ITEM 1. BUSINESS
Unless otherwise indicated, all references to "Notes" are to Notes to Consolidated Financial Statements contained in this report. Capitalized terms used herein, but not defined, have the same meanings as used in the Notes.
The registrant, JMB Income Properties Ltd.-VII, (the "Partnership"), is a limited partnership formed in late 1978 and currently governed by the Revised Uniform Limited Partnership Act of the State of Illinois to invest in improved income-producing commercial and residential real property. The Partnership sold $60,500,000 in Limited Partnership Interests (the "Interests") commencing on January 18, 1980 pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933 (Registration No. 2-65390). A total of 60,505 Interests were sold to the public at $1,000 per Interest. The offering closed on May 30, 1980. No Limited Partner has made any additional capital contribution after such date. The Limited Partners of the Partnership share in their portion of the benefits of ownership of the Partnership's real property investments according to the number of Interests held.
The Partnership is engaged solely in the business of the acquisition, operation and sale and disposition of equity real estate investments. Such equity investments are held by fee title and/or through joint venture partnership interests. The Partnership's remaining real estate investments are located in the states of Iowa and Illinois. A presentation of information about industry segments, geographic regions, raw materials, or seasonality is not applicable and would not be material to an understanding of the Partnership's business taken as a whole. Pursuant to the Partnership agreement, the Partnership is required to terminate no later than October 31, 2028. The Partnership is self-liquidating in nature. At sale of a particular property, the net proceeds, if any, are generally distributed or reinvested in existing properties rather than invested in acquiring additional properties. As discussed further in Item 7, the Partnership currently expects to conduct an orderly liquidation of its remaining investment portfolio as quickly as practicable and to wind up its affairs not later than December 31, 1999, barring any unforeseen economic developments.
The Partnership has made the real property investments set forth in the following table:
The Partnership's real property investments are subject to competition from similar types of properties (including in certain areas, properties owned by affiliates of the General Partners or properties owned by certain of the joint venture partners) in the respective vicinities in which they are located. Such competition is generally for the retention of existing tenants. Additionally, the Partnership is in competition for new tenants in markets where significant vacancies are present. Reference is made to Item 7 below for a discussion of competitive conditions and future capital improvement plans of the Partnership and certain of its significant investment properties. Approximate occupancy levels for the properties are set forth in Item 2

ITEM 2. PROPERTIES
The Partnership owns through joint venture partnerships the properties or interests in the properties referred to under Item 1 above to which reference is hereby made for a description of said properties.
The following is a listing of principal businesses or occupations and approximate physical occupancy levels by quarter during fiscal years 1996 and 1995 for the Partnership's investment properties owned during 1996:
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Partnership is not subject to any material pending legal proceedings.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during fiscal years 1996 and 1995.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP INTERESTS AND RELATED SECURITY HOLDER MATTERS
As of December 31, 1996, there were 5,498 record holders of the 60,500 Interests outstanding of the Partnership. There is no public market for Interests and it is not anticipated that a public market for Interests will develop. Upon request, the Managing General Partner may provide information relating to a prospective transfer of Interests to an investor desiring to transfer his Interests. The price to be paid for the Interests, as well as any other economic aspects of the transaction, will be subject to negotiation by the investor. There are certain conditions and restrictions on the transfer of Interests, including, among other things, the requirement that the substitution of a transferee of Interests as a Limited Partner of the Partnership be subject to the written consent of the Managing General Partner, which, may be granted or withheld in its sole and absolute discretion. The rights of a transferee of Interests who does not become a substituted Limited Partner will be limited to the rights to receive his share of profits or losses and cash distributions from the Partnership, and such transferee will not be entitled to vote such Interests or have other rights of a Limited Partner. No transfer will be effective until the first day of the next succeeding calendar quarter after the requisite transfer form satisfactory to the Managing General Partner has been received by the Managing General Partner. The transferee consequently will not be entitled to receive any cash distributions or any allocable share of profits or losses for tax purposes until such next succeeding calendar quarter. Profits or losses from operations of the Partnership for a calendar year in which a transfer occurs will be allocated between the transferor and the transferee based upon the number of quarterly periods in which each was recognized as the holder of Interests, without regard to the results of Partnership's operations during particular quarterly periods and without regard to whether cash distributions were made to the transferor or transferee. Profits or losses arising from the sale or other disposition of Partnership properties will be allocated to the recognized holder of the Interests as of the last day of the quarter in which the Partnership recognized such profits or losses. Cash distributions to a holder of Interests arising from the sale or other disposition of Partnership properties will be distributed to the recognized holder of the Interests as of the last day of the quarterly period with respect to which distribution is made.
Reference is made to Item 6

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As a result of the public offering of Interests as described in Item 1, the Partnership had approximately $54,700,000 (after deducting selling expenses and other offering costs) with which to make investments in income-producing commercial and residential real property, to pay legal fees and other costs (including acquisition fees) related to such investments and for working capital reserves. A portion of such proceeds was utilized to acquire the properties described in Item 1 above.
During 1996 some of the Limited Partners in the Partnership received from unaffiliated third parties unsolicited tender offers to purchase up to 2,965 Interests in the Partnership between $70 and $90 per Interest. The Partnership recommended against acceptance of these offers on the basis that, among other things, the offer price was inadequate. As of the date of this report, such offers have expired and the Partnership is aware that 1,389.58 Interests have been purchased by such unaffiliated third parties either pursuant to such tender offers or through negotiated purchases. It is possible that other offers for Interests may be made by unaffiliated third parties in the future, although, there is no assurance that any other third party will commence an offer for Interests, the terms of any such offer or whether any such offer, if made, will be consummated, amended or withdrawn. The board of directors of JMB Realty Corporation ("JMB"), the managing general partner of the Partnership, has established a special committee (the "Special Committee") consisting of certain directors of JMB to deal with all matters relating to tender offers for Interests in the Partnership, including any and all responses to such tender offers. The Special Committee has retained independent counsel to advise it in connection with any potential tender offers for Interests and has retained Lehman Brothers Inc. as financial advisor to assist the Special Committee in evaluating and responding to any additional potential tender offers for Interests.
At December 31, 1996, the Partnership and its consolidated ventures had cash and cash equivalents of approximately $6,877,000. Such funds are available for distributions to partners and for working capital requirements including costs to be incurred for capital additions and tenant improvements at Westdale Mall and the Partnership's portion of tenant improvement costs which may be incurred at One Woodfield Lake. The Partnership and its consolidated ventures have currently budgeted in 1997 approximately $1,206,900 for tenant improvements and other capital expenditures, primarily at Westdale Mall as discussed below. The Partnership's share of such items in 1997 is currently budgeted to be approximately $870,300. Actual amounts expended may vary depending on a number of factors including actual leasing activity, results of property operations, liquidity considerations and other market conditions over the course of the year. The sources of capital (in addition to the cash and cash equivalents and short-term investments noted above) for such items and for both short-term and long-term future liquidity and distributions are expected to be through net cash generated by the Partnership's investment properties and through the sale of such investments. However, the Partnership does not consider the One Woodfield Lake investment property to be a significant source of short-term liquidity. In such regard, reference is made to the Partnership's property specific discussions below. The Partnership and its ventures' mortgage obligations are all non-recourse. Therefore, the Partnership and its ventures are not obligated to pay mortgage indebtedness unless the related property produces sufficient net cash flow from operations or sale.
ONE WOODFIELD LAKE
The Schaumburg, Illinois office market in which One Woodfield Lake office building is located has improved during 1996. This has resulted in the property being currently 100% leased. During the year, the joint venture finalized an agreement with a major tenant (U.S. Life, approximately 52,000 square feet) to extend the expiration date of its original lease from 2000 to 2006 and to expand its premises by 5,900 square feet to approximately 58,000 square feet. In return, the joint venture reduced the rental rate effective immediately, with the new rental rate approximating current market rental rates. In addition, the joint venture has renewed for five years at a rate which approximates current market rates another major tenant (Xerox, approximately 38,000 square feet or 21% of the leasable square footage of the building) whose lease had been scheduled to expire in 1997.
Based upon improving property operating and market conditions, the Partnership has committed to a plan to sell the property or its interest in the property, and therefore, has classified the property as held for sale or disposition as of December 31, 1996.
The joint venture must escrow with the lender any excess cash flow (as defined) due to the terms of the current property indebtedness (as modified and extended to September 1998 in 1995). As of the date of this report, $141,131 has been escrowed with the lender which may be used (subject to lender approval) for future deficits, leasing costs or capital improvements.
WESTDALE MALL
The mall continues to operate in a very competitive retail environment. During 1996, occupancy had dropped to 91%. As leases expire, lease renewals and new leases are likely to be at rental rates equal to or slightly below rates on existing leases. In addition, new leases will likely require expenditures for lease commission and tenant improvements prior to tenant occupancy. This anticipated decline in rental rates, an anticipated increase in re-leasing time and the costs upon releasing will result in a decrease in cash flow from operations over the near term. The Partnership is also evaluating certain capital improvement projects and the competitive positioning of this property in its market. The joint venture intends to allocate the resources necessary for the manager of the mall to continue to attract new tenants, subject to working capital sources and reserves. In addition, the Partnership has committed to a plan to sell the property or its interest in the property, and therefore, has classified the property as held for sale or disposition as of December 31, 1996.
