NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

1 | DESCRIPTION OF BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION

Waters Corporation ("Waters" or the "Company"), an analytical instrument manufacturer, is the world's largest manufacturer and distributor of high performance liquid chromatography ("HPLC") instruments, chromatography columns and other consumables, and related service. The Company believes it has the largest HPLC market share in the United States, Europe and non-Japan Asia and believes it has a leading position in Japan. HPLC, the largest product segment of the analytical instrument market, is utilized in a broad range of industries to detect, identify, monitor and measure the chemical, physical and biological composition of materials, and to purify a full range of compounds. Through its Micromass Limited ("Micromass") subsidiary, the Company believes it is a market leader in the development, manufacture, and distribution of mass spectrometry ("MS") instruments, which are complementary products that can be integrated and used along with other analytical instruments, especially HPLC. Through its TA Instruments, Inc. ("TAI") subsidiary, the Company believes it is also the world's leader in thermal analysis, a prevalent and complementary technique used in the analysis of polymers. As discussed in Note 15 to the financial statements, these three operating segments have been aggregated into one reporting segment for financial statement purposes.

2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use Of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the Unites States of America requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the dates of the financial statements and (iii) the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Risks And Uncertainties

The Company is subject to risks common to companies in the analytical instrument industry, including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with regulations of the U.S. Food and Drug Administration and similar foreign regulatory authorities and agencies.

Reclassification

Certain amounts in previous years' financial statements have been reclassified to conform to current presentation.

Principles Of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, most of which are wholly owned. The Company consolidates entities in which it owns or controls fifty percent or more of the voting shares unless control is likely to be temporary. All material intercompany balances and transactions have been eliminated.

Translation Of Foreign Currencies

For most of the Company's foreign operations, assets and liabilities are translated into U.S. dollars at exchange rates prevailing on the balance sheet date while revenues and expenses are translated at average exchange rates prevailing during the period. Any resulting translation gains or losses are included in accumulated other comprehensive (loss) in the consolidated balance sheets. During 2001, approximately 57% of the Company's net sales were derived from operations outside the United States. Gains and losses from foreign currency transactions are included in selling, general and administrative expenses in the consolidated statements of operations and were not material in 2001 and 2000.

Cash And Cash Equivalents

Cash equivalents primarily represent highly liquid investments, with original maturities of 90 days or less, in repurchase agreements and money market funds which are convertible to a known amount of cash and carry an insignificant risk of change in value. The Company has periodically maintained balances in various operating accounts in excess of federally insured limits.

Concentration Of Credit Risk

The Company sells its products and service to a significant number of large and small customers throughout the world, with approximately 63% of 2001 net sales to the pharmaceutical industry. None of the Company's individual customers account for more than 3% of annual Company sales. The Company performs continuing credit evaluation of its customers and generally does not require collateral, but in certain circumstances may require letters of credit or deposits. Historically, the Company has not experienced significant bad debt losses.

Inventory

The Company values all of its inventories at the lower of cost or market on a first-in, first-out basis ("FIFO").

Income Taxes

Deferred income taxes are recognized for temporary differences between financial statement and income tax basis of assets and liabilities.

Property, Plant And Equipment

Property, plant and equipment is recorded at cost. Expenditures for maintenance and repairs are charged to expense while the costs of significant improvements are capitalized. Depreciation is provided using the straight-line method over the following estimated useful lives: buildings and improvements - thirty years, leasehold improvements - fifteen years or life of lease, and production and other equipment - three to ten years. Upon retirement or sale, the cost of assets disposed and the related accumulated depreciation are eliminated from the balance sheet and related gains or losses are reflected in income.

Software Development Costs

The Company capitalizes software development costs for products offered for sale in accordance with Statement of Financial Accounting Standard ("SFAS") 86. Capitalized costs are amortized to cost of sales on a straight-line basis over the estimated useful lives of the related software products, generally three to five years. Capitalized software costs included in other assets were $21,585 and $16,975 at December 31, 2001 and 2000, net of accumulated amortization of $13,177 and $8,419, respectively.

The Company capitalizes internal software development costs in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Capitalized internal software development costs are amortized on a straight-line basis over ten years. For the years ended December 31, 2001 and 2000, capitalized internal software included in property, plant and equipment totaled $2,505 and $2,890, net of accumulated amortization of $1,345 and $960, respectively.

