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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2002

OR

Commission File Number: 01-14010

WATERS CORPORATION

(Exact name of registrant as specified in its charter)

34 Maple Street

Milford, Massachusetts 01757

(Address, including zip code, of principal executive offices)

Registrant’s telephone number, including area code: (508) 478-2000

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $.01 per share New York Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  x  No  ¨

State the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 28, 2002: $3,523,004,898.

Indicate the number of shares outstanding of the registrant’s common stock as of March 17, 2003: 124,132,979.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the 2003 Annual Meeting of Stockholders are incorporated by reference in Part III.

Table of Contents

WATERS CORPORATION AND SUBSIDIARIES

ANNUAL REPORT ON FORM 10-K

INDEX

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PART I

Item 1: BUSINESS

General

Waters Corporation (“Waters” or the “Company”) is a holding company which owns all of the outstanding common stock of Waters Technologies Corporation, the operating subsidiary. Waters was incorporated to acquire (“Acquisition”) the predecessor Waters Chromatography Division (“Predecessor”) of Millipore Corporation (“Millipore”) on August 18, 1994. Waters became a publicly traded company with its initial public offering (“IPO”) in November 1995. The Company has made two significant acquisitions since becoming a public company: Micromass Limited (“Micromass”) in September 1997 and TA Instruments, Inc. (“TAI”) in May 1996.

The Company files all required reports with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information of the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

The Company is an electronic filer and the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC electronic filing web-site is http://www.sec.gov. The Company also makes available free of charge on its web-site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The Internet address for Waters Corporation is http://www.waters.com and SEC filings can be found under Investor Relations.

Business Segments

The Company operates in the analytical instrument industry, with manufacturing and distribution expertise in three complementary technologies: high performance liquid chromatography (“HPLC”) instruments, chromatography columns and other consumables, and related service; mass spectrometry (“MS”) instruments that can be integrated and used along with other analytical instruments, especially HPLC; and thermal analysis (“TA”) and rheology instruments. The Company also operates in several geographic segments. See Note 18 to the financial statements for detailed results by geographic segment and products and service revenue. As also discussed in Note 18 to the financial statements, these three operating segments have been aggregated into one reporting segment for financial statement purposes.

Business

Waters, an analytical instrument manufacturer, is the world’s largest manufacturer and distributor of HPLC instruments, chromatography columns and other consumables, and related service. The Company believes it has the largest HPLC market share in the United States, Europe and non-Japan Asia and believes it has a leading position in Japan. HPLC, the largest product segment of the analytical instrument market, is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. Through Micromass, the Company believes it is a market leader in the development, manufacture, and distribution of mass spectrometry instruments, which are complementary products that can be integrated and used along with other analytical instruments, especially HPLC. Through TAI, the Company believes it is also the world’s leader in thermal analysis, a prevalent and complementary technique used in the analysis of polymers.

Developed in the 1950’s, HPLC today is the standard technique used to identify and analyze the constituent components of a variety of chemicals and materials. HPLC’s performance capabilities enable it to separate and identify 80% of all known chemicals and materials. As a result, HPLC is used to analyze substances in a wide variety of industries for research and development purposes, quality control and process engineering applications. Within the pharmaceutical and life science industries, its most significant end-use market, HPLC is used extensively to identify new drugs, to develop manufacturing methods, and to assure the potency and purity of new pharmaceuticals. HPLC is used to identify food content for nutritional labeling in the food and beverages industry and to test water and air purity within the environmental testing industry. HPLC is also used in a variety of applications in other industries, such as chemical and consumer products, as well as by universities and government agencies. In many instances, the Food and Drug Administration (“FDA”) and the U.S. Environmental Protection Agency regulations, and those of their international counterparts, mandate testing that requires HPLC instrumentation.

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Waters manufactures over 100 HPLC instrument types. A complete HPLC system consists of five basic components: the solvent delivery system, the sample injector, the separation column, the detector and the data acquisition unit. The solvent delivery system pumps the solvent through the HPLC system, while the sample injector injects the sample into the solvent flow. The separation column then separates the sample into its components for analysis by the detector, which measures the presence and amount of the constituents. The data acquisition unit then records and stores the information from the detector. Consumable products primarily are columns packed with separation media used in the HPLC testing process and are replaced at regular intervals. The separation column contains one of several types of packing, typically stationary phase packing made from silica. As the sample flows through the column, it is separated into its constituent components.

The acquisition of Micromass expanded the Company’s product offerings in mass spectrometry instruments. The Company’s mass spectrometry line is a world leader in the development, manufacture, sale and support of organic, inorganic, stable isotope and inductively-coupled plasma (“ICP”) mass spectrometers typically combined with HPLC, chemical electrophoresis, chemical electrophoresis chromatography, gas chromatography or elemental analysis systems. Mass spectrometry is a powerful analytical technique that is used to identify unknown compounds, to quantify known materials, and to elucidate the structural and chemical properties of molecules by measuring the masses of individual molecules that have been converted into ions. These products supply a diverse market with a strong emphasis on the life science, pharmaceutical, biomedical, clinical, environmental and geochemistry markets worldwide. With the acquisition of Micromass, Waters became one of the leading worldwide manufacturers of analytical systems that bring together HPLC and mass spectrometry detection, or HPLC-MS. Design innovations in HPLC-MS interfacing technology have drastically improved the operating efficiencies of these systems, greatly simplifying their operation, driving down their overall cost and making them much more affordable for the average analytical laboratory. These laboratories previously relied on expert mass spectrometrists to provide them the information they now get in minutes. The largest market for HPLC-MS is the pharmaceutical market where new drug development technologies are placing greater demands on laboratories to screen and analyze new drug compounds.

In the fourth quarter of 2002, the Company combined the field sales, service and distribution organizations of it HPLC and Micromass operations. The purpose of this integration was to enhance customer service capabilities and eliminate redundant functions.

The acquisition of TAI expanded the Company’s product offerings to include thermal analysis and rheology products. TAI develops, manufactures, sells and services thermal analysis and rheology instruments which are used for the physical characterization of polymers and related materials. Thermal analysis measures the physical characteristics of materials as a function of temperature. Changes in temperature affect several characteristics of materials such as their physical state, weight, dimension and mechanical and electrical properties, which may be measured by one or more thermal analysis techniques. Consequently, thermal analysis techniques are widely used in the development, production and characterization of materials in various industries such as plastics, chemicals, automobiles, pharmaceuticals and electronics. Rheology instruments complement thermal analyzers in characterizing materials. Rheology characterizes the flow properties of materials and measures their viscosity, elasticity and deformation under different types of loading. The information obtained provides insight with regard to a material’s behavior during manufacture, transport, usage and storage.

Instruments and data products comprise approximately two thirds of the Company’s total revenue. Consumable products and service comprise the remaining amount of the Company’s total revenue.

Customers

Waters has a broad and diversified customer base that includes pharmaceutical accounts, other industrial accounts, universities and government agencies. The pharmaceutical segment represents the Company’s largest sector and includes multinational pharmaceutical companies, generic drug manufacturers and biotechnology companies. The Company’s other industrial customers include chemical manufacturers, polymer manufacturers, food and beverage companies and environmental testing laboratories. The Company also sells to various universities and government agencies worldwide. Waters’ technical support staff work closely with its customers in developing and implementing applications that meet their full range of analytical requirements.