GENERAL
There are certain risks associated with the Partnership's investments made through joint ventures including the possibility that the Partnership's joint venture partners in an investment might become unable or unwilling to fulfill their financial or other obligations, or that such joint venture partners may have economic, business interests or goals that are inconsistent with those of the Partnership.
As a result of the real estate market conditions discussed above, the Partnership continues to conserve its working capital. All expenditures are carefully analyzed and certain capital projects are deferred when appropriate. In an effort to reduce Partnership operating expenses, the Partnership elected to make semi-annual rather than quarterly distributions of operating cash flow commencing with the 1996 distributions. The Partnership has also sought loan modifications where appropriate. By conserving working capital, the Partnership will be in a better position to meet the future needs of its properties since the availability of satisfactory outside sources of capital may be limited given the portfolio's current debt levels. Due to these factors, the Partnership has held its remaining investment properties longer than originally anticipated
in an effort to maximize the return to the Limited Partners. However, after reviewing the remaining properties and the marketplaces in which they operate, the General Partners of the Partnership expect to be able to conduct an orderly liquidation of its remaining investment portfolio as quickly as practicable. Therefore, the affairs of the Partnership are expected to be wound up no later than December 31, 1999 (sooner if the properties are sold in the near term), barring unforeseen economic developments.
RESULTS OF OPERATIONS
The decrease in interest, rents and other receivables at December 31, 1996 as compared to December 31, 1995 is primarily due to the timing of rental collections.
The increase in escrow deposits and restricted funds at December 31, 1996 as compared to December 31, 1995 is primarily due to the continuing requirement at the One Woodfield Lake investment property to escrow with the lender any property excess cash flow (as defined).
The increase in accounts payable at December 31, 1996 as compared to December 31, 1995 is primarily due to the timing of payments for property operating expenses at the Partnership's investment properties.
The decrease in rental income and the related increase in venture partner's share of ventures' loss for 1996 as compared to 1995 is primarily due to the write-off in 1996 of previously accrued rents receivable due to the 1996 extension and modification of a major tenant lease at the One Woodfield Lake investment property as discussed above. The increase in rental income for 1995 as compared to 1994 is primarily due to increased occupancy in 1995 at the Westdale Mall investment property.
The increase in interest income for 1996 as compared to 1995 and 1994 is primarily due to an increase in the Partnership's average investment balance in U.S. Government obligations and other investments in 1996 and to the higher yields received in 1996 related to these investments held by the Partnership.
The increase in property operating expenses for 1996 as compared to 1995 is primarily due to increased real estate taxes at the One Woodfield Lake investment property. Such costs are partially recoverable from tenants. The increase in property operating expenses for 1995 as compared to 1994 is primarily due to increased repair and maintenance expenses at the Westdale Mall investment property, a portion of which are recoverable from tenants.
The increase in professional services for 1996 as compared to 1995 and 1994 is primarily due to expenses incurred in connection with tender offer matters, as discussed above.
The decrease in venture partners' share of ventures' loss from operations for 1995 as compared to 1994 is primarily due to increased rental income resulting from the increase in occupancy at the Westdale investment property.
INFLATION
Due to the decrease in the level of inflation in recent years, inflation generally has not had a material effect on rental income or property operating expenses.
Inflation is not expected to significantly impact future operations due to the expected liquidation of the Partnership by 1999. However, to the extent that inflation in future periods would have an adverse impact on property operating expenses, the effect would generally be offset by amounts recovered from tenants as many of the long-term leases at the Partnership's commercial properties have escalation clauses covering increases in the cost of operating and maintaining the properties as well as real estate taxes. Therefore, there should be little effect on operating earnings if the properties remain substantially occupied. In addition, substantially all of the leases at the Partnership's shopping center investment contain provisions which entitle the Partnership to participate in gross receipts of tenants above fixed minimum amounts.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
JMB INCOME PROPERTIES, LTD. - VII (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURES
INDEX
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1996 and 1995
Consolidated Statements of Operations, years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Partners' Capital Accounts (Deficits), years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows, years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Schedule -------- Consolidated Real Estate and Accumulated Depreciation III
Schedules not filed:
All schedules other than the one indicated in the index have been omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
INDEPENDENT AUDITORS' REPORT
The Partners JMB INCOME PROPERTIES, LTD. - VII:
We have audited the consolidated financial statements of JMB Income Properties, Ltd. - VII (a limited partnership) and consolidated ventures as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the General Partners of the Partnership. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners of the Partnership, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of JMB Income Properties, Ltd. - VII and consolidated ventures at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in the Notes to the consolidated financial statements, in 1996, the Partnership and its consolidated ventures changed their method of accounting for long-lived assets and long-lived assets to be disposed of to conform with Statement of Financial Accounting Standards No. 121.
KPMG PEAT MARWICK LLP
Chicago, Illinois March 21, 1997
JMB INCOME PROPERTIES, LTD. - VII (A LIMITED PARTNERSHIP) AND CONSOLIDATED VENTURES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
OPERATIONS AND BASIS OF ACCOUNTING
GENERAL
The Partnership holds (through joint ventures) two real estate investments. Business activities consist of rentals to a variety of commercial and retail companies, and the ultimate sale or disposition of such real estate. The Partnership currently expects to conduct an orderly liquidation of its remaining investment portfolio and wind up its affairs not later than December 31, 1999.
The accompanying consolidated financial statements include the accounts of the Partnership and its majority-owned ventures, One Woodfield Lake ("Woodfield"), Westdale Associates ("Westdale") and Properties Partners - the former owner of Clackamas Town Center Associates ("Clackamas"). The effect of all transactions between the Partnership and the consolidated ventures has been eliminated.
The Partnership's records are maintained on the accrual basis of accounting as adjusted for Federal income tax reporting purposes. The accompanying consolidated financial statements have been prepared from such records after making appropriate adjustments to reflect the Partnership's accounts in accordance with generally accepted accounting principles ("GAAP") and to consolidate the accounts of the ventures as described above. Such GAAP and consolidation adjustments are not recorded on the records of the Partnership. The net effect of these items for the years ended December 31, 1996 and 1995 is summarized as follows:
The net earnings (loss) per limited partnership interest is based upon the limited partnership interests outstanding at the end of each period. Deficit capital accounts will result, through the duration of the Partnership, in net gain for financial reporting and Federal income tax reporting purposes.
The preparation of financial statements in accordance with GAAP requires the Partnership to make estimates and assumptions that affect the reported or disclosed amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain amounts in the 1994 and 1995 consolidated financial statements have been reclassified to conform to the 1996 presentation.
Statement of Financial Accounting Standards No. 95 requires the Partnership to present a statement which classifies receipts and payments according to whether they stem from operating, investing or financing activities. The required information has been segregated and accumulated according to the classifications specified in the pronouncement. The Partnership records amounts held in U.S. Government obligations at cost, which approximates market. For the purposes of these statements, the Partnership's policy is to consider all such amounts held with original maturities of three months or less ($5,279,536 and $5,283,023 at December 31, 1996 and 1995, respectively) as cash equivalents, which includes investments in an institutional mutual fund which holds U.S. Government obligations, with any remaining amounts (generally with original maturities of one year or less) reflected as short-term investments being held to maturity.
Discounts provided on long-term mortgage notes are amortized over the terms of the related notes using the interest method.
Deferred expenses consist primarily of loan fees and lease commissions which are amortized over the terms stipulated in the related agreements or over the terms of the related leases using the straight line method.
Although certain leases of the Partnership provide for tenant occupancy during periods for which no rent is due and/or increases in minimum lease payments over the term of the lease, the Partnership accrues rental income for the full period of occupancy on a straight-line basis.
No provision for State or Federal income taxes has been made as the liability for such taxes is that of the partners rather than the Partnership. However, in certain instances, the Partnership has been required under applicable law to remit directly to the tax authorities amounts representing withholding from distributions paid to partners.
The Partnership has acquired, either directly or through joint ventures, two office buildings, three shopping centers and an industrial warehouse as investments. Four properties have been sold by the Partnership. Both of the remaining properties owned at December 31, 1996 were operating. The cost of the investment properties represents the total cost to the Partnership and its ventures plus miscellaneous acquisition costs.
Depreciation on the properties has been provided over the estimated useful lives of the various components as follows:
YEARS ----- Improvements (new)--straight-line or 150% declining balance . . . . . . . . . . . . . 5-35 Personal property (used)--straight-line or 150% declining balance . . . . . . . . . . . . . 5-10 Personal property (new)--straight-line or 200% declining balance . . . . . . . . . . . . . 5-10 ====
The investment properties are pledged as security for the long-term debt, for which there is no recourse to the Partnership.
Maintenance and repair expenses are charged to operations as incurred.
Significant betterments and improvements are capitalized and depreciated over their estimated useful lives.
The Partnership adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed of" ("SFAS 121") as required in the first quarter of 1996. SFAS 121 requires that the Partnership record an impairment loss on its properties to be held for investment whenever their carrying value cannot be fully recovered through estimated undiscounted future cash flows from their operations and sale. The amount of the impairment loss to be recognized would be the difference between the property's carrying value and the property's estimated fair value. The Partnership's policy is to consider a property to be held for sale or disposition when the Partnership has committed to a plan to sell such property and active marketing activity has commenced or is expected to commence in the near term. In accordance with SFAS 121, any properties identified as "held for sale or disposition" are no longer depreciated. Adjustments for impairment loss for such properties (subsequent to the date of adoption of SFAS 121) are made in each period as necessary to report these properties at the lower of carrying value or fair value less costs to sell. The adoption of SFAS 121 did not have any effect on the Partnership's financial position, results of operations or liquidity.
