the Company's line of credit, which was established in 1997, and a full year
of interest on the Company's long-term debt in 1997 compared with six months of
interest in 1996.

The Company's effective tax rate for 1997 and 1996 was 0%. The Company
recorded a valuation allowance for the tax benefit related to the net operating
losses for 1997 and 1996. The Company had net operating tax loss carryforwards
of $23.7 million at December 31, 1997.

YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995

Net sales increased 45.2% to $33.3 million in 1996 from $22.9 million in
1995. This $10.4 million increase in net sales was attributable primarily to
increased sales of the Company's PUR household water filter products, including
the countertop and pitcher models which were introduced in 1996, as well as a
full year's sales of OEM water filters to Braun AG. Sales of household products,
including OEM water filters, increased 163.7% to $22.1 million in 1996 from $8.4
million in 1995. This increase was partially offset by a decline in sales of
reverse osmosis desalinators due to lower military sales. Price increases did
not have a significant impact on net sales for 1996 and 1995.

Gross profit as a percentage of sales decreased to 37.6% in 1996 from 39.1%
in 1995. The decrease in gross profit as a percentage of sales in 1996 was
primarily the result of costs associated with entering the household water
filter market, including investments made by the Company in automating its
manufacturing and assembly processes and the cost of conducting manual assembly
operations pending the installation of such automated processes, as well as the
full year impact of OEM filter sales, which had relatively lower profit margins.

Selling, general and administrative expenses increased to $21.8 million in
1996 from $14.7 million in 1995, representing 65.5% and 64.1% of net sales,
respectively. The increase in selling, general and administrative expenses
related primarily to the continued roll-out and expansion of the household water
systems in 1996. Advertising costs increased to $9.5 million in 1996 from $6.4
million in 1995, and accounted for 44.6% of the increase in selling, general and
administrative expenses in 1996 relative to 1995.

Research and development expenses were $2.0 million in each of 1996 and
1995, representing 6.0% and 8.8% of net sales, respectively.

Interest income decreased to $220,000 in 1996 from $551,000 in 1995, due to
decreased balances of cash, cash equivalents and marketable securities. Interest
expense increased to $457,000 in 1996 from $126,000 in 1995 due to interest on
long-term debt issued by the Company in July 1996.

The Company's effective tax rate for 1996 was 0%, compared with 35.0% in
1995. The Company recorded a valuation allowance for the tax benefit related to
the 1996 net operating loss.

SELECTED QUARTERLY FINANCIAL DATA

The following table sets forth certain unaudited quarterly financial data
of the Company for each quarter in calendar year 1996 and 1997. The quarterly
data are derived from the Company's unaudited financial statements not otherwise
contained in this Prospectus. The Company believes that such unaudited
statements include all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of such quarterly information.
The operating results for any quarter are not necessarily indicative of the
results of the full year or any future quarter.

<PAGE>

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996
---------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales ........................ $ 6,440 $ 6,598 $ 11,001 $ 9,238
Gross profit ..................... 2,454 2,522 4,239 3,306
Gross profit margin .............. 38.1% 38.2% 38.5% 35.8%
Net income (loss) ................ (1,921) (1,722) (2,916) (5,940)
Net income (loss) per common share
(Basic and Diluted) ............. $ (0.45) $ (0.40) $ (0.67) $ (1.37)

</TABLE>

<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales ........................ $ 10,347 $ 15,462 $ 22,371 $ 23,063
Gross profit ..................... 4,155 7,001 10,581 12,089
Gross profit margin .............. 40.2% 45.3% 47.3% 52.4%
Net income (loss) ................ (1,898) (1,492) (448) 383
Net income (loss) per common share
(Basic and Diluted) ............. $ (0.44) $ (0.33) $ (0.10) $ 0.08
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

Cash used in operations was $8.6 million in 1997, $5.7 million in 1996, and
$8.1 million in 1995. The reduction in cash flow from operations in 1997
resulted primarily from the net loss and increases in inventories and accounts
receivable. Cash used in operations in 1996 was primarily the result of the net
loss and an increase in accounts receivable. In 1995, the reduction in cash flow
from operations resulted primarily from the net loss and increased inventory
levels. In 1997 and 1996, the decrease in cash flow was partially offset by
increases in accounts payable and accrued liabilities.

Capital expenditures were $6.3 million in 1997 compared with $4.1 million
in 1996 and $4.6 million in 1995. The Company anticipates that capital
expenditures in 1998, principally associated with new product introductions and
an increase in production capacity, will total approximately $8.6 million.

In the past three years the Company has funded its cash requirements
principally with proceeds from the sale of securities and borrowings under
credit facilities with a bank. In June 1994, the Company received net proceeds
of approximately $12.0 million from a public offering of Common Stock. In July
1996, the Company issued $15.0 million of Convertible Notes to GS Group. The
Convertible Notes bear interest at an annual rate of five percent, payable
quarterly, and are due in July 2003. GS Group has the right to convert the
principal amount of the Convertible Notes to Common Stock at any time prior to
maturity at a conversion price of $14.85 per share.

The Company had $7.2 million outstanding under its bank credit facility at
December 31, 1997, compared with no bank borrowings at December 31, 1996. The
credit facility, established in March 1997 and amended in March 1998, provides
for total borrowings of up to $25.0 million, secured by equipment, inventory,
receivables, and intangibles. The credit facility consists of a $15.0 million
discretionary working capital line of credit, limited to eligible receivables
and inventory, which bears interest at the bank's reference rate plus 0.75%, and
a $10.0 million equipment loan which bears interest at the bank's reference rate
plus 1.25%. Borrowings under the equipment loan are made in increments of $2.0
million and are payable over a 48-month period commencing the first full month
following each separate advance. Other borrowings under the credit facility are
due on demand. Pursuant to the Company's agreement with GS Group, borrowings
under the bank credit facility were limited to $10.0 million in 1997 and are
limited to $12.5 million in 1998. However, the Company received waivers from GS
Group allowing it to borrow up to $14.0 million under the credit facility during
the fourth quarter of 1997 and up to $16.0 million in 1998.

Management believes that anticipated cash flows from operations, funds
available through its bank credit facility and the net proceeds from this
offering will provide sufficient capital resources for current operations and
planned product introductions through 1999. The Board of Directors currently
intends to retain all earnings for expansion of the Company's business.

<PAGE>

The Company had recorded $1.6 million of net deferred tax assets at
December 31, 1997 resulting from net operating loss carryforwards and the tax
effects of temporary differences between tax bases and financial statement
carrying amounts of existing assets and liabilities. Realization of the future
tax benefits related to the net deferred tax assets is dependent on many
factors, including the Company's ability to generate taxable income within the
net operating loss carryforward period. Management believes that, at a minimum,
it is more likely than not that future taxable income over the next three years
will be sufficient to realize the recorded asset.

At December 31, 1997, the Company had net operating tax loss carryforwards
available to offset future taxable income of approximately $23.7 million. The
net operating loss carryforwards expire as follows: $5.0 million in year 2010,
$11.5 million in 2011 and $7.2 million in 2012, and may be subject to
limitations under Section 382 of the Internal Revenue Code due to changes in
equity ownership of the Company.

ACCOUNTING STATEMENTS

In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 128, EARNINGS PER SHARE. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to Statement 128
requirements.

In 1997, the FASB issued Statements No. 130, REPORTING COMPREHENSIVE
INCOME, and No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, effective for fiscal years beginning after December 15, 1997. The
adoption by the Company of these Statements in January 1998 is not expected to
have a material impact on the Company's financial statements.

YEAR 2000 ISSUES

Many existing computer programs use only two digits to identify a year in
the date field, with the result that data referring to the year 2000 and
subsequent years may be misinterpreted by these programs. If present in the
computer applications of the Company or its suppliers and customers and not
corrected, this problem could cause computer applications to fail or to create
erroneous results and could cause a disruption in operations and have a
short-term adverse effect on the Company's business and results of operations.
The Company has evaluated its principal computer systems and has determined that
they are substantially Year 2000 compliant. The Company has initiated
discussions with its key suppliers and customers to determine whether they have
any Year 2000 issues. The Company has not incurred any material expenses to date
in connection with this evaluation and does not anticipate material expenses in
the future, depending on the status of its suppliers and customers with respect
to this issue.

<PAGE>

BUSINESS

GENERAL

The Company designs, manufactures and markets proprietary small-scale
drinking water systems under the PUR(R) brand name for the household,
recreational and military markets. These products include a line of
self-monitoring water filters for household use, a rugged line of portable
drinking water systems for outdoor enthusiasts and international travelers and a
line of low-energy, reverse osmosis desalinators for offshore marine, commercial
life raft and military use. PUR household water filters are offered in a variety
of configurations, including pour-through pitchers and dispensers and in-line
faucet-mounted, countertop and under-sink filter systems. Each PUR household
water filter system incorporates a replaceable filtration cartridge. PUR
household water filter systems and replacement filter cartridges accounted for
more than 80% of the Company's net sales in 1997.

The Company's objective is to establish and maintain PUR as the leading
brand of consumer drinking water treatment equipment, using proprietary
technology, superior design and extensive advertising and promotional programs
to obtain a leading position in each market segment it enters. The Company
launched its first PUR water filters for the household market in late 1994, with
the intent of establishing a large installed base of PUR water filter systems to
support recurring sales of replacement filter cartridges. To date, the Company
has sold more than 2.5 million household water filter systems and has obtained a
significant share of this market. According to survey information from Intelect,
a third party market research firm, PUR is the number one brand of in-line water
filters and the second leading brand of all household water filters sold in the
United States. PUR household products currently are distributed through
approximately 26,000 retail outlets in the United States and Canada, compared
with approximately 15,000 retail outlets at the end of 1996. Major customers
include Wal-Mart, Sears, Target, Costco, Kmart, Macy's and Walgreens.

Since its formation in 1986, the Company has utilized its mechanical and
chemical engineering expertise to develop new water filtration and purification
products with superior performance characteristics to meet the identified needs
of consumers. PUR reverse osmosis desalinators, introduced in 1988, include
hand-operated models for life rafts which it believes are the only such products
available in the world, and motor-driven models powered by a 12-volt DC motor.
PUR portable systems drinking water products, launched in 1991, incorporate the
Company's proprietary Tritek(R) disinfection technology which eliminates
microorganisms from water in seconds, making it possible for individuals to
produce safe drinking water when traveling, backpacking or on wilderness trips.
The Company has established a leading position in each of these markets.

In 1994, the Company introduced a faucet-mounted water filter, the first
PUR product for the rapidly growing household water filter market. Since then,
the Company has expanded its household product lines to include a broad range of
products at a variety of price points. The Company's household water filters use
advanced filtration technologies to reduce a wide range of contaminants, such as
microbiological cysts, lead, pesticides, VOCs and other impurities, while
improving water taste and odor. The Company currently offers eight different
types of pour-through and in-line water filters, as well as replacement filter
cartridges for such products. All PUR household products incorporate the
Company's proprietary technology, known as ASM(R) (Automatic Safety
Monitor(TM)), which measures the filter's usage and indicates its remaining
capacity. The Company believes that this visible indication of when to replace
the filter cartridge encourages consumers to purchase replacement cartridges
more frequently than they otherwise would. The Company anticipates that the
installed base of PUR water filter systems will continue to grow, further
promoting the sale of replacement filter cartridges, which on average carry a
higher margin than the Company's other products. Sales of replacement filter
cartridges are expected to comprise an increasing portion of the market for
household water filter products and provide a source of recurring revenues.

INDUSTRY OVERVIEW

During the last half of this century, reliable drinking water has largely
been taken for granted in the United States and other industrialized countries.
However, lead and other impurities can make water potentially unsafe or
unpleasant in taste and odor. In addition, much of the populated world,
including

<PAGE>

parts of Asia, Africa and Latin America, does not have adequate sewage or water
treatment facilities, leaving tap water unfit for human consumption.

HOUSEHOLD MARKET

The EPA and other organizations have identified a number of harmful
contaminants that many municipal water authorities do not remove from drinking
water or that enter the water supply after it has left the municipal water
treatment facility.

* In 1993, the EPA identified microbiological cysts, in particular
CRYPTOSPORIDIUM, as contaminants likely to be found in over 55% of the
nation's surface waters and 17% of the nation's municipal water
supplies. There have been numerous instances of water-borne illness
resulting from such contaminants. For example, approximately 400,000
people became ill in 1993 by an outbreak of CRYPTOSPORIDIA in the
municipal water supply for Milwaukee, Wisconsin, despite the fact that
water from the Milwaukee water-treatment plants met all existing state
and federal quality standards.

* In 1994, the EPA reported on the effect of chlorine byproducts, such
as trihalomethane, in drinking water supplies. The presence of
trihalomethanes in drinking water is considered by the EPA to be a
cancer risk. In 1998, the California Department of Health Services
released a study which found that women who had a high exposure to
trihalomethanes from water consumption were more likely to have
miscarriages.

* In 1993, CONSUMER REPORTS published a report on tests it conducted for
lead in household drinking water that found unacceptable lead
contamination, based on EPA standards, in Chicago, Boston, New York,
Washington, D.C. and San Francisco. Lead consumption is regarded as a
significant health hazard, particularly for children.

* In 1997, a study conducted by the Environmental Working Group found
that certain pesticides and herbicides have leached into underground
aquifers in areas with concentrated agricultural activities. The
Environmental Working Group reported that tap water testing in 1996 by
authorities in midwestern states found that 104 communities, with a
total population of 3.3 million, were provided tap water contaminated
with five or more cancer causing weed killers.

A new contaminant selection regulation under the Safe Drinking Water Act
requires the EPA to publish a list of contaminants that may be found in water
supplies and to consider the need for regulations addressing such contaminants.
The EPA will require all municipalities to notify their customers once a year
whether any contaminants are found in levels higher than the acceptable limits
identified by the EPA. The Company believes that this requirement will promote
public awareness that water supplies may contain health contaminants that
municipalities are currently unable to remove and that water treatment in the
home at the point-of-use is an increasingly important option for homeowners.

The Company believes that increasing awareness and concern about water
quality has contributed significantly to a steady increase in the size of the
market in the United States for household tap water substitutes (primarily
bottled water) and drinking water equipment. The United States market for
bottled water is currently estimated to be over $3.0 billion annually, with
approximately 35% of United States households purchasing bottled water in
individual or bulk containers. However, bottled water is less convenient and
over time is more costly per gallon than water from a point-of-use treatment
system. The Company estimates that the overall annual market for household
drinking water systems, services and supplies (such as water filters, water
softeners and whole house systems) is more than $1.7 billion, with the Company's
current segments of this overall market representing approximately $400 million.
Despite heightened awareness of water quality and safety issues, the domestic
market penetration of household drinking water treatment systems is estimated by
the Company to be less than 25% of United States households.

OUTDOOR MARKETS

The outdoor market consists of reverse osmosis desalinators for offshore
marine and military applications, as well as portable water treatment systems
for recreational outdoor use. The Company estimates that the annual U.S. market
for such outdoor systems is approximately $30 million. The reverse

<PAGE>

osmosis desalinator segment includes large motorized systems for use aboard
larger vessels, as well as smaller systems which are hand-operated or powered by
12-volt DC motors for use aboard life rafts or as a back-up system on a boat or
ship. The recreational segment includes a variety of portable, hand-operated
water purifiers and microfilters which eliminate harmful microorganisms from
outdoor or other questionable water sources, such as tap water in developing
countries. These products are typically used by outdoor enthusiasts and
international travelers.