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The Company does not rely on any single customer or one group of customers for a material portion of its sales. During fiscal year 2002, no single customer accounted for more than 3% of the Company’s net sales.

Research and Development

Waters maintains an active research and development program focused on the development and commercialization of products which both complement and update the existing product offering. The Company’s research and development expenditures for 2002, 2001 and 2000, were $51.9 million, $46.6 million and $42.5 million, respectively. Nearly all of the current HPLC products of the Company have been developed at the Company’s main research and development center located in Milford, Massachusetts, with input and feedback from Waters’ extensive field organization. The majority of the mass spectrometry products have been developed at facilities in England and nearly all of the current thermal analysis products have been developed at the Company’s research and development center in New Castle, Delaware. At December 31, 2002, there were approximately 475 employees involved in the Company’s research and development efforts. Despite the Company’s active research and development program, there can be no assurances that the Company’s product development and commercialization efforts will be successful or that the products developed by the Company will be accepted by the marketplace.

Sales and Service

Waters has one of the largest sales and service teams in the industry focused exclusively on HPLC, MS and TA markets. Across all technologies, using respective specialized sales and service forces, the Company serves its customer base with approximately 1,400 field representatives in 94 sales offices throughout the world. The sales representatives have direct responsibility for account relationships, while service representatives work in the field to install instruments and minimize instrument downtime for customers. Technical support representatives work directly with customers, helping them to develop applications and procedures. Waters provides customers with comprehensive product literature and also makes consumable products available through a dedicated catalog.

Manufacturing

Waters provides high quality HPLC products by controlling each stage of production of its instruments and columns. The Company assembles most of its HPLC instruments at its facility in Milford, Massachusetts, where it performs machining, wiring, assembly and testing. The Milford facility employs manufacturing techniques that are expected to meet the strict ISO 9002 quality manufacturing standards and FDA mandated Good Manufacturing Practices. The Company outsources manufacturing of certain electronic components such as computers, monitors and circuit boards to outside vendors that can meet the Company’s quality requirements.

The Company manufactures its HPLC columns at its facilities in Taunton, Massachusetts and Wexford, Ireland, where it processes, sizes and treats silica and polymer media that are packed into columns, solid phase extraction cartridges and bulk shipping containers. The Wexford facility also manufactures and distributes certain data and software components for the Company’s HPLC, MS and TA product lines. These facilities meet the same ISO and FDA standards met by the Milford, Massachusetts facility and are approved by the FDA. Thermal analysis products are manufactured at the Company’s New Castle, Delaware facility and rheology products are manufactured at the Company’s Leatherhead, England facility.

The Company manufactures its mass spectrometry products at its facilities in Manchester, England and Cheshire, England. Certain components or modules of the Company’s mass spectrometry instruments are manufactured by outside long-standing contractors. Each stage of this supply chain is closely monitored by the Company to maintain its high quality and performance standards. The instruments, components or modules are then returned to the Company’s facilities where its engineers perform final assembly, calibrations to customer specifications and quality control procedures.

Competition

The analytical instrument and systems market is highly competitive. The Company encounters competition from several worldwide instrument manufacturers in both domestic and foreign markets. Waters competes in its markets primarily on the basis of instrument performance, reliability and service and, to a lesser extent, price. Some competitors have instrument businesses that are much larger than the Company’s business, but are typically less focused on Waters’ chosen markets. Some competitors have greater financial and other resources than the Company.

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The market for consumable HPLC products, including separation columns, is also highly competitive but is more fragmented than the analytical instruments market. Waters encounters competition in the columns market from chemical companies that produce column chemicals and small specialized companies that pack and distribute columns. The Company believes that it is one of the few suppliers that process silica, packs columns, and distributes its own product. Waters competes in this market on the basis of reproducibility, reputation and performance, and, to a lesser extent, price. Some competitors in this market have greater financial and other resources than the Company.

Patents, Trademarks and Licenses

Waters owns a number of United States and foreign patents and has patent applications pending in the United States and abroad. Certain technology and software are licensed from third parties. Waters also owns a number of trademarks. The Company’s patents, trademarks and licenses are viewed as valuable assets to its operations.

Employees

At December 31, 2002, Waters employed approximately 3,600 employees, 51% of who are located in the United States. Waters considers its employee relations, in general, to be good, and Waters’ employees are not represented by any unions. The Company believes that its future success depends, in a large part, upon its continued ability to attract and retain highly skilled employees. During 2002, the Company announced and commenced a restructuring in its Micromass and HPLC organizations. Approximately 50 people are to be terminated as a result of this organization integration of which 38 had left the Company as of December 31, 2002.

Environmental Matters

The Company is subject to federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes, and (ii) impose liability for the costs of cleaning up, and certain damages resulting from sites of past spills, disposals or other releases of hazardous substances. The Company believes that it currently conducts its operations, and in the past has operated its business, in substantial compliance with applicable environmental laws. From time to time, operations of the Company have resulted or may result in noncompliance with or liability for cleanup pursuant to environmental laws. The Company is currently working with the Massachusetts Department of Environmental Protection regarding alleged noncompliance with state environmental laws at its Taunton, Massachusetts facility. The Company believes the final outcome of this or any claims, should they be brought by the state, cannot be predicted with certainty, but could be material to the Company. In the fourth quarter of 2002, the Company recorded a litigation provision of $5.1 million for this contingency. The provision recorded represents management’s best estimate of the probable and reasonably estimable loss related to this claim. The Company expects this claim to be settled in the second quarter of 2003 in the form of a monetary fine and agreed upon capital improvements. Other than the alleged noncompliance discussed above, the Company does not currently anticipate any material adverse effect on its operations, financial condition or competitive position as a result of its efforts to comply with environmental laws.

With respect to the Predecessor’s operations of the Company’s HPLC business, Millipore has been notified that the U.S. Environmental Protection Agency has determined that a release or a threat of a release of hazardous substances as defined by CERCLA has occurred at certain sites to which chemical wastes generated by its manufacturing operations have been sent. In each instance, Millipore was one of a large number of entities that received notification from the U.S. Environmental Protection Agency, and Millipore anticipates that any ultimate liability for remedial costs will be shared by others. In any instances involving chemical wastes generated by the Predecessor, Millipore has entered into partial settlements, paid its proportionate financial obligation and received partial releases.

In connection with the Acquisition, Millipore agreed to retain environmental liabilities resulting from pre-acquisition operations of the Company’s facilities. Notwithstanding this contractual agreement, under CERCLA and similar environmental laws, the Company may remain primarily liable to some parties for environmental cleanup costs. As of December 31, 2002, no provisions have been made for these contingencies.

