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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

     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 þ          No o

     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.     þ

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

     State the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2004: $6,754,498,394.

     Indicate the number of shares outstanding of the registrant’s common stock as of March 10, 2005: 117,831,688.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the proxy statement for the 2005 Annual Meeting of Stockholders are incorporated by reference in Part III.

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WATERS CORPORATION AND SUBSIDIARIES

ANNUAL REPORT ON FORM 10-K

INDEX

PART I

Item 1:     Business

General

Waters Corporation, (“Waters” or the “Company”) an analytical instrument manufacturer, designs, manufactures, sells and services, through its Waters Division, high performance liquid chromatography (“HPLC”), ultra performance liquid chromatography (“UPLC”) together with HPLC, herein referred to as (“LC”) and mass spectrometry (“MS”) instrument systems and associated service and support products, including chromatography columns and other consumable products. Additionally, and as a result of the acquisitions by Waters Division of Creon Lab Control AG (“Creon”) in July 2003 and NuGenesis Technologies Corporation (“NuGenesis”) in February 2004, the Company entered the laboratory informatics market (“Laboratory Informatics”), which consists of laboratory-to-enterprise scale software systems for managing and storing scientific information collected from a wide variety of instrument test methods. Through its TA Instruments Division (“TA”), the Company designs, manufactures, sells and services thermal analysis and rheometry instruments which are used in predicting the suitability of polymers and viscous liquids for various industrial, consumer goods and health care products. The Company is also a developer of and supplier of software based products which interface with the Company’s instruments and are typically purchased by customers as part of the instrument system.

      The Company’s products are used by pharmaceutical, life science, biochemical, industrial, academic and government customers working in research and development, quality assurance and other laboratory applications. The Company’s LC instruments are utilized in this broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials as well as to purify a full range of compounds. MS instruments are used in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”), food safety analyses and environmental testing. The Company’s thermal analysis and rheometry instruments are used in predicting the suitability of fine chemicals and polymers for uses in various industrial, consumer goods and health care products.

      Waters is a holding company that owns all of the outstanding common stock of Waters Technologies Corporation, its operating subsidiary. The Company previously operated as the Waters Chromatography division of Millipore Corporation, prior to a management buyout of the division that became effective on August 18, 1994. Waters became a publicly traded company with its initial public offering (“IPO”) in November 1995. Since the IPO, the Company has added two significant and complementary technologies to its range of products with the acquisitions of Micromass Limited (“Micromass”) in September 1997 and TA in May 1996.

Business Segments

The Company evaluated its business activities that are regularly reviewed by the Chief Executive Officer for which discrete financial information is available. As a result of this evaluation, the Company determined that it has two operating segments: Waters Division and TA Division.

      As indicated above, the Company operates in the analytical instruments industry, manufacturing, distributing and servicing products in three complementary technologies: LC instruments, columns and other consumables, MS, and thermal analysis and rheometry instruments. Laboratory Informatics consists of laboratory-to-enterprise scale software systems for managing and storing scientific information collected from a wide variety of LC and MS instrument test methods and is an integral product line within the Waters Division.

      The Company’s two operating segments, Waters Division and TA, have similar economic characteristics, product processes, products and services, types and classes of customers, methods of distribution, and regulatory environments. Because of these similarities, the two segments have been aggregated into one reporting segment for financial statement purposes.

Waters Division

High Performance and Ultra Performance Liquid Chromatography

Developed in the 1950’s, HPLC is the standard technique used to identify and analyze the constituent components of a variety of chemicals and other 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.

      The most significant end-use markets for HPLC are those served by the pharmaceutical and life science industries. In these markets, HPLC is used extensively to identify new drugs, to develop manufacturing methods, and to assure the potency and purity of new pharmaceuticals. HPLC is also used in a variety of other applications such as the identification of food content for nutritional labeling in the food and beverage industry, the testing of water and air purity within the environmental testing industry, as well as applications in other industries, such as chemical and consumer products. HPLC is also used by universities, research institutions and government agencies, and in many instances, the United States Food and Drug Administration (“FDA”) and the United States Environmental Protection Agency (“EPA”), and their international counterparts, mandate testing that requires HPLC instrumentation.

      A complete HPLC system consists of five basic components: solvent delivery system, sample injector, separation column, detector and data acquisition unit. The solvent delivery system pumps the solvent through the HPLC system, while the sample injector introduces the sample into the solvent flow. The chromatography 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, usually referred to as the instrument’s software or data system, then records and stores the information from the detector.

      The primary “consumable products” for HPLC are chromatography columns. These columns are packed with separation media used in the HPLC testing process and are replaced at regular intervals. The chromatography column contains one of several types of packing, typically stationary phase particles made from silica. As the sample flows through the column, it is separated into its constituent components.

      Waters columns can be used on Waters branded as well as competitors’ HPLC systems. The Company believes that it is one of the few suppliers in the world that processes silica, packs columns and distributes its own products. In doing so, the Company believes it can better ensure product consistency, a key attribute for its customers in quality control laboratories, and react quickly to new customer requirements.

      During 2003 and 2004, the Company experienced growth in its HPLC chromatography column and sample preparation businesses, especially in the Xterra^tm and Atlantis^tm columns as well as in Oasis^tm sample preparation cartridges, all newly introduced in 2003. In 2004, the Company introduced a new column brand called Sunfire^tm.

      Based upon reports from independent marketing research firms and publicly disclosed sales figures from competitors, the Company believes that it is the world’s largest manufacturer and distributor of HPLC instruments, chromatography columns and other consumables and related services. The Company also believes that it has the leading HPLC market share in the United States, Europe and non-Japan/ Asia and believes it has a leading market share position in Japan.

      Waters manufactures HPLC instruments that are offered in configurations that allow for varying degrees of automation, from Breeze^tm systems for academic research applications to fully automated Alliance®2795 systems for high speed screening, and with a variety of detection technologies, from UV absorbance to MS, optimized for certain analyses. In 2003, the Company introduced new application tailored HPLC systems for the analysis of biologics as well as a new HPLC detector utilizing evaporative light scattering technology to expand the usage of HPLC to compounds that are not amenable to UV absorbance detection.

      In March 2004, Waters introduced a novel HPLC-type technology that the Company described as Ultra-Performance Liquid Chromatography which utilizes a packing material with narrow diameter particles and a specialized instrument, the ACQUITY UPLC^tm, to accommodate the increased pressure and narrow

chromatographic bands that are generated by these small particles. By using UPLC and the ACQUITY instrument, researchers and analysts are able to achieve more comprehensive chemical separations and faster analysis times in comparison with many analyses performed by HPLC. In addition, in using UPLC, researchers have the potential to extend the range of application beyond that of HPLC, enabling the uncovering of new levels of scientific information. Though UPLC and the ACQUITY instrument are an extension of HPLC, the instrument is compatible with the Company’s software products and the general operating protocols of HPLC. For these reasons, the Company’s customers and field sales and support organizations are well positioned to utilize this new technology and instrument. The Company began shipping the ACQUITY UPLC system for demonstration and evaluation in the second quarter of 2004, with a normalized shipping plan, similar delivery schedules as compared to HPLC products, beginning in the third quarter of 2004.

      The servicing and support of LC instruments and accessories is an important source of revenue for the Waters Division. These revenues are derived primarily through the sale of support plans, demand service, customer training and performance validation services. Support plans most typically involve scheduled instrument maintenance, a commitment to supply software and firmware upgrades and an agreement to promptly repair a non-functioning instrument in return for a fee described in a one or two year contract that is priced according to the configuration of the instrument.

      In the third quarter of 2003, Waters expanded its data management product lines through the acquisition of Creon and further enhanced its capability in this area through the acquisition of NuGenesis in the first quarter of 2004. These new Laboratory Informatics software products available for sale by the Waters Division as a result of these acquisitions expand the range of the Company’s information management offerings. The Company’s existing server based software products, Millenium® and Empower^tm, are now augmented by the addition of Creon’s internet or “web” based software that enables the reporting of scientific data sourced from a broader array of instruments.

      Broadly defined, Laboratory Informatics products are involved with the safe keeping and organization of laboratory procedures and experimental results. The products developed by Creon and NuGenesis are software-based systems designed to accommodate the general information archiving and retrieving needs of laboratories involved in instrumental analyses, typically within pharmaceutical, chemical and academic institutions. Customers buying these products are often using them to replace paper-based or internally developed (home grown) software-based systems that lack the capacity, security and ease of use that is either desired or required. The Company feels it has retained the development resources from the acquired companies to ensure continued leadership in this emerging market and plans to continue selling and supporting its informatics customers through the worldwide field-based resources of the Waters Division augmented by a smaller group of specialists.

      In 2004, the Company introduced a new informatics product, the Electronic Laboratory Notebook, (“eLab Notebook^tm”), designed to replace and augment the paper-based safekeeping and archiving of laboratory procedures and results. In combination with the Company’s Scientific Data Management System (“SDMS”) product, eLab Notebook functions as a portal to laboratory scale information storage and retrieval systems as well as a flexible and personally manageable notation and display device. The pricing of eLab Notebook is based upon the number of users or seats that the customer decides to purchase. The Company began shipping eLab Notebook in the fourth quarter of 2004.