Patent, Trademark And Intellectual Property Costs

Other assets includes costs associated with acquiring and successfully defending Company patents, trademarks and intellectual properties such as licenses. These costs are amortized over their expected useful lives. Patent, trademark and intellectual property costs included in other assets totaled $14,561 and $7,245, net of accumulated amortization of $3,487 and $1,858, at December 31, 2001 and 2000, respectively.

Purchased Technology And Goodwill

Purchased technology and other intangibles are recorded at their fair market value as of the acquisition date and amortized over estimated useful lives ranging from four to fifteen years. Goodwill has been amortized on a straight-line basis over its useful life, primarily forty years for current goodwill components. Purchased technology and other intangibles included in other assets totaled $24,287 and $24,703, net of accumulated amortization of $19,308 and $16,668, at December 31, 2001 and 2000, respectively.

Debt Issuance Costs

Debt issuance costs are amortized over the life of the related debt using the effective interest method. At December 31, 2001 and 2000, debt issuance costs included in other assets amounted to $124 and $336, net of accumulated amortization of $3,539 and $3,327, respectively.

Investments

The Company accounts for its investments that represent less than twenty percent ownership using SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. This standard requires that certain debt and equity securities be adjusted to market value at the end of each accounting period. Unrealized market gains and losses are charged to earnings if the securities are traded for short-term profit. Otherwise, these securities are considered available-for-sale investments and unrealized gains and losses are charged or credited to other comprehensive income (loss) in stockholders' equity. Realized gains and losses on sales of investments are included in the consolidated statements of operations.

Investments for which the Company does not have the ability to exercise significant influence and for which there is not a readily determinable market value are accounted for under the cost method of accounting. The Company periodically evaluates the carrying value of its investments accounted for under the cost method of accounting and carries them at the lower of cost or estimated net realizable value. For investments in which the Company owns or controls between twenty and forty-nine percent of the voting shares, or over which it exerts significant influence over operating and financial policies, the equity method of accounting is used. The Company's share of net income or losses of equity investments is included in the consolidated statements of operations and was not material in any period presented. All investments at December 31, 2001 and 2000 are included in other assets.

Asset Impairment

The Company reviews its long-lived assets and goodwill for impairment in accordance with SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable, the Company evaluates the net realizable value of the asset, relying on a number of factors including but not limited to operating results, business plans, economic projections and anticipated future cash flows. Any change in the carrying amount of an asset as a result of the Company's evaluation is recorded in other expense in the consolidated statements of operations.

Stockholders' Equity

On February 27, 2001, the Board of Directors approved an amendment to the Company's Certificate of Incorporation to increase authorized common stock from two hundred million to four hundred million shares, which was approved by shareholders at the Annual Meeting on May 3, 2001.

On July 13, 2000, the Board of Directors approved a two-for-one common stock split, in the form of a 100% stock dividend. Shareholders of record on August 4, 2000 received the stock dividend on or about August 25, 2000. All share and per share amounts have been retroactively restated to reflect the stock split.

On February 29, 2000, the Board of Directors approved an amendment to the Company's Certificate of Incorporation to increase authorized common stock from one hundred million to two hundred million shares, and on May 4, 2000, shareholders approved the amendment.

Hedge Transactions

Effective January 1, 2001, the Company adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value as either assets or liabilities. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income ("OCI") and are recognized in earnings when the hedged item affects earnings; ineffective portions of changes in fair value are recognized in earnings. The impact of adopting SFAS 133 on January 1, 2001 was not material to the Company.

The Company currently uses derivative instruments to manage exposures to foreign currency risks. The Company's objectives for holding derivatives are to minimize foreign currency risk using the most effective methods to eliminate or reduce the impact of foreign currency exposure. The Company documents all relationships between hedging instruments and hedged items, and links all derivatives designated as fair value, cash flow or foreign currency hedges to specific assets and liabilities on the balance sheet or to specific forecasted transactions. The Company also assesses and documents, both at the hedges' inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows associated with the hedged items.