BUSINESS STRATEGY

The Company's objective is to establish and maintain PUR as the leading
brand of consumer drinking water treatment equipment and attain a leading
position in each of the market segments it enters. The Company's key strategies
to accomplish this objective are:

* DEVELOP PROPRIETARY TECHNOLOGY TO ADDRESS CONSUMER CONCERNS. The
Company's research and development efforts are focused on creating
innovative and technologically superior products that provide
performance characteristics exceeding those of competing products.
Consumer research conducted by the Company in 1993 and 1996 revealed
that the performance of water filters from other manufacturers failed
to meet consumers' expectations because (i) consumers were uncertain
whether a filter had reached the end of its useful life and (ii) such
filters treated primarily the aesthetic properties of drinking water
and generally did not remove contaminants related to health concerns.
In response to these findings, the Company developed the ASM
monitoring technology and higher performance filters such as the PUR
ULTIMATE faucet-mounted filter and the PUR PLUS pour-through pitcher
and dispenser which were introduced in January 1998. The Company
believes that its research and development team gives it a significant
competitive advantage over others engaged in the design and
manufacture of consumer water filtration and purification equipment.

* ESTABLISH A BROAD DISTRIBUTION NETWORK. The Company's entry into the
household water filter market in 1994 required it to establish new
distribution channels for its products. Since then, the Company has
expanded its distribution network aggressively. The Company's broad
product line and range of price points and its ability to provide
retailers with differentiated product configurations has enabled PUR
products to be sold by a wide variety of retailers including
department stores, mass merchants, drug stores, grocery stores,
hardware stores and warehouse clubs. PUR household products are
currently sold throughout the United States and Canada through
approximately 26,000 retail outlets, a significant increase from
approximately 15,000 retail outlets at the end of 1996. The Company
continues to seek additional retail outlets and distribution channels
for its household products. The Company also distributes its household
products to international markets through Groupe-SEB, one of the
world's leading suppliers of small household appliances whose products
are distributed in over 80 countries under the brand names Rowenta and
T-Fal.

* PROMOTE BRAND AWARENESS THROUGH EFFECTIVE MARKETING. The Company
entered the growing household water filter market with the belief that
it could capture a significant share of the market by quickly
establishing its PUR brand. The Company therefore invested and
continues to invest significant resources in advertising and
promotional activities to increase awareness of its products and build
the PUR brand name. These activities include providing its retailers
with point-of-sale displays, cooperative advertising programs, product
flyers and in-store product demonstrations. The Company also utilizes
television commercials and infomercials which air on a variety of
national cable channels and local broadcast stations, as well as print
and radio advertisements. These efforts have enabled the Company to
establish PUR products as the number one brand of in-line water
filters and the number two brand of all household water filters sold
in the United States.

22
<PAGE>

* GENERATE RECURRING SALES OF REPLACEMENT FILTER CARTRIDGES. The Company
has pursued a strategy of building brand name recognition for PUR
products and developing an installed base of its products to promote
recurring sales of replacement cartridges. The Company anticipates
that, as the installed base of PUR water filter systems grows, an
increasing portion of its net sales will be derived from recurring
sales of replacement cartridges, which on average carry a higher
margin than the Company's other products. All PUR household products
incorporate the Company's proprietary ASM technology which measures
the filter's usage and indicates its remaining capacity. The Company
believes that this visible indication of when to replace the filter
cartridge encourages consumers to purchase replacement filters more
frequently than they otherwise would.

* DEVELOP LOW-COST, HIGH-VOLUME FLEXIBLE MANUFACTURING PROCESSES. The
Company has invested heavily in automating the manufacturing and
assembly processes for its household water filters, including the
development of several proprietary, automated processes for
manufacturing filter elements used in certain of its products. These
automated processes have enabled the Company to improve its
manufacturing efficiencies while enhancing its ability to provide high
volumes of differentiated products to respond to retailers' needs.
Many of these processes were implemented in 1997 and have contributed
to improved margins. The Company intends to continue implementing
processes to reduce the cost of manufacturing it products.

PRODUCTS

* In 1988, the Company introduced the world's first hand-operated
reverse osmosis desalinator.

* In 1991, the Company launched its line of PUR portable systems
employing the Company's proprietary Tritek(R) disinfection technology
which enables the elimination of microorganisms from water.

* In 1994, the Company introduced the first faucet-mounted water filter
capable of removing CRYPTOSPORIDIUM and GIARDIA LAMBLIA.

* In 1994, the Company introduced the first faucet-mounted water filter
with a device that automatically monitors the useful life of the
filter cartridge.

* In 1996, the Company introduced the first gravity-fed, pour-through
pitcher with an automatic monitoring device.

* In 1997, the Company introduced the first faucet-mounted water filter
to remove mercury, particulates, atrazine and lindane.

* In 1998, the Company introduced two new pour-through systems, the PUR
PLUS pitcher and the PUR PLUS dispenser, the first gravity-fed water
filter systems capable of removing microorganisms as small as
CRYPTOSPORIDIUM and GIARDIA LAMBLIA.

* In 1998, the Company introduced the PUR ULTIMATE faucet-mounted
filter, the first faucet-mounted system to remove VOCs, including
trihalomethanes, which have been linked to cancer.

The Company believes its track record of introducing leading edge
technology to the marketplace ahead of its competitors has enabled it to attain
the number one market share in the outdoor product and reverse osmosis market
segments in which it competes, as well as the number one market share in in-line
household water filter systems.

HOUSEHOLD WATER FILTERS

The Company believes it offers the broadest line of household water filters
widely available at retail. PUR household water filters are offered in a variety
of configurations, including pour-through

<PAGE>

pitchers and dispensers and in-line faucet-mounted, countertop and under-sink
filters. Each PUR household water filter system incorporates a replaceable
filter cartridge. Within each configuration, the Company offers different levels
of contaminant reduction capabilities and a range of price points. In addition,
the Company's flexible manufacturing processes allow it to make minor
modifications to its products to meet the preferences of retailers.

All PUR household water filters incorporate the Company's ASM technology
which measures the filter's usage and indicates its remaining capacity, enabling
consumers to anticipate the need to purchase a replacement filter cartridge. The
PUR in-line products also include a feature that automatically shuts off the
water flow when the filter cartridge needs changing. Replacement filter
cartridges are sold at suggested retail prices ranging from $7.99 to $29.99
which allow consumers to obtain filtered water at a small fraction of the cost
of bottled water.

PUR faucet-mounted water filters, introduced to the market in 1994, were
the first household water filters offered by the Company. These compact units
are approximately five inches high and incorporate a proprietary carbon block
filter developed by the Company. The filter cartridges for these units have a
useful life of about two to three months based on the Company's surveys of
consumer usage. The Company introduced its PUR countertop water filter systems
in 1996 and its PUR under-sink water filter system in 1997, with filter
cartridges having a useful life of four to six months. Each of these products is
approximately nine inches high and offers greater contaminant reduction and
longer filter life than the faucet-mounted units. The filter cartridge for the
countertop and under-sink units employ the same proprietary carbon block
technology as the faucet-mounted units. The Company estimates, based on survey
information from Intelect, that its line of faucet-mounted PUR water filters
accounted for approximately 75% of all household faucet-mounted water filtration
sales in the United States in 1997.

The initial PUR pour-through product, introduced to the market in January
1996, is a water pitcher which holds approximately a half-gallon of filtered
water. In 1998, the Company introduced its PUR PLUS pitcher and PUR PLUS
dispenser, which are the only gravity-fed water filters capable of filtering
microorganisms as small as CRYPTOSPORIDIUM and GIARDIA LAMBLIA. The Company
expects to begin shipping the PUR PLUS pour-through products to retailers toward
the end of the first quarter of 1998. The PUR pour-through products incorporate
a proprietary three-stage filtration cartridge, developed and manufactured by
the Company, which employs activated carbon, ion exchange resin and a
microfilter and has a useful life of approximately one to two months based on
the Company's surveys of consumer usage. The Company estimates, based on survey
information from Intelect, that its line of PUR pour-through products accounted
for approximately 8% of all water filtration pitcher sales in the United States
in 1997.

<PAGE>

The products comprising the PUR line of household water filters are as follows:

<TABLE>
<CAPTION>
SUGGESTED RETAIL PRICE
------------------------
ASM
FILTER LIFE NSF CERTIFICATION OF FILTER FILTER REPLACEMENT
PRODUCT/CONFIGURATION INDICATOR CONTAMINANT REDUCTION CAPABILITY (1)(2) CAPACITY (3) SYSTEM (4) CARTRIDGE
- --------------------- ----------- --------------------------------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
POUR-THROUGH PRODUCTS:

PUR Pitcher X * Chlorine, Taste/Odor, Zinc, 40 gal. $ 24.99 $ 7.99
(1|M/2 gallon capacity) Particulate, Lead, Copper 1-2 mos.

PUR PLUS Pitcher X * Chlorine, Taste/Odor, Zinc, 40 gal. $ 39.99 $ 12.99
(1|M/2 gallon capacity) Particulate, Lead, Copper 1-2 mos.
* Cysts (CRYPTOSPORIDIUM, GIARDIA),
Asbestos, Turbidity

PUR PLUS Dispenser X * Chlorine, Taste/Odor, Zinc, 40 gal. $ 49.99 $ 12.99
(2 gallon capacity) Particulate, Lead, Copper 1-2 mos.
* Cysts (CRYPTOSPORIDIUM, GIARDIA),
Asbestos, Turbidity

IN-LINE PRODUCTS:

PUR FM (standard) X * Chlorine, Taste/Odor, Particulate, 100 gal. $ 39.99 $ 14.99
(faucet-mounted) Cysts (CRYPTOSPORIDIUM, GIARDIA), 2-3 mos.
Lead

PUR FM PLUS X * Chlorine, Taste/Odor, Particulate, 100 gal. $ 49.99 $ 19.99
(faucet-mounted) Cysts (CRYPTOSPORIDIUM, GIARDIA), 2-3 mos.
Lead
* Asbestos, Mercury, Lindane,
Atrazine

PUR FM ULTIMATE X * Chlorine, Taste/Odor, Particulate, 100 gal. $ 59.99 $ 21.99
(faucet-mounted) Cysts (CRYPTOSPORIDIUM, GIARDIA), 2-3 mos.
Lead
* Asbestos, Mercury, Lindane,
Atrazine
* VOCs

PUR CT PLUS X * Chlorine, Taste/Odor, Particulate, 200 gal. $ 79.99 $ 29.99
(countertop) Cysts (CRYPTOSPORIDIUM, GIARDIA), 4-6 mos.
Lead
* Asbestos, Mercury, Lindane,
Atrazine
* Turbidity

PUR US PLUS X * Chlorine, Taste/Odor, Particulate, 200 gal. $ 119.99 $ 29.99
(under-sink) Cysts (CRYPTOSPORIDIUM, GIARDIA), 4-6 mos.
Lead
* Asbestos, Mercury, Lindane,
Atrazine
</TABLE>

- ------------------
(1) The National Sanitation Foundation ("NSF") is a nationally recognized
not-for-profit agency which, at the request of state drinking water
administrators and the EPA, has developed consensus standards for the
certification of water filters. NSF certification indicates that a product
has passed a series of stringent independent tests.

(2) NSF certification of the PUR PLUS dispenser and PUR FM ULTIMATE
faucet-mounted products is pending.

(3) Estimated useful life (months) based on Company surveys of consumer usage.

(4) A filter system includes the base unit and one filtration cartridge.

<PAGE>

OUTDOOR PRODUCTS

The Company believes that it offers the broadest line of small-scale
drinking water systems for recreational and offshore marine use. The Company's
outdoor products include a rugged line of portable drinking water systems for
outdoor enthusiasts and international travelers and a line of low-energy,
reverse osmosis desalinators for offshore marine, commercial life raft and
military use.

Various methods have historically been used to disinfect fresh water,
including chlorine gas, iodine, silver nitrate, hydrogen peroxide and boiling.
These methods involve a significant amount of time to be effective and,
therefore, are not convenient or practical for use on a consistent basis to
produce drinking water. In addition, chemical disinfectants are relatively
ineffective against cyst forms of various parasites, including GIARDIA LAMBLIA,
and leave residual concentrations in water, which may render the water
unpalatable. Although filtration is also commonly used to treat contaminated
water and is an effective means of removing larger microorganisms like protozoa
and bacteria, filtration is not a practical means of removing viruses.

PUR fresh water purifiers incorporate the Company's proprietary Tritek
technology, which combines microfiltration and an iodinated resin matrix to
produce safe drinking water in seconds. The microfilter is used to remove
sediment and the largest and most chemically resistant microorganisms. Smaller
microorganisms, like bacteria and viruses, are killed upon contact with the
iodinated resin. The result is a process that takes advantage of the positive
attributes of microfiltration and iodinated resin, without suffering the
drawbacks of each approach when used alone. Each of the PUR fresh water
purifiers is registered with the EPA, which has established minimum performance
guidelines for microbiological water purifiers. See "Business -- Government
Regulation."

The Company offers a range of PUR water purifiers and microfilters for use
by backpackers, campers and other outdoor enthusiasts. The PUR Voyageur(TM) is a
compact water purifier which produces approximately 1.0 liter of water per
minute. The Voyageur incorporates the Company's proprietary Anti-Clog Filter
Technology ("AFT") which extends the life of the filter, eliminating the need
for the user to clean or maintain it. The PUR Scout(R) also incorporates the AFT
filter technology and produces approximately 0.5 liter of water per minute. The
PUR Explorer(R) has a double-action pump which enables one person to produce
over 1.5 liters of water per minute. The Explorer includes a self-cleaning
mechanism, permitting the filter to be cleaned conveniently without disassembly.
The Company's microfilter products include the PUR Pioneer(R), an entry level
product which features a disposable microfilter designed to filter up to 20
gallons, and the PUR Hiker(R), which incorporates the Company's AFT filter
technology and is designed to filter up to 100 gallons.

The Company also offers a line of PUR reverse osmosis desalinators for
converting seawater to potable water when sources of energy are either
unavailable or in limited supply. These products are used primarily in offshore
marine, commercial life raft and military applications. Reverse osmosis
desalination, which has been in use in large-scale systems for over 20 years,
occurs when feed water with dissolved solids (such as salt) is forced against a
semipermeable membrane at high pressure, typically 800 pounds per square inch.
The membrane acts as a barrier to contaminants such as salts, viruses and
bacteria, separating them from the pure water that passes through the membrane.
In a conventional reverse osmosis system, approximately 10% of the seawater
forced against the membrane passes through as pure water. The remaining
high-pressure waste brine stream is discharged. This process requires a large
amount of energy, making it impractical for small-scale applications. In 1988,
the Company introduced the world's first hand-operated reverse osmosis
desalinator, a compact unit incorporating a patented high-pressure energy
recovery pump that is designed to recover and effectively use energy that is
wasted in a conventional reverse osmosis system. The pump recycles the
high-pressure waste brine stream, redirecting it to the backside of the pump's
piston, providing a power assist to the pumping operation. By thus recovering
energy contained in the high-pressure waste brine stream, the Company's energy
recovery pump reduces the external power needed to operate a desalinator by
approximately 90%, and makes possible a small-scale low-energy desalinator.

The PUR Survivor(R) models are hand-operated desalinators, designed
primarily for emergency life raft use. The Survivor-35, the first desalinator
built by the Company, was designed for use by the United States Navy in
25-person life rafts and is also available in commercial versions. The
Survivor-06, the

<PAGE>

smallest reverse osmosis desalinator manufactured in the world, can produce a
pint of fresh water in less than 30 minutes. It is recommended for 4- to
12-person life rafts and individual survival kits. The Company is not aware of
any other hand-operated desalinators on the market. The PUR PowerSurvivor models
are driven by a 12-volt DC motor with power supplied by a boat's battery.