Mass Spectrometry

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.

      The Company believes it is a market leader in the development, manufacture, sale and distribution of MS instruments. These instruments can be integrated and used along with other complementary analytical instruments and systems such as HPLC, UPLC, chemical electrophoresis, chemical electrophoresis chromatography, gas chromatography and elemental analysis systems. A wide variety of instrumental designs fall

within the overall category of MS instrumentation including devices that incorporate quadrupole, ion trap, time of flight (“Tof”) and classical magnetic sector technologies. Furthermore, these technologies are often used in tandem to maximize the efficacy of certain experiments.

      Currently, the Company offers and provides service, support and training for a wide range of MS instruments utilizing various combinations of quadrupole, Tof and magnetic sector designs. These instruments are used in drug discovery and development as well as for environmental testing. The majority of mass spectrometers sold by Waters are designed to utilize an HPLC or UPLC system as the sample introduction device. These products supply a diverse market with a strong emphasis on the life science, pharmaceutical, biomedical, clinical and environmental markets worldwide. Service revenues are primarily related to the sale of parts and to billed labor associated with instrument repair and routine maintenance.

      The mass spectrometer is an increasingly important detection device for HPLC and UPLC. The Company’s smaller sized mass spectrometers (such as the single quadrupole ZQ^tm and Waters EMD^tm) are often referred to as HPLC “detectors” and are either sold as part of an HPLC system or as an HPLC upgrade. Tandem quadrupole systems, such as the Waters Quattro micro^tm and Quattro Ultima® instruments, are used primarily for experiments performed for late stage drug development, including clinical trial testing, and Q-Tof Instruments such as the Company’s Q-Tof micro^tm and Q-Tof Ultima® instruments, are typically used to analyze the role of proteins in disease processes, an application sometimes referred to as “proteomics”.

      In 2003, the Company introduced two new mass spectrometry systems, the Quattro Premier^tm and the LCT Premier^tm. The Quattro Premier is a tandem quadrupole instrument that is designed to deliver a higher level of speed, sensitivity and reliability in a more compact configuration. The LCT Premier is a LC, electrospray-Tof instrument designed to deliver a higher level of mass accuracy and the ability for more precise quantitative analysis.

      In 2004, the Company introduced a new Q-Tof configuration mass spectrometry system, the Q-Tof Premier^tm to replace its Q-Tof Ultima line of systems and offer a new level of instrument performance to its customers. The Q-Tof Premier is a tandem mass spectrometry system developed to provide increased levels of sensitivity and specificity to customers involved in challenging analyses such as those often encountered in proteomics and metabolite profiling experiments. The Company began shipping the Q-Tof Premier in the fourth quarter of 2004. The Q-Tof Premier is compatible and often purchased with an HPLC or UPLC system as an inlet, a device to efficiently introduce a separated sample into the mass spectrometer.

LC-MS

Liquid chromatography (HPLC and UPLC) and mass spectrometry (MS) are instrumental technologies often embodied within an analytical system tailored for either a dedicated class of analyses or as a general purpose analytical device. An increasing percentage of the Company’s customers are purchasing LC and MS components simultaneously and it is becoming common for LC and MS instrumentation to be used within the same laboratory and be operated by the same user. The descriptions of LC and MS above reflect the historical segmentation of these analytical technologies and the historical categorization of their respective practitioners. Increasingly in today’s instrument market, this segmentation and categorization is becoming obsolete as a high percentage of instruments used in the laboratory embody both LC and MS technologies as part of a single device. In response to this development and to further promote the high utilization of these hybrid instruments, the Company has organized its Waters Division to develop, manufacture, sell and support integrated LC-MS systems.

TA Division

Thermal Analysis

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 characteriza-

tion of materials in various industries such as plastics, chemicals, automobiles, pharmaceuticals and electronics.

      Rheometry instruments complement thermal analyzers in characterizing materials. Rheometry characterizes the flow properties of materials and measures their viscosity, elasticity and deformation under different types of “loading” or conditions. The information obtained under such conditions provides insight to a material’s behavior during manufacturing, transport, usage and storage.

      Thermal analysis and rheometry instruments are heavily used in material testing laboratories and in many cases provide information useful in predicting the suitability of polymers and viscous liquids for various industrial, consumer goods and health care products. As with HPLC, a range of instrumentation is available with increasing levels of sample handling and information processing automation. In addition, systems and accompanying software packages can be tailored for specific applications. For example, the Q-Series^tm family of differential scanning calorimeters includes a range of instruments from basic dedicated analyzers to more expensive systems that can accommodate robotic sample handlers and a variety of sample cells and temperature control features for analyzing a broad range of materials. In 2002, TA introduced a new dynamic mechanical analyzer (“DMA”), the Q800^tm DMA. In 2003, TA introduced two new DMA’s, the Q400^tm DMA and the Q600^tm DMA. Additionally, in the first quarter of 2003, TA expanded its rheometry product line through the acquisition of Rheometrics Scientific, Inc. (“Rheometrics”). During 2003, the Rheometrics product line was successfully integrated within the TA Instruments Division.

      The Company sells, supports and services these product offerings through TA, headquartered in New Castle, Delaware. The TA division operates independently from the Waters Division though several of its overseas offices are situated in Waters facilities. TA has dedicated field sales and service operations and service revenue primarily derived from the sale of replacement parts and from billed labor expenses associated with the repair, maintenance and upgrade of installed systems.

Customers

The Company 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. The Company’s technical support staff works closely with its customers in developing and implementing applications that meet their full range of analytical requirements.

      The Company does not rely on any single customer or one group of customers for a material portion of its sales. During fiscal years 2004 and 2003, no single customer accounted for more than 3% of the Company’s net sales.

Sales and Service

The Company has one of the largest sales and service organizations in the industry focused exclusively on LC, MS and thermal analysis markets. Across these technologies, using respective specialized sales and service forces, the Company serves its customer base with approximately 1,990 field representatives in 89 sales offices throughout the world as of December 31, 2004 compared to approximately 1,890 field representatives in 97 sales offices as of December 31, 2003. 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. The Company provides customers with comprehensive product literature and also makes consumable products available through a dedicated catalog.

Manufacturing

The Company provides high quality LC products by controlling each stage of production of its instruments and columns. The Company assembles most of its LC 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 LC 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, instruments and software components for the Company’s LC, MS and thermal analysis product lines. These facilities meet the same ISO and FDA standards met by the Milford, Massachusetts facility and are approved by the FDA.

      The Company manufactures most of its MS products at its facilities in Manchester, England, Cheshire, England and Wexford, Ireland. Certain components or modules of the Company’s MS instruments are manufactured by long-standing outside 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. The Company’s MS facilities meet similar 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 rheometry products are manufactured at the Company’s New Castle, Delaware and Crawley, England facilities. Similar to MS, certain elements of TA’s products are manufactured by outside contractors and are then returned to the Company’s facilities for final assembly, calibration and quality control. The Company’s thermal analysis facilities meet similar ISO standards met by the Milford, Massachusetts facility.

Research and Development

The Company 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 2004, 2003 and 2002 were $65.2 million, $59.2 million and $51.9 million, respectively. Nearly all of the current LC 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 the Company’s extensive field organizations. The majority of the MS 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, 2004, there were approximately 525 employees involved in the Company’s research and development efforts. The Company has increased research and development expenses relating to acquisitions and the Company’s continued commitment to invest significantly in new product development and existing product enhancements. Despite the Company’s active research and development programs, 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.

Employees

The Company employed approximately 4,200 employees, with 49% located in the United States, and 3,900 employees, with 48% located in the United States at December 31, 2004 and 2003, respectively. The increase of 8% over 2003 is primarily due to the acquisition of NuGenesis and increases in service personnel in support of the Company’s growing installed base of instrument systems. The Company considers its employee relations, in general, to be good, and the Company’s 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 2004, the Company announced and commenced a small restructuring effort to realign its personnel between various support functions and field sales and service organizations around the world. The employment of approximately 70 people was terminated as a result of this restructuring, all of whom had left the Company as of December 31, 2004.

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 for each of its three technologies. The Company 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 more diversified than the Company’s business, but are typically less focused on the Company’s chosen markets. Some competitors have greater financial and other resources than the Company.

      In the markets served by HPLC, UPLC, MS and LC-MS, the Company’s principal competitors include: Applied BioSystems, Inc., Agilent Technologies, Inc., Thermo Electron Corporation, Varian, Inc., Shimadzu Corporation and Bruker BioSciences Corporation. In the markets served by TA, the Company’s principal competitors include: PerkinElmer Inc., Mettler-Toledo International Inc., Shimadzu Corporation, HAAKE and Parr-Physica. The Company is not aware of a competitor offering a UPLC system comparable to its ACQUITY instrument.

