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Energy Recovery, Inc. Reports Third Quarter 2008 Financial Results

Energy Recovery, Inc. (Nasdaq:ERII), a global leading provider of ultra efficient energy recovery products and technology for seawater desalination, announced today the results of its third quarter ended September 30, 2008. In the third quarter of 2008, ERI achieved net revenue of $9.0 million, exceeding the Companys guidance of $6.8 million to $7.2 million. Year to date 2008 net revenue was $30.1 million, which represented an increase of 40% over net revenue of $21.6 million for the nine months ended September 30, 2007. ERI reported net income of $623 thousand, or $0.01 per diluted share, for the three months ended September 30, 2008 compared to $2.4 million, or $0.06 per diluted share, for the same period last year. Year to date net income was $3.4 million, or $0.07 per diluted share, compared to $3.1 million, or $0.08 per diluted share, for the same period last year.

In July 2008, ERI sold an aggregate of 16,100,000 shares of its common stock in its initial public offering (IPO) at $8.50 per share, including the underwriters over-allotment option. Of the shares sold in the offering, 10,178,566 shares were sold by the Company and 5,921,434 shares were sold by selling stockholders. ERI received net proceeds of approximately $76.8 million from the IPO, after deducting underwriting discounts and commissions and direct expenses. The financial effect of the IPO is reflected in the Companys third quarter financial results.

We exceeded our sales forecast in the third quarter due to stronger than expected demand from our OEM customer group whose projects are under 50,000 cubic meters per day, said GG Pique, President and CEO of Energy Recovery, Inc. We continue to see strong demand among both our large EPC customers as well as our OEM customers as reflected in our fourth quarter guidance. Our fourth quarter alone is expected to exceed our total annual revenue in 2006.

ERI provides the following guidance for the fourth quarter of 2008 and the full year (in thousands, except per share data):

Q4 2008 Full Year 2008

Estimated net revenue

$20.0 to $22.0 million

$50.0 to $52.0 million

Estimated net income $3.4 to $4.1 million $6.8 to 7.5 million
Estimated earnings per diluted share $0.07 to $0.08 $0.14 to $0.16

Forward Looking Statements

This press release includes forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements regarding the Companys ability to achieve certain levels of revenue and earnings in the fourth quarter and full year for 2008, the Companys ability to successfully implement its strategic initiatives and the Companys position in the desalination industry. Because such forward-looking statements involve risks and uncertainties, the Company's actual results may differ materially from those projected in such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, cyclical nature of sea water reverse osmosis plants, delays or postponements in the construction of desalination plants, the ability of our customer to obtain financing for the construction of their plants, the ability of our customers to obtain other key components of a plant, delays in governmental approvals, changes in customers budgets for desalination plans and the timing of their purchasing decision, interruption in the supply of key production components such as ceramic parts, shipping delays, and other risks detailed in the Company's filings with the Securities and Exchange Commission (SEC). All forward-looking statements are made as of today, and the Company assumes no obligation to update such statements. For more details relating to the risks and uncertainties that could cause actual results to differ materially from those anticipated in our forward-looking statements, please refer to the Company's SEC filings.

Conference Call to Discuss Third Quarter 2008 Results

The conference call scheduled today at 1:30 p.m. PDT will be in a "listen-only" mode for all participants other than the investment professionals who regularly follow the Company. The toll-free phone number for the call is 800-951-9235 or 706-758-9752 and the access code is 68565515. Callers should dial in approximately 15 minutes prior to the scheduled start time. A telephonic replay will be available at 800-642-1687 or 706-645-9291, Access Code: 68565515, from 5:30 p.m. PDT on Tuesday, November 11, 2008 to 8:59 p.m. PDT on Tuesday, November 24, 2008. Investors may also access the live call or the replay over the internet at www.streetevents.com; www.earnings.com and www.energyrecovery.com. The replay will be available approximately three hours after the live call concludes.

About ERI®

Energy Recovery, Inc. (ERI) is a leading manufacturer of energy recovery devices, which significantly reduce energy consumption and help make desalination affordable. ERIs PX Pressure Exchanger® technology (PX®) is a rotary positive displacement pump that recovers energy from the high pressure reject stream of seawater reverse osmosis systems at up to 98% efficiency with no downtime or scheduled maintenance.

The Company has research, development and manufacturing facilities in San Leandro, California as well as direct sales offices and technical support centers in key desalination hubs such as Madrid, UAE, Shanghai and Florida. ERI service representatives are based in Algeria, Australia, China, India, Korea, Mexico, Taiwan and the Caribbean. For more information on ERI and PX technology, please visit www.energyrecovery.com.