The Company has operations in various countries and currencies throughout the world. As a result, the Company's financial position, results of operations and cash flows are affected by fluctuations in foreign currency exchange rates. The Company uses debt swap agreements to partially mitigate such effects, and these agreements are designated as foreign currency hedges of a net investment in foreign operations. These agreements effectively swap higher U.S. dollar fixed rate borrowings for lower fixed rate borrowings denominated in the respective currencies. The effects of these debt swap agreements are included in interest income for the years presented. During 2001, the Company opened and subsequently closed debt swap agreements, in European and Japanese currencies. In December 2001, the Company entered into new debt swap agreements in Japanese yen, with a notional amount totaling $27,000, with a term of three months and an interest rate of .15%. For the year ended December 31, 2001, the Company recorded a cumulative net pre-tax gain of $7,800 in OCI, which consisted of a realized gain of $6,803 relating to the closed debt swap agreements and an unrealized gain of $997 relating to the new Japanese yen swap agreements, both of which partially offset hedged foreign exchange impacts. At December 31, 2000, the Company did not have any open debt swap agreements and for the year ended December 31, 2000, a realized gain of $15,202 was recognized in accumulated other comprehensive (loss).

The Company also enters into forward foreign exchange contracts, not designated as cash flow hedging instruments under SFAS 133, principally to hedge the impact of currency fluctuations on certain intercompany balances. Principal hedged currencies include the euro and British pound. The periods of these forward contracts typically range from three to six months and have varying notional amounts which are intended to be consistent with changes in intercompany balances. Gains and losses on these forward contracts are recorded in selling, general and administrative expenses in the consolidated statements of operations. Foreign currency gains and losses from currency fluctuations on intercompany balances and these forward contracts were not material for the years presented. At December 31, 2001 and December 31, 2000, the Company held forward foreign exchange contracts with notional amounts totaling approximately $54,100 and $60,000, respectively.

Revenue Recognition And Change In Accounting

Sales of products and services are generally recorded based on product shipment and performance of service, respectively. Proceeds received in advance of product shipment or performance of service are recorded as deferred revenue in the consolidated balance sheets.

Effective January 1, 2000, the Company changed its method of revenue recognition for certain products requiring installation in accordance with Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements. Previously, the Company recognized revenue related to both the sale and the installation of certain products at the time of shipment. The larger of the contractual cash holdback or the fair value of the installation service is now deferred when the product is shipped and recognized as a multiple element arrangement in accordance with SAB 101 when installation is complete. The cumulative effect of the change on prior years resulted in a charge to income of $10,771 (net of an income tax benefit of $3,785), which is included in income for the year ended December 31, 2000. The adoption of SAB 101 had virtually no effect on the Company's 2000 results of operations excluding the cumulative effect. For the year ended December 31, 2000, the Company recognized $17,561 in revenue, which is the entire amount of revenue associated with the cumulative effect adjustment as of January 1, 2000.

The following unaudited Pro Forma results of operations for the year ended December 31, 1999 give effect to the adoption of SAB 101 as if the change in accounting occurred at the beginning of that period.

                                                         Year Ended
Unaudited Pro Forma Results                       December 31, 1999
---------------------------                       -----------------
Net income available to common stockholders               $ 118,860
Net income per basic common share                              $.97
Net income per diluted common share                            $.90

Product Warranty Costs

The Company provides for estimated warranty costs at the time of sale which are included in cost of sales in the consolidated statements of operations.

Field Service Expenses

All expenses of the Company's field service organization are included in selling, general and administrative expenses in the consolidated statements of operations.

Advertising Costs

All advertising costs are expensed as incurred and included in selling, general and administrative expenses in the consolidated statements of operations. Advertising expenses for 2001, 2000 and 1999 were $7,621, $7,774 and $7,161, respectively.

Research And Development Costs

Internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work is performed.

Income (Loss) Per Share

In accordance with SFAS 128, Earnings Per Share, the Company presents two earnings per share ("EPS") amounts. Income (loss) per basic common share is based on income available to common shareholders and the weighted average number of common shares outstanding during the periods presented. Income (loss) per diluted common share includes additional dilution from potential common stock, such as stock issuable pursuant to the exercise of stock options outstanding and the conversion of debt. Accretion, cumulative dividends and gain on redemption of preferred stock have been included in computing income (loss) per share.

Comprehensive Income (Loss)

The Company accounts for comprehensive income (loss) in accordance with SFAS 130, Reporting Comprehensive Income. The statement establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The statement requires that all components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.

Retirement Plans

The Company adopted SFAS 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. The statement standardizes employer disclosure requirements about pension and other postretirement benefit plans by requiring additional information on changes in the benefit obligations and fair values of plan assets and eliminating certain disclosures that are no longer useful. It does not change the measurement or recognition of those plans.