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Risk Factors

Forward-Looking Statements:

Certain of the statements in this Form 10-K and the documents incorporated in this Form are forward-looking statements, including statements regarding, among other items, (i) the impact of the Company’s new products, (ii) the Company’s growth strategies, including its intention to make acquisitions and introduce new products, (iii) anticipated trends in the Company’s business and (iv) the Company’s ability to continue to control costs and maintain quality. You can identify these forward-looking statements by our use of the words “believes”, “anticipates”, “plans”, “expects”, “may”, “will”, “would”, “intends”, “estimates” and similar expressions, whether in the negative or affirmative. These statements are subject to various risks and uncertainties, many of which are outside the control of the Company, including (i) changes in the HPLC, mass spectrometry and thermal analysis portions of the analytical instrument marketplace as a result of economic or regulatory influences, (ii) general changes in the economy or marketplace including currency fluctuations, in particular with regard to the euro, British pound and Japanese yen, (iii) changes in the competitive marketplace, including obsolescence resulting from the introduction of technically advanced new products and pricing changes by the Company’s competitors, (iv) the ability of the Company to generate increased sales and profitability from new product introductions, (v) the ability of the Company to replace or increase the amount of its existing revolving credit agreement in the event the need of a credit facility is required, (vi) the reduction in capital spending of pharmaceutical customers, (vii) the loss of intellectual property rights in the Company’s research and development efforts, (viii) the short term effect on sales and operating expenses as a result of the recent combination of the Waters HPLC and Micromass sales, service and distribution organizations, as well as additional risk factors set forth below. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make, whether because of these factors or for other reasons. We do not assume any obligations to update any forward-looking statement we make.

Competition and the Analytical Instrument Market:

The analytical instrument market; in particular, the portion related to the Company’s HPLC, mass spectrometry and thermal analysis product lines; is highly competitive, and the Company encounters competition from several international instrument manufacturers and other companies in both domestic and foreign markets. Many competitors are divisions of significantly larger companies that have greater financial and other resources, including larger sales forces and technical staffs, than the Company. There can be no assurances that the Company’s competitors will not introduce more effective and less costly products than those of the Company, or that the Company will be able to increase its sales and profitability from new product introductions. There can be no assurances that the Company’s sales and marketing forces will compete successfully against its competitors in the future.

Additionally, the market may, from time to time, experience low sales growth. Approximately 57% of the Company’s net sales in 2002 were to the worldwide pharmaceutical industry, which may be periodically subject to unfavorable market conditions and consolidations. Unfavorable industry conditions could have a material adverse effect on the Company’s results of operations.

Risk of Disruption:

The Company manufactures HPLC instruments at its facility in Milford, Massachusetts, separation columns at its facilities in Taunton, Massachusetts and Wexford, Ireland, mass spectrometry products at its facilities in Manchester, England and Cheshire, England, thermal analysis products at its facility in New Castle, Delaware and rheology products at its facility in Leatherhead, England. Any prolonged disruption to the operations at these facilities, whether due to labor difficulties, destruction of or damage to either facility or other reasons, could have a material adverse effect on the Company’s results of operations and financial condition.

Restructuring and Other Unusual Charges:

In July 2002, the Company announced a combination of its HPLC and MS field sales, service and support organizations, the purpose of which was to enhance customer service capabilities and eliminate redundant functions. Approximately 50 people are to be terminated of which 38 had left the Company as of December 31, 2002, and the Company incurred a $7.4 million charge for both restructuring and other specific incremental charges. The combination efforts are ongoing and additional costs will be incurred in 2003, including severance and contract cancellations. There are no assurances the Company will realize incremental sales or lower expenses as a result of these actions.

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Foreign Operations and Exchange Rates:

Approximately 62% of Waters’ 2002 net sales were outside of the United States and were primarily denominated in foreign currencies. As a result, a significant portion of the Company’s sales and operations are subject to certain risks, including adverse developments in the foreign political and economic environment, tariffs and other trade barriers, difficulties in staffing and managing foreign operations and potentially adverse tax consequences.

Additionally, the U.S. dollar value of the Company’s net sales varies with currency exchange rate fluctuations. Significant increases in the value of the U.S. dollar relative to certain foreign currencies could have a material adverse effect on Waters’ results of operations.

Reliance on Key Management:

The operation of the Company requires managerial and operational expertise. None of the key management employees has an employment contract with the Company, and there can be no assurance that such individuals will remain with the Company. If, for any reason, such key personnel do not continue to be active in management, the Company’s operations could be adversely affected.

Protection of Intellectual Property:

The Company vigorously protects its intellectual property rights and seeks patent coverage on all developments that it regards as material and patentable. However, there can be no assurances that any patents held by the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. Conversely, there could be successful claims against the Company where its intellectual property does not cover competitor products or is invalidated. See, in particular, the matter discussed in Item 3: Legal Proceedings, under “Applera Corporation.” The Company’s patents, including those licensed from others, expire on various dates. If the Company is unable to protect its intellectual property rights, it could have an adverse and material effect on the Company’s results of operations and financial conditions.

Reliance on Customer Demand:

The demand for the Company’s products is dependent upon the size of the markets for its HPLC, MS and TA products, the level of capital expenditures of the Company’s customers, the rate of economic growth in the Company’s major markets and competitive considerations. There can be no assurances that the Company’s results of operations will not be adversely impacted by a change in any of the factors listed above.

Reliance on Suppliers:

Most of the raw materials, components and supplies purchased by the Company are available from a number of different suppliers; however, a number of items are purchased from limited or single sources of supply, and disruption of these sources could have a temporary adverse effect on shipments and the financial results of the Company. The Company believes alternative sources could ordinarily be obtained to supply these materials, but a prolonged inability to obtain certain materials or components could have an adverse effect on the Company’s financial condition or results of operations and could result in damage to its relationship with its customers.

Reliance on Outside Manufacturers:

Certain components or modules of the Company’s mass spectrometry instruments are manufactured by outside long-standing contractors. Disruptions of service by these outside contractors could have an adverse effect on the supply chain and the financial results of the Company. The Company believes that it could obtain alternative sources for these components or modules, but a prolonged inability to obtain these components or modules could have an adverse effect on the Company’s financial condition or results of operations.

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Item 2: PROPERTIES

Waters operates 17 United States facilities and 79 international facilities, including field offices. The Company believes its facilities are suitable and adequate for its current production level and for reasonable growth over the next two to three years. The Company’s primary facilities are summarized in the table below.

Primary Facility Locations

Waters operates and maintains 12 field offices in the United States and 71 field offices abroad in addition to sales offices in the primary facilities listed above. The Company’s field office locations are listed below.

Field Office Locations(3)

Item 3: LEGAL PROCEEDINGS

Applera Corporation:

Reference regarding the Applera patent litigation against the Company is contained in Note 9, Patent Litigation on page 35 of this Form, included in Part II, Item 8, Financial Statements and Supplementary Data.

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Hewlett-Packard Company:

Reference regarding the Hewlett-Packard Company and Hewlett-Packard GmbH patent litigation is contained in Note 9, Patent Litigation on page 35 of this Form 10-K, included in Part II, Item 8, Financial Statements and Supplementary Data.

The Perkin-Elmer Corporation:

Reference regarding The Perkin-Elmer Corporation patent litigation is contained in Note 9, Patent Litigation on page 35 of this Form 10-K, included in Part II, Item 8, Financial Statements and Supplementary Data.