      The market for consumable HPLC products, including separation columns, is also highly competitive but is more fragmented than the analytical instruments market. The Company encounters competition in the consumable 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. The Company competes in this market on the basis of reproducibility, reputation and performance, and, to a lesser extent, price. The Company’s principal competitors for consumable products include Phenomenex, Supelco Inc., Agilent Technologies, Inc., Alltech International Holdings, Inc. and Merck and Co., Inc. The ACQUITY instrument is designed to offer a predictable level of performance when used with UPLC columns to effect the chemical separation. UPLC columns are both fluidically and electronically connected to the ACQUITY instrument to allow users to simultaneously employ and track the performance status of the UPLC column. The Company believes that the expansion of UPLC technology will enhance its chromatographic column business because of the high level of synergy between UPLC and the ACQUITY UPLC instrument.

Patents, Trademarks and Licenses

The Company owns a number of United States and foreign patents and has patent applications pending in the United States and abroad. Certain technology and software is licensed from third parties. The Company also owns a number of trademarks. The Company’s patents, trademarks and licenses are viewed as valuable assets to its operations. However, the Company believes that no one patent or group of patents, or trademark or license is, in and of itself, essential to the Company such that its loss would materially affect the Company’s business as a whole.

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. In July 2003, the Company entered into a settlement agreement (the “Environmental Settlement Agreement”) with the Commonwealth of Massachusetts, acting by and through the Attorney General and the

Department of Environmental Protection (“DEP”), with respect to alleged non-compliance with state environmental laws at its Taunton, Massachusetts facility. Pursuant to the terms of a final judgment entered in the Superior Court of the Commonwealth on July 10, 2003, the Company paid a civil penalty of $5.9 million. In addition, the Company agreed to conduct a Supplemental Environmental Project in the amount of $0.6 million, comprised of investments in capital infrastructure, to study the effects of bio-filtration on certain air emissions from the Taunton facility and for the purchase of equipment in connection therewith. Pursuant to the terms of the Environmental Settlement Agreement, the Company also agreed to undertake a variety of actions to ensure that air emissions from the facility do not exceed certain limits and that the facility is brought into full compliance with all applicable environmental regulations. 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.

Available Information

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, DC 20549. The public may obtain information on 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 the caption About Waters > Investor Information.

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 the 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, UPLC, MS 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 reduction in capital spending of pharmaceutical customers, (vi) the loss of intellectual property rights in the Company’s research and development efforts, 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, whether because of these factors or for other reasons. The Company does not assume any obligation to update any forward-looking statements.

Risk Factors

Competition and the Analytical Instrument Market:

The analytical instrument market, and, in particular, the portion related to the Company’s HPLC, UPLC, MS, LC-MS, thermal analysis and rheometry product lines, is highly competitive, and the Company encounters competition from several international instrument manufacturers and other companies in both

domestic and foreign markets. Some competitors have instrument businesses that are more diversified than the Company’s business, but are typically less focused on the Company’s chosen markets. 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 53% of the Company’s net sales in 2004 were to the worldwide pharmaceutical and biotechnology industries, 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 and UPLC instruments at its facility in Milford, Massachusetts, separation columns at its facilities in Taunton, Massachusetts and Wexford, Ireland, MS products at its facilities in Manchester, England, Cheshire, England and Wexford, Ireland, thermal analysis products at its facility in New Castle, Delaware and rheometry products at its facilities in New Castle, Delaware and Crawley, England. Any prolonged disruption to the operations at any of 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.

Foreign Operations and Exchange Rates:

Approximately 64% of the Company’s 2004 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 the Company’s 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. 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, UPLC, MS, thermal analysis and rheometry 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.

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 relationships with its customers and, accordingly, adversely affect the Company’s business.

Certain components or modules of the Company’s MS instruments are manufactured by long-standing outside 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.

Item 2:     Properties

Waters operates 20 United States facilities and 74 international facilities, including field offices. In 2004, the Company purchased a 250,000 square foot building adjacent to the Company’s headquarters. The Company intends to use this building to consolidate certain functions and facilities in Massachusetts in 2005. The Company believes its facilities are suitable and adequate for its current production level and for reasonable growth over the next several years. The Company’s primary facilities are summarized in the table below.

     Primary Facility Locations

      The Company operates and maintains 13 field offices in the United States and 62 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)

_______________

Hewlett-Packard Company

The Company filed suit in the United States against Hewlett-Packard Company and Hewlett-Packard GmbH (collectively, “HP”), seeking a declaration that certain products sold under the mark “Alliance” do not constitute an infringement of one or more patents owned by HP or its foreign subsidiaries (the “HP patents”). The action in the United States was dismissed for lack of controversy. Actions seeking revocation or nullification of foreign HP patents were filed by the Company in Germany, France and England. A German patent tribunal found the HP German patent to be valid. In Germany, France and England, HP and its successor, Agilent Technologies Deutschland GmbH, have brought an action alleging that certain features of the Alliance pump may infringe the HP patents. In England, the Court of Appeal has found the HP patent valid and infringed. The Company’s petitions for leave to appeal to the House of Lords were denied. A trial on damages was scheduled for November 2004. In March 2004, Agilent Technologies GmbH brought a new action against the Company alleging that certain features of the Alliance pump continue to infringe the HP patents. At a hearing held in the UK on June 8, 2004, the UK court postponed the previously scheduled November 2004 damages trial until March 2005. Instead, the court scheduled the trial in the new action for November 2004. In December 2004, the UK court ruled in the new action that the Company did not infringe the HP patents. HP has filed an appeal in that action and the damages trial scheduled for March 2005 has been postponed pending this appeal and rescheduled for November 2005. In France, the Paris District Court has found the HP patent valid and infringed by the Alliance pump. The Company appealed the French decision and on April 12, 2004, the French appeals court affirmed the Paris District Court’s finding of infringement. The Company has filed a further appeal in the case. In the German case, a German court has found the patent infringed. The Company appealed the German decision, and in December 2004, the German appeals court reversed the trial court and issued a finding of non-infringement in favor of the Company. HP is seeking an appeal in that action. The Company recorded provisions in the quarters ended June 30, 2002 and April 3, 2004 for estimated damages, legal fees, and court costs incurred with respect to this ongoing litigation. The provision represents management’s best estimate of the probable and reasonably estimable loss related to the litigation.

Other:

Cohesive Technologies, Inc. (“Cohesive”) has brought three suits against the Company in the U.S. 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 United 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”) filed a civil action against the Company in the Federal District Court for the Southern District of Texas, Houston Division, alleging that 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. DuPont de Nemours and Company (“DuPont”) and claimed to be exclusively licensed to Viscotek. DuPont is not a party to the suit. On January 16, 2004, a jury returned a verdict finding that the Company had not infringed Viscotek’s patents. Judgment has been entered on the jury’s verdict in favor of the Company. Viscotek has appealed the judgment. The Company believes it should prevail on appeal and, in any event, that any outcome of the proceedings will not be material to the Company.

Item 4:     Submission of Matters to a Vote of Security Holders

None.

PART II

Equity compensation plan information is incorporated by reference from Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management, of this document, and should be considered an integral part of this Item 5. The Company’s Common Stock is registered under the Securities Exchange Act of 1934 as amended the (“Exchange Act”) and is listed on the New York Stock Exchange under the symbol WAT. As of March 10, 2005, the Company had approximately 279 common stockholders of record. The Company has not declared or paid any dividends on its Common Stock in its past three fiscal 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:

      The following table provides information about purchases by the Company during the three months ended December 31, 2004 of equity securities registered by the Company pursuant to the Exchange Act (in thousands, except per share data):

Item 6:     Selected Financial Data

      Reference is made to information contained in the section entitled “Selected Financial Data” on page 76 of this Form 10-K, included in Item 8, Financial Statements and Supplementary Data.

Item 7:     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business and Financial Overview:

      The Company’s business in 2004 continued to benefit from stable pharmaceutical customer demand, improved industrial chemical customer demand and the impact of new product initiatives. Sales grew by 15% in 2004 and by 8% in 2003. Excluding currency effects, sales grew by 11% in 2004 and were flat in 2003. Geographically, business was strongest in the U.S., Japan, and Asia, particularly India and China, while trending positively in Europe during the second half of the year. Growth in these geographies was across all of the Company’s product lines and in particular mass spectrometry (“MS”) products and ACQUITY UPLC™ systems, which accelerated sales in the second-half of the year.

      From a product line perspective and excluding the impact of currency translation, the Waters Division liquid chromatography products (“LC”) — including high performance liquid chromatography (“HPLC”) and Ultra Performance Liquid Chromatography (“UPLC”) — grew approximately 9% in 2004 and benefited from shipment of the ACQUITY systems, growth in LC service revenues of 13% and growth in LC chemical products of 10%. In mass spectrometry, sales grew approximately 6% in 2004, as initial shipments of the Q-T of Premier^tm augmented the full-year performance of tandem quadrupole instrument sales. As a result of the acquisition of Creon Lab Control AG (“Creon”) in July 2003 and NuGenesis Technologies Corporation (“NuGenesis”) in February 2004, the Waters Division entered the laboratory informatics market (“Laboratory Informatics”). Laboratory Informatics products and service added approximately 2% to the Company’s sales growth in 2004. The Thermal Analysis Division (“TA”) sales grew approximately 11% in 2004, benefiting from overall stronger industrial chemical customer demand, recent new product introductions and from the expansion of the business into overseas markets.