Recent Accounting Standards Changes

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 141, Business Combinations and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets other than goodwill be amortized over their useful lives. SFAS 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The provisions of SFAS 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company, as required, in fiscal year 2002. Goodwill amortization was approximately $4.0 million in fiscal year 2001. The impact of impairment, if any, of goodwill on the Company's financial statements has not yet been determined.

In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. The provisions of SFAS 143 apply to all entities that incur obligations associated with the retirement of tangible long-lived assets. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002, and will thus be adopted by the Company, as required, in fiscal year 2003. The Company does not expect the application of SFAS 143 to have a material impact on its financial position or results of operations.

In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 provides guidance on the accounting for the impairment or disposal of long-lived assets. The objectives of SFAS 144 are to address significant issues relating to the implementation of SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and to develop a single model (based on the framework established in SFAS 121) for long-lived assets to be disposed of by sale, whether previously held or newly acquired. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. The Company does not expect the application of SFAS 144 to have a material impact on its financial position or results of operations.

3 | BUSINESS INVESTMENTS AND ACQUISITIONS

In June 2000, the Company formed a strategic alliance with Variagenics, Inc. ("Variagenics") to develop and commercialize genetic variance reagent kits for use in the clinical development of pharmaceutical products. Variagenics is a leader in applying genetic variance information to the drug development process. In July 2000, the Company paid Variagenics $7.5 million for a minority common stock equity ownership and $3.0 million for a license to manufacture and sell reagents, and warrants to purchase common stock. The warrants to purchase Variagenics common stock are exercisable at $14 per share for a period of 5 years. The warrants were valued at approximately $.7 million using the Black-Scholes model. The Company could pay up to $4.0 million in future milestone payments and is obligated to pay royalties on net sales of the reagent kits. The common stock and warrant investments in Variagenics are included in other assets and carried at fair value with unrealized gains and losses reported as a separate component of other comprehensive income (loss). The carrying amount of the common stock and warrants in Variagenics was approximately $1.7 million and $6.9 million at December 31, 2001 and 2000, respectively. The license is being amortized on a straight-line basis over its useful life of 15 years.

In the fourth quarter of 2001, the Company recorded a $7.1 million charge to other expense, in the consolidated statements of operations, for the impairment of certain equity investments, primarily the equity investment in Variagenics, Inc. At December 31, 2001, no other investments and long-lived assets were determined to be impaired.

In November 2000, the Company entered into an agreement to make a minority equity investment in GeneProt(TM), Inc. ("GeneProt") of $3.6 million Series B Preferred Stock, which is included in other assets at December 31, 2001 and 2000 and accounted for under the cost method of accounting. In December 2001, the Company formed a strategic alliance with GeneProt to collaborate on product development in the application of mass spectrometry equipment to industrial-scale proteomics drug discovery. As part of the strategic alliance, the Company will purchase $10.0 million of Series B Preferred Stock equity securities and GeneProt will purchase up to $20.0 million of mass spectrometry equipment, related systems, and services. The additional investment in GeneProt equity securities was made in February 2002 as part of a second round of equity financing and will be accounted for under the cost method of accounting. The shipment of mass spectrometry products is planned for later in 2002 and will be recognized as sales. The products' prices were at fair values consistent with other orders of this magnitude. The equity investment and sales arrangement were considered on an arms-length basis.

In December 2000, the Company entered into an agreement to make a minority equity investment of $7.5 million in Caprion Pharmaceuticals Inc. ("Caprion"). Caprion applies proprietary processes in sub-cellular biology in combination with its use of the Company's mass spectrometry products. As of December 31, 2001 and 2000, the Company had paid $7.5 million and $3.5 million, respectively, under this agreement. The investment in Caprion is included in other assets and has been accounted for under the cost method of accounting. Sales to Caprion during 2001 were approximately $4.0 million.

During 2001 and 2000, the Company also made business acquisitions totaling $2.6 million and $1.7 million, respectively. The business acquisitions were accounted for as purchases and the results of operations of the acquired companies have been included in the consolidated results of the Company from the acquisition date. The purchase price of the acquisitions have been allocated to tangible and intangible assets and any assumed liabilities based on respective fair market values. Any excess purchase price after this allocation has been accounted for as goodwill. Fixed assets and intangible assets are being amortized over their expected useful lives.

In the first quarter of 2002, the Company made a business acquisition totaling approximately $5.5 million for the net assets of a foreign distributor and other minority equity investments totaling $3.5 million.