Environmental Legal Proceedings:

Reference regarding legal proceedings with the Massachusetts Department of Environmental Protection is contained in Note 10, Environmental Contingencies on page 35 of this Form 10-K, included in Part II, Item 8, Financial Statements and Supplementary Data.

Other:

Cohesive Technologies, Inc. (“Cohesive”) has brought three suits against the Company in the United States District Court of Massachusetts. Cohesive alleges that several products of the Company, which are part of a much larger product line, are an infringement of two Cohesive U.S. Patents. The Company has denied infringement of such patents and has asserted several defenses. Two of the products alleged to be an infringement are now obsolete and are no longer sold in the Unites States. During the fourth quarter of 2001, a jury returned a verdict in one of the suits finding the Company liable for infringement of one of the two patents. The Company intends to continue to vigorously defend its position. Judgment has not been entered on the jury’s verdict and further proceedings may preclude such entry. The Company believes it has meritorious positions and should prevail either through judgment or on appeal, although the outcome is not certain. The Company believes that any outcome of the proceedings will not be material to the Company.

Viscotek Corporation (“Viscotek”) has filed a civil action against the Company alleging one option offered by the Company with a high temperature gel permeation chromatography instrument is an infringement of two of its patents. These patents are owned by E. I. Du Pont de Nemours and Company (“Du Pont”) and claimed to be exclusively licensed to Viscotek. Du Pont is not a party to the suit. The Company has answered the complaint and believes it does not infringe the patents. The Company believes it has meritorious arguments and should prevail, although the outcome is not certain. The Company believes that any outcome of the proceedings will not be material to the Company.

In June 2002, Varian, Inc. (“Varian”) filed a civil action against the Company alleging trademark infringement with respect to a product the Company previously sold under the mark “Polarity”. The Company does not believe the trademark Polarity infringed the trademark rights of Varian. The Company currently sells the product under a different name. In the fourth quarter of 2002, Varian and the Company came to an agreement that the Company will not use the trademark in question.

In July 2002, the Company filed suit against Applera Corporation in a civil action alleging patent infringement on U.S. Patent No. 5,304,798 owned by the Company. The Company believes it has a meritorious claim and should prevail, although the outcome is uncertain.

In November 2002, the University of Manitoba (the “University”) and Applera Corporation brought a civil action against the Company alleging patent infringement of U.S. Patent No. 6,331,702 owned by the University. The Company believes it has a meritorious defense and should prevail although the outcome is not certain.

Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

Douglas A. Berthiaume, 54, has served as Chairman of the Board of Directors of the Company since February 1996 and has served as Chief Executive Officer and a Director of the Company since August 1994. Mr. Berthiuame also served as President of the Company from August 1994 to January 2002. In March 2003, Mr. Berthiaume once again became President of the Company. From 1990 to 1994, Mr. Berthiaume served as President of the Waters Chromatography Division of Millipore. Mr. Berthiaume is a Director of the Children’s Hospital Trust, the Analytical and Life Science Systems Association and Genzyme Corporation.

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Arthur G. Caputo, 51, became an Executive Vice President in March 2003 and has served as President of the Waters Division since January 2002. Previously, he was the Senior Vice President, Worldwide Sales and Marketing of the Company since August 1994. He joined the Predecessor in October 1977 and held a number of positions in sales within the Predecessor and Millipore. Previous roles include Senior Vice President and General Manager of Millipore’s North American Business Operations responsible for establishing the Millipore North American Sales Subsidiary and General Manager of Waters’ North American field sales, support and marketing functions.

Brian K. Mazar, 45, Senior Vice President, Human Resources, has directed Human Resources since August 1994. He joined the Predecessor in 1991 as Director of Human Resources with responsibility for worldwide human resources functions. From 1986 to 1991, Mr. Mazar was Director of Human Resources of GeneTrak Systems. Prior thereto, Mr. Mazar worked at Exxon Corporation and Corning, Inc.

John R. Nelson, 59, became Executive Vice President and Chief Technology Officer of the Company in March 2003. Previously, he was Senior Vice President, Research, Development and Engineering since August 1994. He joined the Predecessor in August 1976 and has held a variety of positions in marketing as well as research and development, including Vice President Waters Research Development and Engineering, Senior Vice President Worldwide Marketing Operations and Senior Vice President of Product Development. Mr. Nelson is also responsible for the Company’s TA Instruments, Inc. operations and he is a Director of the Analytical and Life Science Systems Association.

John Ornell, 45, became Vice President, Finance and Administration and Chief Financial Officer in June 2001. He joined Waters in 1990 and most recently was Vice President, Operations. During his years at Waters, he has also been Vice President of Manufacturing and Engineering, had responsibility for Operations Finance and Distribution and had a senior role in the successful implementation of the Company’s worldwide business systems.

David Terricciano, 47, Vice President, Operations joined Waters in 2001. Prior to joining Waters, he worked as Vice President and General Manager of Operations for Perkin-Elmer Instruments. Previously, he held a variety of positions at B.F Goodrich Aerospace and Honeywell Aerospace.

PART II

Item 5: MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company’s Common Stock is registered under the Securities Exchange Act of 1934 and is listed on the New York Stock Exchange under the symbol WAT. As of March 17, 2003, the Company had approximately 284 common stockholders of record. The Company has not declared or paid any dividends on its Common Stock in the past two years and does not plan to pay dividends in the foreseeable future.

The quarterly range of high and low sales prices for the Common Stock as reported by the New York Stock Exchange is as follows:

Information concerning securities authorized for issuance under equity compensation plans is set forth in the Proxy Statement under the heading “Matters to be Acted On” and under proposal number 2, “Approval of the 2003 Equity Incentive Plan.” Such information is incorporated herein by reference.

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Item 6: SELECTED FINANCIAL DATA

Reference is made to information contained in the section entitled “Selected Financial Data” on page 44 of this Form 10-K, included in Item 8, Financial Statements and Supplementary Data

Financial Overview

Sales grew by 4% in 2002 and by 8% in 2001. Excluding currency effects, sales grew 2% in 2002 and 11% in 2001. Sales growth, before currency effects, in both years reflected increased customer demand for new products. Sales growth in 2002 was adversely impacted by the effect of ongoing patent litigation in the U.S., as discussed below. As a result of this litigation, sales in the U.S. were down 5% while sales growth elsewhere was generally broad-based geographically. Reported operating income for 2002 and 2001 was $196.4 million and $149.5 million, respectively. Operating income, excluding provisions for litigation of $7.9 million, an impairment charge of $2.4 million and restructuring and other unusual charges of $7.4 million, for 2002 was $214.2 million, a 5% decrease from the $224.5 million, excluding provisions for litigation of $75.0 million, generated in 2001. The Company remained essentially debt-free while generating all-in cash flow of $84.9 million. All-in cash flow is the increase of cash, including changes in restricted cash, plus the reduction of debt. In February 2002, the Company entered into an agreement to replace its existing credit facility. The new credit facility provides a $250.0 million line of credit and is unsecured.