As of December 31, 1996, the Partnership has committed to a plan to sell the Westdale and One Woodfield Lake investment properties. Accordingly, these properties have been classified at December 31, 1996 as held for sale or disposition in the accompanying consolidated financial statements. The results of operations, net of venture partners' share, for such properties were ($563,217), ($357,656) and ($523,204), respectively, for the years ended December 31, 1996, 1995 and 1994.
VENTURE AGREEMENTS - GENERAL
The Partnership at December 31, 1996 is a party to two operating joint venture agreements. Pursuant to such agreements, the Partnership made initial capital contributions of approximately $35,585,000 (before legal and other acquisition costs and its share of operating deficits as discussed below). In general, the joint venture partners, who are either the sellers (or their affiliates) of the property investments being acquired, or parties which have contributed an interest in the property being developed, or were subsequently admitted to the ventures, make no cash contributions to the ventures, but their retention of an interest in the property, through the joint venture, is taken into account in determining the purchase price of the Partnership's interest, which is determined by arm's-length negotiations. Under certain circumstances, either pursuant to the venture agreements or due to the Partnership's obligations as a general partner, the Partnership may be required to make additional cash contributions to the ventures.
The Partnership has acquired, through the above ventures, one office building and one regional shopping mall. The joint venture partners (who were primarily responsible for constructing the properties) contributed any excess of cost over the aggregate amount available from Partnership contributions and financing and, to the extent such funds exceeded the aggregate costs, were to retain such excesses. The venture properties have been financed under various long-term debt arrangements as described below.
There are certain risks associated with the Partnership's investments made through joint ventures including the possibility that the Partnership's joint venture partners in an investment might become unable or unwilling to fulfill their financial or other obligations, or that such joint venture partners may have economic or business interests or goals that are inconsistent with those of the Partnership.
INVESTMENT PROPERTIES
ONE WOODFIELD LAKE
The Partnership owns an 80% general partnership interest in an existing joint venture whose sole investment is an office building in Schaumburg, Illinois. The venture agreement, as amended, provides that the Partnership has a cumulative annual preference in the distribution of net cash receipts (as defined) of $546,000. The next $136,500 of annual net cash receipts is to be distributed to the venture partners; any remaining net cash receipts are to be distributed 80% to the Partnership and 20% to the venture partners. As of December 31, 1996, cumulative preference payments to the Partnership are in arrears in the amount of $5,778,500.
Operating deficits are scheduled to be funded 80% by the Partnership and 20% by the joint venture partner. The Partnership and the joint venture partner have executed an amendment to the venture agreement which specifies that each partner make contributions to the venture in their respective partnership interests to fund the venture's operating deficits and provides for the repayment of such contributions (as defined) prior to the distributions of the cumulative annual preferences of net cash receipts. Operating profits and losses are allocated 80% to the Partnership and 20% to the joint venture partner.
An affiliate of the developer manages the property pursuant to a long- term agreement which provides for a management fee of approximately $68,300 for 1996, subject to annual increases based upon a formula relating to the Consumer Price Index.
The long-term mortgage note secured by the One Woodfield Lake office building matured on September 1, 1995. The joint venture signed an extension of the maturity date of the mortgage loan until September 1, 1998 and a reduction in the interest rate. Though the monthly mortgage loan payments decline as a result of this agreement, any excess cash flow, as defined, must be escrowed with the lender and which may be used (subject to lender approval) for future deficits, leasing costs and capital improvements. The joint venture is current in its payments to the mortgage lender under the agreement as of the date of this report. In 1996, the joint venture produced cash flow, and therefore, escrowed $141,131 as required by the loan modification.
WESTDALE MALL
The Partnership owns, through a joint venture partnership with the seller, an interest in Westdale Mall shopping center. The venture agreement provides that the first $1,267,500 of net cash receipts shall be distributed 64.7% to the Partnership and 35.3% to the venture partner; all remaining annual net cash receipts are to be distributed 45.5% to the Partnership, 24.8% to the venture partner and 29.7% to the ground lessor as additional rent. The Partnership has a preferred position (related to the Partnership's cash investment in the venture) with respect to distributions of sale or refinancing proceeds from the venture, after payment to the ground lessor of the amounts described below. As required by the venture agreement, any deficit from operations is to be funded 45.5% by the Partnership and 54.5% by the venture partner.
Venture operating profits and losses are allocated 64.7% to the Partnership and 35.3% to the venture partner.
Effective August 1, 1994, the venture partner transferred its interest in Westdale Mall to another company affiliated with the venture partner's parent company. The property is managed by the new venture partner pursuant to an assignment of the previous agreement which provides for a management fee equal to a portion of the tenants' contributions toward operating costs plus the lesser of $120,000 per year or 3% of the minimum rent received from tenants.
LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996 and 1995: 1996 1995 ----------- ----------- 8.25% (9.875% prior to September 1, 1995) mortgage note, secured by an office building in Schaumburg, Illinois; balance payable in monthly installments (interest only) of $84,774 from September 1, 1995 through maturity on Septem- ber 1, 1998. . . . . . . . . . . . . . $12,330,749 12,330,749
8-3/4% - 10-3/8% mortgage notes, due at various dates from March 1, 2010 to July 1, 2015; secured by a leasehold and shopping center in Cedar Rapids, Iowa; payable in monthly installments aggregating $234,841 (including interest). Balances are net of $4,396,833 in 1996 and $4,623,569 in 1995 of unamortized discounts based on imputed interest rates of 12%. . . . 20,752,152 21,059,132 ----------- ---------- Total debt. . . . . . . . . . . . . 33,082,901 33,389,881 Less current portion of long-term debt. . . . . . . . . 345,913 306,980 ----------- ---------- Total long-term debt. . . . . . . . $32,736,988 33,082,901 =========== ==========
Five-year maturities of long-term debt (net of unamortized discounts) are summarized as follows:
1997 . . . . . . . . . . . $ 345,913 1998 . . . . . . . . . . . 12,720,532 1999 . . . . . . . . . . . 439,217 2000 . . . . . . . . . . . 494,921 2001 . . . . . . . . . . . 557,690 ===========
PARTNERSHIP AGREEMENT
Pursuant to the terms of the Partnership Agreement, net profits or losses of the Partnership from operations are allocated 96% to the Limited Partners and 4% to the General Partners. Profits from the sale or refinancing of investment properties are to be allocated to the General Partners to the greater of 1% of such profits or the amount of cash distributable to the General Partners from any such sale or refinancing (as described below). Losses from the sale or refinancing of investment properties are to be allocated 1% to the General Partners. The remaining sale or refinancing profits and losses will be allocated to the Limited Partners.
An amendment to the Partnership Agreement, effective January 1, 1991, generally provides that notwithstanding any allocation contained in the Agreement, if at any time profits are realized by the Partnership, any current or anticipated event that would cause the deficit balance in absolute amount in the Capital Account of the General Partners to be greater than their share of the Partnership's indebtedness (as defined) after such event, then the allocation of Profits to the General Partners shall be increased to the extent necessary to cause the deficit balance in the Capital Account of the General Partners to be no less than their respective shares of the Partnership's indebtedness after such event. In general, the effect of this amendment is to allow the deferral of the recognition of taxable gain to the Limited Partners.
The General Partners are not required to make any capital contribu- tions except under certain limited circumstances upon termination of the Partnership. Distributions of "cash flow" of the Partnership are allocated 90% to the Limited Partners and 10% to the General Partners. However, portions of such distributions to the General Partners are subordinated to the Limited Partners' receipt of a stipulated return on capital.
The Partnership Agreement provides that the General Partners shall receive as a distribution from the sale of a real property by the Partnership an amount equal to 3% of the selling price, and that the remaining proceeds (net after expenses and retained working capital) be distributed 85% to the Limited Partners and 15% to the General Partners. However, the Limited Partners shall receive 100% of such net sale proceeds until the Limited Partners (i) have received cash distributions of sale or refinancing proceeds in an amount equal to the Limited Partners' aggregate initial capital investment in the Partnership and (ii) have received cumulative cash distributions from the Partnership's operations which, when combined with sale or refinancing proceeds previously distributed, equal a 6% annual return on the Limited Partners' average capital investment for each year (their initial capital investment as reduced by sale or refinancing proceeds previously distributed) commencing with the fourth fiscal quarter of 1980. Two-thirds of the 3% General Partner distribution discussed above is further subordinated to the Limited Partners receiving out of sales proceeds an amount equal to 110% of their initial capital investment in the Partnership. The Limited Partners have received cash distributions that satisfied the requirements in (i) and (ii) above. Also, the Limited Partners have received an amount equal to 110% of their initial capital investment with the August 1993 cash distribution. Therefore, approximately $4,500,000 of sales proceeds have been distributed to the General Partners pursuant to the distribution levels described above.
LEASES - AS PROPERTY LESSOR
At December 31, 1996, the Partnership's and its consolidated ventures' principal assets consist of one shopping center and one office building. The Partnership has determined that all leases relating to these properties are properly classified as operating leases; therefore rental income is reported when earned and the cost of the properties, excluding the cost of the land, is depreciated over the estimated useful lives. Leases with tenants range in term from one to twenty-seven years and provide for fixed minimum rent and partial reimbursement of operating costs. In addition, leases with shopping center tenants provide for additional rent based upon percentages of tenants' sales volume. With respect to the Partnership's shopping center investment, a substantial portion of the ability of retail tenants to honor their leases is dependent upon the retail economic sector.