The products comprising the PUR line of outdoor products are as follows:

<TABLE>
<CAPTION>
SUGGESTED
PRODUCT TYPE SPECIAL FEATURES RETAIL PRICE
- ------- ----------- ---------------------------------------- ------------
<S> <C> <C> <C>
PORTABLE SYSTEMS:
PUR Pioneer Microfilter Disposable filter $ 34.95
PUR Hiker Microfilter Anti-clog filter $ 59.95
PUR Voyageur Purifier Anti-clog filter with iodinated resin $ 74.95
PUR Scout Purifier Anti-clog filter with iodinated resin $ 89.95
and dirt shield
PUR Explorer Purifier Double-action pump; self-cleaning filter $ 129.95
with iodinated resin

DESALINATORS:
PUR Survivor-06 Desalinator Hand-operated, 6 gallons per day ("gpd") $ 585.00
PUR Survivor-35 Desalinator Hand-operated, 35 gpd $ 1,550.00
PUR PowerSurvivor-40E Desalinator Powered by 12-volt DC motor, 40 gpd $ 2,220.00
PUR PowerSurvivor-80E Desalinator Powered by 12-volt DC motor, 80 gpd $ 3,540.00
PUR PowerSurvivor-160E Desalinator Powered by 12-volt DC motor, 160 gpd $ 3,770.00

</TABLE>

MARKETING AND DISTRIBUTION

The Company entered the growing household water filter market with the
belief that it could capture a significant share of the market by quickly
establishing its PUR brand name. The Company therefore invested and continues to
invest significant resources in advertising and promotional activities to create
awareness of its products and recognition of the PUR brand name. These
activities include providing its retailers with point-of-sale displays,
cooperative advertising programs, product flyers and in-store product
demonstrations. The Company also utilizes television commercials which air on a
variety of national cable channels and local broadcast stations, as well as
print and radio advertisements. These efforts have enabled the Company to
establish PUR products as the number one brand of in-line water filters and the
second leading brand of all household water filters sold in the United States.
In February 1998, the Company began airing a one-half hour infomercial featuring
the PUR PLUS pitcher. This infomercial is designed to generate both direct and
retail sales and further educate consumers about the advantages of the PUR PLUS
pitcher relative to the leading pitcher brand.

The Company's entry into the household water filter market in 1994 required
it to establish new distribution channels for its products. Since then, the
Company has expanded its distribution network aggressively, and currently sells
its household water filters in the United States and Canada through a wide
variety of mass retail channels, including department stores, mass merchants,
drug stores, grocery stores, hardware stores, and warehouse clubs. The Company's
household products are distributed in approximately 26,000 stores in the United
States and Canada. The accounts are serviced by a network of more than 30
independent manufacturers' representative agencies. The Company continues to
seek additional retail outlets and distribution channels for its household
products.

<PAGE>

The Company's household products are distributed through the following
channels:

<TABLE>
<CAPTION>
APPROXIMATE
DISTRIBUTION CHANNEL NO. OF STORES (1) REPRESENTATIVE RETAILERS
- -------------------- ----------------- ---------------------------------------------------
<S> <C> <C>
Mass merchants 6,400 Wal-Mart; Target; Kmart

Department stores 2,100 Dayton's; Marshall Fields; Macy's; Robinson-May;
Dillard's; Bloomingdale's; JC Penney; Sears

Drug stores 7,800 Walgreens; Eckerd Drug; Long's Drug; Osco

Grocery stores 3,400 Albertson's; Kroger; Super Valu; Fleming; Wegman's

Home center and 4,500 Home Depot; Lowes; Menards; Payless Cashways;
hardware stores Builders Square; Ace Hardware; True Value Hardware;
Hardware Hank; Servistar; Coast-to-Coast

Warehouse clubs 700 Costco; Sam's Club; B.J.'s

Specialty retailers 1,100 Bed, Bath & Beyond; Linens 'N Things; Home Place;
Lechters; QVC
</TABLE>

- --------------------
(1) Represents the Company's estimate of the number of outlets at which one or
more of the Company's household products are sold, including but not
limited to the representative retailers named in the table.

As part of its continuing efforts to enhance communications with its
customers, the Company utilizes electronic data interchange with its customers
to generate electronic purchase orders and invoices. The Company also receives
point-of-sale information through this system from 25 retailers including seven
of the Company's top 10 customers. This information allows the Company to track
and monitor consumer sales of its products and anticipate orders from its
principal customers.

In 1996, the Company established an international distribution agreement
with Groupe-SEB, one of the world's leading suppliers of small household
appliances whose products are distributed in over 80 countries under the brand
names Rowenta and T-Fal. Under the distribution agreement, Groupe-SEB has the
exclusive right to distribute PUR household water filters in all countries
outside of North America and Japan. The agreement gives the Company immediate
access to worldwide markets with minimal investment in sales and marketing
activities. The agreement has an initial term expiring on December 31, 1998, and
is automatically renewed for successive one-year terms unless notice of
non-renewal is given by either party at least six months prior to the renewal
date. The agreement may be terminated by the Company upon 30 days written notice
if Groupe-SEB does not purchase specified quantities of products.

The Company's portable drinking water systems are offered to outdoor
enthusiasts and international travelers through more than 1,550 outdoor and
travel stores and more than a dozen mail order catalogs. A network of
approximately 20 independent manufacturers' representatives services these
accounts. The Company's reverse osmosis desalinators can be purchased from more
than 450 marine dealers and service centers on the Atlantic, Pacific and Gulf
coasts and from several marine catalogs. Internal sales and service personnel
manage these accounts directly. The Company also sells directly to the United
States armed forces. Sales to foreign military forces and consumers are made
through approximately 30 distributors located in Europe, Asia and the Middle
East. To create awareness for its products, the Company advertises in consumer
and trade publications, participates in consumer and trade shows, and publishes
periodic newsletters to its retailers.

RESEARCH AND DEVELOPMENT

The Company believes that its research and development team gives it a
significant competitive advantage over others engaged in the design and
manufacture of consumer water filtration and purification equipment. Through the
efforts of its research and development team, the Company develops products
which incorporate proprietary technology to offer performance superior to
comparably priced products sold by competitors. The Company utilizes customer
surveys, focus groups, home user studies and field testing of its products to
assess consumer needs and preferences. Research and development efforts are then
focused on products where technological innovation can create a

<PAGE>

meaningful difference between the Company's products and competing products. The
Company's research and development team includes an advanced manufacturing
design group which works to coordinate the transition of new products from the
research and development stage through the manufacturing process and ultimately
to a successful product launch. The Company's expenditures for research and
development were $3.1 million in 1997 and $2.0 million in each of 1996 and 1995,
representing 4.3%, 6.0% and 8.8% of sales, respectively.

MANUFACTURING

Since entering the household water filter market in 1994, the Company has
invested heavily in developing and implementing automated assembly and
manufacturing processes. The Company's annual production volume of replacement
cartridges has risen from less than 100,000 in 1994 to more than 3.1 million in
1997. During this period, the Company has also implemented management processes
and information systems which it believes can accommodate significant additional
growth.

The Company currently assembles all of the filter elements used in its
household products. The manufacturing and assembly processes of some of its
filter units and most of its filter cartridges is automated. The assembly,
testing, quality control and packaging of the Company's products are conducted
by the Company's employees at its facilities in Minneapolis, Minnesota.

The principal raw materials utilized in the Company's manufacturing
operations are engineered thermoplastics, stainless steel and filtration media.
The Company relies on third party machine shops and injection molders to
manufacture components to the Company's specifications. The Company has
consolidated its supply relationships to two or three vendors for each component
to promote quality control. The Company has identified additional potential
suppliers for most of its components, and believes that alternate sources of
supply would be readily available to the Company if its relationships with
current suppliers were interrupted. The interruption of any of these supply
relationships could have a material adverse effect on the Company's results of
operations.

PATENTS

The Company is the owner of 12 United States utility patents and five
United States design patents related to its reverse osmosis desalinators,
portable drinking water systems and household drinking water systems. These
patents expire at various dates from 1998 to 2013. The Company has applied for
corresponding foreign patents where it deemed such applications necessary. The
Company has also applied for 11 other patents in the United States with respect
to its household drinking water products and for corresponding foreign patents.
The protection offered by these patents and the ability to obtain protection
with respect to new technology are important to the Company's future
performance. See "Risk Factors -- Reliance on Proprietary Technology."

COMPETITION

The Company competes with a number of companies in the manufacture and
marketing of household water filtration and purification systems. The most
significant competitors in this market currently are Brita U.S.A. (a subsidiary
of Clorox Company), Teledyne Waterpik (a subsidiary of Allegheny Teledyne,
Inc.), Culligan Water Technologies, Inc., Rubbermaid Inc. and Signature Brands
Inc. As this market develops, the Company may experience increased competition
from public water utilities, appliance manufacturers and consumer electronics
companies. In addition, the Company competes indirectly with suppliers of
bottled water.

The Company is not aware of any other company which manufactures
hand-operated desalinators. The Company competes with several other companies in
the manufacture and sale of small-scale motorized reverse osmosis desalinators.
These companies include Sea Recovery Corp. and Village Marine Tec. The Company
also competes with several companies in the manufacture of water filters and
purifiers for personal and recreational uses. These companies include Katadyn
U.S.A., Inc., Mountain Safety Research Corporation (a subsidiary of Recreational
Equipment, Inc.), and Cascade Designs, Inc.

The Company competes in the sale of drinking water systems on the basis of
product features, product performance and reputation, price and service.

<PAGE>

GOVERNMENT REGULATION

The manufacture, marketing, advertising and distribution of water
purification devices containing active ingredients, such as iodine, is regulated
by the EPA. The EPA generally requires registration of the manufacturer, the
active ingredients and the applicable device and its packaging prior to sale of
the product. Registration entails obtaining scientific data as to the efficacy
and toxicity of the device and its active ingredients. The PUR Explorer, Scout
and Voyageur, all of which contain iodinated resin, have been registered by the
EPA as "microbiological water purifiers."

In 1987, the EPA issued a protocol (the "1987 Protocol"), applicable to
manufacturers of microbiological water purification devices, for the testing and
certification of such devices, including those offered by the Company. The 1987
Protocol requires that to be registered as a "microbiological water purifier," a
device must remove, kill or inactivate all types of disease-causing
microorganisms from the water, including bacteria, viruses and protozoan cysts,
so as to render the processed water safe for drinking. The 1987 Protocol does
not require the removal of all traces of iodine from the treated water. Because
small amounts of iodine may be present in water treated by the Company's
antimicrobial water purifiers, the Company, in its labeling, advises persons
with thyroid problems and pregnant women to consult their doctors before use of
such products. Management believes the Company's water purification products
satisfy all the 1987 Protocol requirements.

In addition to EPA regulation, some states require registration of
household water filtration and purification products. The Company believes that
its current household products, and any future household products it develops,
comply and will comply with state regulations applicable to such products. There
can be no assurance, however, that such state registration requirements will not
result in delays in introduction of these products in certain markets.

The Company is also subject to regulation with respect to the handling and
disposal of the elemental iodine used in manufacturing resins. The Company
believes it is in compliance with applicable rules, and that it has properly
disposed of such material. There can be no assurance that more restrictive and
costly requirements will not be imposed in the future.

EMPLOYEES

At December 31, 1997, the Company had approximately 345 full-time
employees, of whom 33 were involved in research and development, 229 in
manufacturing, assembly and testing, 47 in sales, marketing, technical and
customer service, and 36 in administration. None of the Company's employees is
represented by a labor union or is covered by a collective bargaining agreement.
The Company has not experienced any work stoppages and believes that its
employee relations are excellent.

FACILITIES AND EQUIPMENT

The Company is headquartered in a leased facility of 101,000 square feet at
9300 North 75th Avenue, Minneapolis, Minnesota 55428. The Company initiated
construction on an 87,000 square foot expansion of this facility in 1997, and
expects to take occupancy of such expansion in May 1998, at which time the
expiration date of the lease for the entire facility will be extended from April
2007 to the date that is ten years from the date of occupancy, plus 15 days. The
Company believes this expanded facility will provide sufficient space to support
the Company's anticipated requirements for the near-term, and that additional or
alternate facilities would be available on terms acceptable to the Company if
the Company's operations were to require additional space. The Company also
leases a warehouse facility of 19,000 square feet in Brooklyn Park, Minnesota
pursuant to a one year lease that expires on July 31, 1998.

The Company was formerly headquartered in a leased facility of 52,000
square feet in Minneapolis, Minnesota pursuant to a seven-year lease which
expires on December 31, 2000. The Company has obtained a replacement tenant for
26,000 square feet of that facility and is seeking tenants for the remainder of
the facility. The original lease remains in effect and the Company will have
continuing financial obligations under such lease to the extent the facility is
not occupied by another tenant or the tenant does not assume or perform the
Company's obligations under the original lease.

The Company owns manufacturing and engineering equipment, located at its
facilities in Minneapolis, used in its assembly operations and research and
development efforts. Such equipment is available from

<PAGE>

a variety of sources, and the Company believes that it currently owns or can
readily acquire equipment required for its current and anticipated levels of
operations.

LITIGATION

The Company and several other water filtration companies are defendants in
a civil proceeding initiated in January 1997 by Brita U.S.A., a subsidiary of
Clorox Company, which asserts that the defendants have infringed one of Brita's
patents relating to pitcher products. Brita's lawsuit, now pending in the United
States District Court for the Northern District of Illinois, seeks injunctive
relief and unspecified monetary damages. This litigation is still in the initial
stages. The Company was aware of Brita's patent prior to developing the PUR
pitcher design and believes that it does not infringe Brita's patent. The
Company intends to defend vigorously its right to market and sell these
products. The design of the PUR PLUS pitcher, dispenser and related filter
cartridge differs in material respects from the design of the pitcher products
that are the subject of this litigation.

The Company is also a defendant in a civil proceeding initiated in April
1997 by UltraPure Systems, Inc., a subsidiary of Culligan Water Technologies,
Inc., which asserts that the Company has infringed an UltraPure patent on a
faucet-mounted filter system. UltraPure's lawsuit, now pending in the United
States District Court for the District of Minnesota, seeks injunctive relief and
unspecified monetary damages. The Company believes it does not infringe
UltraPure's patent and intends to defend vigorously its right to market and sell
these products.

The Company from time to time is involved in various other legal
proceedings arising in the normal course of business, none of which is expected
to result in any material loss to the Company.

<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
--------------------------------- --- ------------------------------------------
<S> <C> <C>
Brian F. Sullivan ............... 36 President, Chief Executive Officer
and Director
Jeffrey T. Dekko ................ 31 Vice President -- Marketing
Richard D. Hembree .............. 45 Vice President -- Engineering
Charles F. Karpinske ............ 43 Vice President and Chief Financial Officer
Sally S. Mainquist .............. 42 Vice President -- Manufacturing
Barry B. Van Lerberghe .......... 36 Vice President -- Sales
Robert R. Gheewalla ............. 30 Director
John E. Gherty .................. 54 Director
Sanjay H. Patel ................. 37 Director
William D. Thompson ............. 76 Director
William F. Wanner, Jr. .......... 55 Director
Ronald W. Weber ................. 69 Director
Richard J. Zeckhauser ........... 57 Director

</TABLE>

BRIAN F. SULLIVAN has been the President and Chief Executive Officer and a
director of the Company since its inception in 1986, and also served as Chief
Financial Officer of the Company from 1986 to 1994. Mr. Sullivan has
established and directed the implementation of the Company's strategic
direction since its inception. He has led the Company from the development
stage through its initial contracts with the United States armed forces, the
introduction of reverse osmosis desalinators and portable drinking water
systems, and the development and introduction of the Company's household
drinking water systems. Mr. Sullivan is named as an inventor on four United
States patents held by the Company. Mr. Sullivan is also a director of North
Central Life Insurance Company.