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December 31                                           2001              2000
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Land and land improvements                        $  3,962           $  3,840
Buildings and leasehold improvements                47,620             43,605
Production and other equipment                     143,884            117,341
Construction in progress                             5,162              6,179
                                                 -----------       -----------
    Total property, plant and equipment            200,628            170,965
Less: accumulated depreciation and amortization    (86,421)           (68,357)
                                                 -----------       -----------
    Property, plant and equipment, net            $114,207           $102,608
                                                 ===========       ===========

                             5  |  INVENTORIES

Inventories are classified as follows:

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December 31                                          2001              2000
------------------------------------------------------------------------------

Raw materials                                    $ 31,965           $ 32,760
Work in progress                                   26,305             20,269
Finished goods                                     44,448             34,246
                                                 -----------       -----------
    Total inventories                            $102,718           $ 87,275
                                                 ===========       ===========

                             6  |  DEBT

The Company's Bank Credit Agreement ("Agreement") provided a $450.0 million line of credit through June 2002. Loans under the Agreement bore interest for each calendar quarter at an annual rate equal to, at the Company's option, 1) the applicable LIBOR rate plus a varying margin between .30% and 1.00% or 2) prime rate. Margins on LIBOR borrowings varied with the Company's financial performance. At December 31, 2001 and 2000, the Company had no aggregate borrowings outstanding under the Agreement and had additional amounts available to borrow of $442.6 million and $442.8 million, respectively, after outstanding letters of credit. Borrowings were collateralized by substantially all of the Company's assets. The Company was also required to meet certain covenants, none of which was considered restrictive to operations. In February 2002, the Company entered into an agreement to replace its existing credit facility. The new credit facility provides a $250.0 million line of credit, is unsecured in nature and has a five year term.

The Company's foreign subsidiaries also had available short-term lines of credit totaling $32.9 million at December 31, 2001 and $33.2 million at December 31, 2000. At December 31, 2001 and 2000, related short-term borrowings were $1.1 million at a weighted average interest rate of 5.154% and $2.0 million at a weighted average interest rate of 7.70%, respectively. In addition, at December 31, 2000 the Company had a short-term note payable of $2.8 million related to an acquisition which bore interest at a fixed rate of 6.0%.

---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31                                                                  2001          2000          1999
---------------------------------------------------------------------------------------------------------------------------
The components of income from operations before
   income taxes were as follows:
      Domestic                                                                      $ 48,677      $ 54,263      $ 66,082
      Foreign                                                                         98,749       156,699       101,479
                                                                                   ----------    ----------    ----------
         Total                                                                      $147,426      $210,962      $167,561
                                                                                   ==========    ==========    ==========

The components of the current and deferred income tax provision
   from operations were as follows:
      Current                                                                       $ 31,680      $ 59,293      $ 41,560
      Deferred                                                                         1,203        (4,444)        3,683
                                                                                   ----------    ----------    ----------
         Total                                                                      $ 32,883      $ 54,849      $ 45,243
                                                                                   ==========    ==========    ==========

The components of the provision for income taxes from
   operations were as follows:
      Federal                                                                       $ 13,303      $ 13,589      $ 16,428
      State                                                                            1,592         2,195         1,187
      Foreign                                                                         17,988        39,065        27,628
                                                                                   ----------    ----------    ----------
         Total                                                                      $ 32,883      $ 54,849      $ 45,243
                                                                                   ==========    ==========    ==========

The differences between income taxes computed at the United
   States statutory rate and the provision for income taxes
   are summarized as follows:
      Federal tax computed at U.S. statutory income tax rate                        $ 51,599      $ 73,837      $ 58,646
      Foreign sales corporation                                                       (2,283)       (2,999)       (3,075)
      State income tax, net of federal income tax benefit                              1,035         1,427           772
      Deferred tax assets (benefited)                                                   (711)       (5,498)       (4,891)
      Net effect of foreign operations                                               (16,875)      (12,814)       (7,243)
      Other, net                                                                         118           896         1,034
                                                                                   ----------    ----------    ----------
         Provision for income taxes                                                 $ 32,883      $ 54,849      $ 45,243
                                                                                   ==========    ==========    ==========