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months EndedNine Months Ended
September 30,September 30,
2008200720082007
Net revenue $ 9,044 $ 10,978 $ 30,125 $ 21,569
Cost of revenue (1) 3,497 4,096 11,122 8,524
Gross profit 5,547 6,882 19,003 13,045
Operating expenses:
Sales and marketing (1) 1,467 1,372 4,263 3,787
General and administrative (1) 2,696 1,053 8,211 2,786
Research and development (1) 678 392 1,723 1,221
Total operating expenses 4,841 2,817 14,197 7,794
Income from operations 706 4,065 4,806 5,251
Other income (expense):
Interest expense (17 ) (17 ) (62 ) (42 )
Interest and other income 217 85 841 121
Income before provision for income taxes 906 4,133 5,585 5,330
Provision for income taxes 283 1,736 2,186 2,238
Net income $ 623 $ 2,397 $ 3,399 $ 3,092
Earnings per share:
Basic $ 0.01 $ 0.06 $ 0.08 $ 0.08
Diluted $ 0.01 $ 0.06 $ 0.07 $ 0.08
Number of shares used in per share calculations:
Basic 49,646 39,631 43,114 38,821
Diluted 52,396 42,080 45,647 41,192

(1) Includes stock-based compensation expense as follows:
Three Months EndedNine Months Ended
September 30,September 30,
2008200720082007
Cost of revenue $ 34 $ 30 $ 65 $ 80
Sales and marketing 122 95 224 263
General and administrative 149 92 290 280
Research and development 52 38 97 108
Total stock-based compensation $ 357 $ 255 $ 676 $ 731

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)
(unaudited)
September 30,

December 31,

20082007
ASSETS
Current assets:
Cash and cash equivalents $ 79,821 $ 240
Restricted cash - 366

Accounts receivable, net of allowance for doubtful accounts of $76 and $121 at September 30, 2008 and December 31, 2007, respectively

13,333 12,849
Unbilled receivables, current 3,576 1,733
Notes receivable from stockholders - 20
Inventories 9,779 4,791
Deferred tax assets, net 1,052 1,052
Prepaid expenses and other current assets 3,060 369
Total current assets 110,621 21,420
Unbilled receivables, non-current 119 2,457
Restricted cash, non-current - 1,221
Property and equipment, net 1,694 1,671
Intangible assets, net 323 345
Deferred tax assets, non-current, net 148 148
Other assets, non-current 51 42
Total assets $ 112,956 $ 27,304
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,090 $ 1,697
Accrued expenses and other current liabilities 4,613 1,868
Liability for early exercise of stock options - 20
Income taxes payable 540 1,154
Accrued warranty reserve 248 868
Deferred revenue 594 488
Customer deposits 2,739 318
Current portion of long-term debt 172 172
Current portion of capital lease obligations 36 38
Total current liabilities 11,032 6,623
Long-term debt 428 557
Capital lease obligations, non-current 36 63
Total liabilities 11,496 7,243
Commitments and contingencies
Stockholders' equity

Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding

- -

Common stock, $0.001 par value; 200,000,000 shares authorized; 50,008,118 and 39,777,446 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively

50 40
Additional paid-in capital 98,250 20,762
Notes receivable from stockholders (307 ) (835 )
Accumulated other comprehensive loss (31 ) (5 )
Retained earnings 3,498 99
Total stockholders' equity 101,460 20,061
Total liabilities and stockholders' equity $ 112,956 $ 27,304

ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
20082007
Cash Flows From Operating Activities
Net income $ 3,399 $ 3,092
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 378 222
Interest accrued on notes receivables from stockholders (12 ) (23 )
Stock-based compensation 676 731
Gain on foreign currency transactions (383 ) -
Provision for doubtful accounts 6 (13 )
Provision for warranty claims (531 ) 31
Provision for excess or obsolete inventory 29 -
Changes in operating assets and liabilities:
Accounts receivable (107 ) 883
Unbilled receivables 495 (3,396 )
Inventories (5,017 ) (2,439 )
Prepaid and other assets (2,700 ) (105 )
Accounts payable 393 451
Accrued expenses and other liabilities 2,653 118
Income taxes payable (614 ) 142
Deferred revenue 106 237
Customer deposits 2,421 52
Net cash provided by (used in) operating activities 1,192 (17 )
Cash Flows From Investing Activities
Capital expenditures (376 ) (884 )
Restricted cash 1,587 (33 )
Other (1 ) (45 )
Net cash provided by (used in) investing activities 1,210 (962 )
Cash Flows From Financing Activities
Proceeds from long-term debt - 639
Repayment of long-term debt (129 ) (44 )

Repayments of revolving note, net

- (438 )
Repayment of capital lease obligation (28 ) (30 )
Net proceeds from issuance of common stock 76,808 5,119
Repayment of notes receivables from stockholders 560 23
Other short term financing activities (6 ) (129 )
Net cash provided by (used in) financing activities 77,205 5,140
Effect of exchange rate differences on cash and cash equivalents (26 ) 3
Net change in cash and cash equivalents 79,581 4,164
Cash and cash equivalents, beginning of period 240 42
Cash and cash equivalents, end of period $ 79,821 $ 4,206
Supplemental disclosure of cash flow information
Cash paid for interest $ 60 $ 39
Cash paid for income taxes $ 4,706 $ 2,120
Supplemental disclosure of non-cash transactions
Issuance of common stock in exchange for notes receivable from stockholders $ 20 $ 6

Contacts:

Energy Recovery, Inc.
Tom Willardson, 510-483-7370
Chief Financial Officer

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