      Operating income was $284.9 million and $219.2 million in 2004 and 2003, respectively, an increase of $65.7 million or 30% for the year. In 2004, operating income included the benefit of a litigation judgment in the amount of $17.1 million from Perkin-Elmer Corporation offset by litigation provisions of $7.8 million and

a technology license asset impairment of $4.0 million. In 2003, operating income included expensed in-process research and development of $6.0 million, a loss on sale of a business of $5.0 million, restructuring charges of $0.9 million and litigation provisions of $1.5 million. The remaining increase in operating income of $47.0 million is primarily a result of sales volume growth, reductions in manufacturing costs, operating expense leverage, and the effects of currency translations.

      Operating cash flow increased to $259.4 million in 2004 compared to $157.0 million in 2003. The increase of $102.4 million for the year is primarily attributable to the increase in net income and a decrease in the change of accrued litigation from $60.1 million in 2003 to $16.1 million in 2004 primarily related to the Applera patent litigation. In addition, the Company received $17.1 million in 2004 related to the Perkin-Elmer Corporation patent litigation judgment. Capital expenditures related to property, plant, equipment, software capitalization and other intangibles were $66.2 million in 2004 compared to $34.6 million in 2003. During 2004, the Company purchased a 250,000 square foot building adjacent to the Company’s headquarters for $18.1 million. The Company intends to use this building to consolidate certain functions and facilities in Massachusetts in 2005 and spent an additional $3.2 million in 2004 to prepare the building for its intended use.

      In June 2004, the Company effectively concluded its $400.0 million stock buyback program previously announced in May 2003. The Company repurchased approximately 11.8 million shares under this program. In October 2004, the Company’s Board of Directors authorized the Company to repurchase up to $500.0 million in outstanding common shares over a two-year period. The Company believes that the share repurchase program is beneficial to shareholders by increasing earnings per share through reducing the outstanding shares and has financial flexibility to fund these share repurchases given current cash and debt levels. In 2004, the Company repurchased a total of 5.5 million shares of its common stock for $231.3 million, of which 1.2 million shares were purchased under the October 2004 program for $56.3 million. This follows a 2003 repurchase of a total 11.9 million shares of common stock for $324.6 million.

      In December 2004, the Company terminated its existing credit agreement early without penalty and entered into a new Credit Agreement (“Credit Agreement”) with a syndicate of banks, many of which participated in the prior credit agreement. The new Credit Agreement increases the Company’s borrowing capacity from $375.0 million to $700.0 million and provides for lower borrowing costs and less restrictive covenants. The Company believes that this additional borrowing capacity will provide the Company the flexibility to fund working capital needs, potential acquisitions and stock repurchases. The Company had outstanding borrowings at the end of 2004 of $456.7 million, primarily relating to borrowings in the U.S. under the Company’s new Credit Agreement.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

(The Company has included references to the Notes of the Company’s Consolidated Financial Statements included in Item 8 below.)

Net Sales:

Net sales for 2004 were $1,104.5 million, an increase of 15% compared to $958.2 million for 2003. Excluding currency effects, net sales grew 11% over 2003. Currency translation effect increased sales growth in 2004 by 4% primarily due to the strengthening of the Euro, British pound, Japanese Yen and Canadian dollar against the U.S. dollar. In 2004, product sales increased $83.7 million or 12% and service sales increased $62.7 million or 27% over sales in 2003. The increase in product sales, aside from the effects of foreign currency translation, is primarily due to the continued strength of LC, MS and TA sales growth, the mid-year launch of the ACQUITY UPLC system and the impact of acquired businesses. The increase in service sales, aside from the effects of foreign currency translation, is primarily due to growth in the Company’s instrument installed base and sales of service contracts, including the effect of the Company’s recent acquisitions.

Waters Division Net Sales:

With respect to the Waters Division’s performance by product line (excluding the effects of currency translation), LC sales (Liquid Chromatography — including HPLC and UPLC product lines) grew approxi-

mately 9%. The growth in LC instrument sales in 2004 was 7%. This growth was due principally to the introduction of new products, such as the ACQUITY UPLC instrument, and steady demand for existing instruments. In 2004, the sales of LC consumables (sample preparation devices) in the Company’s chemistry operations grew 10% primarily as a result of continued strength in demand related to pharmaceutical production and the introduction of new chromatography columns, most notably the Sunfire^tm product line. LC service sales grew 13% over 2003 due to increased sales of service plans to the Company’s growing installed base of customers. For the LC business, service revenue was approximately 28% of total LC revenue in 2004. The growth of LC service revenue was geographically broad-based and was driven by increased demand primarily from large multi-national customers for service plans to maintain a higher percentage of their installed base and newly purchased Waters instruments. LC consumables account for approximately 19% of overall LC sales.

      MS sales grew approximately 6% in 2004 (excluding the effects of currency translation). The increase in sales over 2003 is primarily a result of strong growth of tandem quadrupole instruments throughout the year and the positive impact of new product shipments, especially the Q-Tof Premier, late in the year. The growth in 2004 is also a result of weak 2003 MS performance, during which MS sales declined 18% over the prior year, due primarily to the effects of a patent litigation loss sustained in 2002. During 2004, the Company re-entered all instrument categories impacted by the patent litigation loss. Service revenue for the MS product line accounted for approximately 19% of total MS revenue in 2004 and 2003, and grew approximately 12% in 2004 due to increased sales of service plans to the Company’s growing installed base of customers.

      The Laboratory Informatics product line was expanded in 2004 with the acquisition of NuGenesis in the first quarter. In 2003, the Laboratory Informatics product and service offerings consisted of those from Creon, a company that Waters acquired in 2003. In 2004, Laboratory Informatics sales added approximately 2% to sales growth. Revenues consisted of new product sales as well as revenue associated with the servicing of the user base.

      Geographically, Waters LC and MS sales in Asia had the highest growth in 2004. Growth in Asia was highlighted by business associated with growth of the pharmaceutical industry in India and more broad-based growth in China. More regulations for food and drinking water testing contributed to sales growth in Japan and in Southeast Asia. In Asia and in Japan, the Company’s growth rates in sales (excluding the effects of currency translation) were 27% and 14%. respectively. Sales in the U.S. grew 12% while Europe experienced a modest 1% increase in sales due to slower sales volume in the first half of the year.

TA Instruments Division Net Sales:

Sales for thermal analysis instruments, rheometry instruments and related service revenues grew 11% in 2004 (excluding the effects of currency translation). The growth of this business was influenced by strong sales growth of 16% outside of the U.S., primarily from Europe and Asia, as a result of expanded sales and marketing efforts in the regions. Sales in the U.S. grew 5%. In 2004 and 2003, service revenue was approximately 26% of overall revenue and grew approximately 10% in 2004 primarily as a result of providing service to a larger installed base of instruments.

Gross Profit:

Gross profit for 2004 was $649.7 million compared to $560.4 million for 2003, an increase of $89.3 million or 16% and is generally consistent with the increase in net sales. Gross profit as a percentage of sales increased to 58.8% in 2004 from 58.5% in 2003. The increase in gross profit percentage is a net result of favorable foreign currency translation along with the continuing success of the Company’s manufacturing cost reduction programs, offset by costs associated with additional service resources added to the Waters Division in support of the service product line growth. Within MS, there was a decrease in gross profit as a percentage of net sales as a result of a product mix shift away from the higher margin Q-Tof product line.

Selling and Administrative Expenses:

Selling and administrative expenses for 2004 and 2003 were $300.2 million and $264.3 million, respectively. As a percentage of net sales, selling and administrative expenses declined slightly to 27.2% for 2004 compared

to 27.6% for 2003. The $35.9 million, or 14%, increase in total selling and administrative expenses for 2004 included an increase of approximately $11.9 million as a result of currency translation; an incremental $10.4 million attributed to the Laboratory Informatics acquisition; an increase of $18.6 million in personnel costs attributed to higher headcount, selling related expenses related to the higher sales volume, annual merit increases and increased employee incentive plans costs as a result of the Company’s 2004 performance. An increase in costs related to Sarbanes-Oxley compliance of $3.2 million was offset by a decrease in litigation costs of $3.8 million. The increase in selling and administrative expenses was partially offset by $6.6 million of realized and unrealized foreign currency transaction gains compared to the $2.2 million of realized and unrealized foreign currency transaction gains in 2003.

Research and Development Expenses:

Research and development expenses were $65.2 million for 2004 and $59.2 million for 2003, an increase of $6.0 million or 10%. The increase is primarily attributable to an increase in headcount due to Laboratory Informatics acquisitions, the effects of foreign currency translation, and to the Company’s continued commitment to invest significantly in the development of new and improved LC, MS, thermal analysis and rheometry products.

Purchased Intangibles Amortization:

Purchased intangibles amortization for 2004 was $4.8 million compared to $4.2 million for 2003, an increase of $0.6 million or 14%. The increase primarily relates to the amortization of purchased intangibles resulting from the Laboratory Informatics acquisitions.