In March 2002, the Company was informed, as a result of a jury’s finding on a civil action filed by competitors, that the Quattro Ultima triple quadrupole mass spectrometer sold in the U.S. infringes on their U.S. patent. The jury has determined damages in the amount of $47.5 million. In March 2003, the infringement in the U.S. was affirmed on appeal, including damages and interest of approximately $54.0 million. Similar claims have been asserted against the Company in other countries and there is a possibility that claims may be made with respect to other products in the mass spectrometry line. The Company recorded a $75.0 million patent litigation charge in the fourth quarter of 2001 as a result of this matter including interest, court costs, legal fees and other charges. An additional provision of $2.8 million was recorded in the first quarter of 2002 relating to current year sales. The amounts recorded represent the Company’s best estimate of its exposure based on information currently available.

During 2002, approximately 62% of the Company’s combined net sales were derived from operations outside the United States. The Company believes that the geographic diversity of its sales reduces its dependence on any particular region. The U.S. dollar value of these revenues varies with currency exchange fluctuations, and such fluctuations can affect the Company’s results from period to period.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Net Sales:

Net sales for 2002 were $890.0 million and were an increase of 4% compared to $859.2 million for 2001. Excluding the favorable effects of a weaker U.S. dollar, 2002 net sales increased by 2% over 2001. The Company’s HPLC product line performed well across all major geographies with overall sales growth in the high single digits, excluding currency effects. In particular, the Company experienced an increase of approximately 19% in service revenue, primarily due to additional service plan revenues from the Company’s installed customer base. The Company’s mass spectrometry product line was affected in the U.S. by the March 2002 unfavorable patent litigation ruling involving sales of certain mass spectrometry products. Overall mass spectrometry sales decreased by a mid single-digit rate in 2002, excluding currency effects. Thermal analysis sales were up slightly in 2002. Currency increased reported sales growth in 2002 by two percentage points primarily due to the strengthening of the euro and British pound.

Gross Profit:

Gross profit for 2002 was $516.5 million compared to $497.3 million for 2001, an increase of $19.2 million or 4%. Gross profit as a percentage of sales increased to 58.0% in 2002 from 57.9% in 2001. These gross profit amounts and gross profit percentages reflect a reclassification of certain labor and related costs associated with service revenues that were previously classified in operating expenses and included in selling, general and administrative expenses. The Company experienced a higher mix of sales of more profitable consumables and services in 2002 as well as reductions in HPLC manufacturing costs due to lower material costs. In addition, the Company acquired the businesses of its Irish and Korean distributors in early 2002 and mid- 2001, respectively. As such, the incremental profit from direct billings have increased gross profit and gross profit percentages in 2002, as well as operating expenses. The Company experienced an increase in service labor costs, offsetting some of the above-mentioned increases in gross profit and gross profit percentage.

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Selling, General, and Administrative Expenses:

Selling, general and administrative expenses for 2002 and 2001 were $246.8 million and $219.0 million, respectively. As a percentage of net sales, selling, general and administrative expenses increased to 27.7% for 2002 from 25.5% for 2001 after considering the reclassification of certain labor and related costs discussed above. The $27.8 million or 13% increase primarily resulted from increased headcount and related costs required to support anticipated increased current and future sales levels, including the acquisitions of Irish and Korean distributor businesses. Headcount rose from 2,133 at December 31, 2001 to 2,230 at December 31, 2002 or 5%. In addition, the Company recorded an increase of approximately $2.5 million in patent defense costs during 2002. The Company changed its method of accounting for legal costs associated with litigating patents effective January 1, 2002 and current year patent related expenses are recorded in selling, general and administrative expenses. The Company also recorded a provision of $1.5 million for estimated damages incurred with respect to ongoing patent infringement litigation during 2002. Expenses also slightly increased due to the effects of currency translation. Foreign currency transaction gains and losses were negligible in fiscal year 2002.

Research and Development Expenses:

Research and development expenses were $51.9 million for 2002 and $46.6 million for 2001, an increase of $5.3 million or 11%. The Company continued to invest significantly in the development of new and improved HPLC, mass spectrometry, thermal analysis and rheology products.

Goodwill and Purchased Technology Amortization:

Goodwill and purchased technology amortization for 2002 was $3.6 million compared to $7.1 million for 2001, a decrease of $3.5 million or 50%. The change was primarily related to the elimination of goodwill amortization in 2002 in accordance with recently adopted accounting standards.

Litigation Provisions:

The Company recorded $2.8 million and $75.0 million for the Applera patent litigation in 2002 and 2001, respectively. The 2002 charge of $2.8 million was for additional liabilities associated with related product sales made in 2002 prior to the day of the jury’s verdict in March 2002. In addition, in the fourth quarter of 2002, the Company recorded a litigation provision of $5.1 million relating to an estimated settlement of an outstanding case with the Massachusetts Department of Environmental Protection regarding the Company’s Taunton, Massachusetts facility. The provisions represent management’s best estimate of the probable and reasonably estimable loss related to this litigation.

Impairment of Long-Lived Asset:

In 2002, the Company recorded a $2.4 million charge for an other-than-temporary impairment of its technology license asset with Varigenics, as the technology collaboration program was discontinued. There was no such charge in 2001.

Restructuring and Other Unusual Charges:

The Company recorded $7.4 million of charges in the fourth quarter of 2002 for restructuring and other specific incremental charges relating to its integration of the worldwide sales, service and distribution groups of the Micromass division with the Waters HPLC division. The charges in 2002 include severance costs for 42 people, cancellation penalties for distributor contracts, facility closure costs and other specific incremental costs related to this integration. The objective of this strategy is to leverage the strengths of both divisions and align operating expenses to a more rational level as a percentage of sales. There was no such charge in 2001.

The following table provides additional information about the 2002 restructuring and other unusual charges:

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Operating Income:

Operating income for 2002 was $196.4 million compared to $149.5 million for 2001. This increase of $46.9 million or 31% for the year is primarily attributed to the decrease in litigation provisions from $75.0 million to $7.9 million, an increase in sales and the elimination of goodwill amortization in 2002. Offsetting the increase in operating income is an increase in operating expenses including $7.4 million for restructuring and other unusual charges associated with the integration of the worldwide sales, service and distribution groups of the Micromass division with the Waters HPLC division and a $2.4 million charge of an other-than-temporary impairment of a long-lived asset. Operating expenses grew faster than sales as the Company has yet to realize the full benefits of the combination of the Micromass and HPLC field operations.

Other Income (Expense), Net:

In 2002, the Company recorded $13.7 million in pre-tax charges for other-than-temporary impairments to the carrying amounts of certain equity investments, including investments in Geneprot and Variagenics. The impairment charges were offset by a $7.7 million termination fee received from Geneprot for cancellation of its $20.0 million order. In 2001, the Company recorded a $7.1 million pre-tax charge for an other-than-temporary impairment to the carrying amount of certain equity investments, primarily its investment in Variagenics.

Interest Income (Expense), Net:

Net interest income for 2002 and 2001 was $5.0 million for both years. The Company experienced an increase in interest income due to higher cash balances in 2002, offset by an increase in interest expense due to accrued post-judgment interest associated with the Applera patent litigation.

Provision for Income Taxes:

The Company’s effective income tax rate was 22.1% in 2002 and 22.3% in 2001. The 2002 tax rate decreased primarily due to the continued favorable shift in the mix of taxable income to lower tax rate jurisdictions.