JEFFREY T. DEKKO has served as Vice President -- Marketing of the Company
since July 1995. Mr. Dekko served as Vice President of Recreational Products
for the Company from October 1994 to July 1995. Mr. Dekko directs the Company's
marketing efforts in the consumer household water products category. From 1988
to October 1994, Mr. Dekko was marketing manager for General Mills, Inc.

RICHARD D. HEMBREE has served as chief engineer of the Company since 1986
and Vice President -- Engineering since 1987. Mr. Hembree has been principally
responsible for the development of new technologies incorporated into the
Company's products. Mr. Hembree is named as an inventor on eight United States
patents held by the Company. From 1983 to 1986, Mr. Hembree was a senior design
engineer at Seagold Industries Corporation, a manufacturer of desalinators,
where he designed several energy recovery pumps and was engaged in the design
and development of manual desalinators and hydraulic energy recovery devices.

CHARLES F. KARPINSKE has served as the Company's Vice President and Chief
Financial Officer since February 1996. Prior to joining the Company, Mr.
Karpinske served as Vice President of Operations and Chief Financial Officer of
Goretek Data Systems, a software development company, from April 1995 to
February 1996. From August 1993 to March 1995, Mr. Karpinske was the Chief
Operating Officer and Chief Financial Officer for Decision Data, a manufacturer
and distributor of computer equipment. From October 1986 to July 1993, Mr.
Karpinske worked for Apertus Technologies (formerly Lee Data), a manufacturer
and distributor of computer equipment, serving in a number of financial
positions including Chief Financial Officer, Vice President of Finance and
Administration and Corporate Controller.

SALLY S. MAINQUIST has served as Vice President -- Manufacturing of the
Company since March 1994. Ms. Mainquist directs the Company's manufacturing
operations and is responsible for establishing automated manufacturing processes
for the Company's household drinking water systems. From 1982 to February 1994,
Ms. Mainquist served in various positions with Graco Inc., a manufacturer of
fluid handling equipment, most recently as a factory operations manager.

<PAGE>

BARRY B. VAN LERBERGHE has served as Vice President -- Sales of the Company
since July 1995. Prior to joining the Company, Mr. Van Lerberghe was Western
Regional Manager for Sunbeam Household Products from 1992 to 1995, and District
Sales Manager for Polaroid Corporation from 1988 to 1992.

ROBERT GHEEWALLA has been a director of the Company since February 1998.
Mr. Gheewalla has been an Associate in the Principal Investment Area of
Goldman, Sachs & Co. since 1994. From 1989 to 1994, he worked in the Global
Finance Department of Goldman, Sachs & Co. Mr. Gheewalla also serves on the
Advisory Committees or Boards of Directors of Marcus Cable Co., L.P. and North
American Railnet, Inc.

JOHN E. GHERTY has been a director of the Company since 1988. Mr. Gherty
has been President and Chief Executive Officer of Land O' Lakes, Inc., a food
and agricultural company, since 1989 and prior thereto was Group Vice President
and Chief Administrative Officer of Land O' Lakes, Inc. Mr. Gherty is also a
director of CF Industries, Inc., the National Parenting Association, the
National Council of Farmer Cooperatives and the Minnesota Business Partnership.

SANJAY H. PATEL has been a director of the Company since July 1996. Mr.
Patel is expected to join Greenwich Street Capital Partners as a managing
director in April 1998. Mr. Patel was a Managing Director in the Principal
Investment Area of Goldman, Sachs & Co. from 1996 to January 1998, and worked
in the Leveraged Buyout Group of Goldman, Sachs & Co. from 1987 to 1996. Mr.
Patel is also a director of Stirling Cooke Brown Holdings Limited.

WILLIAM D. THOMPSON has been a director of the Company since December
1995. Mr. Thompson served as Executive Vice President of the New York City
advertising firm of Young & Rubicam, Inc. until his retirement in 1989. During
37 years of service for Young & Rubicam, Mr. Thompson oversaw accounts for
numerous companies, including General Foods, Merrill Lynch, General Electric,
Warner-Lambert, Bristol-Meyers Squibb, and Johnson & Johnson.

WILLIAM F. WANNER, JR. has been a director of the Company since its
inception in 1986. Mr. Wanner served as Chairman of the Board of the Company
from 1986 to 1994. Since 1973, Mr. Wanner has been the Chief Executive Officer
and principal shareholder of Wanner Engineering, Inc. and its affiliated
companies, which design, produce and market a range of high pressure pumps and
controls.

RONALD W. WEBER has been a director of the Company since 1993. Mr. Weber
has been President and Chief Executive Officer of Normark Corporation, a
distributor of fishing and sporting equipment, since 1959. Mr. Weber is also a
director of Rapala Oy, a manufacturer of fishing and sporting equipment.

RICHARD J. ZECKHAUSER has been a director of the Company since 1987. Dr.
Zeckhauser has been a professor of political economy at the John F. Kennedy
School of Government at Harvard University since 1968. Dr. Zeckhauser was a
co-founder of Niederhoffer, Cross and Zeckhauser, a New York-based investment
firm specializing in mergers and acquisitions and money management.

Directors of the Company are elected annually to serve until the next
annual meeting of shareholders. GS Group has the right to nominate one person
to serve on the Company's Board of Directors, and the Company has agreed to use
its best efforts to secure the election of such nominee to the Board of
Directors. Mr. Gheewalla serves as a director of the Company pursuant to such
arrangements.

<PAGE>

PRINCIPAL SHAREHOLDERS

The following table sets forth information as of December 31, 1997,
regarding the beneficial ownership of shares of Common Stock of the Company by
each director and executive officer of the Company, by all directors and
executive officers of the Company as a group, and by each shareholder known by
the Company to own beneficially more than five percent (5%) of the outstanding
shares of the Company's Common Stock. Unless otherwise noted, each person or
group identified possesses sole voting and investment power with respect to such
shares.

<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING
SHARES (2)
----------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) OFFERING OFFERING
- ------------------------------------ ---------------------- ---------- ---------
<S> <C> <C> <C>
Certain investment funds affiliated with
The Goldman Sachs Group, L.P. (3) .................... 1,015,101 18.2% 15.5%
85 Broad Street
New York, NY 10004

Investment Advisers, Inc. (4) ......................... 620,300 13.6% 11.2%
3700 First Bank Place
Minneapolis, MN 55440

Wanner Engineering, Inc. (5) .......................... 596,100 13.1% 10.7%
1204 Chestnut Avenue
Minneapolis, MN 55403

US Trust Company of New York (6) ...................... 370,036 8.1% 6.7%
114 West 47th Street
New York, NY 10036

Nevis Capital Management, Inc. (7) .................... 311,300 6.8% 5.6%
1119 St. Paul Street
Baltimore, MD 21202

DIRECTORS AND EXECUTIVE OFFICERS:

Brian F. Sullivan (8)(9) .............................. 530,000 11.3% 9.3%
Jeffrey T. Dekko (8) .................................. 15,263 * *
Richard D. Hembree (8) ................................ 72,150 1.6% 1.3%
Charles F. Karpinske (8) .............................. 22,500 * *
Sally S. Mainquist (8) ................................ 20,615 * *
Barry B. Van Lerberghe (8) ............................ 16,050 * *
Robert R. Gheewalla (10) .............................. -- * *
John E. Gherty (8) (11) ............................... 56,451 1.2% 1.0%
Sanjay H. Patel (8) (12) .............................. 5,700 * *
William D. Thompson (8) ............................... 21,000 * *
William F. Wanner, Jr. (8)(13) ........................ 660,150 14.5% 11.9%
Ronald W. Weber (8) ................................... 28,000 * *
Richard J. Zeckhauser (8) (14) ........................ 92,500 2.0% 1.7%

All directors and executive officers as a group
(13 persons, including those named above)(8) ......... 1,540,379 31.9% 26.4%

</TABLE>

- ---------------------------
* Less than one percent.

(1) Each person has sole voting and sole power with respect to all outstanding
shares, except as noted.

(2) Based on 4,548,249 shares outstanding before the offering and 5,548,249
shares to be outstanding after the offering. Such amounts do not include
2,094,051 shares of Common Stock issuable upon exercise of stock options
and warrants or conversion of Convertible Notes outstanding at December 31,
1997. Each figure showing the percentage of outstanding shares owned
beneficially has been calculated by treating as outstanding and owned the
shares which could be purchased by the indicated person(s) within 60 days
upon the exercise of existing stock options or the conversion of the
Convertible Notes.

(3) Reflects information included on a Schedule 13D, dated October 1, 1997,
filed with the Securities and Exchange Commission by certain investment
partnerships, of which affiliates of The Goldman Sachs Group, L.P. ("GS
Group") are the general partner, managing general partner, managing partner
or investment manager. Includes (i) 1,010,101 shares which may be

<PAGE>

acquired upon the conversion of Convertible Notes owned by the investment
partnerships, and (ii) 5,000 shares subject to options held for the benefit
of the GS Group by Mr. Patel (see Notes 8 and 12). Includes Convertible
Notes held of record by GS Capital Partners II, L.P., currently convertible
into 633,766 shares, Convertible Notes held of record by GS Capital
Partners II Offshore, L.P., currently convertible into 251,948 shares,
Convertible Notes held of record by Stone Street Fund 1996, L.P., currently
convertible into 60,191 shares, Convertible Notes held of record by Bridge
Street Fund 1996, L.P., currently convertible into 40,819 shares, and
Convertible Notes held of record by Goldman, Sachs & Co. Verwaltungs GmbH,
currently convertible into 23,377 shares. Does not include up to 367,309
aggregate shares of Common Stock in respect of certain reset rights held by
the investment partnerships. GS Group disclaims beneficial ownership of the
shares owned by such investment partnerships to the extent attributable to
partnership interests therein held by persons other than GS Group and its
affiliates. Each of such investment partnerships shares voting and
investment power with certain of its respective affiliates. See "Dilution."

(4) Reflects information as of December 31, 1997, based on a Schedule 13G,
dated January 30, 1998, filed by such company with the Securities and
Exchange Commission, which indicates that the shareholder has sole voting
power and sole dispositive power with respect to 464,500 shares and shared
voting power and shared dispositive power with respect to 155,800 shares.

(5) Mr. Wanner, a director of the Company, is a director, officer and principal
shareholder of Wanner Engineering, Inc. Such shares are also included in
the shares beneficially owned by Mr. Wanner.

(6) Reflects information as of December 31, 1997, based on a Schedule 13G,
dated February 6, 1998, filed by such company with the Securities and
Exchange Commission, which indicates that the shareholder has shared voting
power and shared dispositive power with respect to said shares.

(7) Reflects information as of December 31, 1996, based on a Schedule 13G,
dated February 12, 1997, filed by such company with the Securities and
Exchange Commission, which indicates that the shareholder has sole voting
power and sole dispositive power with respect to said shares.

(8) Includes shares which could be purchased within 60 days upon the exercise
of stock options as follows: Mr. Sullivan, 121,500 shares; Mr. Dekko,
14,750 shares; Mr. Hembree, 41,250 shares; Mr. Karpinske, 22,500 shares;
Ms. Mainquist, 19,800 shares, Mr. Van Lerberghe, 12,250 shares; Mr. Gherty,
9,000 shares; Mr. Patel, 5,000 shares; Mr. Thompson, 6,000 shares; Mr.
Wanner, 10,000 shares; Mr. Weber, 8,000 shares; Dr. Zeckhauser, 8,500
shares; and all directors and executive officers as a group, 278,550
shares.

(9) Mr. Sullivan's address is 9300 North 75th Avenue, Minneapolis, MN 55428.

(10) Does not include securities that may be deemed to be beneficially owned by
GS Group (see Note 3). Mr. Gheewalla, a director of the Company, is an
associate of Goldman, Sachs & Co., the investment manager for certain of
the investment partnerships, Mr. Gheewalla disclaims beneficial ownership
of such securities.

(11) Includes 10,701 shares held by Mr. Gherty as custodian for his minor
children.

(12) Includes 5,000 shares subject to options held for the benefit of GS Group
with which Mr. Patel was previously associated. Mr. Patel disclaims
beneficial ownership of such securities.

(13) Includes 2,200 shares held by Mr. Wanner as trustee for members of his
family and 596,100 shares owned by Wanner Engineering, Inc., of which Mr.
Wanner is a director, officer and principal shareholder.

(14) Includes 25,000 shares owned by Dr. Zeckhauser's wife. Dr. Zeckhauser,
having no voting or dispositive powers with respect to such shares,
disclaims beneficial ownership of such shares.

<PAGE>

UNDERWRITING

NationsBanc Montgomery Securities LLC and Deutsche Morgan Grenfell Inc.
(the "Underwriters") have severally agreed, subject to the terms and conditions
in the underwriting agreement (the "Underwriting Agreement") by and between the
Company and the Underwriters, to purchase from the Company the aggregate number
of shares of Common Stock indicated below opposite their respective names at the
public offering price less the underwriting discount set forth on the cover page
of this Prospectus. The Underwriting Agreement provides that the obligations of
the Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all the shares of Common Stock if they
purchase any.

UNDERWRITER NUMBER OF SHARES
----------- ----------------

NationsBanc Montgomery Securities LLC ........
Deutsche Morgan Grenfell Inc. ................
---------
Total ....................................... 1,000,000

The Underwriters have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share and the Underwriters
may allow, and such dealers may reallow, a concession of not more than $ per
share to certain other dealers. After the offering, the public offering price
and other selling terms may be changed by the Underwriters. The Common Stock is
offered subject to receipt and acceptance by the Underwriters and to certain
other conditions, including the right to reject orders in whole or in part.

The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 150,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 1,000,000 shares to be purchased by
the Underwriters. To the extent that the Underwriters exercise such
over-allotment option, each of the Underwriters will be committed, subject to
certain conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this offering.

The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.

The Company, its officers, directors and certain other shareholders of the
Company designated by the Underwriters, including the holders of the Convertible
Notes, have agreed that, for a period of 180 days from the date of this
Prospectus (120 days in the case of the holders of the Convertible Notes), they
will not, without the prior written consent of NationsBanc Montgomery Securities
LLC, offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities convertible into, or exercisable or exchangeable for,
Common Stock, except that the Company may issue shares of Common Stock (i) in
connection with acquisitions and (ii) pursuant to the conversion of the
Convertible Notes and the exercise of options and warrants outstanding as of the
closing of this offering. Such shareholders beneficially own an aggregate of
1,261,829 shares of Common Stock currently outstanding and options exercisable
for or securities convertible into an aggregate of 1,293,651 shares of Common
Stock.

The Underwriters have informed the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts over
which they exercise discretionary authority in excess of 5% of the number of
shares of Common Stock offered hereby.

Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the Underwriters are permitted to
engage in certain transactions that stabilize the price of the Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock. If the Underwriters create
a short position in the Common Stock in connection with this offering, i.e., if
they sell more shares of Common Stock than are set forth on the cover page of
this Prospectus, the Underwriters may reduce that short position by purchasing
Common Stock in the open

<PAGE>

market. The Underwriters may also elect to reduce any short position by
exercising all or part of the over-allotment option described above. The
Underwriters may also impose a penalty bid on certain Underwriters and selling
group members. This means that if the Underwriters purchase shares of Common
Stock in the open market to reduce the Underwriters' short position or to
stabilize the price of the Common Stock, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those shares as part of this offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Robins, Kaplan, Miller & Ciresi L.L.P., Minneapolis,
Minnesota. Eric O. Madson, a partner in Robins, Kaplan, Miller & Ciresi L.L.P.,
is the Secretary of the Company and a beneficial owner of shares of Common
Stock. Certain legal matters will be passed upon for the Underwriters by Fried,
Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), Los Angeles, California.