Cost and accumulated depreciation of the leased assets are summarized as follows at December 31, 1996:
Office Building: Cost. . . . . . . . . . . . . . . $ 19,043,867 Accumulated depreciation. . . . . 12,955,499 ------------ 6,088,368 ------------ Shopping Center: Cost. . . . . . . . . . . . . . . 41,915,136 Accumulated depreciation. . . . . 27,543,437 ------------ 14,371,699 ------------ $ 20,460,067 ============
Minimum lease payments, including amounts representing executory costs (e.g. taxes, maintenance, insurance) and any related profit, to be received in the future under the operating leases are as follows:
1997 . . . . . . . . . . . . . . . . $ 7,535,268 1998 . . . . . . . . . . . . . . . . 7,524,240 1999 . . . . . . . . . . . . . . . . 6,995,229 2000 . . . . . . . . . . . . . . . . 5,833,524 2001 . . . . . . . . . . . . . . . . 4,906,642 Thereafter . . . . . . . . . . . . . 18,536,728 ----------- Total . . . . . . . . . . . . $51,331,631 ===========
Contingent rent (based on sales by property tenants) included in con- solidated rental income was as follows for the years ended December 31, 1996, 1995 and 1994:
1994 . . . . . . . . . . . . . . . . $578,166 1995 . . . . . . . . . . . . . . . . 656,128 1996 . . . . . . . . . . . . . . . . 793,567 ========
LEASES - PROPERTY LESSEE
The following lease agreement has been determined to be an operating lease.
The Westdale venture leases the land underlying the Cedar Rapids, Iowa shopping center from the Partnership's venture partner. The lease has a remaining term of approximately 42 years with options to extend the lease for two additional ten-year periods. The lease requires the venture to pay all costs and expenses of the property, including maintenance, insurance and real estate taxes. The lease provides for annual base rent of $848,900 plus additional rent based upon gross income from certain tenants and annual cash flow in excess of specified levels as described in the Notes. The lease further provides that upon sale of the Westdale Mall shopping center the Westdale venture may require the lessor to convey a portion of the leased land to the purchaser as part of the sale. As consideration for such conveyance, the lessor is entitled to receive the first $5,872,000 of net sales proceeds plus 29.7% of any net sales proceeds in excess of $19,784,000.
Total rental expense for the years ended December 31, 1996, 1995 and 1994 under the above operating leases was $1,080,250, $1,071,906 and $1,096,231, respectively, and consisted substantially of minimum rent.
Future minimum rental commitments under the above operating lease are as follows:
1997 . . . . . . . . . . . . . . . . $ 848,900 1998 . . . . . . . . . . . . . . . . 848,900 1999 . . . . . . . . . . . . . . . . 848,900 2000 . . . . . . . . . . . . . . . . 848,900 2001 . . . . . . . . . . . . . . . . 848,900 Thereafter . . . . . . . . . . . . . 31,409,300 ----------- Total . . . . . . . . . . . . . $35,653,800 ===========
TRANSACTIONS WITH AFFILIATES
The Partnership, pursuant to the Partnership Agreement, is permitted to engage in various transactions involving the Managing General Partner and its affiliates including the reimbursement for direct expenses relating to the administration of the Partnership and the operation of the Partnership's investments. Fees, commissions and other expenses required to be paid by the Partnership to the General Partners and their affiliates as of December 31, 1996, 1995 and 1994 are as follows:
UNPAID AT DECEMBER 31, 1996 1995 1994 1996 ------ ------ ------ ------------ Reimbursement (at cost) for other out-of-pocket expenses . $3,992 10,481 3,429 -- ------ ------ ------ ------
$3,992 10,481 3,429 -- ====== ====== ====== ======
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes of or disagreements with accountants during fiscal years 1996 and 1995.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP
The Managing General Partner of the Partnership is JMB Realty Corporation ("JMB"), a Delaware corporation, substantially all of the outstanding stock of which is owned directly or indirectly, by certain of its officers, directors, members of their families and affiliates. JMB has responsibility for all aspects of the Partnership's operations, subject to the requirement that sales of real property must be approved by the Associate General Partner of the Partnership, AGPP Associates, L.P. AGPP Associates, L.P., an Illinois limited partnership with JMB as the sole general partner, shall be directed by a majority in interest of its limited partners (who are generally officers, directors and affiliates of JMB or its affiliates) as to whether to provide its approval of any sale of real property (or any interest therein) of the Partnership. The Partnership is subject to certain conflicts of interest arising out of its relationships with the General Partners and their affiliates as well as the fact that the General Partners and their affiliates are engaged in a range of real estate activities. Certain services have been and may in the future be provided to the Partnership or its investment properties by affiliates of the General Partners, including property management services and insurance brokerage services. In general, such services are to be provided on terms no less favorable to the Partnership than could be obtained from independent third parties and are otherwise subject to conditions and restrictions contained in the Partnership Agreement. The Partnership Agreement permits the General Partners and their affiliates to provide services to, and otherwise deal and do business with, persons who may be engaged in transactions with the Partnership, and permits the Partnership to borrow from, purchase goods and services from, and otherwise to do business with, persons doing business with the General Partners or their affiliates. The General Partners and their affiliates may be in competition with the Partnership under certain circumstances, including, in certain geographical markets, for tenants for properties and/or for the sale of properties. Because the timing and amount of cash distributions and profits and losses of the Partnership may be affected by various determinations by the General Partners under the Partnership Agreement, including whether and when to sell or refinance a property, the establishment and maintenance of reasonable reserves, the timing of expenditures and the allocation of certain tax items under the Partnership Agreement, the General Partners may have a conflict of interest with respect to such determinations.
The names, positions held and length of service therein of each director and the executive and certain other officers of the Managing General Partner are as follows:
SERVED IN NAME OFFICE OFFICE SINCE - - ---- ------ ------------
Judd D. Malkin Chairman 5/03/71 Director 5/03/71 Chief Financial Officer 2/22/96 Neil G. Bluhm President 5/03/71 Director 5/03/71 Burton E. Glazov Director 7/01/71 Stuart C. Nathan Executive Vice President 5/08/79 Director 3/14/73 A. Lee Sacks Director 5/09/88 John G. Schreiber Director 3/14/73 H. Rigel Barber Executive Vice President 1/02/87 Chief Executive Officer 8/01/93 Glenn E. Emig Executive Vice President 1/01/93 Chief Operating Officer 1/01/95 Gary Nickele Executive Vice President and 1/01/92 General Counsel 2/27/84 Gailen J. Hull Senior Vice President 6/01/88 Howard Kogen Senior Vice President 1/02/86 Treasurer 1/01/91
There is no family relationship among any of the foregoing directors or officers. The foregoing directors have been elected to serve a one-year term until the annual meeting of the Managing General Partner to be held on June 7, 1997. All of the foregoing officers have been elected to serve one-year terms until the first meeting of the Board of Directors held after the annual meeting of the Managing General Partner to be held on June 7, 1997. There are no arrangements or understandings between or among any of said directors or officers and any other person pursuant to which any director or officer was elected as such.
JMB is the corporate general partner of Carlyle Real Estate Limited Partnership-VII ("Carlyle-VII"), Carlyle Real Estate Limited Partnership-IX ("Carlyle-IX"), Carlyle Real Estate Limited Partnership-XI ("Carlyle-XI"), Carlyle Real Estate Limited Partnership-XII ("Carlyle-XII"), Carlyle Real Estate Limited Partnership-XIII ("Carlyle-XIII"), Carlyle Real Estate Limited Partnership-XIV ("Carlyle-XIV"), Carlyle Real Estate Limited Partnership-XV ("Carlyle-XV"), Carlyle Real Estate Limited Partnership-XVI ("Carlyle-XVI"), Carlyle Real Estate Limited Partnership-XVII ("Carlyle- XVII"), JMB Mortgage Partners, Ltd.-III ("Mortgage Partners-III"), JMB Mortgage Partners, Ltd.-IV ("Mortgage Partners-IV"), Carlyle Income Plus, Ltd. ("Carlyle Income Plus") and Carlyle Income Plus, Ltd.-II ("Carlyle Income Plus-II") and the managing general partner of JMB Income Properties, Ltd.-IV ("JMB Income-IV"), JMB Income Properties, Ltd.-V ("JMB Income-V"), JMB Income Properties, Ltd.-VI ("JMB Income-VI"), JMB Income Properties, Ltd.-X ("JMB Income-X"), JMB Income Properties, Ltd.-XI ("JMB Income-XI"), JMB Income Properties, Ltd.-XII ("JMB Income-XII"), and JMB Income Properties Ltd.-XIII ("JMB Income-XIII"). JMB is also the sole general partner of the associate general partner of most of the foregoing partnerships. Most of the foregoing directors and officers are also officers and/or directors of various affiliated companies of JMB including Arvida/JMB Managers, Inc. (the general partner of Arvida/JMB Partners, L.P. ("Arvida")), Arvida/JMB Managers-II, Inc. (the general partner of Arvida/JMB Partners, L.P.-II ("Arvida-II") and Income Growth Managers, Inc. (the corporate general partner of IDS/JMB Balanced Income Growth, Ltd. ("IDS/BIG")). Most of such directors and officers are also partners of certain partnerships which are associate general partners in the following real estate limited partnerships: Carlyle-VII, Carlyle-IX, Carlyle-XI, Carlyle-XII, Carlyle-XIII, Carlyle-XIV, Carlyle-XV, Carlyle-XVI, Carlyle- XVII, JMB Income-VI, JMB Income-X, JMB Income-XI, JMB Income-XII, JMB Income-XIII, Mortgage Partners-III, Mortgage Partners-IV, Carlyle Income Plus, Carlyle Income Plus-II and IDS/BIG.