Income before Cumulative Effect of Change in Accounting Principle:

Income before the cumulative effect of an accounting change for 2002 and 2001 was $152.2 million and $114.5 million, respectively, resulting in an increase of $37.7 million or 33%. The increase is primarily due to the decrease in litigation provisions from $75.0 million to $7.9 million, an increase in sales and the elimination of goodwill amortization in 2002. Offsetting this increase is an increase in operating expenses including $7.4 million for restructuring and other unusual charges associated with the integration of the worldwide sales, service and distribution groups of the Micromass division with the Waters HPLC division and a $2.4 million charge of an other-than-temporary impairment of a long-lived asset. Operating expenses grew faster than sales as the Company has yet to realize the full benefits of the combination of the Micromass and HPLC field operations.

Cumulative Effect of Change in Accounting Principle:

In 2002, the method of accounting for patent related costs associated with patent litigation was changed effective January 1, 2002 from a method of capitalizing the patent related costs and amortizing them over their estimated remaining economic life, to expensing the costs as incurred. The Company believes that this change is preferable because it will provide a better comparison with the Company’s industry peers, the majority of which expense these costs as incurred. The $4.5 million cumulative effect of the change on prior years (after reduction for income taxes of $1.3 million) is included as a charge to net income for 2002.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Net Sales:

Net sales for 2001 were $859.2 million and were an increase of 8% compared to $795.1 million for 2000. Excluding the adverse effects of a stronger U.S. dollar in 2001, particularly with the euro and the Japanese yen, 2001 net sales increased by 11% over 2000. Overall orders and sales reflected continued strong demand across all major geographies especially from life science customers. HPLC and MS sales in 2001 grew slightly more than 10% in constant currencies over 2000 while TA sales were flat. Order backlog remained unchanged for the year. Sales of high-end mass spectrometry products were strong for 2001 in all of the Company’s life science applications.

Gross Profit:

Gross profit for 2001 was $497.3 million compared to $464.1 million for 2000, an increase of $33.2 million or 7%. Gross profit as a percentage of sales decreased to 57.9% in 2001 from 58.4% in 2000. These gross profit amounts and gross profit percentages reflect a reclassification of certain labor and related costs associated with service revenues that were previously

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classified in operating expenses and included in selling, general and administrative expenses. The decrease in the gross profit percentage was primarily due an increase in service labor costs and to some extent the adverse effects of currency translation to the Company’s sales. The decrease in the gross profit percentage was offset by productivity improvements realized from volume growth and cost savings efficiencies, and a modest shift in sales mix toward higher margin chemistry and service product lines.

Selling, General, and Administrative Expenses:

Selling, general and administrative expenses for 2001 and 2000 were $219.0 million and $203.7 million, respectively. As a percentage of net sales, selling, general and administrative expenses decreased slightly to 25.5% for 2001 from 25.6% for 2000 after considering the reclassification of certain labor and related costs discussed above. The $15.3 million or 8% increase in 2001 resulted primarily from increased headcount, particularly in after-sales technical support within the Company’s mass spectrometry business. Headcount rose from 1,895 at December 31, 2000 to 2,133 at December 31, 2001 or 13%. This increase in headcount and related costs were required to support increased current and future sales levels, and were slightly reduced by the effects of currency translation. Foreign currency transaction gains and losses were negligible in fiscal year 2001.

Research and Development Expenses:

Research and development expenses were $46.6 million for 2001 and $42.5 million for 2000, an increase of $4.1 million or 10%. The Company continued to invest significantly in the development of new and improved HPLC, mass spectrometry, thermal analysis and rheology products.

Goodwill and Purchased Technology Amortization:

Goodwill and purchased technology amortization was $7.1 million for both 2001 and 2000 as there was relatively no change in the nature or amortization periods of the asset components. In 2002, goodwill amortization ceased in accordance with recently issued accounting standards. Goodwill amortization was approximately $4.0 million in 2001.

Litigation Provisions:

In 2001, the Company recorded a $75.0 million pre-tax charge for patent litigation as more fully described in Note 9 of the financial statements. There was no such charge in 2000.

Operating Income:

Operating income for 2001, excluding a provision for patent litigation, was $224.5 million compared to $210.8 million for 2000. This increase of $13.7 million or 6% for the year is attributed to production efficiencies and continued focus on cost controls in all operating areas. Operating income as a percentage of sales decreased slightly from 26.5% in 2000 to 26.1% in 2001 essentially due to marginal increases in operating expenses in relation to sales growth unfavorably impacted by currency translation.

Other Income (Expense), Net:

In 2001, the Company recorded a $7.1 million pre-tax charge for an other-than-temporary impairment to the carrying amount of certain equity investments. There was no such charge in 2000.

Interest Income (Expense), Net:

Net interest income for 2001 and 2000 was $5.0 million and $0.1 million, respectively. The change primarily reflected the elimination of debt under the Company’s Bank Credit Agreement during 2000 and interest earned on investments of cash generated from the Company’s positive cash flow, offset slightly by lower yields.

Provision for Income Taxes:

The Company’s effective income tax rate was 22.3% in 2001 and 26% in 2000. The 2001 tax rate decreased primarily due to the continued favorable shift in the mix of taxable income to lower tax rate jurisdictions and tax benefits provided by the provision for patent litigation.

Income before Cumulative Effect of Change in Accounting Principle:

Net income before the cumulative effect of an accounting change for 2001 and 2000 was $114.5 million and $156.1 million, respectively, resulting in a decrease of $41.6 million or 27%. The decrease was primarily due to a $75.0 million pre-tax charge against income in 2001 for patent litigation and, to a certain extent, the unfavorable impact of currency translation offset by sales growth, favorable interest income dynamics and the impact of a decrease in the Company’s effective income tax rate.

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Liquidity and Capital Resources

During 2002, net cash provided by the Company’s operating activities was $219.6 million, primarily as a result of net income for the year of $147.7 million after adding back depreciation of $26.0 million, amortization of intangible assets of $11.2 million and non-cash impairment charges of $16.1 million. The $219.6 million is an increase of $30.4 million over 2001 and is primarily due to the increase in the Company’s net income. Working capital for 2002 was $316.2 million, relatively flat with 2001, excluding the increase in cash.

In terms of working capital and after excluding the effects of currency translation, $1.8 million was used as accounts receivable grew relatively proportionate to sales growth. Days-sales-outstanding stood at 70 days at December 31, 2002 compared to 67 days at December 31, 2001, with the increase mainly attributed to the effects of currency translation. Approximately $4.6 million was used for inventory growth related to current sales expectations. Within liabilities, an increase in accounts payable and other current liabilities, and deferred revenue and customer advances provided $6.4 million. In addition, from financing activities, the Company received $11.3 million of proceeds from the exercise of stock options and its employee stock purchase plan.

Primary uses of cash flow during the year were $99.3 million for the purchase of treasury shares, $20.4 million for investments in unaffiliated companies and business acquisitions and $38.0 million of property, plant and equipment and software capitalization investments. Approximately $49.9 million of cash was reclassed to restricted cash during the period in connection with the standby letter of credit issued by the Company with respect to the unfavorable judgment in the Applera patent litigation. In March 2003, the unfavorable judgment was upheld in appeals court; the Company is expected to pay approximately $54.0 million in damages, including interest, in the second quarter of 2003. Cash held as restricted will no longer be required once payment has been made.