EXPERTS

The financial statements of the Company as of December 31, 1996 and 1997
and for each of the three years in the period ended December 31, 1997, included
in this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon, appearing
elsewhere herein, and in the Registration Statement, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits, the "Registration Statement")
under the Securities Act of 1933, as amended, with respect to the offering of
the shares of Common Stock made hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement. For further information
with respect to the Company and the Common Stock, reference is made to such
Registration Statement. Statements made in this Prospectus as to the contents of
any contract, agreement or other documents referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved. The Registration
Statement may be inspected without charge and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; 500 West Madison, Suite 1400, Chicago, Illinois 60661; and 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such materials may
also be obtained at prescribed rates from the Commission's Public Reference
Section at 450 Fifth Street, N.W., Washington, D.C. 20549.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information may be
inspected without charge and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
500 West Madison, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such materials may also be
obtained at prescribed rates from the Commission's Public Reference Section at
450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a web
site at "http://www.sec.gov" which provides on-line access to registration
statements, reports, proxy statements and other information regarding
registrants that file electronically with the Commission.

<PAGE>

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission are hereby
incorporated by reference in this Prospectus except as superseded or modified
herein:

i. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;

ii. The description of the Company's capital stock, contained in the
Company's Form 8-A filed February 3, 1996, and amended on December 4,
1997; and

iii. The description of the Company's Rights Plan, contained in the
Company's Form 8-A filed February 20, 1996.

All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of the shares of Common Stock
offered hereby shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing such documents.

Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as modified or
superseded, to constitute a part of this Prospectus.

The Company will provide without charge to each person, including a
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request of such person, a copy of any or all documents that have been or may be
incorporated by reference herein (other than exhibits to such documents which
are not specifically incorporated by reference into such documents). Such
requests should be directed to the Chief Financial Officer at the Company's
principal executive offices at 9300 North 75th Avenue, Minneapolis, Minnesota
55428, telephone number (612) 315-5500.

<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors ............................................... F-2
Balance Sheets as of December 31, 1996 and 1997 .............................. F-3
Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997 F-4
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 F-5
Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 ............................................ F-6
Notes to Financial Statements ................................................ F-7

</TABLE>

F-1

<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Recovery Engineering, Inc.

We have audited the accompanying balance sheets of Recovery Engineering,
Inc. as of December 31, 1996 and 1997, and the related statements of operations,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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 statement presentation. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Recovery Engineering, Inc.
at December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.

Ernst & Young LLP

Minneapolis, Minnesota
January 30, 1998

F-2

<PAGE>

RECOVERY ENGINEERING, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>

ASSETS
Current assets:
Cash and cash equivalents ............................ $ 5,988 $ 261
Marketable securities ................................ 1,542 --
Accounts receivable (net of allowance of $212 for 1996
and $314 for 1997) .................................. 8,109 16,236
Inventory ............................................ 4,926 7,594
Other current assets ................................. 304 1,522
--------- ---------
Total current assets .................................. 20,869 25,613
Property and equipment:
Tooling .............................................. 6,057 9,815
Equipment and fixtures ............................... 6,569 9,123
--------- ---------
12,626 18,938
Less accumulated depreciation ........................ 3,003 4,771
--------- ---------
9,623 14,167
Deferred income taxes ................................. 1,512 1,512
Patents (net of accumulated amortization) ............. 766 732
Other assets .......................................... 487 676
--------- ---------
Total assets .......................................... $ 33,257 $ 42,700
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit .................................. $ -- $ 7,161
Accounts payable ..................................... 6,483 8,336
Accrued facility relocation costs .................... 608 217
Accrued marketing expenses ........................... 861 1,781
Accrued coop advertising ............................. 1,050 2,138
Other accrued expenses ............................... 2,124 3,836
--------- ---------
Total current liabilities ............................. 11,126 23,469
Long term debt ........................................ 15,000 15,000
Commitments
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares -- 100,000,000
Issued and outstanding shares 1996 -- 4,325,710 and
1997 -- 4,548,249 ................................. 43 45
Additional paid-in capital ........................... 20,313 21,364
Note receivable from sale of stock ................... -- (498)
Retained earnings (deficit) .......................... (13,225) (16,680)
--------- ---------
Total shareholders' equity ............................ 7,131 4,231
--------- ---------
Total liabilities and shareholders' equity ............ $ 33,257 $ 42,700
========= =========

</TABLE>

See accompanying notes

F-3

<PAGE>

RECOVERY ENGINEERING, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ....................................... $ 22,921 $ 33,277 $ 71,243
Cost of products sold ........................... 13,959 20,756 37,417
-------- --------- --------
Gross profit .................................... 8,962 12,521 33,826
Operating expenses:
Selling, general and administrative ............ 14,692 21,803 32,815
Research and development ....................... 2,021 2,007 3,082
Facility relocation costs ...................... -- 973 --
-------- --------- --------
16,713 24,783 35,897
-------- --------- --------
Loss from operations ............................ (7,751) (12,262) (2,071)
Other income (expense):
Interest income ................................ 551 220 43
Interest expense ............................... (126) (457) (1,427)
-------- --------- --------
Loss before income taxes ........................ (7,326) (12,499) (3,455)
Income tax benefit .............................. (2,564) -- --
-------- --------- --------
Net loss ........................................ $ (4,762) $ (12,499) $ (3,455)
======== ========= ========
Net loss per share -- basic and diluted ......... $ (1.12) $ (2.90) $ (0.77)
======== ========= ========
Weighted average shares ......................... 4,239 4,307 4,471
======== ========= ========
</TABLE>

See accompanying notes

F-4

<PAGE>

RECOVERY ENGINEERING, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------ ------------- ------------
<S> <C> <C> <C>

OPERATING ACTIVITIES
Net loss .................................................... $ (4,762) $ (12,499) $ (3,455)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .............................. 852 1,396 1,883
Write off of leasehold improvements ........................ -- 365 --
Deferred income taxes ...................................... (1,775) -- --
Changes in operating assets and liabilities:
Accounts receivable ..................................... (207) (3,913) (8,127)
Inventory ............................................... (3,554) 1,247 (2,668)
Refundable income taxes ................................. (975) 1,177 --
Other current assets .................................... 69 80 (1,218)
Other assets ............................................ -- (487) (189)
Accounts payable ........................................ 1,489 3,571 1,853
Accrued expenses ........................................ 807 3,363 3,329
-------- --------- ---------
Net cash used in operating activities ....................... (8,056) (5,700) (8,592)

INVESTING ACTIVITIES
Purchase of marketable securities ........................... (2,511) (12,185) --
Sale of marketable securities ............................... 4,963 11,665 1,542
Purchase of investments ..................................... (614) -- --
Sale of investments ......................................... 5,116 -- --
Purchase of property and equipment .......................... (4,601) (4,117) (6,312)
Purchase of patents ......................................... (216) (166) (81)
-------- --------- ---------
Net cash (used in) provided by investing activities ......... 2,137 (4,803) (4,851)

FINANCING ACTIVITIES
Gross borrowings -- bank line of credit ..................... -- -- 52,181
Gross repayments -- bank line of credit ..................... -- -- (45,020)
Issuance of warrants ........................................ -- -- 328
Proceeds from issuance of long-term debt .................... -- 15,000 --
Note receivable from sale of stock .......................... -- -- (498)
Exercise of stock options and warrants ...................... 1,342 334 725
Common stock acquired ....................................... (45) (134) --
-------- --------- ---------
Net cash provided by financing activities ................... 1,297 15,200 7,716
-------- --------- ---------
Increase (decrease) in cash and cash equivalents ............ (4,622) 4,697 (5,727)
Cash and cash equivalents at beginning of year .............. 5,913 1,291 5,988
-------- --------- ---------
Cash and cash equivalents at end of year .................... $ 1,291 $ 5,988 $ 261
======== ========= =========

</TABLE>

See accompanying notes

F-5

<PAGE>

RECOVERY ENGINEERING, INC.

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK RETAINED
---------------------- ADDITIONAL NOTE EARNINGS
SHARES AMOUNT PAID-IN CAPITAL RECEIVABLE (DEFICIT) TOTAL
------------- -------- ----------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1994 ...................... 4,002,414 $ 40 $18,819 $ -- $ 4,036 $ 22,895
Stock options and warrants
exercised ............................ 251,525 2 1,270 -- -- 1,272
Employee stock purchase plan .......... 5,312 -- 70 -- -- 70
Common stock acquired ................. (2,528) -- (45) -- -- (45)
Net loss for year ..................... -- -- -- -- (4,762) (4,762)
--------- ---- ------- ------ --------- ---------
December 31, 1995 ...................... 4,256,723 42 20,114 -- (726) 19,430
Stock options and warrants
exercised ............................ 71,375 1 272 -- -- 273
Employee stock purchase plan .......... 6,874 -- 61 -- -- 61
Common stock acquired ................. (9,262) -- (134) -- -- (134)
Net loss for year ..................... -- -- -- -- (12,499) (12,499)
--------- ---- ------- ------ --------- ---------
December 31, 1996 ...................... 4,325,710 43 20,313 -- (13,225) 7,131
Stock options and warrants
exercised ............................ 213,038 2 605 -- -- 607
Employee stock purchase plan .......... 9,501 -- 118 -- -- 118
Issuance of warrants .................. -- -- 328 -- -- 328
Note receivable from sale of stock .... -- -- -- (498) -- (498)
Net loss for year ..................... -- -- -- -- (3,455) (3,455)
--------- ---- ------- ------ --------- ---------
December 31, 1997 ...................... 4,548,249 $ 45 $21,364 $ (498) $ (16,680) $ 4,231
========= ==== ======= ====== ========= =========
</TABLE>

See accompanying notes

F-6

<PAGE>

RECOVERY ENGINEERING, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997

NOTE 1. BUSINESS ACTIVITY

Recovery Engineering, Inc., (the Company) manufactures and markets low
energy desalinators, antimicrobial water purifiers and microfilters, and
residential water filters sold primarily to retailers under the PUR brand name
for residential, marine, military and recreational use in the United States and
foreign markets.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Marketable securities and investments are classified as available for sale
and consist primarily of commercial paper, US Treasury Notes and municipal
bonds. At December 31, 1997, the Company had no marketable securities. At
December 31, 1996, the market value of marketable securities and investments
approximates cost.

Sales are recorded upon shipment of product. The Company performs periodic
credit evaluation of its customers' financial condition and generally does not
require collateral. The Company requires irrevocable letters of credit on sales
to certain foreign customers. Receivables generally are due within 30 days.
Credit losses relating to customers consistently have been within management's
expectations.

Inventories are stated at the lower of cost or market determined by the
first-in, first-out (FIFO) method. Inventory cost elements consist of raw
materials, purchased parts, direct labor and applied manufacturing overhead.

The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related interpretations in
accounting for its stock options. Under APB 25, when the exercise price of stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("Statement 123"). The Company adopted the disclosure only
provisions of Statement 123. Accordingly, the Company has made pro forma
disclosures of what net loss and loss per share would have been had the
provisions of Statement 123 been applied to the Company's stock options.

Property and equipment are stated at cost. The Company depreciates these
assets over their estimated useful lives ranging from three to ten years.
Depreciation expense was $767,000, $1,294,000 and $1,768,000 for the years ended
1995, 1996, and 1997, respectively.

Patents are stated at cost and are amortized on a straight-line basis
ranging from three to fifteen years. The carrying value of a patent will be
reviewed if the facts and circumstances suggest that it may be impaired. If this
review indicates that patent cost will not be recoverable, the Company's
carrying value of the patents will be reduced to the estimated fair value.

Deferred financing costs which are included in other assets are being
amortized over a five year period.

The Company records losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.

Advertising costs are charged to operations in the year incurred.
Advertising costs charged to operations were $6,372,000, $9,541,000 and
$14,602,000 for the years ended December 31, 1995, 1996, and 1997, respectively.

Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between the financial reporting and
tax basis of assets and liabilities.

F-7

<PAGE>

RECOVERY ENGINEERING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 the estimates.

NOTE 3. INVENTORIES

Inventories consist of the following:

DECEMBER 31
-----------------------------
1996 1997
------------- -------------

Finished goods ........... $1,704,000 $1,981,000
Work in progress ......... 95,000 157,000
Raw materials ............ 3,127,000 5,456,000
---------- ----------
$4,926,000 $7,594,000
========== ==========

NOTE 4. RELATED PARTY NOTE RECEIVABLE

At December 31, 1997 the Company had a note receivable of approximately
$498,000 due from its president and CEO. The note bears interest at 9.25%.
Principal and interest are due and payable in one installment on June 30, 1999.
The proceeds of the note were used to exercise stock options which were nearing
their expiration date.

NOTE 5. DEBT

Long-term debt consists of a $15.0 million convertible loan with certain
investment partnerships affiliated with The Goldman Sachs Group, L.P. ("GS
Group") which bears interest at 5% per annum and expires in 2003. Interest on
the loan is paid quarterly. GS Group may convert the outstanding balance of the
loan into shares of Common Stock at a conversion price of $14.85 per share at
any time during the life of the loan. If not converted, the loan is payable in
annual installments starting August 2001. The estimated fair value of the
convertible loan, based on the Company's incremental borrowing rate for similar
liabilities, approximates its carrying value.

The Company had no bank debt at December 31, 1996, compared with $7.2
million at December 31, 1997. In March 1997, the Company obtained a $14.0
million credit facility secured by equipment, inventory, receivables, and
intangibles. The credit facility consists of a $10.0 million discretionary
working capital line-of-credit, limited to eligible receivables and inventory,
which bears interest at the bank reference rate plus 1.25%, and a $4.0 million
equipment loan which bears interest at the bank reference rate plus 2.50%. The
principal amount of the equipment loan is payable over a 42-month period
commencing October 1998, unless demand is made sooner. Other borrowings under
the credit facility are due on demand. The Company's weighted average interest
rate on the bank debt for 1997 was 10.2%. Borrowings under this agreement are
limited to $10.0 million in 1997 and $12.5 million in 1998

F-8

<PAGE>

RECOVERY ENGINEERING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

NOTE 5. DEBT (CONTINUED)

by provisions in the convertible loan agreement. The Company received a waiver
allowing it to make full use of the $14.0 million credit facility for the fourth
quarter of 1997. In connection with the acquisition of the credit facility, the
Company issued warrants to the bank for the purchase of 80,000 shares of Common
Stock at $7.00 per share. The warrants cannot be exercised until October 8, 1998
and expire six years from the effective date of the credit facility. The Company
has estimated the value of the warrants to be $328,000, which has been included
in additional paid-in capital and is being amortized over the estimated life of
the credit facility.

NOTE 6. STOCK OPTIONS AND WARRANTS

The Company has various incentive and non-qualified stock option plans
which it uses as an incentive for directors, officers, and other employees,
consultants and technical advisors. Options are granted at fair market values
determined on the date of grant and vesting normally occurs over a four year
period. The Company adopted the 1993 Director Stock Option Plan, a non-qualified
stock option plan, to provide non-employee directors with an automatic annual
stock option grant at 85% of fair market value on the date of grant.