The business experience during the past five years of each such director and officer of the Managing General Partner of the Partnership in addition to that described above is as follows:
Judd D. Malkin (age 59) is an individual general partner of JMB Income-IV and JMB Income-V. Mr. Malkin has been associated with JMB since October 1969. Mr. Malkin is a director of Urban Shopping Centers, Inc. ("USC, Inc."), an affiliate of JMB that is a real estate investment trust in the business of owning, managing and developing shopping centers. He is a Certified Public Accountant.
Neil G. Bluhm (age 59) is an individual general partner of JMB Income-IV and JMB Income-V. Mr. Bluhm has been associated with JMB since August 1970. Mr. Bluhm is a director of USC, Inc. He is a member of the Bar of the State of Illinois and a Certified Public Accountant.
Burton E. Glazov (age 58) has been associated with JMB since June 1971 and served as an Executive Vice President of JMB until December of 1990. He is a member of the Bar of the State of Illinois and a Certified Public Accountant.
Stuart C. Nathan (age 55) has been associated with JMB since July 1972. Mr. Nathan is also a director of Sportmart Inc., a retailer of sporting goods. He is a member of the Bar of the State of Illinois.
A. Lee Sacks (age 63) (President and Director of JMB Insurance Agency, Inc.) has been associated with JMB since December 1972.
John G. Schreiber (age 50) has been associated with JMB since December 1970 and served as an Executive Vice President of JMB until December 1990. Mr. Schreiber is a director of USC, Inc. He is also a director of a number of investment companies advised or managed by T. Rowe Price Associates and its affiliates. Mr. Schreiber is President of Schreiber Investments, Inc., a company which is engaged in the real estate investing business. He is also a senior advisor and partner of Blackstone Real Estate Partners, an affiliate of the Blackstone Group, L.P. Since 1994, Mr. Schreiber has also served as a Trustee of Amli Residential Property Trust, a publicly-traded real estate investment trust that invests in multi-family properties. He holds a Masters degree in Business Administration from Harvard University Graduate School of Business.
H. Rigel Barber (age 47) has been associated with JMB since March 1982. He holds a J.D. degree from the Northwestern Law School and is a member of the Bar of the State of Illinois.
Glenn E. Emig (age 49) has been associated with JMB since December, 1979. Prior to becoming Executive Vice President of JMB in 1993, Mr. Emig was Executive Vice President and Treasurer of JMB Institutional Realty Corporation. He holds a Masters degree in Business Administration from the Harvard University Graduate School of Business and is a Certified Public Accountant.
Gary Nickele (age 44) has been associated with JMB since February, 1984. He holds a J.D. degree from the University of Michigan Law School and is a member of the Bar of the State of Illinois.
Gailen J. Hull (age 48) has been associated with JMB since March, 1982. He holds a Masters degree in Business Administration from Northern Illinois University and is a Certified Public Accountant.
Howard Kogen (age 61) has been associated with JMB since March, 1973. He is a Certified Public Accountant.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no officers or directors. The General Partners of the Partnership are entitled to receive a share of cash distributions, when and as cash distributions are made to the Limited Partners, and a share of profits or losses. Reference is also made to the Notes for a description of such transactions, distributions and allocations. In 1996, 1995 and 1994 cash distributions of $67,046, $53,782 and $53,782 were paid, respectively, to the General Partners.
The General Partners of the Partnership may be reimbursed for their direct expenses relating to the administration of the Partnership and the operation of the Partnership's real property investments. In 1996, the Managing General Partner was due reimbursement for such out-of-pocket expenses in the amount of $3,992, all of which was paid as of December 31, 1996.
The Partnership is permitted to engage in various transactions involving affiliates of the Managing General Partner of the Partnership and its affiliates. The relationship of the Managing General Partner (and its directors and officers) to its affiliates is set forth in Item 10 above and Exhibit 21 hereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no significant transactions or business relationships with the Managing General Partner, affiliates or their management other than those described in Items 10 and 11 above.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements (See Index to Financial Statements filed with this report).
(2) Exhibits.
3-A.* The Prospectus of the Partnership dated January 18, 1980, as supplemented May 23, 1980, as filed with the Commission pursuant to Rules 424(b) and 424(c), is hereby incorporated herein by reference.
3-B.* Amended and Restated Agreement of Limited Partnership set forth as Exhibit A to the Prospectus, which is hereby incorporated herein by reference.
3-C. Acknowledgement of rights and duties of the General Partners of the Partnership between ABPP Associates, L.P. (a successor Associate General Partner of the Partnership) and JMB Realty Corporation as of December 31, 1995 is incorporated herein by reference to the Partnership's Report for September 30, 1996 on Form 10-Q as amended (File No. 0-9555) dated November 8, 1996.
4-A. Mortgage loan agreement relating to the purchase by the Partnership of an interest in the One Woodfield Lake Office Building in Schaumburg, Illinois is hereby incorporated by reference to the Partnership's Report on Form 8-K (File No. 0-9555) dated June 17, 1980.
4-B. Mortgage loan agreement relating to the purchase by the Partnership of an interest in Westdale Mall in Cedar Rapids, Iowa is hereby incorporated by reference to the Partnership's Report on Form 8-K (File No. 0-9555) dated October 3, 1980.
4-C. Mortgage loan modification and extension agreement concerning the mortgage loan secured by the One Woodfield Lake Office Building in Schaumburg, Illinois dated May 1, 1995 is incorporated herein by reference to the Partnership's Report for December 31, 1995 on Form 10-K (File No. 0-9555) dated March 25, 1996.
10-A. Acquisition documents including the venture agreement relating to the purchase by the Partnership of an interest in the One Woodfield Lake Office Building in Schaumburg, Illinois are hereby incorporated by reference to the Partnership's Report on Form 8-K (File No. 0-9555) dated June 17, 1980.
10-B. Acquisition documents including the venture agreement relating to the purchase by the Partnership of an interest in Westdale Mall in Cedar Rapids, Iowa are hereby incorporated by reference to the Partnership's Report on Form 8-K (File No. 0-9555) dated October 3, 1980.
21. List of Subsidiaries.
24. Powers of Attorney
27. Financial Data Schedule
----------------
* Previously filed as Exhibits 3-A and 3-B to the Partnership's Report for December 31, 1992 on Form 10-K (File No. 0-9555) and hereby incorporated herein by reference.
(b) No reports on Form 8-K were filed since the beginning of the last quarter of the period covered by this report
No annual report for the fiscal year 1996 or proxy material has been sent to the Partners of the Partnership. An annual report will be sent to the Partners subsequent to this filing.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
JMB INCOME PROPERTIES, LTD. - VII
By: JMB Realty Corporation Managing General Partner
GAILEN J. HULL By: Gailen J. Hull Senior Vice President Date: March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: JMB Realty Corporation Managing General Partner
JUDD D. MALKIN* By: Judd D. Malkin, Chairman and Chief Financial Officer Date: March 21, 1997
NEIL G. BLUHM* By: Neil G. Bluhm, President and Director Date: March 21, 1997
H. RIGEL BARBER* By: H. Rigel Barber, Chief Executive Officer Date: March 21, 1997
GLENN E. EMIG* By: Glenn E. Emig, Chief Operating Officer Date: March 21, 1997
GAILEN J. HULL By: Gailen J. Hull, Senior Vice President Principal Accounting Officer Date: March 21, 1997
A. LEE SACKS* By: A. Lee Sacks, Director Date: March 21, 1997
By: STUART C. NATHAN* Stuart C. Nathan, Executive Vice President and Director Date: March 21, 1997
*By: GAILEN J. HULL, Pursuant to a Power of Attorney
GAILEN J. HULL By: Gailen J. Hull, Attorney-in-Fact Date: March 21, 1997
JMB INCOME PROPERTIES, LTD. - VII
EXHIBIT INDEX
DOCUMENT INCORPORATED BY REFERENCE PAGE ------------- ----
3-A. The Prospectus of the Partnership dated January 18, 1980 Yes
3-B. Amended and Restated Agreement of Limited Partnership Yes
3-C. Acknowledgement of rights and duties of the General Partners of the Partnership Yes
4-A. Mortgage loan agreement relating to One Woodfield Lake Office Building Yes
4-B. Mortgage loan agreement relating to Westdale Mall Yes
4-C. Mortgage loan modification and no extension agreement relating to the One Woodfield Lake Office Building Yes
10-A. Acquisition documents related to One Woodfield Lake Office Building Yes
10-B. Acquisition documents related to the Westdale Mall Yes
10-C. Sale documents related to the Clackamas Town Center Yes
10-D. Sale documents related to the Oklahoma Distribution Center Yes
21. List of Subsidiaries No
24. Powers of Attorney No
27. Financial Data Schedule No


ITEM 1. BUSINESS
Osmonics, Inc. and its wholly-owned subsidiaries (the "Company") design, manufacture and market machines, systems and components used in the processing and handling of fluids. The Company was founded in 1969 and manufactures replaceable, semi-permeable membranes and other filter media for use in fluid separation and filtration. The Company's processing equipment employs crossflow filtration (including reverse osmosis, nanofiltration, ultrafiltration and microfiltration), normal filtration (including microfiltration and particle filtration), coalescing filtration, ion exchange, clarification, chromatography, ozonation and distillation. The Company's fluid handling equipment includes centrifugal, diaphragm and bellows pumps; electronic controllers to operate precision valves for water conditioning; flow control and measuring devices and instrumentation; and specialty holders and devices for retaining its membranes and filter media.