The Company believes that the existing cash and cash equivalent balance of $263.3 million and expected cash flow from operating activities together with borrowings available from its credit facility will be sufficient to fund working capital, capital spending requirements, and any adverse final determination of ongoing litigation in the foreseeable future. It is the Company’s intention to continue to purchase the remaining $100.7 million in treasury shares available under its stock repurchase program during the first half of 2003. Because the repurchases are made in the U.S. only, the Company may have borrowings against its credit facility in 2003.

Commitments:

The Company paid $19.3 million in the first quarter of 2003 for acquisitions. The Company also has various ongoing license and collaboration agreements in conjunction with its research and development efforts. Capital expenditures in 2003 are expected to be similar to 2002 levels. The Company has commitments for lease agreements, expiring at various dates through 2019, covering certain buildings, office equipment and automobiles. Future minimum rents payable as of December 31, 2002 under non-cancelable leases with initial terms exceeding one year are $13.8 million, $11.9 million, $8.8 million and $5.4 million for the years 2003, 2004, 2005 and 2006, respectively. Future minimum rents payable from 2007 through 2019 are $21.6 million.

The Company is not aware of any undisclosed risks and uncertainties, including but not limited to product technical obsolescence, regulatory compliance, protection of intellectual property rights, changes in pharmaceutical industry spending, competitive advantages, current and pending litigation, and changes in foreign exchanges rates, that are reasonably likely to occur and could materially and negatively affect the Company’s existing cash balance or its ability to borrow funds from its credit facility. The Company also believes there are no provisions in the new credit facility, its real estate leases, and supplier and collaborative agreements that would accelerate payments, require additional collateral or impair its ability to continue to enter into critical transactions. As a publicly held company, the Company has not paid any dividends and does not plan to pay any dividends in the foreseeable future.

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Critical Accounting Policies and Estimates

Summary:

The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, Waters evaluates its estimates, including those related to revenue recognition, product returns and allowances, bad debts, inventory valuation, equity investments, goodwill and intangible assets, income taxes, warranty and installation provisions, contingencies and litigation. Waters bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition:

Sales of products and services are generally recorded based on product shipment and performance of service, respectively. Partial proceeds received in advance of product shipment or performance of service are recorded as deferred revenue in the consolidated balance sheets. Once the product is shipped all advance payments received associated with that particular order are reclassified to accounts receivable to offset against the customer invoice. Shipping and handling costs are included in cost of sales net of amounts invoiced to the customer per the order. The Company’s products generally carry one year of warranty. These costs are accrued at the point of shipment. Once the warranty period has expired, the customer may purchase a service contract. Service contract billings are generally invoiced to the customer at the beginning of the contract term, and revenue is amortized on a straight-line basis over the contract term. At December 31, 2002, the Company had a deferred revenue liability of $52.1 million.

Product shipments, including those for demonstration or evaluation, and service contracts are not recorded as revenues until a valid purchase order or master agreement is received specifying fixed terms and prices. Revenues are adjusted accordingly for changes in contract terms or if collectibility is not reasonably assured. Revenue related to installation of certain products is deferred when the product is shipped and recognized when installation is complete. The larger of the contractual cash holdback or the fair value of the installation service is deferred and recognized under a multiple element arrangement in accordance with SAB 101. The Company changed its method of revenue recognition for products requiring installation effective January 1, 2000. Previously, the Company recognized revenue related to both the sale and the installation of certain products at the time of shipment and accrued all associated costs. Estimates of the fair value of installation revenue deferred are based on comparable values from contracts in the same product family where installation is quoted or billed separately.

Loss Provisions on Accounts Receivable and Inventory:

Waters maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Waters does not request collateral from its customers but collectibility is enhanced through the use of credit card payments and letters of credit. The Company assesses collectibility based on a number of factors including, but not limited to, past transaction history with the customer, the credit-worthiness of the customer, independent credit reports, industry trends and the macro-economic environment. Sales returns and allowances are estimates of future product returns related to current period revenue. Material differences may result in the amount and timing of revenue for any period if management made different judgments or utilized different estimates for sales returns and allowances for doubtful accounts. The Company’s accounts receivable balance at December 31, 2002 was $198.3 million, net of allowances for doubtful accounts and sales returns of $5.8 million. Historically, the Company has not experienced significant bad debt losses.

Waters values all of its inventories at the lower of cost or market on a first-in, first-out basis (“FIFO”). Waters estimates revisions to its inventory valuations based on technical obsolescence, historical demand, projections of future demand including that in the Company’s current backlog of orders, and industry and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional write-downs may be required. The Company’s inventory balance at December 31, 2002 was $111.6 million, net of write-downs to net realizable value of $11.0 million. The Company wrote-down inventory in 2002 by approximately $2.0 million to reflect decreased net realizable value for mass spectrometry inventory.

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Valuation of Equity Investments:

Waters holds minority equity interests in companies having operations or technology in areas within its strategic focus, some of which are publicly traded and have highly volatile share prices. For investments where the company is not publicly traded, the Company obtains and reviews quarterly and annual financial statements and progress of technological expectations. The Company records an investment impairment charge when it believes an investment has experienced a decline in value that is other-than-temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future. In the second quarter and fourth quarter of 2002, the Company recorded a $7.6 million and $6.1 million charge, respectively, to other expense, in the consolidated statements of operations, for the impairment of certain equity investments. At December 31, 2002, the Company had equity investments totaling $15.7 million included in other assets on the balance sheet.

Long-Lived Assets, Intangible Assets and Goodwill:

The Company assesses the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important which could trigger an impairment review include but are not limited to the following:

When the Company determines that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon the existence of one or more of the above indicators, it measures any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the Company’s current business model. Net intangible assets, long-lived assets, and goodwill amounted to $346.7 million as of December 31, 2002. In 2002, Statement of Financial Accounting Standards (“SFAS”) 142, Goodwill and Other Intangible Assets became effective and as a result, the Company ceased amortization of approximately $163.5 million of goodwill as of December 31, 2001. The Company had recorded approximately $4.0 million of amortization on these amounts during 2001 and would have recorded approximately the same amount of amortization in 2002. In lieu of amortization, the Company was required to perform an initial impairment review of its goodwill in 2002 and is required to perform an annual impairment review thereafter. The Company completed its initial review during the first half of 2002 and currently does not expect to record an impairment charge in the foreseeable future. However, there can be no assurance that at the time future reviews are completed, a material impairment charge will not be recorded.

Warranty:

Product warranties are recorded at the time revenue is recognized for certain product shipments. While Waters engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the Company’s previous estimates, revisions to the estimated warranty liability would be required. At December 31, 2002, the Company’s warranty liability was $9.6 million.

Income Taxes:

As part of the process of preparing the consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves the Company estimating its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation, amortization, and inventory reserves, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes that recovery is not likely, the Company must establish a valuation allowance. In the event that actual results differ from these estimates, or the Company adjusts these estimates in future periods, the Company may need to establish an additional valuation allowance which could materially impact its financial position and results of operations.