Litigation Settlement and Provisions:

Net litigation settlements and provisions for 2004 were a $9.3 million benefit compared to a litigation provision of $1.5 million for 2003. The Company recorded the benefit of a litigation judgment in the second quarter of 2004 in the amount of $17.1 million and a provision expense of $7.8 million in the first quarter of 2004. The benefit in 2004 is related to the conclusion of the Company’s litigation with Perkin-Elmer. The provision in 2004 is related to the on-going patent infringement suit with Hewlett-Packard. In 2004, the Company made payments for legal fees and potential award deposits regarding the Hewlett-Packard litigation in the amount of approximately $4.1 million. The Company recorded a $1.5 million expense in 2003 for an environmental matter concerning the Company’s Taunton facility (Note 13).

Loss on Sale of Business:

The Company recorded a $5.0 million charge relating to the loss on the sale (Note 8) of the inorganic MS product line in 2003. There was no such charge in 2004.

Impairment of Long-Lived Asset:

In 2004, the Company recorded a $4.0 million charge for an other-than-temporary impairment of its technology license with Sandia National Laboratories, as a significant portion of the technology collaboration program was suspended. The remaining value of the license is approximately $1.0 million at December 31, 2004. There was no such charge in 2003.

Restructuring and Other Unusual Charges, net:

2004 Restructuring:

In January 2004, the Company initiated a restructuring effort to realign its personnel between various support functions and field sales and service organizations around the world. As a result, 70 employees were terminated, all of which had left the Company as of December 31, 2004. The provision of $2.1 million represents costs incurred, including severance costs, for the 70 people and other directly related incremental costs of this realignment effort.

      The following is a rollforward of the Company’s 2004 restructuring liability (in thousands):

2002 Restructuring:

In July 2002, the Company took action to restructure and combine its field sales, service and distribution of its Micromass and LC operations. The objective of this integration was to leverage the strengths of both divisions and align and reduce operating expenses. The integration efforts impacted the U.S., Canada, continental Europe and the United Kingdom. Approximately 55 employees were terminated, all of which had left the Company as of December 31, 2003. In addition, the Company originally committed to closing four sales and distribution facilities, two of which were closed by December 31, 2004.

      The Company recorded $2.6 million of charges for the year ended December 31, 2003 and $7.4 million for the year ended December 31, 2002, for restructuring and other directly related incremental charges relating to its integration of the worldwide LC and MS sales, service and support organizations. The charge for the year ended December 31, 2003 includes severance costs for 13 people, distributor termination costs and other directly related incremental costs of this integration effort. The charge for the year ended December 31, 2002 includes severance costs for 42 people, contract cancellation fees, non-cancelable lease obligations and other directly related incremental costs.

      During the year ended December 31, 2004, the Company reversed approximately $2.2 million in restructuring reserves, primarily attributable to a change in plans with respect to two facilities previously selected for closure and distributor contract settlements being less than previously estimated. During the year ended December 31, 2003, the Company reversed approximately $1.9 million in restructuring reserves, primarily attributable to facility closure and distributor termination costs being less than previously estimated and the retention of certain employees previously selected for termination.

      The following is a rollforward of the Company’s LC and MS integration restructuring liability (in thousands):

      The Company also recorded an unrelated restructuring provision of $0.1 million at its TA subsidiary for severance and other related costs in the year ended December 31, 2003. There were no such charges for the years ended December 31, 2004 and 2002.

Expensed In-Process Research and Development:

In 2003, in connection with the acquisition of Creon, the Company wrote off the fair value of purchased in-process research and development (“IPR&D”) of various projects for the development of new products and technologies in the amount of $6.0 million. The amount was determined by identifying research projects for which technological feasibility had not been established and which had no alternative future uses. As of the Creon acquisition date (the “Acquisition Date”), there were four projects that met the above criteria. The

significant IPR&D projects identified consist of the eLab Notebook and the automatic LC-MS dereplication system. The IPR&D charges associated with these projects were $4.5 million and $0.8 million, respectively.

      Management determined the valuation of the IPR&D using a number of factors, including engaging a third party valuation firm to provide an independent appraisal. The value was based primarily on the discounted cash flow method. This valuation included consideration of (i) the stage of completion of each of the projects, (ii) the technological feasibility of each of the projects, (iii) whether the projects had an alternative future use, and (iv) the estimated future residual cash flows that could be generated from the various projects and technologies over their respective projected economic lives.

      The primary basis for determining the technological feasibility of these projects was whether the product met predetermined design specifications and complex functionality. As of the Acquisition Date, none of the IPR&D projects had reached predetermined design specifications and complex functionality. In assessing the technological feasibility of a project, consideration was also given to the level of complexity in future technological hurdles that each project had to overcome.

      Future residual cash flows that could be generated from each of the projects were determined based upon management’s estimate of future revenue and expected profitability of the various products and technologies involved. These projected cash flows were then discounted to their present values taking into account management’s estimate of future expenses that would be necessary to bring the projects to completion. The discount rates include a rate of return, which accounts for the time value of money, as well as risk factors that reflect the economic risk that the cash flows projected may not be realized. The cash flows were discounted at discount rates ranging from 55% to 60% per annum, depending on the project’s stage of completion and the type of complex functionality needed. This discounted cash flow methodology for the various projects included in the purchased IPR&D resulted in a total valuation of $6.0 million. Although work on the projects related to the IPR&D continued after the acquisition, the amount of the purchase price allocated to IPR&D was written off because the projects underlying the IPR&D that was being developed were not considered technologically feasible as of the Acquisition Date. As of December 31, 2004, the IPR&D automatic LC-MS dereplication system project still had not reached technological feasibility. The expected remaining cost to complete this project is not considered material to the Company and there are currently no expected material variations between projected results from the projects versus those at the time of the acquisition. The Company expects the project to be completed within the next twelve months.

Other Income (Expense), Net:

In 2004 and 2003, the Company recorded $1.0 million and $0.3 million, respectively, of pre-tax charges for other-than-temporary impairments to the carrying amounts of certain equity investments (Note 5). The 2004 pre-tax charge of $1.0 million is for the Company’s remaining investment carrying value of GeneProt. This charge was recorded based on the Company’s current assessment of GeneProt’s financial condition.

Interest Expense:

Interest expense was $10.1 million and $2.4 million for 2004 and 2003, respectively. The increase in 2004 interest expense is primarily attributed to the additional borrowings in the U.S. to fund the stock repurchase programs (Note 10).

Interest Income:

Interest income for 2004 and 2003 was $11.9 million and $7.1 million, respectively. The increase in interest income is primarily due to higher cash balances and higher interest rate yields.

Provision for Income Taxes:

The Company’s effective tax rate was 21.6% in 2004 and 23.6% in 2003. The change in effective tax rates for the period was impacted by the net tax effect of the Perkin-Elmer litigation judgment received and litigation provisions and restructuring charges made during 2004, compared to the tax effect of certain litigation provisions, restructuring charges, expensed in-process research and development and loss on sale of a business incurred during 2003. The effective tax rates, excluding these items and corresponding tax effects, were 21.0%

and 23.0% for the years ended December 31, 2004 and 2003, respectively. This decrease is primarily attributable to the increase in income in international jurisdictions with lower effective tax rates.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

(The Company has included references to the Notes of the Company’s Consolidated Financial Statements included in Item 8 below.)

Net Sales:

Net sales for 2003 were $958.2 million, an increase of 8% compared to $890.0 million for 2002. Excluding the favorable currency effects, net sales remained essentially flat over 2002. In 2003, product sales increased $25.9 million or 4% and service sales increased $42.4 million or 22% over sales in 2002.

      With respect to the Company’s performance by product line (excluding the effects of currency translation), LC sales overall grew approximately 5%. In 2003, LC chemistry grew 11% primarily as a result of continued strength in sales related to pharmaceutical production. LC service sales grew 14% over 2002 due to increased sales of service plans to our growing installed base of customers. Growth in chemistry and service were offset by a decline of 1% in instrument sales during 2003. The decline in instrument sales is largely attributable to a combination of postponements and delays in purchase decisions for such instruments by the Company’s customers for new and replacement products. For the LC business, service revenue was approximately 27% of total LC revenue in 2003 compared to 25% of revenue in 2002. The growth of service revenue was geographically broad-based and was driven by increased demand from large multi-national customers for service plans to maintain a higher percentage of their installed base and newly purchased Waters instruments. Chromatography consumables account for approximately 19% of overall LC sales and grew by approximately 11% in 2003. Chromatography consumable growth was driven by increased utilization of existing LC equipment and by the successful launch of a new line of chromatography columns and sample preparation devices. Geographically, the strongest growth areas of the world for LC in 2003 were Asia, Japan and Eastern Europe, achieving 16%, 10% and 40% growth, respectively. The U.S. grew modestly at 2%, while Europe experienced a decline of 4%. Sales growth in Asian and Eastern European geographies is related to economic modernization and development of basic infrastructure. Japan continues to be a robust market as Waters continues to offer Japanese language software products that meet local needs. Markets in the U.S. and Europe languished in 2003 as we saw a continuation of delays in instrument replacements early in the year at many of our pharmaceutical customers.