Shares available and options outstanding are as follows:

<TABLE>
<CAPTION>
WEIGHTED
PLAN DIRECTOR AVERAGE
OPTIONS PLAN NON-PLAN PLAN EXERCISE
AVAILABLE FOR OPTIONS OPTIONS OPTIONS PRICE
GRANT OUTSTANDING OUTSTANDING OUTSTANDING PER SHARE
--------------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994. ......... 280,611 610,425 500 10,000 $ 4.32
Additional shares reserved ........... 350,000 -- -- -- --
Granted .............................. (306,475) 306,475 -- 8,000 13.86
Exercised ............................ -- (251,525) -- -- 2.30
Canceled ............................. 14,125 (14,125) -- -- 12.90
-------- -------- --- ------ -------
Balance at December 31, 1995 .......... 338,261 651,250 500 18,000 8.97
Granted .............................. (410,850) 410,850 -- 7,000 12.04
Exercised ............................ -- (71,375) -- -- 3.75
Canceled ............................. 95,700 (95,700) -- -- 11.27
-------- -------- --- ------ -------
Balance at December 31, 1996. ......... 23,111 895,025 500 25,000 9.77
Additional shares reserved ........... 350,000 -- -- -- --
Granted .............................. (249,825) 249,825 -- 24,000 13.59
Exercised ............................ -- (212,925) -- -- 2.86
Canceled ............................. 34,975 (34,975) -- -- 10.52
-------- -------- --- ------ -------
Balance at December 31, 1997 .......... 158,261 896,950 500 49,000 $ 12.49
======== ======== === ====== =======
</TABLE>

The weighted average fair value of options granted in 1995, 1996 and 1997
was $6.77, $6.35 and $8.52, per share, respectively. The exercise price of
options outstanding at December 31, 1997 ranged from $2.50 to $29.19 per share
as summarized in the following table:

F-9

<PAGE>

RECOVERY ENGINEERING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

NOTE 6. STOCK OPTIONS AND WARRANTS (CONTINUED)

<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE OUTSTANDING AT REMAINING NUMBER EXERCISABLE EXERCISE PRICE PER
PRICES 12/31/97 CONTRACTUAL LIFE AT 12/31/97 SHARE
- ------------------- ---------------- ------------------ -------------------- -------------------
<S> <C> <C> <C> <C>
$ 2.50 - $10.00 256,000 10 years 65,438 $ 7.26
$10.01 - $12.00 180,150 8 years 84,388 $ 10.22
$12.01 - $14.00 397,400 9 years 143,375 $ 13.92
$14.01 - $29.19 112,900 10 years 1,425 $ 22.92
- ------------------- ------- ------------------ ------- -------
$ 2.50 - $29.19 946,450 9 years 294,626 $ 12.49
=================== ======= ================== ======= =======

</TABLE>

The number of stock options exercisable at December 31, 1995 and 1996 were
391,025 and 403,350, respectively, at a weighted average price of $7.30 and
$7.68, respectively.

The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided under FASB
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.

Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1995, 1996 and 1997, respectively; risk-free interest rate of
6%; volatility factor of the expected market price of the Company's Common Stock
of .55 and a weighted-average expected life of the options of 6 years.

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. 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 fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information is as follows:

<TABLE>
<CAPTION>
1995 1996 1997
---------------- ----------------- ----------------
<S> <C> <C> <C>
Pro forma net loss ........................... $ (5,024,000) $ (13,102,000) $ (4,254,000)
Pro forma net loss per common share .......... $ (1.19) $ (3.05) $ (0.95)

</TABLE>

These pro forma amounts may not be indicative of future years' amounts
since the statement provides for a phase in of option values beginning with
those granted in 1995.

The Company has warrants outstanding for the purchase of 57,500 shares of
Common Stock at $8.40 per share, which expire in 1998.

The Company has an Employee Stock Purchase Plan with 100,000 shares
reserved for issuance under the plan. During 1995, 1996 and 1997, 5,312, 6,874
and 9,501 shares were issued under the plan at prices ranging from $5.84 to
$25.73. Approximately 75,000 shares remain reserved for future issuance.

F-10

<PAGE>

RECOVERY ENGINEERING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

NOTE 7. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward ................... $ 5,590,000 $ 8,070,000
Tax benefit of nonqualified stock options ......... 530,000 449,000
Warranty reserve .................................. 130,000 296,000
Inventory obsolescence ............................ 81,000 150,000
Bad debt reserve .................................. 76,000 130,000
Facility relocation costs ......................... 350,000 78,000
Accrued expenses .................................. 165,000 74,000
Other ............................................. 34,000 29,000
------------ ------------
Total deferred tax assets .......................... 6,956,000 9,276,000
Deferred tax liabilities:
Tax depreciation in excess of financial reporting
depreciation ..................................... 769,000 1,670,000
Tax amortization of patents in excess of financial
reporting amortization ........................... 116,000 108,000
------------ ------------
Total deferred tax liabilities ..................... 885,000 1,778,000
6,071,000 7,498,000
Valuation allowance ................................ (4,496,000) (5,923,000)
------------ ------------
Net deferred tax assets ............................ $ 1,575,000 $ 1,575,000
============ ============
</TABLE>

Realization of the future tax benefits related to the net deferred tax
assets is dependent on many factors, including the Company's ability to generate
taxable income within the net operating loss carryforward period. Management
believes that, at a minimum, it is more likely than not that future taxable
income will be sufficient to realize the recorded asset.

Significant components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
---------------- ------ -------
<S> <C> <C> <C>
Current:
Federal ............... $ (1,256,000) $ -- $ --
State ................. -- -- --
------------ ---- ----
Total current ......... (1,256,000) -- --
------------ ---- ----
Deferred:
Federal ............... (1,158,000) -- --
State ................. (150,000) -- --
------------ ---- ----
Total deferred ......... (1,308,000) -- --
------------ ---- ----
$ (2,564,000) $ -- $ --
------------ ---- ----
</TABLE>

The Company has net operating loss carryforwards of $23,664,000 available
to offset future taxable income, of which $4,986,000 expires in 2010,
$11,493,000 expires in 2011 and $7,185,000 expires in 2012. Cash paid for income
taxes amounted to $31,000, $0, and $0 in 1995, 1996, and 1997, respectively.

F-11

<PAGE>

RECOVERY ENGINEERING, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997

NOTE 7. INCOME TAXES (CONTINUED)

A reconciliation of the statutory federal income tax rate of 34% to the
Company's effective income tax rate is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Income taxes (benefit) at statutory rate (34%). ......... $ (2,491,000) $ (4,249,000) $ (1,175,000)
State tax net of federal benefit ........................ (100,000) (255,000) (69,000)
Effect of tax rate changes on NOL carryback ............. 171,000 -- --
Valuation allowance ..................................... -- 4,496,000 1,427,000
Other ................................................... (144,000) 8,000 (183,000)
------------ ------------ ------------
Provision (benefit) for income taxes .................... $ (2,564,000) $ -- $ --
------------ ------------ ------------
Effective rate .......................................... 35% --% --%
------------ ------------- -------------
</TABLE>

NOTE 8. RETIREMENT SALARY SAVINGS PLAN

The Company has a defined contribution 401(k) plan that covers all
full-time employees who have six months of vested service. Employees are allowed
to contribute up to 15% of their pre-tax income to the plan. Employee salary
deferrals are matched by the Company at a rate of 100% of the first 1% of salary
deferred and 25% of the next 4% of salary deferred. The Company contributions to
this plan for each of the years ended December 31, 1995, 1996, and 1997 were
$34,000, $61,000, and $98,000, respectively.

NOTE 9. SALES AND SEGMENT INFORMATION

The Company, operating in a single business segment, designs, manufactures
and markets water purification products. The Company's manufacturing and
distribution operations are located within the United States. Export sales for
1995, 1996, and 1997 amounted to $2.6 million, $3.9 million, and $6.3 million,
respectively. During 1995, one customer accounted for approximately 22% of the
total net sales. During 1996, no one customer accounted for more than 10% of the
total net sales. During 1997, two customers accounted for approximately 12.8%
and 10.1%, respectively, of the total net sales.

NOTE 10. COMMITMENTS

The Company has noncancelable operating lease agreements for its facilities
in Minneapolis, Minnesota extending through April 2008. Under the terms of the
lease agreements, the Company is responsible for base rent and all operating
costs associated with the building. Total rent expense was $393,000, $469,000
and $695,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Future minimum rental lease commitments are as follows: 1998 -- $837,000; 1999
- -- $717,000; 2000 -- $738,000; 2001 -- $613,000; 2002 -- $682,000; thereafter --
$3,698,000.

In the fourth quarter of 1997, management entered into an agreement to
expand the Company's facility. The Company entered into a noncancelable
operating lease agreement for an expansion to its facility in Brooklyn Park,
Minnesota extending through April 2008. Under the terms of the lease agreement,
the Company will be responsible for base rent and all operating costs associated
with the addition. Future minimum rental lease commitments are as follows: 1998
- -- $408,000; 1999 -- $544,000; 2000 -- $544,000; 2001 -- $544,000; 2002 --
$605,000; thereafter -- $3,281,000.

The Company incurred expenses of $973,000 for the year ended December 31,
1996, primarily related to the writedown of certain fixed assets, buildout
costs, future lease payments on the original lease, and real estate commissions
associated with the relocation to its new facility.

F-12

<PAGE>

PUR PORTABLE SYSTEMS

[PHOTO]
Make back country water microbiologically safe to drink by eliminating all types
of microorganisms, including viruses, bacteria and Giardia. PUR offers a line of
purifiers and microfilters at a variety of price points and safety levels.

[GRAPHIC]
Pioneer Microfilter

[GRAPHIC]
Hiker Microfilter

[GRAPHIC]
Voyageur Purifier

[GRAPHIC]
Scout Purifier

[GRAPHIC]
Explorer Purifier

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

PUR DESALINATION SYSTEMS

[PHOTO]
PUR makes dependable watermakers for extended use - under all kinds of
conditions. Highly efficient PUR PowerSurvivor 12-volt systems produce a
plentiful supply of drinking water while putting the least demand on power
supplies.

[GRAPHIC]
POWER SURVIVOR 40

PUR hand-operated Survivor watermakers are perfect for liferafts. They are
small, lightweight and proven life savers.

[GRAPHIC]
SURVIVOR 06

[GRAPHIC]
SURVIVOR 35

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

<PAGE>

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY THE SECURITIES BY ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. 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 OF
THIS PROSPECTUS.

---------------------------------------------------
TABLE OF CONTENTS
---------------------------------------------------

PAGE
PROSPECTUS SUMMARY .................... 3
RISK FACTORS .......................... 6
USE OF PROCEEDS ....................... 10
DIVIDEND POLICY ....................... 10
CAPITALIZATION ........................ 11
DILUTION .............................. 11
PRICE RANGE OF COMMON STOCK ........... 12
SELECTED FINANCIAL DATA ............... 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .......................... 14
BUSINESS .............................. 20
MANAGEMENT ............................ 32
PRINCIPAL SHAREHOLDERS ................ 34
UNDERWRITING .......................... 36
LEGAL MATTERS ......................... 37
EXPERTS ............................... 37
AVAILABLE INFORMATION ................. 37
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE ........................... 38
INDEX TO FINANCIAL STATEMENTS ......... F-1

1,000,000 SHARES

[LOGO] PUR(R)
Drinking Water Systems

RECOVERY ENGINEERING, INC.

COMMON STOCK

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

PROSPECTUS

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

NationsBanc Montgomery
Securities LLC

Deutsche Morgan Grenfell

___________, 1998

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the estimated expenses to be borne by the
Company in connection with the issuance and distribution of the shares of Common
Stock offered hereby:

SEC registration fee ..................... $ 10,019
NASD filing fee .......................... 3,807
Nasdaq listing fee ....................... 17,500
Legal fees and expenses .................. 90,000
Accounting fees and expenses ............. 45,000
Blue Sky fees and expenses ............... 6,000
Printing expenses ........................ 75,000
Transfer agent fees and expenses ......... 5,000
Miscellaneous ............................ 47,674
--------
TOTAL ................................... $300,000
========

Each amount set forth above, except the SEC registration fee, NASD filing
fee and Nasdaq listing fee, is estimated.

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 302A.521 of the Minnesota Statutes provides that unless prohibited
or limited by a corporation's articles of incorporation or bylaws, the Company
must indemnify its current and former officers, directors, employees and agents
against reasonable expenses (including attorneys' fees), judgments, penalties,
fines and amounts paid in settlement and which were incurred in connection with
actions, suits, or proceedings in which such persons are parties by reason of
the fact that they are or were an officer, director, employee or agent of the
corporation, if they (i) have not been indemnified by another organization, (ii)
acted in good faith, (iii) received no improper personal benefit, (iv) in the
case of a criminal proceeding, had no reasonable cause to believe the conduct
was unlawful, and (v) reasonably believed that the conduct was in the best
interests of the corporation. Section 302A.521 also permits a corporation to
purchase and maintain insurance on behalf of its officers, directors, employees
and agents against any liability which may be asserted against, or incurred by,
such persons in their capacities as officers, directors, employees and agents of
the corporation, whether or not the corporation would have been required to
indemnify the person against the liability under the provisions of such section.

Article V of the Bylaws of the Company provides that the directors,
officers, committee members, of the Company and other persons shall have the
rights to indemnification provided by Section 302A.521 of the Minnesota
Statutes.

Section 8 of the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides certain indemnification rights to officers and
directors of the Registrant.

ITEM 16. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement

4.1 Rights Agreement dated as of January 30, 1996 between Recovery Engineering, Inc. and
Norwest Bank Minnesota, National Association, as Rights Agent

4.1.1 Amendment No. 1 dated as of February 3, 1998 to Rights Agreement between
Recovery Engineering, Inc. and Norwest Bank Minnesota, National Association, as
Rights Agent

5.1 Opinion of Robins, Kaplan, Miller & Ciresi L.L.P.

10.1 Recovery Engineering, Inc. 1986 Stock Option Plan, as amended**

</TABLE>

II-1

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------------------------------------------------
<S> <C>
10.2 Recovery Engineering, Inc. 1993 Director Stock Option Plan**

10.3 Recovery Engineering, Inc. 1994 Stock Purchase Plan**

10.4 Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan**

10.5 Supplier Agreement dated November 25, 1996, between Thermotech and Recovery
Engineering, Inc.

10.6 Form of Distributor Agreement

10.7 Financing Agreement dated March 31, 1997 between Recovery Engineering, Inc. and
First Bank National Association

10.7.1 First Amendment to Financing Agreement dated March 16, 1998 between Recovery
Engineering, Inc. and First Bank National Association

10.8 Securities Purchase Agreement dated July 19, 1996 by and among Recovery
Engineering, Inc. and investment partnerships affiliated with The Goldman Sachs Group,
L.P. ("GS Group")

10.9 Registration Rights Agreement dated July 19, 1996 by and among Recovery
Engineering, Inc. and GS Group

10.10 Executive Restriction Agreement dated July 19, 1996 by and among
Recovery Engineering, Inc., GS Group and Brian F. Sullivan**

10.11 Executive Severance Pay Agreement dated March 24, 1997 between Recovery
Engineering, Inc. and Charles F. Karpinske**

10.12 Lease Agreement dated November 8, 1996 between Ryan Companies US, Inc. and
Recovery Engineering, Inc.

10.12.1 First Amendment to Lease dated December 20, 1996, between Ryan Companies US,
Inc. and Recovery Engineering, Inc.

10.12.2 Second Amendment to Lease dated May 1, 1997, between Ryan
Recovery, LLC and Recovery Engineering, Inc.

10.12.3 Third Amendment to Lease dated December 22, 1997, between Ryan
Recovery, LLC and Recovery Engineering, Inc.

10.13 Lock-Up Agreement dated February 23, 1998, from GS Group

23.1 Consent of Ernst & Young LLP

23.2 Consent of Robins, Kaplan, Miller & Ciresi L.L.P. (included in Exhibit 5.1)

24.1 Powers of Attorney

</TABLE>

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

**Management Contracts

ITEM 17. UNDERTAKINGS.

(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors,
officers, and controlling persons of the registrant pursuant to the
provisions summarized in Item 15 above, 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 or paid 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, as amended, and will be governed by the final adjudication of
such issue.

II-2

<PAGE>

(b) The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus 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.

II-3

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Minneapolis, State of Minnesota, on April 2,
1998.

RECOVERY ENGINEERING, INC.