Crossflow, normal and coalescing filtration are precision processes in which a semi-permeable membrane or other filter material separates a fluid's components. Separation is accomplished by applying pressure to a fluid in order to cause selective passage of some components of the fluid through the membrane or filter media. Ion exchange and chromatography are quasi-filtration processes in which specialized plastic beads are used to selectively remove ionized or charged particles from a fluid. The fluid is pressurized and passes through a bed of the plastic beads in a normal filtration mode. Distillation is the condensation of steam from boiling water to produce ultrapure water. Ozone generation equipment uses electricity to develop a corona discharge which produces ozone, a strong oxidant used in the purification of water and other fluids.
The Company's processing products are used in fractionation, preferential separation, conditioning and purification in connection with such processes as purification of water and industrial solutions, dewatering and recycling of commercial and industrial fluids, pollution control and seawater desalting. The Company's principal domestic and international markets, from which it derives more than 50% of its sales, include the electronics, potable water, health care, biotechnology, food and beverage, chemical processing and power generation industries.
Filtration processes cover a broad spectrum ranging from those which separate discrete molecules and ions to those which separate particles visible to the naked eye. Historically, the Company specialized in products utilizing crossflow filtration processes designed to separate particles in the molecular range. Through acquisitions and internal product developments, the Company now has a full line of filtration products including depth cartridge filters for particle filtration and pleated membrane cartridge filters for microfiltration. The filtration media and membrane is produced primarily from polymers; however, inorganic membranes and filters of metal and ceramic are also manufactured. In addition, the Company manufactures housings to contain the filters. The crossflow filter membrane elements, and the microfilter and depth filter cartridges are replaceable while the housings are a permanent fixture in the fluid processing system.
To provide a complete line of products for the production of pure water, the Company manufactures distillation equipment, both single- effect and more energy efficient multi-effect. In addition, deionization and softening equipment in both laboratory size and large scale is manufactured in multiple locations.
In June 1989, the Company acquired Ozone Research & Equipment Corporation of Phoenix, Arizona. Ozone Research was founded in 1957 and is a pioneer in the manufacture of ozone generation equipment for the purification of water and the testing of elastomeric materials.
In November 1989, the Company acquired certain assets for the manufacture and sale of MACE flow control and pumping products to increase its fluid handling offerings. MACE products are made from Teflon PTFE, the most chemically stable polymer available, and are used to handle ultrapure and aggressive chemicals.
In December 1990, the Company acquired certain assets of the FASTEK Division of Eastman Kodak for the production of reverse osmosis membrane, home reverse osmosis membrane elements, a rolled filter product, and a blown microfiber filter cartridge product. This Syracuse, New York facility and manufacturing equipment provides the Company with added capacity and capability and gives the Company three sites for manufacturing membrane and membrane elements.
In October 1993, the Company acquired Autotrol Corporation through a pooling-of-interests, stock-for-stock transaction. Autotrol was founded in 1962 and is a leader in the manufacture of controllers for water softening and filtration equipment. In addition, Autotrol manufactures other fluid control and measuring devices such as a totalizing flow meter and dosing system to assure proper treatment of cooling tower water. Most of Autotrol's products are sold to OEM's who then use them as a component in a water conditioning device which is then sold to consumers.
In November 1994, the Company acquired substantially all of the assets of Lakewood Instruments of Phoenix, Arizona. This acquisition adds a line of instruments, sensors and analyzers used in the measurement of fluid characteristics in the chemical water treatment and pure water industries.
In October 1995, the Company acquired the assets and operations of Western Filter Company, Denver, Colorado, an important supplier to the beverage and bottled water industry for over 50 years. Western Filter has extensive experience in providing the beverage market with conventional water treatment technologies and membrane water treatment. Western Filter also has experience in coagulation clarification pretreatment technologies. These technologies will be utilized with Osmonics' existing distribution channels, allowing the Company to expand capability in the international markets where conventional water treatment is required, as well as complement municipal sales in the United States where ozone disinfection is becoming accepted.
In July 1996, the Company acquired Desalination Systems, Inc. ("Desal") through a pooling-of-interests, stock-for-stock transaction. Desal manufactures crossflow filtration membrane and membrane elements.
Desal has manufacturing facilities in Vista, California, and markets its products worldwide. Desal's products extend the range of membranes and membrane elements previously offered by the Company. The acquisition also extends the Company's distribution network for such products.
In February 1997, the Company acquired AquaMatic, Inc. of Rockford, Illinois. AquaMatic, started in 1930, offers a line of specialty valves and controllers for the water conditioning market, which will be sold through existing Osmonics distribution channels.
The Company focuses the marketing of its products through two sales groups:
1. Large equipment and systems.
2. Components and product sales.
Both of these sales groups are supported by Application Engineers and market support personnel.
Products
Membranes and Membrane Elements: The Company markets polymer membranes for crossflow applications sold in replaceable elements. Most membranes are produced in a spiral-wound configuration ranging in diameter from two to twelve inches and in length from twelve to sixty inches.
Membrane elements are typically replaced every 6 to 60 months, depending upon the severity of the application. The Company manufactures the membrane material and membrane elements used in its own systems, and also manufactures membrane elements for other original equipment manufacturers (OEM's) who include them as component parts in their products.
The Company's membranes are used in many bioengineering processes such as the production of high fructose corn sugar, enzyme purification, and purification of pharmaceuticals produced by biological processes. Other uses include water purification applications in hemodialysis, semiconductor manufacturing, production of pure water for beverages, production of ultrapure pharmaceutical and boiler feed water, industrial water purification and waste removal for pollution control compliance. In addition, the Company sells its home reverse osmosis (HRO) membrane elements to OEM's who package them into systems for use in homes, offices and retail vending establishments to produce purified drinking water. The Company is registered with the United States Food and Drug Administration for the manufacture and sale of certain membrane elements used in biological preparations.
Beginning in December 1985, the Company funded the start-up of Poretics Corporation for the development, manufacture, and sale of polycarbonate track-etched membrane and the hardware for use in a variety of laboratory and medical diagnostic applications. The Company also manufactures silver microfiltration membranes and ceramic microfilters used in the laboratory. Use of the silver membrane in normal filtration will neither kill bacteria nor cause them to grow,
permitting use of this separation process to count bacteria by collecting them on the membrane. Numerous applications exist for the Company's microfilters because of unique features, including use in air monitoring and in laboratory procedures for cancer and other research.
Filters: The Company markets replaceable depth cartridge filters, pleated cartridge filters, and rolled cartridge filters. The depth cartridge filters consist of a matrix of thermally-bonded polypropylene blown microfibers. The structure of these fibers allows particles to be trapped throughout the depth of the cartridge filter rather than simply on its surface, enhancing the efficiency of the filtration process. The pleated cartridge filters use either a specially processed sheet of blown polypropylene microfibers or microporous membranes and use surface filtration to act as a very selective filter. Rolled cartridge filters use media similar to pleated filters in a semicrossflow configuration, for enhanced filtration in specialized applications. Cartridge filters are manufactured in a range of pore sizes and particulate retention ratings. As a result of retention of particles in the filters, cartridge filters are typically replaced at intervals of eight hours to four weeks.
The Company markets ceramic cartridge filters for microfiltration and particulate filtration. The ceramic cartridge filters operate similar to the pleated cartridge filters in that particles are trapped on the surface. Ceramic cartridge filters are used to sterilize pharmaceutical solutions and are used in laboratory applications, where many analytic and diagnostic procedures require purification or sterilization.
The Company also markets separation elements and equipment used in coalescing filtration, a process distinct from crossflow and normal filtration, which separates different liquids based on their density and adsorption differences. This process can reduce concentrations of contaminants of several percent to only a few parts per million. Applications of coalescing filtration include removal of contaminants from compressed air and gas lines, dewatering of solvents and jet fuel, and removal of trace oil from waste water prior to disposal.
Ion Exchange and Chromatography Equipment: The Company markets equipment using ion exchange technology. Ion exchange plastic beads and selected polymer gels are utilized to preferentially adsorb ionized and charged material from a fluid stream. After the ion exchange beads have adsorbed a certain amount of material, they must be regenerated, typically with acid or caustic, or in the case of chromatography with a selected fluid to strip off the adsorbed material. The most used ion exchange process is for water softening where the ions of calcium and magnesium are replaced with sodium to reduce soap usage, improve boiler operation and improve cleaning. The Company is a leader in the manufacture of the controllers and valves used to effect softening. Another ion exchange application is to polish ultrapure water for electronics manufacture and high pressure boiler feed. Chromatography is primarily used to purify biotech fluids and food proteins.