      MS sales declined approximately 18% in 2003, excluding the impact of the sale of the inorganic product line. The decline in sales over 2002 was across most geographic areas, primarily due to the impact of the Applera patent litigation, reduced MS instrument prices and a decline in pharmaceutical capital spending. Sales to customers working on proteomics applications in the pharmaceutical industry, government and academic sector and biotech all experienced declines in instrument purchases in 2003. The Company believes that its sales decline is a result of a temporary market decline in 2003 as well as a loss of market share to competing technologies that resulted in the overall 18% sales decline in MS. Service revenue for the MS product line accounted for approximately 19% of total MS revenue in 2003 compared to 12% in 2002, and grew approximately 27% during this period. The growth in MS service revenue as a percentage of overall MS revenue was primarily due to the decline in MS instrument revenue, which is attributed to reduced demand from proteomics customers.

      Sales for thermal analysis products grew 20% in 2003, excluding the impact of the acquired rheometry business. The growth of this business is geographically broad-based with increased spending by core industrial chemical and pharmaceutical companies. The impact of sales in 2003 from the rheometry business acquisition added an additional 16% to the thermal analysis business growth. TA service revenue was approximately 26% of total TA revenue. Compared to 2002, TA service revenue grew by approximately 41% primarily as a result of providing service to a larger installed base of instruments and the Rheometrics acquisition.

Gross Profit:

Gross profit for 2003 was $560.4 million compared to $516.5 million for 2002, an increase of $43.9 million or 8%. Gross profit as a percentage of sales increased to 58.5% in 2003 from 58.0% in 2002. The increase in gross profit of 8% is generally linear with the net sales increase of 8%, which is mostly attributed to favorable foreign exchange in 2003.

Selling and Administrative Expenses:

Selling and administrative expenses for 2003 and 2002 were $264.3 million and $246.8 million, respectively. As a percentage of net sales, selling and administrative expenses remained relatively flat at 27.6% for 2003 compared to 27.7% for 2002. The $17.4 million or 7% increase in total selling and administrative expenses for 2003 included an increase of approximately $17.7 million as a result of currency translation, offset by a reduction in operating expenses of $0.3 million. The reduction in operating expenses includes cost savings of $4.5 million from the recently completed LC and MS field sales and service integration efforts, generating lower headcount and labor costs, associated fringe benefits and travel costs. These reductions were offset by annual merit increases across most divisions and other headcount additions and related fringe benefits and indirect costs associated with the 2003 acquisitions totaling approximately $4.2 million. The Company experienced realized and unrealized foreign currency transaction gains of approximately $2.2 million in 2003 compared to losses of $0.8 million in 2002, an increase of $3.0 million.

Research and Development Expenses:

Research and development expenses were $59.2 million for 2003 and $51.9 million for 2002, an increase of $7.3 million or 14%. The increase is primarily attributable to an increase in headcount due to acquisitions, specifically Creon and Rheometrics, and to the Company’s continued commitment to invest significantly in the development of new and improved LC, MS, thermal analysis and rheometry products. In addition, the Company incurred contract research and development costs of $1.8 million related to new product development efforts for the Q-Tof product line.

Purchased Intangibles Amortization:

Purchased intangibles amortization for 2003 was $4.2 million compared to $3.6 million for 2002, an increase of $0.6 million or 18%. The increase primarily relates to amortization associated with the intangible assets purchased as part of the Rheometrics and Creon acquisitions.

Litigation Provisions:

Litigation provision for 2003 was $1.5 million compared to $7.9 million for 2002. The Company recorded $1.5 million and $5.1 million in 2003 and 2002, respectively, relating to an environmental matter concerning the Company’s Taunton facility (Note 13). In 2002, the Company recorded $2.8 million for the Applera patent litigation for liabilities associated with product sales made prior to the day of the unfavorable jury’s verdict in March 2002 (Note 12).

Loss on Sale of Business:

The Company recorded a $5.0 million charge relating to the loss on the sale of the inorganic MS product line in 2003. There was no such charge in 2002 (Note 8).

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 with Variagenics, as the technology collaboration program was discontinued (Note 5). There was no such charge in 2003.

Restructuring and Other Unusual Charges, net:

The Company recorded $2.6 million in 2003 and $7.4 million in 2002 for restructuring and other directly related incremental costs relating to its integration of the worldwide LC and MS sales, service, manufacturing and support organizations. The charge in 2003 includes severance costs for 13 people, distributor terminations and other directly related incremental costs of this integration effort. The charge in 2002 includes severance

costs for 42 people, contract cancellation fees, non-cancelable lease obligations and other directly related incremental costs.

      During 2003, the Company reversed approximately $1.9 million in restructuring reserves, primarily attributable to distribution and facility settlements being less than previously estimated and the retention of certain employees previously selected for employment termination. There were no such reversals in 2002.

      The Company has included in the consolidated balance sheet in other long-term liabilities approximately $1.5 million and $1.8 million at December 31, 2003 and 2002, respectively, for non-cancelable lease obligations with a portion to be paid out extending to 2012. The remaining $1.1 million and $3.7 million of the liability is included in other current liabilities in the consolidated balance sheet at December 31, 2003 and 2002, respectively.

      The following is a rollforward of the Company’s LC and MS integration restructuring liability (in thousands):

      The amount of expected annual cost savings is approximately $6.0 million. The Company began realizing savings of approximately $1.5 million per quarter beginning in the second quarter of 2003. The Company believes that there were no material increases in other expenses or reductions in revenues as a result of this restructuring. The annual cost savings is comprised of head count reductions of approximately $4.2 million, reductions in related travel, promotional and other expenses of approximately $1.6 million and facility closures of approximately $0.2 million.

      The Company also recorded an unrelated restructuring provision of $0.1 million at its TA subsidiary for severance and other related costs in 2003. There were no such charges in 2002.

Expensed In-Process Research and Development:

See Expensed In-Process Research and Development herein under the Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 discussion.

Other Income (Expense), Net:

In 2003 and 2002, the Company recorded $0.3 million and $6.0 million, respectively, in pre-tax charges for other-than-temporary impairments to the carrying amounts of certain equity investments, including investments in GeneProt and Variagenics (Note 5). During 2002, the Company recorded a $1.0 million charge to other income (expense), in the consolidated statements of operations, for an other-than-temporary impairment of the equity investment and warrants resulting from Variagenics public stock price declines. In addition, in 2002, the Company recorded pre-tax charges of $12.6 million to other income (expense) for an other-than-temporary impairment of its investment in GeneProt. This charge was recorded because to the Company’s knowledge, GeneProt had been unable to generate enough commercial interest to expand its business in the U.S. market. Additionally, during 2003 and 2002, the Company recorded a $0.3 million and $0.1 million charge, respectively, to other income (expense) for the impairment of certain other equity investments. The impairment charges in 2002 were offset by a $7.7 million termination fee received from GeneProt for cancellation of its $20.0 million order. There were no such off-setting charges in 2003.

Interest Expense:

Interest expense was $2.4 million and $2.5 million for 2003 and 2002, respectively. Total interest expense in 2003 was offset by a $0.9 million reduction in an interest expense estimate relating to the calculation of interest expense for the Applera litigation paid in April 2003 (Note 12). Excluding this reduction, interest expense for 2003 would have been $3.3 million, or an increase of 32%. This increase primarily relates to interest expense on borrowings against the Company’s credit facility to fund the stock repurchase program (Note 10). In 2002, the interest expense primarily related to accrued post-judgment interest associated with the Applera litigation.

Interest Income:

Interest income for 2003 and 2002 was $7.1 million and $7.5 million, respectively. The decline in interest income is primarily due to lower yields on cash investments.

Provision for Income Taxes:

The Company’s effective income tax rate was 23.6% in 2003 and 22.1% in 2002. The 2003 effective tax rate increased primarily due to lower effective tax rates on special charges and the expensed in-process research and development charge related to the Creon acquisition of $6.0 million not being tax deductible under German statutory law.

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. There were no such charges for 2003.

Liquidity and Capital Resources

Condensed Consolidated Statements of Cash Flows (in thousands):

Net cash provided from operating activities was $259.4 million and $157.0 million in 2004 and 2003, respectively. The primary sources of net cash provided from operating activities were net income, the effect of depreciation and amortization, and the increase in the tax benefit related to stock option plans from stock

options exercised. Included in net income for 2004 was $17.1 million in proceeds for the Perkin-Elmer litigation judgment. Depreciation and amortization increased in 2004 primarily from the increase in capital spending, higher software capitalization amortization and the effect of the Laboratory Informatics acquisitions. Days-sales-outstanding (“DSO”) increased by 5 days to 76 days in 2004 from 71 days in 2003. The increase in accounts receivable and DSO are directly related to the timing of the Company’s sales within the quarter, and foreign currency translation. The increase in inventory at December 31, 2004 is related to the development of new products, primarily the ACQUITY UPLC and the Q-Tof Premier.

      The changes in accounts payable and other current liabilities are primarily related to the timing of payments of income tax, compensation, and retirement accruals. Accrued litigation decreased by $16.1 million primarily due to the $18.1 million payment to Applied Biosystems/ MDS Sciex Instruments for the settlement of a patent litigation matter and approximately $4.1 million of payments in connection with the Hewlett-Packard patent litigation matter, offset by a $7.8 million provision for the Hewlett-Packard patent litigation in 2004. The remaining change in accrued litigation is attributed to payment of legal fees directly associated with existing litigation accruals.