By: /s/ BRIAN F. SULLIVAN
-------------------------------------
Brian F. Sullivan
Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to registration statement has been signed by the following persons in the
capacities and on the dates indicated.

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

/s/ BRIAN F. SULLIVAN President, Chief Executive Officer and April 2, 1998
- ------------------------------ Director (Principal Executive Officer)
Brian F. Sullivan

/s/ CHARLES F. KARPINSKE Vice President and Chief Financial Officer April 2, 1998
- ------------------------------ (Principal Financial and Accounting Officer)
Charles F. Karpinske

* Director April 2, 1998
- ------------------------------
Robert Gheewalla

* Director April 2, 1998
- ------------------------------
John E. Gherty

* Director April 2, 1998
- ------------------------------
Sanjay H. Patel

* Director April 2, 1998
- ------------------------------
William D. Thompson

* Director April 2, 1998
- ------------------------------
William F. Wanner, Jr.

Director April 2, 1998
- ------------------------------
Ronald W. Weber

* Director April 2, 1998
- ------------------------------
Richard J. Zeckhauser

*By: /s/ BRIAN F. SULLIVAN
-------------------------
Brian F. Sullivan
Attorney-in-fact

</TABLE>

II-4

<PAGE>

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- --------- ----------- ----------------------------------------
<S> <C> <C>

1.1 Form of Underwriting Agreement Previously filed

4.1 Rights Agreement dated as of Filed as Exhibit 4.1 to the Company's
January 30, 1996 between Recovery Form 8-A Registration Statement dated
Engineering, Inc. and Norwest Bank February 20, 1996 (File No. 0-21232)
Minnesota, National Association, as and incorporated herein by reference
Rights Agent

4.1.1 Amendment No. 1 dated as of Filed as Exhibit 4.1.1 to the Company's
February 3, 1998 to Rights Agreement Annual Report on Form 10-K for the
between Recovery Engineering, Inc. year ended December 31, 1997 (File
and Norwest Bank Minnesota, National No. 0-21232) and incorporated herein
Association, as Rights Agent by reference

5.1 Opinion of Robins, Kaplan, Miller &
Ciresi L.L.P. ................................ Filed electronically herewith

10.1 Recovery Engineering, Inc. 1986 Stock Filed as Exhibit 10.6 to the Company's
Option Plan, as amended** Registration Statement on Form SB-2
(No. 33-57826C) and incorporated
herein by reference

10.2 Recovery Engineering, Inc. 1993 Filed as Exhibit 10.7 to the Company's
Director Stock Option Plan** Annual Report on Form 10-K for the
year ended December 31, 1993 (File
No. 0-21232) and incorporated herein
by reference

10.3 Recovery Engineering, Inc. 1994 Stock Filed as Exhibit 10.8 to the Company's
Purchase Plan** Annual Report on Form 10-K for the
year ended December 31, 1993 (File
No. 0-21232) and incorporated herein
by reference

10.4 Recovery Engineering, Inc. 1994 Stock Filed as Exhibit 99.1 to the Company's
Option and Incentive Plan** Registration Statement on Form S-8
(No. 333- ) and incorporated
herein by reference

10.5 Supplier Agreement dated Filed as Exhibit 10.5 to the Company's
November 25, 1996, between Annual Report on Form 10-K for the
Thermotech and Recovery year ended December 31, 1997 (File
Engineering, Inc. No. 0-21232) and incorporated herein
by reference

10.6 Form of Distributor Agreement Filed as Exhibit 10.3 to the Company's
Registration Statement on Form SB-2
(No. 33-57826C) and incorporated
herein by reference

10.7 Financing Agreement dated March 31, Filed as Exhibit 99.1 to the Company's
1997 between Recovery Engineering, Quarterly Report on Form 10-Q for the
Inc. and First Bank National quarter ended June 30, 1997 (File
Association No. 0-21232) and incorporated herein
by reference

10.7.1 First Amendment to Financing
Agreement dated March 16, 1998
between Recovery Engineering, Inc.
and First Bank National Association .......... Filed electronically herewith

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
- -------- ----------- ----------------------------------------
<S> <C> <C>
10.8 Securities Purchase Agreement dated Filed as Exhibit 4.1 to the Company's
July 19, 1996 by and among Recovery Report on Form 8-K dated July 19,
Engineering, Inc. and investment 1996 (File No. 0-21232) and
partnerships affiliated with The incorporated herein by reference
Goldman Sachs Group, L.P. ("GS
Group")

10.9 Registration Rights Agreement dated Filed as Exhibit 99.1 to the Company's
July 19, 1996 by and among Recovery Report on Form 8-K dated July 19,
Engineering, Inc. and GS Group 1996 (File No. 0-21232) and
incorporated herein by reference

10.10 Executive Restriction Agreement dated Filed as Exhibit 99.2 to the Company's
July 19, 1996 by and among Recovery Report on Form 8-K dated July 19,
Engineering, Inc., GS Group and Brian 1996 (File No. 0-21232) and
F. Sullivan** incorporated herein by reference

10.11 Executive Severance Pay Agreement Filed as Exhibit 99.2 to the Company's
dated March 24, 1997 between Quarterly Report on Form 10-Q for the
Recovery Engineering, Inc. and Charles quarter ended June 30, 1997 (File
F. Karpinske** No. 0-21232) and incorporated herein
by reference

10.12 Lease Agreement dated November 8, Filed as Exhibit 10.20 to the Company's
1997 between Ryan Companies US, Inc. Annual Report on Form 10-K for the
and Recovery Engineering, Inc. year ended December 31, 1996 (File
No. 0-21232) and incorporated herein
by reference

10.12.1 First Amendment to Lease dated Filed as Exhibit 10.12.1 to the
December 20, 1996, between Ryan Company's Annual Report on Form
Companies US, Inc. and Recovery 10-K for the year ended December 31,
Engineering, Inc. 1997 (File No. 0-21232) and
incorporated herein by reference

10.12.2 Second Amendment to Lease dated Filed as Exhibit 10.12.2 to the
May 1, 1997, between Ryan Recovery, Company's Annual Report on Form
LLC and Recovery Engineering, Inc. 10-K for the year ended December 31,
1997 (File No. 0-21232) and
incorporated herein by reference

10.12.3 Third Amendment to Lease dated Filed as Exhibit 10.12.3 to the
December 22, 1997, between Ryan Company's Annual Report on Form
Recovery, LLC and Recovery 10-K for the year ended December 31,
Engineering, Inc. 1997 (File No. 0-21232) and
incorporated herein by reference

10.13 Lock-Up Agreement dated February 23,
1998 from GS Group .................... Filed electronically herewith

23.1 Consent of Ernst & Young LLP .......... Filed electronically herewith

23.2 Consent of Robins, Kaplan, Miller &
Ciresi L.L.P. Included in Exhibit 5.1

24.1 Powers of Attorney Previously filed

</TABLE>

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

**Management Contracts

EXHIBIT 5.1

ROBINS, KAPLAN, MILLER & CIRESI L.L.P.
ATTORNEYS AT LAW
2800 LASALLE PLAZA
800 LASALLE AVENUE
MINNEAPOLIS, MINNESOTA 55402-2015
TELEPHONE (612) 349-8500
FACSIMILE (612) 339-4181

April 2, 1998

Recovery Engineering, Inc.
9300 North 75th Avenue
Minneapolis, MN 55428

Re: Registration Statement on Form S-3
Registration No. 333-46833

Ladies and Gentlemen:

We have acted as legal counsel for Recovery Engineering, Inc. (the "Company") in
connection with the preparation and filing of a Registration Statement on Form
S-3 (the "Registration Statement") relating to the registration under the
Securities Act of 1933, as amended, of an aggregate of 1,150,000 shares (the
"Shares") of common stock, $.01 par value, (the "Common Stock") of the Company,
including 150,000 shares subject to the Underwriters' over-allotment option.

In connection therewith, we have examined (a) the Articles of Incorporation and
Bylaws of the Company, both as amended to date; (b) the corporate proceedings of
the Company relative to its organization and to the authorization and issuance
of the Shares; (c) the Registration Statement and the Prospectus included as a
part thereof (the "Prospectus"); and (d) the form of Underwriting Agreement
included as an exhibit to the Registration Statement (the "Underwriting
Agreement"). In addition to such examination, we have reviewed such other
proceedings, documents and records and have ascertained or verified such
additional facts as we deem necessary or appropriate for purposes of this
opinion.

Based upon the foregoing, we are of the opinion that:

1. The Company has been legally incorporated and is validly existing under
the laws of the State of Minnesota.

2. All necessary corporate action has been taken by the Company to
authorize the issuance of (a) the 1,000,000 Shares to be issued by the
Company, and (b) up to an additional 150,000 Shares issuable by the
Company upon exercise of the Underwriters' over-allotment option.

<PAGE>

3. The Shares are validly authorized by the Company's Articles of
Incorporation, as amended, and when issued and paid for in accordance
with the Underwriting Agreement, will be validly issued, fully paid,
and non-assessable.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus.

Sincerely,

ROBINS, KAPLAN, MILLER & CIRESI L.L.P.

By /s/ Eric O. Madson
----------------------------------
Eric O. Madson

EXHIBIT 10.7.1

FIRST AMENDMENT TO FINANCING AGREEMENT

THIS FIRST AMENDMENT TO FINANCING AGREEMENT (this "Amendment"), made
and entered into as of March 16,1998, is by and between RECOVERY ENGINEERING,
INC., a Minnesota corporation (the "Borrower"), and FIRST BANK NATIONAL
ASSOCIATION, a national banking association (the "Lender").

RECITALS

1. The Lender and the Borrower entered into a Financing Agreement dated
as of March 31, 1997 the ("Financing Agreement"); and

2. The Borrower desires to amend certain provisions of the Agreement,
and the Lender has agreed to make such amendments, subject to the terms and
conditions set forth in this Amendment.

AGREEMENT

NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto hereby covenant
and agree to be bound as follows:

SECTION 1. CAPITALIZED TERMS. Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to them in the
Financing Agreement, unless the context shall otherwise require.

SECTION 2. AMENDMENTS. The Financing Agreement is hereby amended as
follows:

2.1 DEFINITIONS. The definition of "Raw Material Inventory Advance"
contained in Section 1.1 of the Financing Agreement is hereby amended as
follows:

"Raw Material Inventory Advance": As defined in Section 2.1(c)(ii).

Section 1.1 of the Financing Agreement is amended further amended by
adding the definitions of "Cumulative Net profit" thereto in correct
alphabetical order:

"Cumulative Net Profit": The cumulative net profit of the Borrower for
the applicable fiscal year before any deduction for local, state or federal
taxes, in each case determined in accordance with GAAP.

2.2 THE ADVANCES. Section 2.1 of the Financing Agreement is amended in
its entirety as follows:

2.1(a) up to sixty-five percent (65%) of the net amount of Eligible
Accounts which are listed in the Borrower's most current Borrowing Base
Certificate and which are deemed eligible for advances by the Lender, or such
greater or lesser percentage at the Lender's sole and absolute discretion, not
to exceed a maximum amount of $15,000,000 (the "Accounts Advances");

2.1(b) up to fifty percent (50%) of the net amount of Eligible Foreign
Accounts which are listed in the Borrower's most current Borrowing Base
Certificate and which are deemed eligible for advances by the Lender, or such
greater or lesser percentage at the Lender's sole and absolute discretion, not
to exceed a maximum amount of $500,000 (the "Foreign Accounts Advances");

2.1(c)(i) up to forty percent (40%) of the net amount of Eligible
Inventory that consists

<PAGE>

of finished goods which is listed in the Borrower's most current Borrowing Base
Certificate and which is deemed eligible for advances by the Lender, or such
greater or lesser percentage at the Lender's sole and absolute discretion not to
exceed a maximum amount of $1,500,000 (the "Finished Goods Inventory Advances");

2.1(c)(ii) up to thirty percent (30%) of the net amount of Eligible
Inventory that consists of raw materials which is listed on the Borrower's most
current Borrowing Base Certificate and which is deemed eligible for advances by
the Lender, or such greater or lesser percentage at the Lender's sole and
absolute discretion not to exceed a maximum amount of $1,500,000 (the "Raw
Materials Inventory Advances"). The Finished Goods Inventory Advances and the
Raw Materials Inventory Advances shall not exceed a maximum of $1,500,00 in the
aggregate.

Notwithstanding the preceding clauses 2.1(a), 2.1(b), 2.1(c) the
maximum aggregate amount advanced against all Eligible Accounts, Eligible
Foreign Accounts and Eligible Inventory from time to time shall not exceed
$15,000,000.

Section 2.1(d) of the Financing Agreement is deleting Section 2.1(d) in
its entirety.

2.1(e) from the date of this Agreement through December 31, 1998, a
maximum amount of $10,000,000, advanced in separate increments not to exceed
$2,000,000, for the purposes of financing or recapturing outstanding capital
expenditures and capital expenditures proposed in the Borrower's 1997 or 1998
fiscal years, and for other working capital expenditures (the "FAR Advances").

Notwithstanding anything to the contrary in this Agreement, in the event Lender,
in its absolute and sole discretion determines that the Advances to the Borrower
exceed the lesser of the percentages or such maximum amount as the Lender may in
its sole discretion determine to make as Advances set forth in the preceding
clauses 2.1(a), 2.1(b), and 2.1(c), Lender may demand and require Borrower to
immediately repay the Advances in such amount to bring the amount of outstanding
Advances within the lesser of the percentages set forth in the preceding clauses
2.1(a), 2.1(b), and 2.1(c) or said maximum amount determined by the Lender.

Loans for additional sums requested by the Borrower may be made at the Lender's
sole discretion based upon the Lender's valuation of the Borrower's collateral
or other factors. The Lender's security interest in all such collateral, and any
other collateral rights, interests and properties which may now or hereafter be
available to the Lender, shall secure and may be applied to the payment of any
and all Advances and other indebtedness secured by the Lender's security
interest, in any order or manner of application and without regard to the method
by which the Lender determines to make Advances hereunder.

2.3 INTEREST RATES AND INTEREST PAYMENTS. Section 2.3 of the Financing
Agreement is amended in its entirety as follows:

2.3(a) Interest shall accrue on the unpaid balance of the Accounts
Advances, the Foreign Account Advances, the Finished Goods Inventory Advances
and the Raw Material Inventory Advances at a floating rate per annum equal to
the sum of the Reference Rate plus 0.75%, (the "Applicable Advance Rate") and
shall be due and payable monthly in arrears on the last day of each calendar
month.

2.3(b) Interest shall accrue on the unpaid balance on the FAR Advances
at a floating rate per annum equal to the sum of the Reference Rate plus 1.25%
(the "Applicable FAR Rate") and shall be due and payable monthly in arrears on
the last day of each calendar month.