Distillation Equipment: The Company markets distillation and related water purification equipment used primarily in the laboratory and pharmaceutical industries. Distillation, which involves the
condensation of steam from boiling water, was one of the first technologies used to purify water. The Company's distillation product lines range from laboratory stills to elaborate 2000-gallon-per-hour multi-stage purifiers.
Ozonation Equipment: The Company markets equipment to generate ozone from electricity using corona discharge. Ozone is becoming increasingly important as a bactericide and water purifier because it kills bacteria, virus and giardia cysts 10 to 300 times faster than chlorine.
Ozone is also effective in oxidizing trace organic materials in water which are precursors of the carcinogenic trihalomethanes. Ozone can also be used to purify solvent-contaminated groundwater and is often used to de-color water and waste water.
Pumps, Valves and Flow Control Devices: The Company markets a line of multi-stage centrifugal pumps. These pumps were developed by the Company to meet the need for dependable high pressure pumps and are available in 60 standard sizes with flows ranging from 3 gallons per minute to 500 gallons per minute and pressure capabilities from 25 pounds per square inch (psi) to 500 psi. The pumps are capable of operating in series to obtain 1000 psi for seawater desalting and other high pressure applications.
The Company markets two types of chemical-resistant, air-operated pumps used in both the chemical and electronics industries. These unique pumps are constructed of Teflon PTFE or polypropylene materials making them resistant to acids, caustics, solvents and numerous other aggressive chemicals.
The Company markets a dry chemical feeder system to sanitize well water and reduce iron and sulfur odors, and also markets the pellets used in the feeder.
The Company markets totalizing flow meters and electronic controllers made of corrosion resistant Noryl plastic, as well as a line of Teflon PTFE fluid control products including valves, fittings and flow meters used in the electronics, pharmaceutical and chemical industries. The PTFE is molded and machined into unique shapes to provide extremely chemical resistant high temperature parts.
The acquisition of Lakewood Instruments brings to the Company a line of analog and digital instrumentation which strengthens and broadens corporate offerings to the chemical water treatment and high purity water industries. Lakewood manufactures conductivity, pH, ORP, chlorine and specific ion sensors, analyzers and controllers, which offer unique synergies with Autotrol's flow-based controls, enabling chemical water treatment companies to offer a comprehensive line of products for cooling tower and boiler water treatment from a single source. Lakewood is also developing new local operating network (LON) communications and data acquisition capabilities, which allow networking multiple sensors to an individual control/display device using standard telephone cable.
Machines and Systems: The crossflow and normal filtration machines manufactured by the Company are comprised of one or more membrane elements, cartridge filters, pumps, valves, controls, transformers, heat exchangers, pipes and a steel frame on which the components are mounted. The size and number of membrane elements and filters can vary greatly. Pumps, pipes and frames of various sizes can be combined and configured to accommodate the membrane elements or filters required for various fluid handling or separation tasks.
The systems sold by the Company are comprised of one or more machines or pieces of equipment designed and manufactured by the Company as well as ancillary equipment, such as prefilters and postfilters, ion exchange equipment, ozonator equipment, additional pumps, heat exchangers and holding tanks. The type, size and number of machines and the ancillary equipment included in a system will vary with the nature and size of the fluid separation task.
The Company is registered with the United States Food & Drug Administration as a Class II medical device manufacturer for certain of its reverse osmosis machines, as is required to supply water purification equipment for use in artificial kidney dialysis.
The following table shows the percentage of net sales during the past five years attributable to the Company's fluid processing and handling equipment compared to its replaceable components:
Year Ended Replaceable December 31 Equipment Components 1996 49% 51% 1995 48% 52% 1994 51% 49% 1993 49% 51% 1992 50% 50%
Equipment includes: (i) membrane elements, filter elements, ion exchange resin and filter cartridges sold with machines, (ii) pumps, controls, instruments, valves, fittings, chemicals, and other ancillary equipment sold with systems and (iii) pumps, control valves, instruments and machines sold separately.
Replaceable components include only those membrane elements, coalescer and dielectric elements, cartridges, membranes, filters and other components sold by the Company as replacements for its machines, systems and products, or as replaceable components for products manufactured by others. They do not include those components originally sold as parts of new machines or systems manufactured by the Company. Sales of components and replacement parts provide the Company with a relatively stable and continuing source of revenue.
Sales and Marketing
The Company markets its custom machines and systems through its direct sales force. The Company's standard products are marketed to a network of independent distributors with the help of Company district managers. These distributors provide worldwide installation service and
stocking of a wide range of the Company's standard products. Some sales are made directly to certain of the Company's largest customers and to other manufacturers of filtration equipment and systems.
The Company's marketing activities include appearances at trade shows, direct mail campaigns, advertisements in professional and trade journals and appearances before professional organizations. The Company participates with its customers in planning the systems in which its products are to be used, particularly if new applications are involved. In some cases, the sale of a system designed for a particular customer may result from an engineering and service relationship which has extended over several years.
Research and Development
Research and development activities emphasize product development and applied research, with the goal of developing proprietary products. Such expenditures totaled $10,937,000 in 1996, $9,399,000 in 1995, and $8,989,000 in 1994. The Company anticipates that research and development expenditures in 1997 will be similar to the 1996 level as a percent of sales.
Patents and Trademarks
The Company has been granted domestic and certain foreign trademarks on numerous product names, and on its logo-types. The Company holds domestic and foreign patents on certain of its filter media, filters, controlling valves, machine designs and other products. Although the Company believes that its patents have value, the Company's business is not dependent on any patent or group of related patents. The Company considers its technological position to be based primarily on its proprietary manufacturing methods, innovative engineering and marketing expertise.
Employees
As of December 31, 1996, the Company employed 1,402 persons, including 247 holding engineering or technical degrees.
Competition
The Company experiences competition from a variety of sources with respect to virtually all of its products, although the Company knows of no single entity that competes with it across the full range of its products and systems. Competition in the markets served by the Company is based on a number of factors, which may include price, technology, applications experience, know-how, availability of financing, reputation, product warranties, reliability, service and distribution.
With respect to the Company's membrane and related water treatment equipment business activity, there are a number of companies, including several sizable chemical companies, that manufacture membranes, but not equipment. There are numerous smaller companies, primarily fabricators, that build water treatment and desalination equipment, but which generally do not have their own proprietary membrane technology. A limited number of companies manufacture both membranes and equipment.
In ozone and distillation equipment, there are both large and small competitors with no single dominant competitor. In water softener controls and valves, the Company has three primary and numerous secondary competitors. Some competitors sell only controller valves and some sell complete softeners. The Company has numerous competitors in its conventional water treatment and filtration products business activities.
With respect to the Company's disposable filter and lab products, two companies, Pall and Millipore, dominate the industry with several smaller companies competing in selected product lines.
With respect to the Company's pump and fluid handling products, there are numerous competitors of larger size and with greater resources than the Company. Some competitors have significantly broader product lines than the Company.
The Company is unable to state with certainty its relative market position in all aspects of its business. Many of its competitors have financial and other resources greater than those of the Company.
Raw Materials
The principal raw materials used by the Company are various plastic materials including polyvinyl chloride, polypropylene, Noryl PPO, cellulose acetate, polycarbonate, polyester, polysulfone, and PTFE; ceramic and glass materials, stainless steel, steel, brass, copper, titanium, silver and various synthetic materials, all of which are normally available from sources within the continental United States. Most raw materials used by the Company are available from multiple sources of supply. A limited number of materials are proprietary products of major chemical companies which, if not available, would have a material effect on the Company's sales and profits. The Company believes it could find substitutes for these materials if they should become unavailable, but has no assurance that the substitute would perform as well or be priced as favorably.
To date, the Company has experienced no difficulty in securing any of its needed raw materials and components.
Customers
No one customer accounted for 10 percent or more of the Company's consolidated revenue in 1996, 1995 or 1994.
Backlog
The dollar amount of the Company's backlog of orders considered to be firm at December 31, 1996, was $27.9 million. The comparable backlog at December 31, 1995, was $20.6 million. The Company expects that nearly all orders included in the backlog at December 31, 1996, will be filled during the 1997 fiscal year. The Company does not believe that its backlog at any time is necessarily indicative of annual sales. The business of the Company is not subject to significant seasonal variations.
Governmental Regulation
Certain applications of the Company's reverse osmosis and ultrafiltration products and distillation equipment are subject to governmental regulation. Systems used for fractionation of cheese whey for human consumption are subject to regulation by the United States Department of Agriculture. Reverse osmosis, ultrafiltration and distillation systems used in medical applications, particularly the systems used in artificial kidney dialysis equipment and pharmaceutical water for injection, are subject to regulation by the United States Food and Drug Administration. Ultrafiltration and microfiltration products used for biological separations are subject to regulation by the United States Food and Drug Administration.
To date, compliance with federal, state and local provisions relating to the protection of the environment has had no material effect upon the capital expenditures, earnings or competitive position of the Company.
Foreign Operations
Substantially all of the Company's operations and assets are located in the United States. The Company has sales offices and distribution facilities in France, Thailand, Switzerland, Hong Kong, Japan, Singapore and China. Limited assembly is conducted in Europe and Asia. The profitability of domestic and foreign sales is substantially equal. Sales to Canada are made on the same trade terms as are available to U.S. customers.