      Net cash used in investing activities totaled $108.6 million in 2004 compared to $18.7 million in 2003. Additions to fixed assets and intangible assets were $66.2 million in 2004 and $34.6 million in 2003. Included in 2004 was a 250,000 square foot building purchase adjacent to the Company’s headquarters for $18.1 million as well as approximately $3.2 million of costs in construction in-progress related to improvements made to the building. The Company intends to use this building to consolidate certain functions and facilities in Massachusetts in 2005 and to accommodate growth over the next several years. Aside from the purchase of this building, fixed asset and intangible asset additions were consistent with capital spending trends and expectations throughout the respective years. Business acquisitions were $42.4 million and $35.2 million in 2004 and 2003, respectively, as the Company continues to seek growth opportunities through acquisitions. Included in 2003 was approximately $49.9 million of cash provided by a decrease in restricted cash. The Company held approximately $49.9 million of restricted cash at December 31, 2002 in connection with the standby letter of credit issued by the Company in 2002 for the unfavorable judgment in the Applera patent litigation. Due to the March 2003 affirmed judgment in the case, the Company paid $53.7 million to Applera in April 2003. As a result of that payment, the Company will no longer be required to maintain a restricted cash balance.

      Regarding cash provided by (used in) financing activities, the Company repurchased 5.5 million and 11.9 million common stock shares at a cost of $231.3 million and $324.6 million, during 2004 and 2003, respectively. In October 2004, the Company’s Board of Directors authorized the Company to repurchase up to $500.0 million in outstanding common shares over a two-year period. The Company believes that the share repurchase program is beneficial to shareholders by increasing earnings per share via reducing the outstanding shares through open market purchases and that it has adequate financial flexibility to fund these share repurchases given current cash and debt levels. During 2004, the Company purchased 1.2 million shares at a cost of $56.3 million under the October 2004 Board of Directors authorized repurchase program and 4.3 million shares at a cost of approximately $175.0 million under a previously authorized program under which the Company has purchased the maximum amount of authorized shares. The Company believes it has the resources to fund the common stock repurchases as well as to pursue acquisition opportunities in the future. The Company received $45.0 million and $27.8 million of proceeds from other financing activities, including the exercise of stock options and the purchase of shares pursuant to employee stock purchase plans in 2004 and 2003, respectively.

      In December 2004, the Company entered into a Credit Agreement (the “Credit Agreement”) to replace its existing credit facility. The Credit Agreement provides for a $250.0 million term loan facility, a $300.0 million revolving facility (“US Tranche”), and a $150.0 million revolving facility (“European Tranche”). The term loan facility and the revolving facilities both mature on December 15, 2009, and require no scheduled prepayments before that date. At December 31, 2004, the Company had $250.0 million outstanding under the term loan facility which is classified as long-term debt and $190.0 million outstanding under the US Tranche revolving facility. The Company terminated its existing credit agreement early without penalty. The interest rates applicable to the term loan and revolving loans under the new credit agreement are

equal to either the base rate (which is the higher of the prime rate or the federal funds rate plus 1/2%) or the applicable 1, 2, 3, 6, 9 or 12 month LIBOR rate, in each case plus an interest rate margin based upon the Company’s leverage ratio, which can range between 29.5 basis points and 80.0 basis points. The Credit Agreement is unsecured in nature, and requires that the Company comply with an interest coverage ratio test of not less than 3.5:1, and a leverage ratio test of not more than 3:1, for any period of four consecutive fiscal quarters, respectively. The minimum interest coverage ratio on the terminated agreement was 5:1 and the maximum leverage ratio test was 2.5:1. In addition, the new credit agreement includes negative covenants that are customary for investment grade credit facilities. The new credit agreement also contains certain customary representations and warranties, affirmative covenants and events of default. The new Credit Agreement increased the Company’s committed syndicated borrowing capacity from $375.0 million to $700.0 million and provides for lower borrowing costs. The additional borrowing capacity will provide the Company the flexibility to fund working capital needs, potential acquisitions and stock repurchases.

      The Company believes that the cash and cash equivalent balance of $539.1 million at the end of 2004 and expected cash flow from operating activities together with borrowing capacity from committed credit facilities will be sufficient to fund working capital, capital spending requirements, authorized share repurchase amounts and any adverse final determination of ongoing litigation for at least the next twelve months. Management believes, as of the date of this report, that its financial position along with expected future cash flows from earnings based on historical trends and the ability to raise funds from a number of financing alternatives and external sources, will be sufficient to meet future operating and investing needs beyond the next twelve months.

      In October 2004, the American Jobs Creation Act of 2004 (“AJCA”) was signed into law. The AJCA contains a series of provisions, several of which are pertinent to the Company. The AJCA creates a temporary incentive for U.S. multi-national corporations to repatriate accumulated income abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. It has been the Company’s practice to permanently reinvest all foreign earnings into foreign operations and the Company currently still plans to continue to reinvest foreign earnings permanently into its foreign operations. The deduction is subject to a number of limitations and uncertainty remains as to how to interpret numerous provisions of the AJCA. As such, the Company is not yet in a position to decide on whether, and to what extent, it might repatriate foreign earnings that have not yet been remitted to the U.S. Should the Company determine that it plans to repatriate any foreign earnings, it will be required to establish an income tax expense and related tax liability on such earnings. If the Company elects this provision before it expires at the end of 2005, the Company could repatriate a maximum of $500.0 million in qualified foreign earnings. If the maximum was repatriated, the Company estimates an increase in the income tax provision of between $20.0 million and $45.0 million depending on the final technical clarifications.

Commitments:

The Company licenses certain technology and software from third parties, which expire at various dates through 2008. Fees paid for licenses were approximately $1.1 million in 2004, $2.9 million in 2003 and $5.4 million in 2002. Future minimum licenses payable under existing license agreements as of December 31, 2004 are immaterial.

Contractual Obligations and Commercial Commitments

The following is a summary of the Company’s commitments as of December 31, 2004 (in thousands):

      From time to time, the Company and its subsidiaries are involved in various litigation matters arising in the ordinary course of business. The Company believes it has meritorious arguments in its current litigation matters and any outcome, either individually or in the aggregate, with the exception of the current litigation described in Note 12, Patent Litigation, will not be material to the financial position or results of operations.

      During fiscal year 2005, the Company expects to contribute approximately $7.5 million to the Company’s retirement plans. Capital expenditures are expected to be modestly higher in 2005, excluding the recent building purchase, due to expected capital needs to support the growth in the business.

      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. The Company has not paid any dividends and does not plan to pay any dividends in the foreseeable future.

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. Critical accounting policies are those that are central to the presentation of the Company’s financial condition and results of operations that require management to make estimates about matters that are highly uncertain. On an on-going basis, the Company evaluates its policies and estimates. The Company 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 results may differ from these estimates under different assumptions or conditions.

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, 2004, the Company had current and long-term deferred revenue liabilities of approximately $66.8 million and $7.3 million, respectively.

      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. The Company’s method of revenue recognition for certain products requiring installation is in accordance with Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition in Financial Statements.” Accordingly, the larger of the contractual cash holdback or the fair value of the installation service is deferred

when the product is shipped and revenue is recognized as a multiple element arrangement when installation is complete. The Company determines the fair value of installation based upon a number of factors, including hourly service billing rates, estimated installation hours and comparisons of amounts charged by third parties. The Company believes that this amount approximates the amount that a third party would charge for the installation effort.

Loss Provisions on Accounts Receivable and Inventory:

The Company 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. The Company 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, 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, 2004 was $271.7 million, net of allowances for doubtful accounts and sales returns of $7.1 million. Historically, the Company has not experienced significant bad debt losses.

      The Company values all of its inventories at the lower of cost or market on a first-in, first-out basis (“FIFO”). The Company 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, 2004 was $139.9 million, net of write-downs to net realizable value of $14.1 million.

Valuation of Equity Investments:

The Company 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 a 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 2004 and 2003, the Company recorded $1.0 million and $0.3 million charges to other expense, respectively, in the consolidated statements of operations, for the impairment of certain equity investments. At December 31, 2004, the Company had equity investments totaling $17.9 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. In 2004, the Company recorded a $4.0 million charge for an other-than-temporary impairment of its technology licenses with Sandia National Laboratories as a significant portion of the technology collaboration program was suspended. Net intangible assets, long-lived assets, and goodwill amounted to $85.2 million, $135.9 million, and $228.5 million, respectively, as of December 31, 2004. The Company performs annual impairment reviews of its goodwill. The Company performed its annual review during 2004 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 the Company 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, 2004, the Company’s warranty liability was $10.6 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. In the future event there is U.S. taxable income, the valuation allowance would be reversed and deferred tax assets recorded with a corresponding credit to additional paid-in-capital.

Litigation:

As described in Item 3 of Part I 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 this determination, and thus has recorded charges, with respect to the claims described under the heading “Hewlett-Packard Company.” 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.

Pension and Other Post-retirement Benefits:

Assumptions used in determining projected benefit obligations and the fair values of plan assets for the Company’s pension plans and other post-retirement benefits are evaluated periodically by management in consultation with outside actuaries and investment advisors. Changes in assumptions are based on relevant company data. Critical assumptions, such as the discount rate used to measure the benefit obligations and the expected long-term rate of return on plan assets are evaluated and updated annually. The Company has assumed that the expected long-term rate of return on plan assets will be 8.00%.