<PAGE>

2.3(c) Notwithstanding Sections 2.3(a) and 2.3(b) the Applicable
Advance Rate and the Applicable FAR Rate shall be adjusted, based on Borrower's
financial performance, as follows:

(i) in the event that Borrower's Cumulative Net Profit for fiscal year
1998, as of June 30, 1998 (as reported in Borrower's financial statements as of
June 30, 1998, as required by and prepared in accordance with Section 5.1(b) is
at least $291,000, then the Applicable Advance Rate per annum shall be reduced
to the sum of the Reference Rate plus 0.50% and the FAR Rate shall be reduced to
the sum of the Reference Rate plus 1% after the first day of the first calendar
month following the date of Lender's receipt of the June 30, 1998 financial
statement;

(ii) in the event that Borrower's Cumulative Net Profit for fiscal year
1998, as of September 30, 1998 (as reported in Borrower's financial statements
as of September 30, 1998, as required by and prepared in accordance with,
Section 5.1(b) is at least $2,093,000, then the Applicable Advance Rate per
annum shall be reduced to the sum of the Reference Rate plus 0.25% and the FAR
Rate shall be reduced to the sum of the Reference Rate plus 0.75% after the
first day of the first calendar month following the date of Lender's receipt of
the September 30, 1998 financial statement;

(iii) in the event that Borrower's Cumulative Net Profit for fiscal
year 1998, as of December 31, 1998 (as reported in Borrower's financial
statements as of December 31, 1998, as required by and prepared in accordance
with, Section 5.1(b) is at least $4,270,000, then the Applicable Advance Rate
per annum shall be reduced to the Reference Rate and the FAR Rate shall be
reduced to the sum of the Reference Rate plus 0.50% after the first day of the
first calendar month following the date of Lender's receipt of the December 31,
1998 financial statement;

2.3(d) Notwithstanding the foregoing, upon the occurrence and during
the continuance of an Event of Default as defined in the Security Agreement, the
unpaid balance of the Accounts Advances, the Foreign Account Advances, the
Finished Goods Inventory Advances and the Raw Material Inventory Advances shall
thereafter bear interest at a floating rate equal to the sum of (a) the
Applicable Advance Rate, plus (b) 2% and shall be due and payable on demand.

2.3(e) Notwithstanding the foregoing, upon the occurrence and during
the continuance of an Event of Default as defined in the Security Agreement, the
unpaid balance of the FAR Advances shall thereafter bear interest at a floating
rate equal to the sum of (a) the FAR Advance Rate, plus (b) 2% and shall be due
and payable on demand.

2.4 REPAYMENT AND PREPAYMENT. Section 2.4 of the Financing Agreement is
amended in its entirety as follows:

2.4 REPAYMENT AND PREPAYMENT.

UPON THE EARLIER OF (i) TERMINATION OF THIS AGREEMENT PURSUANT TO
ARTICLE VII (ii) ON DEMAND IN ACCORDANCE WITH THE TERMS SET FORTH IN SECTION
21(A) OF THE SECURITY AGREEMENT OR (iii) THE FAILURE OF THE BORROWER TO HAVE
CUMULATIVE NET PROFIT IN THE AMOUNTS AND BY THE DATES SET FORTH IN SECTION
2.3(c)(i), (ii) or (iii), NECESSARY TO ACHIEVE THE ADJUSTMENT OF THE APPLICABLE
FAR RATE AND APPLICABLE ADVANCE RATE SET FORTH IN SECTION 2.3(c)(i), (ii) or
(iii) ALL ADVANCES SHALL BE DUE AND PAYABLE, provided that, if (x) this
Agreement is not sooner terminated, (y) the Borrower achieves the adjustment of
the Applicable FAR Rate and Applicable Advance Rate set forth in Section
2.3(c)(i), (ii) and (iii) or (z) if demand for payment of the FAR Advances is
not sooner made, the outstanding amount of the FAR Advances as shall be reduced
in full in forty-eight (48) equal monthly installments, commencing on the first
day of the first full month following each separate FAR Advance and continuing
on the first day of each month thereafter until such time that the FAR Advances
are paid in full.

<PAGE>

2.5 SPECIAL AGREEMENTS REGARDING ACCOUNTS. Section 5.11(a) is amended
by deleting the phrase two (2) Business Days where it appears therein and
replacing it with the phrase one (1) Business Day.

2.6 TERMINATION. Article VII of the Financing Agreement is amended in
its entirety as follows:

This Agreement shall continue in effect until terminated upon not less
than 30 days' prior written notice delivered by manual delivery or certified
mail by either party to the other. Termination shall not impair or affect the
Lender's rights existing as of the time of termination.

In the event that the Borrower gives notice to the Lender of the
termination of this Agreement under Section VII hereof at any time prior to the
third anniversary of the date of this Agreement, the Borrower will pay to the
Lender at the time of such termination a prepayment charge, as additional
compensation for the Lender's costs of entering into this Agreement, in the
amount of (i) $300,000 if the effective date of termination occurs prior to the
first anniversary of the date of this Agreement; (ii) $200,000 if the effective
date of termination occurs after the first anniversary, but prior to the second
anniversary, of the date of this Agreement; and (iii) $100,000 if the effective
date of termination occurs after the second anniversary, but before the fourth
anniversary, of the date of this Agreement, unless the outstanding amount of the
obligations hereunder are refinanced in full by an affiliate of First Bank
System or if termination occurs due to an offering of Borrower's common stock or
through a private placement of Borrower's common stock through an investment
banker. Borrower may prepay the FAR Advances at any time without effecting a
termination, provided, that, amounts prepaid on the FAR Advances after December
30, 1998 may not be reborrowed.

SECTION 3. EFFECTIVENESS OF AMENDMENTS. The amendments contained in
this Amendment shall become effective upon delivery by the Borrower of, and
compliance by the Borrower with, the following: 3.1 This Amendment, duly
executed by the Borrower.

3.2 A copy of the resolutions of the Board of Directors of the Borrower
authorizing the execution, delivery and performance of this Amendment certified
as true and accurate by its Secretary or Assistant Secretary, along with a
certification by such Secretary or Assistant Secretary (i) certifying that there
has been no amendment to the Articles of Incorporation or Bylaws of the Borrower
since true and accurate copies of the same were delivered to the Lender with a
certificate of the Secretary of the Borrower dated March 31, 1997, and (ii)
identifying each officer of the Borrower authorized to execute this Amendment
and any other instrument or agreement executed by the Borrower in connection
with this Amendment, and certifying as to specimens of such officer's signature
and such officer's incumbency in such offices as such officer holds.

3.3 The Borrower shall have satisfied such other conditions as
specified by the Lender or counsel to the Lender, including payment of all
unpaid legal fees and expenses incurred by the Lender through the date of this
Amendment in connection with the Financing Agreement.

SECTION 4. REPRESENTATIONS; ACKNOWLEDGMENTS. The Borrower hereby
represents that on and as of the date hereof and after giving effect to this
Amendment (a) all of the representations and warranties contained in the
Financing Agreement, and in any and all other Loan Documents of the Borrower,
are true, correct and complete in all respects as of the date hereof as though
made on and as of such date, except for changes permitted by the terms of the
Financing Agreement, and (b) the Borrower is in compliance with all covenants
and agreements of the Borrower as set forth in the Financing Agreement and in
any and all other Loan Documents of the Borrower.

<PAGE>

The Borrower represents and warrants that the Borrower has the power and legal
right and authority to enter into this Amendment and has duly authorized as
appropriate the execution and delivery of this Amendment and other agreements
and documents executed and delivered by the Borrower in connection herewith or
therewith by proper corporate action. The Borrower acknowledges and agrees that
its obligations to the Lender under the Financing Agreement and exist and are
owing without offset, defense or counterclaim assertable by the Borrower against
the Lender. The Borrower further acknowledges and agrees that its obligations to
the Lender under the Financing Agreement, as amended, constitute "Obligations"
within the meaning of the Security Agreement and are secured by the Security
Agreement, as amended.

SECTION 5. AFFIRMATION, FURTHER REFERENCES. Except as expressly
modified under this Amendment, all of the terms, conditions, provisions,
agreements, requirements, promises, obligations, duties, covenants and
representations of the Borrower under the Financing Agreement, the Security
Agreement, and any and all other Loan Documents entered into with respect to the
obligations under the Financing Agreement are incorporated herein by reference
and are hereby ratified and affirmed in all respects by the Borrower. All
references in the Financing Agreement to "this Agreement," "herein," "hereof,"
and similar references, and all references in the other Loan Documents to the
"Agreement," shall be deemed to refer to the Agreement, as amended by this
Amendment.

SECTION 6. MERGER AND INTEGRATION, SUPERSEDING EFFECT. This Amendment,
from and after the date hereof, embodies the entire agreement and understanding
between the parties hereto and supersedes and has merged into it all prior oral
and written agreements on the same subjects by and between the parties hereto
with the effect that this Amendment, shall control with respect to the specific
subjects hereof and thereof.

SECTION 7. SEVERABILITY. Whenever possible, each provision of this
Amendment and any other statement, instrument or transaction contemplated hereby
or thereby or relating hereto or thereto shall be interpreted in such manner as
to be effective, valid and enforceable under the applicable law of any
jurisdiction, but, if any provision of this Amendment or any other statement,
instrument or transaction contemplated hereby or thereby or relating hereto or
thereto shall be held to be prohibited, invalid or unenforceable under the
applicable law, such provision shall be ineffective in such jurisdiction only to
the extent of such prohibition, invalidity or unenforceability, without
invalidating or rendering unenforceable the remainder of such provision or the
remaining provisions of this Amendment or any other statement, instrument or
transaction contemplated hereby or thereby or relating hereto or thereto in such
jurisdiction, or affecting the effectiveness, validity or enforceability of such
provision in any other jurisdiction.

SECTION 8. SUCCESSORS. This Amendment shall be binding upon the
Borrower and the Lender and their respective successors and assigns, and shall
inure to the benefit of the Borrower and the Lender and the successors and
assigns of the Lender.

SECTION 9. LEGAL EXPENSES. The Borrower agrees to reimburse the Lender,
upon execution of this Amendment, for all reasonable out-of-pocket expenses
(including attorneys' fees and legal expenses of Dorsey & Whitney, counsel for
the Lender) incurred in connection with the Financing Agreement, including in
connection with the negotiation, preparation and execution of this Amendment and
all other documents negotiated, prepared and executed in connection with this
Amendment, and in enforcing the obligations of the Borrower under the Financing
Agreement, as amended by this Amendment, which obligations of the Borrower shall
survive any termination of the Financing Agreement.

SECTION 10. HEADINGS. The headings of various sections of this
Amendment have been inserted for reference only and shall not be deemed to be a
part of this Amendment.

<PAGE>

SECTION 11. COUNTERPARTS. This Amendment may be executed in several
counterparts as deemed necessary or convenient, each of which, when so executed,
shall be deemed an original, provided that all such counterparts shall be
regarded as one and the same document, and either party to this Amendment may
execute any such agreement by executing a counterpart of such agreement.

SECTION 12. GOVERNING LAW. The Amendment Documents shall be governed by
the internal laws of the State of Minnesota, without giving effect to conflict
of law principles thereof.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date and year first above written.

RECOVERY ENGINEERING, INC.

By /s/ Chuck Karpinske
Print Name Chuck Karpinske
Title VP/CFO

Borrower's Address:
9300 North 75th Avenue
Brooklyn Park, MN 55428

FIRST BANK NATIONAL ASSOCIATION

By /s/ Richard L. Ogle
Print Name Richard L. Ogle
Title Officer
Lender's Address:
2338 Central Avenue N.E.
Minneapolis, MN 55418

EXHIBIT 10.13

2/23/98

NationsBanc Montgomery Securities LLC
Deutsche Morgan Grenfell Inc.
c/o NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, CA 94111

RE: Recovery Engineering, Inc. (the "Company")

Ladies & Gentlemen:

The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
underwriters. The undersigned recognizes that the Offering will be of benefit to
the undersigned and will benefit the Company by, among other things, raising
additional capital for its operations. The undersigned acknowledges that you and
the other underwriters are relying on the representations and agreements of the
undersigned contained in this letter in carrying out the Offering and in
entering into underwriting arrangements with the Company with respect to the
Offering.

In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of NMSI (which consent
may be withheld in its sole discretion), directly or indirectly, sell, offer,
contract or grant any option to sell (including without limitation any short
sale), pledge, transfer, establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common Stock, or securities exchangeable or exercisable for or convertible into
shares of Common Stock currently owned either of record or beneficially (as
defined in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the
undersigned or publicly announce the undersigned's intention to do any of the
foregoing, for a period commencing on the date hereof and continuing through the
close of trading on the date 120 days after the date of the final Prospectus
relating to the Offering. The undersigned also agrees and consents to the entry
of stop transfer instructions with the Company's transfer agent and registrar
against the transfer of shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock held by the undersigned except in
compliance with the foregoing restrictions.

<PAGE>

With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.

This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.

This agreement shall terminate automatically and be of no further force or
effect in the event that the contemplated Offering is not consummated on or
prior to June 1, 1998.

GS Capital Partners II, L.P.
- ----------------------------
Printed Name of Holder

By: GS ADVISERS, INC.
GENERAL PARTNER

By: GS ADVISERS, L.P.
GENERAL PARTNER

By: /s/ Richard A. Friedman
- ----------------------------

Richard A. Friedman
- ------------------------------
Printed Name of Person Signing
(AND INDICATE CAPACITY OF PERSON SIGNING IF
SIGNING AS CUSTODIAN, TRUSTEE, OR ON BEHALF
OF AN ENTITY)

<PAGE>

This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.

This agreement shall terminate automatically and be of no further force or
effect in the event that the contemplated Offering is not consummated on or
prior to June 1, 1998.

GS Capital Partners II Offshore, L.P.
- -------------------------------------
Printed Name of Holder

By: GS ADVISERS II (CAYMAN), L.P.
GENERAL PARTNER

By: GS ADVISERS I, INC.
GENERAL PARTNER

By: /s/ Richard A. Friedman
-----------------------------
Signature

Richard A. Friedman
- ------------------------------
Printed Name of Person Signing
(AND INDICATE CAPACITY OF PERSON SIGNING IF
SIGNING AS CUSTODIAN, TRUSTEE, OR ON BEHALF
OF AN ENTITY)

<PAGE>

This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.

This agreement shall terminate automatically and be of no further force or
effect in the event that the contemplated Offering is not consummated on or
prior to June 1, 1998.

Goldman, Sachs & Co. Verwaltungs GumbH
- --------------------------------------
Printed Name of Holder

By: /s/ Eve M. Gerriets
-----------------------------
Signature

Eve M. Gerriets
- ------------------------------
Printed Name of Person Signing
(AND INDICATE CAPACITY OF PERSON SIGNING IF
SIGNING AS CUSTODIAN, TRUSTEE, OR ON BEHALF
OF AN ENTITY)

<PAGE>

This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.

This agreement shall terminate automatically and be of no further force or
effect in the event that the contemplated Offering is not consummated on or
prior to June 1, 1998.

Stone Street Fund 1996, L.P.
- ---------------------------
Printed Name of Holder

By: STONE STREET EMPIRE CORP.
GENERAL PARTNER

By: /s/ Richard A. Friedman
-----------------------------
Signature

Richard A. Friedman
- ------------------------------
Printed Name of Person Signing
(AND INDICATE CAPACITY OF PERSON SIGNING IF
SIGNING AS CUSTODIAN, TRUSTEE, OR ON BEHALF
OF AN ENTITY)

<PAGE>

This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.

This agreement shall terminate automatically and be of no further force or
effect in the event that the contemplated Offering is not consummated on or
prior to June 1, 1998.

BRIDGE STREET FUND 1996, L.P.
- ---------------------------
Printed Name of Holder

By: STONE STREET EMPIRE CORP.
MANAGING GENERAL PARTNER

By: /s/ Richard A. Friedman
-----------------------------
Signature

Richard A. Friedman
- ------------------------------
Printed Name of Person Signing
(AND INDICATE CAPACITY OF PERSON SIGNING IF
SIGNING AS CUSTODIAN, TRUSTEE, OR ON BEHALF
OF AN ENTITY)

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP

We consent to the incorporation by reference in this Registration Statement
(Form S-3 No. 333-46833) and related Prospectus of Recovery Engineering, Inc.
for the registration of 1,150,000 shares of its Common Stock of our report dated
January 30, 1998, with respect to the financial statements and schedule of
Recovery Engineering, Inc. included in the Annual Report (Form 10-K) of Recovery
Engineering, Inc. for the year ended December 31, 1997, and to the references
to our firm under the captions "Selected Financial Data" and "Experts" in this
Registration Statement.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
April 2, 1998