The Company has realized significant income tax benefits associated with the exercise of its nonqualified stock options. The corresponding credit was to additional paid-in-capital. Because of the outstanding stock options, the Company believes that it is more likely than not that the U.S. deferred tax assets will not be realized, therefore, a valuation allowance has reduced to zero all the deferred tax assets relating to U.S. income. The remaining net deferred tax assets of $2.6 million at December 31, 2002 relate to foreign deferred tax assets that are expected to be utilized.

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Litigation:

As described in Item 3 of this Form 10-K, the Company is a party to various pending litigation matters. With respect to each pending claim, management determines whether it can reasonably estimate whether a loss is probable and, if so, the probable range of that loss. If and when management has determined, with respect to a particular claim, both that a loss is probable and that it can reasonably estimate the range of that loss, the Company records a charge equal to either its best estimate of that loss or the lowest amount in that probable range of loss. The Company will disclose additional exposures when the range of loss is subject to considerable interpretation.

With respect to the claims referenced in Item 3, management of the Company to date has been able to make both of these determinations, and thus has recorded charges with respect to the claims described under the heading “Applera Corporation”, “Hewlett-Packard Company” and “Environmental Legal Proceedings.” As developments occur in these matters and additional information becomes available, management of the Company will reassess the probability of any losses and of their range, which may result in its recording charges or additional charges, which could materially impact the Company’s results of operation or financial position.

Recent Accounting Standards Changes

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment to SFAS 123. SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation to provide alternative methods of transition to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years ending after December 15, 2002 with respect to the alternative transition methods permitted and the annual disclosures required. The disclosure provisions for interim financial information is effective for all periods presented in financial reports containing financial statements for interim periods beginning after December 15, 2002. Management has not yet evaluated the alternative transition methods if it were to adopt SFAS 123 under this new standard, however, the Company has complied with all current disclosure requirements.

In November 2002, the FASB issued Interpretation (“FIN”) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB 5, 57 and 107 and Rescission of FIN 34. FIN 45 requires that guarantors recognize a liability for certain types of guarantees equal to the fair value of the guarantee upon its issuance. FIN 45 also requires increased disclosure of guarantees, including product warranty information. The disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods that end after December 15, 2002. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. The Company has adopted the disclosure provisions of FIN 45. The Company does not expect the application of FIN 45, as it relates to initial recognition and measurement of an obligation, to have a material impact on its financial position or results of operations.

In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (“EITF”) has set forth in EITF Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The scope of SFAS 146 also includes (1) costs related to terminating a contract that is not a capital lease, (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract and (3) costs to consolidate facilities or relocate employees. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. Early application is encouraged. The Company does not expect the application of SFAS 146 to have a material impact on its financial position or results of operations.

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Item 7a: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to financial risk in several areas including changes in foreign exchange rates and interest rates. The Company attempts to minimize its exposures by using certain financial instruments, for purposes other than trading, in accordance with the Company’s overall risk management guidelines. Further information regarding the Company’s accounting policies for financial instruments and disclosures of financial instruments can be found in Notes 2 and 7 to the Company’s consolidated financial statements.

Foreign Exchange

The Company has operations in various countries and currencies throughout the world. As a result, the Company’s financial position, results of operations and cash flows can be affected by fluctuations in foreign currency exchange rates. The Company uses debt swap agreements and forward foreign exchange contracts to partially mitigate such effects, and these agreements are designated as foreign currency hedges of a net investment in foreign operations. The debt swap agreements effectively swap higher U.S. dollar fixed rate borrowings for lower fixed rate borrowings denominated in the respective currencies. During 2002, the Company opened and subsequently closed debt swap agreements in Japanese yen. In December 2002, the Company entered into new debt swap agreements in Japanese yen, with notional amounts totaling $25.0 million, with terms of three months and an interest rate of .07%. For the year ended December 31, 2002, the Company recorded cumulative net pre-tax losses of $1.0 million in accumulated other comprehensive income (loss), which consisted of realized losses of $1.4 million relating to the closed debt swap agreements and unrealized gains of $.4 million relating to the new Japanese yen swap agreements, both of which partially offset hedged foreign exchange impacts. In December 2002, the Company also opened forward foreign exchange contracts in British pounds with notional amounts totaling $40.0 million and terms of forty-five days. For the year ended December 31, 2002, the Company recorded unrealized gains of $.3 million in accumulated other comprehensive income (loss) relating to these forward foreign exchange contracts. At December 31, 2001, the Company held debt swap agreements in Japanese yen with notional amounts totaling $27.0 million, with terms of three months and an interest rate of .15%. For the year ended December 31, 2001, the Company recorded cumulative net pre-tax gains of $7.8 million in accumulated other comprehensive income (loss), which consisted of realized gains of $6.8 million and unrealized gains of $1.0 million.

Assuming a hypothetical adverse change of 10% in year-end exchange rates (a weakening of the U.S. dollar), the fair market value of the debt swap agreements as of December 31, 2002 would decrease by $2.5 million.

The Company also enters into forward foreign exchange contracts, principally to hedge the impact of currency fluctuations on certain intercompany balances. Principal hedged currencies include the euro and British pound. The periods of these forward contracts typically range from one to three months and have varying notional amounts which are intended to be consistent with changes in intercompany balances. Gains and losses on these forward contracts are recorded in selling, general and administrative expenses in the consolidated statement of operations. At December 31, 2002 and December 31, 2001, the Company held forward foreign exchange contracts with notional amounts totaling approximately $69.0 million and $54.1 million, respectively.

Interest Rates

The Company is exposed to the risk of interest rate fluctuations when borrowing in connection with its credit agreement. As a result, the Company may periodically attempt to minimize its interest rate exposures by using certain financial instruments such as interest swap agreements for the purposes other than trading. At December 31, 2002 and 2001, there were no outstanding interest swap agreements.

The Company is exposed to the risk of interest rate fluctuations from the investments of cash generated from operations. The Company’s cash equivalents represent highly liquid investments, with original maturities of 90 days or less, in repurchase agreements and money market funds. Cash equivalents are convertible to a known amount of cash and carry an insignificant risk of change in value. The Company periodically maintained balances in various operating accounts in excess of federally insured limits.

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Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Accountants

To the Board of Directors and Stockholders of Waters Corporation:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and comprehensive income, and of cash flows present fairly, in all material respects, the financial position of Waters Corporation and Subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the accompanying financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for patent related costs in 2002 and changed its method of revenue recognition in 2000. Also discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for goodwill to conform with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” in 2002.

/s/    PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Boston, Massachusetts

January 28, 2003, except as to Note 20

which is as of March 11, 2003

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Table of Contents

Waters Corporation and Subsidiaries

Consolidated Balance Sheets

The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents

Waters Corporation and Subsidiaries

Consolidated Statements of Operations

The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents

Waters Corporation and Subsidiaries

Consolidated Statements of Cash Flows

The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents

Waters Corporation and Subsidiaries

Consolidated Statements of Stockholders’ Equity and Comprehensive Income