      At the end of each year, the Company determines the discount rate that reflects the current rate at which the pension liabilities could be effectively settled. This rate should be in line with rates for high quality fixed income investments available for the period to maturity of the pension benefits, and changes as long-term interest rates change. At year-end 2004, the Company determined this rate to be 5.75%. Post-retirement benefit plan discount rates are the same as those used by the Company’s defined benefit pension plan in accordance with the provisions of SFAS No. 106, “Employers’ Accounting for Post-retirement Benefits other than Pensions.”

Recent Accounting Standards Changes

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based Payments”, which amends SFAS No. 123, “Accounting for Stock-Based Compensation”. This standard requires that all share-based payments to employees, including grants of employee stock options, be recognized in the statement of operations based on their fair values. The standard is effective for public companies for interim periods beginning after June 15, 2005. The final standard allows alternative methods for determining fair value. At the present time, the Company has not determined which valuation method it will use; however, under the Black-Scholes valuation model, it is estimated that the pre-tax compensation expense recorded in the consolidated statements of operations for the second half of 2005 would be approximately $14.5 million.

      In December 2004, the FASB issued SFAS No. 153 “Exchanges of Nonmonetary Assets” which amends Accounting Principles Board Opinion No. 29. This standard requires that exchanges of nonmonetary assets be measured based on the fair value of the assets exchanged. This standard is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and should be applied prospectively. At the present time, the Company does not believe that adoption of SFAS 153 will have a material effect on its financial position, results of operations or cash flows.

      In November 2004, the FASB issued SFAS No. 151 “Inventory Costs” which amends Accounting Research Bulletin No. 43 Chapter 4. This standard clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. This standard is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. At the present time, the Company is evaluating SFAS 151 but does not believe that it will have a material effect on its financial position, results of operations or cash flows.

      In October 2004, the American Jobs Creation Act of 2004 (“AJCA”) was signed into law. The AJCA contains a series of provisions, several of which are pertinent to the Company. The AJCA creates a temporary incentive for U.S. multi-national corporations to repatriate accumulated income abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. It has been the Company’s practice to permanently reinvest all foreign earnings into foreign operations and the Company currently still plans to continue to reinvest foreign earnings permanently into its foreign operations. The deduction is subject to a number of limitations and uncertainty remains as to how to interpret numerous provisions of the AJCA. As such, the Company is not yet in a position to decide on whether, and to what extent, the Company might repatriate foreign earnings that have not yet been remitted to the U.S. Should the Company determine that it plans to repatriate any foreign earnings, it will be required to establish an income tax expense and related tax liability on such earnings. If the Company elects this provision before it expires at the end of 2005, the Company could repatriate a maximum of $500.0 million in qualified foreign earnings. If

the maximum was repatriated, the Company estimates an increase in the income tax provision of between $20.0 million and $45.0 million depending on the final technical clarifications.

Item 7a:     Quantitative and Qualitative Disclosures About Market Risk

The Company operates on a global basis and is exposed to the risk that its earnings, cash flows and stockholders’ equity could be adversely impacted by fluctuations in currency 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 10 to the Company’s consolidated financial statements.

      The Company is primarily exposed to currency exchange-rate risk with respect to certain inter-company balances, forecasted transactions and net assets denominated in Euro, Japanese Yen and British pound. The Company manages its foreign currency exposures on a consolidated basis, which allows the Company to analyze exposures globally and take into account offsetting exposures in certain balances. In addition, the Company utilizes derivative and non-derivative financial instruments to further reduce the net exposure to currency fluctuations.

      The Company is also exposed to the risk that its earnings and cash flows could be adversely impacted by fluctuations in interest rates. The Company’s policy is to manage interest costs by using a mix of fixed and floating rate debt that management believes is appropriate. At times, to manage this mix in a cost efficient manner, the Company has periodically entered into interest rate swaps, in which the Company agrees to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed upon notional amount.

Cash Flow Hedges

The Company uses interest rate swap agreements to hedge the risk to earnings associated with fluctuations in interest rates related to outstanding U.S. dollar floating rate debt.

      During the first quarter of 2004, the Company entered into a floating to fixed rate interest rate swap with a notional amount of $125.0 million, to hedge floating rate debt related to the term loan tranche of its outstanding debt, with a maturity date of 21 months. The Company subsequently closed out the swap in the second quarter of 2004, with a realized gain of $1.6 million. The total pre-tax amount of the gain that was re-classified to earnings in 2004 was $0.7 million. The remaining $0.9 million will be re-classified to earnings in 2005 over the original term of the interest rate swap. As of December 31, 2004, the Company had no outstanding cash flow hedges.

Hedges of Net Investments in Foreign Operations

The Company has operations in various countries and currencies throughout the world, with approximately 31% of its sales denominated in Euros, 11% in Yen and smaller sales exposures in other currencies. 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 cross-currency interest rate swaps, forward contracts and range forward contracts to hedge its stockholders’ equity balance from the effects of fluctuations in currency exchange rates. These agreements are designated as foreign currency hedges of a net investment in foreign operations. Any increase or decrease in the fair value of cross-currency interest rate swap agreements, forward contracts or range forward contracts is offset by the change in the value of the hedged net assets of the Company’s consolidated foreign affiliates. Therefore, these derivative instruments are intended to serve as an effective hedge of certain foreign net assets of the Company.

      During 2004, the Company hedged its net investment in Yen foreign affiliates with cross-currency interest rate swaps, with notional values ranging from approximately $25.0 million to approximately $37.0 million. At December 31, 2004 and 2003, the notional amounts of outstanding contracts were approximately $37.0 million and $25.0 million, respectively. For the year ended December 31, 2004, the Company recorded cumulative net pre-tax losses of $2.4 million in accumulated other comprehensive income, which consisted of realized losses

of $1.6 million relating to closed cross-currency interest rate swap agreements and unrealized losses of $0.8 million relating to the Japanese Yen cross-currency interest rate swap agreements. For the year ended December 31, 2003, the Company recorded cumulative net pre-tax gains of $1.6 million in accumulated other comprehensive income, which consisted of realized gains of $1.3 million and unrealized gains of $0.3 million. For the year ended December 31, 2002, the Company recorded cumulative net pre-tax losses of $1.0 million in accumulated other comprehensive income, which consisted of realized losses of $1.4 million and unrealized gains of $0.4 million.

      During 2004, the Company hedged its net investment in British pound foreign affiliates with forward foreign exchange contracts in British pounds. For the year ended December 31, 2004, the Company recorded a cumulative net pre-tax gain of $0.7 million in accumulated other comprehensive income, which consisted of realized gains of $0.5 million related to closed forward agreements and unrealized gains of $0.2 million related to the British pound forward agreements. As of December 31, 2004, the Company had forward foreign exchange contracts in British pounds with a notional amount of approximately 45.0 million British pounds outstanding. For the year ended December 31, 2003, the Company recorded realized losses of $3.3 million in accumulated other comprehensive income relating to forward foreign exchange contracts in British pounds that were entered into and closed in 2003. As of December 31, 2003, the Company had no open forward foreign exchange contracts in British pounds. For the year ended December 31, 2002, the Company recorded unrealized gains of $0.3 million in accumulated other comprehensive income relating to forward foreign exchange contracts in British pounds.

      During 2004, the Company hedged its net investment in British pound foreign affiliates with range forward agreements in British pounds. Under the terms of the agreement the Company purchases an option below the current spot rate to sell British pounds, and sells an option to their counterparties above the current spot rate to buy British pounds, with option premiums that offset. For the year ended December 31, 2004, the Company recorded a realized cumulative net pre-tax loss of $8.6 million to accumulated other comprehensive income, related to the closed range forward agreements. As of December 31, 2004, the Company had no open range forward agreements in British pounds.

      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 cross-currency interest rate swap and foreign exchange contracts agreements, designated as hedges of net investment in foreign operations, as of December 31, 2004, would decrease accumulated other comprehensive income by approximately $12.3 million.

Other

The Company enters into forward foreign exchange contracts, principally to hedge the impact of currency fluctuations on certain inter-company balances. Principal hedged currencies include the Euro, Japanese Yen 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 inter-company balances. Gains and losses on these forward contracts are recorded in selling and administrative expenses in the consolidated statement of operations. At December 31, 2004 and December 31, 2003, the Company held forward foreign exchange contracts with notional amounts totaling approximately $62.9 million and $32.0 million, respectively.

      Assuming a hypothetical adverse change of 10% in year-end exchange rates (a strengthening of the U.S. dollar), the fair market value of the forward contracts, designated as fair value hedges, as of December 31, 2004 would decrease earnings by approximately $6.3 million.

      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 maintains balances in various operating accounts in excess of federally insured limits.

Item 8:     Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Waters Corporation:

We have completed an integrated audit of Waters Corporation’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the accompanying consolidated balance sheets and 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 its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule at Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9a, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating

effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Boston, Massachusetts

March 15, 2005

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

WATERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)