Large export sales are primarily made on the basis of confirmed irrevocable letters of credit or time drafts to selected customers in U.S. dollars. Therefore, the Company believes that problems of currency fluctuation or political and economic stability do not constitute substantial risks. See Note 11 of Notes to Consolidated Financial Statements for a breakdown of the Company's foreign operations and export sales by geographic area.
ITEM 2.

ITEM 2. PROPERTIES
The executive offices and principal manufacturing facilities of the Company are located in Minnetonka, Minnesota, a suburb of Minneapolis.
A summary of the Company's main operating facilities is as follows:
Location Status Size Function
Minnetonka, MN Owned 309,600 sq ft Sales, Manufacturing, Warehouse
Milwaukee, WI Owned 103,700 sq ft Sales, Manufacturing, Warehouse
Phoenix, AZ Owned 57,600 sq ft Sales, Manufacturing, Warehouse
Vista, CA Owned 110,000 sq ft Sales, Manufacturing, Warehouse
Escondido, CA Leased 30,000 sq ft Manufacturing
Rockland, MA Leased 38,200 sq ft Sales, Manufacturing, Warehouse
Syracuse, NY Owned 48,500 sq ft Sales, Manufacturing, Warehouse
Upland, CA Leased 22,000 sq ft Sales, Manufacturing, Warehouse
Denver, CO Owned 20,700 sq ft Sales, Manufacturing, Warehouse
Ft. Lauderdale, FL Leased 20,000 sq ft Sales, Warehouse
Livermore, CA Leased 6,000 sq ft Sales, Manufacturing, Warehouse
Emmetsburg, IA Leased 8,800 sq ft Manufacturing, Warehouse
Bryan, TX Owned 2,500 sq ft Manufacturing, Warehouse
Le Mee, France Owned 18,300 sq ft Sales, Manufacturing, Warehouse
Neuchatel, Leased 4,000 sq ft Sales, Warehouse Switzerland
Total Owned 670,900 sq ft
Total Leased 129,000 sq ft
Total Owned and Leased 799,900 sq ft
Certain debts of the Company are collateralized by real property of the Company.
The current manufacturing facilities are adequate for intermediate-term operations. In addition, the Company leases space in Thailand, Japan, Hong Kong, Switzerland and Singapore that are used primarily for sales activities.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in several lawsuits incidental to its business. Management does not believe that any of the lawsuits will have a material adverse effect on the Company's financial position or results of operations.
Autotrol's rotating biological contactor assemblies (the "RBC's") were a product which Autotrol discontinued producing and selling in 1982. Currently there are no performance claims pending against the Company with respect to the RBC's, and, as of December 31, 1996, the Company has reserves to cover potential future liability with respect to the RBC's.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock trades on the New York Stock Exchange under the symbol "OSM".
Shareholders of record on March 3, 1997 numbered 2,630. The Company estimates that an additional 2,500 shareholders own stock held for their account at brokerage firms and financial institutions.
1996 1995 Quarterly Prices High Low High Low First Quarter 20 3/8 18 1/4 16 5/8 13 1/4 Second Quarter 24 7/8 18 1/2 18 1/4 15 1/2 Third Quarter 22 3/4 18 1/4 17 7/8 15 1/2 Fourth Quarter 22 1/8 18 5/8 21 1/4 16 5/8
Adjusted for splits.
"Notes to Consolidated Financial Statements," pages 19-23 of the Annual Report to Shareholders, are incorporated herein by reference. As of March 14, 1997 there were 2,650 shareholders of record.
The Company has not paid cash dividends on its common shares. The Board of Directors currently intends to retain its earnings for the expansion of the Company's business. The Company has issued promissory notes which contain a covenant limiting the payment of dividends to shareholders. At December 31, 1996, approximately $33,583,000 of retained earnings was restricted under this covenant.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
"Selected Financial Data," page 29 of the Annual Report to Shareholders, is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of Operations," pages 24 and 25 of the Annual Report to Shareholders, is incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial information of the Registrant and its subsidiaries, included in the Annual Report to Shareholders, is incorporated herein by reference:
Page(s)
Consolidated Statements of Income . . . . . . 16
Consolidated Balance Sheets . . . . . . . . . 17
Consolidated Statements of Cash Flows . . . . 18
Consolidated Statements of Changes in
Shareholders' Equity . . . . . . . . . . . 19
Independent Auditors' Report . . . . . . . . 24
Notes to Consolidated Financial Statements . . 19-23
Quarterly Income Data . . . . . . . . . . . . 26
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers of the Registrant
Officer Name and Age Position with Company Since
D. Dean Spatz (52) President and Chairman 1969 of the Board
Ruth Carol Spatz (52) Secretary 1969
Howard W. Dicke (59) Vice President Human Resources 1978 and Corporate Development, and Treasurer
L. Lee Runzheimer (54) Chief Financial Officer 1988
James J. Carbonari (55) Vice President Sales & Marketing 1989
Kenneth E. Jondahl (40) Vice President International 1991
Andrew T. Rensink (40) Vice President Technology 1991
All of the executive officers, except Messrs. Jondahl and Rensink, have been officers of the Company for more than five years. Mr. Jondahl joined the Company in 1981 as an Application Engineer. Since then he has served as a Regional Sales Manager, Dairy Market Specialist, General Manager of Osmonics Asia/Pacific, General Manager of Osmonics Europa,
Marketing Manager and International Sales Manager. He was promoted to Vice President International in April 1991. Mr. Rensink joined the Company as Vice President Technology in September 1991. Prior to that he had been a plant manager and manufacturing manager for Mantaline, an elastomeric extrusion company. Previously he held various management positions in both engineering and manufacturing in several General Electric business units. All executive officers are elected annually by, and serve at the direction of, the Board of Directors. D. Dean Spatz and Ruth Carol Spatz are husband and wife.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement for the Company's 1997 Annual Meeting of Stockholders.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement for the Company's 1997 Annual Meeting of Stockholders.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement for the Company's 1997 Annual Meeting of Stockholders.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) (1) Financial Statement
The consolidated financial statements of the Registrant and its subsidiaries, included in the Annual Report to Shareholders, are incorporated by reference in Item 8, and are also incorporated herein by reference.
(a) (2) Financial Statement Schedules
Reports of Independent Public Accountants on Supplemental Schedules to the Consolidated Financial Statements.
Valuation and qualifying accounts.
Schedules not listed above have been omitted because they are either not applicable, not material or the required information has been given in the financial statements or in the notes to the financial statements.
(2) Agreement and Plan of Merger among Desalination Systems, Inc., Osmonics, Inc. and DSI Acquisition Corp. dated May 17, 1996. (Incorporated herein by reference to Exhibit 2 to Registration Statement on Form S-3, File No. 33-05029.)
(3)A. Certificate of Incorporation of the Registrant, as amended. (Incorporated herein by reference to Exhibit 3.1 to Registration Statement on Form S-2, File No. 33-336.) Certificate of Amendment. (Incorporated herein by reference to Exhibit (3)A on Form 10-K for fiscal year ended December 31, 1987, File No. 0-8282.)
B. By-Laws of the Registrant. (Incorporated herein by reference to Exhibit 3.2 to Registration Statement on Form S-2, File No. 33-336.)
(4)A. Note Purchase Agreement dated July 12, 1991. (Incorporated herein by reference to Annual Report on Form 10-K for fiscal year ended December 31, 1991.)
(10)A.* 1993 Stock Option Plan and related form of stock option agreement. (Incorporated herein by reference to Annex C of the Registrant's Joint Proxy Statement/Prospectus dated September 10, 1993.)
B. Stock Option Agreement with Michael L. Snow, Director. (Incorporated herein by reference to Annual Report on Form 10-K for fiscal year ended December 31, 1993.)
C.* 1983 Stock Option Plan and related form of stock option agreement. (Incorporated herein by reference to Exhibit 10.2 to Registration Statement on Form S-2, File No. 33-336.)
D. 1995 Employee Stock Purchase Plan. (Incorporated herein by reference to the Registrant's Proxy Statement dated March 27, 1995.)
E.* 1995 Director Stock Option Plan. (Incorporated herein by reference to the Registrant's Proxy Statement dated March 27, 1995.)
* Denotes Executive Compensation Plan. (13) 1996 Annual Report to Shareholders. (Only those portions incorporated herein by reference shall be deemed filed with the Commission.)
(21) Subsidiaries of the Registrant.
(23) Consent of Deloitte & Touche LLP.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OSMONICS, INC.
By /s/ D. Dean Spatz D. Dean Spatz, President
Dated: March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signatures Title Date
/s/ L. Lee Runzheimer Chief Financial Officer March 26, 1997 L. Lee Runzheimer (Principal Finance and Accounting Officer)
/s/ Howard W. Dicke Vice President Human March 26, 1997 Howard W. Dicke Resources and Corporate Development, and Treasurer
/s/ Ruth Carol Spatz Director March 27, 1997 Ruth Carol Spatz
/s/ Michael L. Snow Director March 18, 1997 Michael L. Snow
/s/ Ralph E. Crump Director March 18, 1997 Ralph E. Crump
/s/ Verity C. Smith Director March 17, 1997 Verity C. Smith
/s/ Charles W. Palmer Director March 17, 1997 Charles W. Palmer
/s/ D. Dean Spatz President, Chairman of March 26, 1997 D. Dean Spatz the Board and Director (Principal Executive Officer)