The tax effects of temporary differences and carryforwards
   which gave rise to deferred tax assets and deferred tax
   (liabilities) were as follows:
      Tax benefit of net operating losses and credits                               $103,831      $ 96,534      $ 27,778
      Goodwill amortization                                                            6,334         6,426        10,496
      Deferred compensation                                                            7,703         9,610         9,908
      Inventory                                                                        1,960         3,794         2,586
      Other                                                                            4,611         7,176           645
      Depreciation and capitalized software                                          (13,838)      (10,760)       (9,890)
      Valuation allowance                                                           (108,801)     (109,139)      (22,565)
                                                                                   ----------    ----------    ----------
         Total deferred taxes                                                       $  1,800      $  3,641      $ 18,958
                                                                                   ==========    ==========    ==========

The income tax benefits associated with nonqualified stock option compensation expense recognized for tax purposes and credited to additional paid-in capital were $12.7 million, $12.3 million and $9.7 million for the years ended December 31, 2001, 2000 and 1999, respectively. The deferred tax benefit of net operating losses and credits is broken out as follows: $65.4 million in U.S. operating loss carryforwards that begin to expire in 2019; $29.6 million in foreign tax credits that begin to expire in 2005; $3.3 million in research and development credits that begin to expire in 2009; $3.5 million in Alternative Minimum Tax credits with no expiration date; and $2.0 million in foreign net operating losses with no expiration date. Because of the magnitude of the stock option exercises, the Company believes that it is more likely than not that the U.S. deferred tax assets will not be realized, therefore, a valuation allowance has reduced to zero all the deferred tax assets relating to U.S. income. The remaining deferred tax assets relate to foreign deferred tax assets which are expected to be utilized. To the extent that the deferred tax assets relate to stock option deductions, the resultant benefits, if and when realized, will be credited to stockholders' equity.

Deferred tax assets included in other current assets totaled $1.8 million, $3.6 million and $5.6 million at December 31, 2001, 2000 and 1999, respectively. Deferred tax assets included in other assets were zero at December 31, 2001 and 2000 and $13.4 million at December 31, 1999. The goodwill amortization amount arises from the difference between the book and tax treatment of goodwill and in-process research and development charges.

At December 31, 2001, there were unremitted earnings of foreign subsidiaries of approximately $240.5 million. The Company has not provided U.S. income taxes or foreign withholding taxes on these earnings as it is the Company's intention to permanently reinvest the earnings outside the U.S. The Company's effective tax rate for the years ended December 31, 2001, 2000 and 1999 was 22.3%, 26% and 27%, respectively.

--------------------------------------------------
2002                                      $13,024
2003                                       11,054
2004                                        8,685
2005                                        6,260
2006 and thereafter                        25,698

The Company has disbursed $19,000 in the first quarter of 2002 as part of minority equity investments and an acquisition. This is described in more detail in Note 3, Business Investments and Acquisitions.

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 and any outcome, either individually or in the aggregate, with the exception of the current litigation with Applera Corporation, will not be material to the financial position or results of operations. See Note 17, Subsequent Event, for further information.

9 | REDEEMABLE PREFERRED STOCK

In conjunction with the August 18, 1994 acquisition of the predecessor HPLC business of Millipore Corporation ("Millipore"), the Company authorized and issued one hundred shares of Redeemable Preferred Stock ("Preferred Stock") with a par value of $.01 per share. The Preferred Stock had a liquidation value of $10,000 and earned an annual 6% cumulative dividend on the liquidation value with any accumulated but unpaid dividends added to the liquidation value. The Company could, at any time, redeem the Preferred Stock at the current liquidation value but in no event later than August 18, 2006. The Preferred Stock was recorded at its estimated fair value of $5,000 on the date of issuance. The excess of the liquidation value over the fair market value was being accreted by periodic charges to additional paid-in capital or available retained earnings since the date of issue.

On November 2, 1999, the Company redeemed all outstanding shares of Preferred Stock, including cumulative unpaid dividends, for $9,500 in cash. The carrying value of the one hundred shares of Preferred Stock and cumulative dividends payable was $9,883 on that date and the transaction resulted in a gain on redemption of $383 which was credited to additional paid-in capital.

During the year ended December 31, 1999, $322 for accretion and $503 for unpaid dividends were charged against additional paid-in capital or available retained earnings.

10 | STOCK COMPENSATION AND PURCHASE PLANS

Basis of Accounting

The Company has four stock-based compensation plans, which are described below. The Company uses the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees, and related interpretations, including FASB Interpretation 44, Accounting for Certain Transactions Involving Stock Compensation, for its plans. Accordingly, no compensation expense has been recognized for its fixed employee stock option plans and its employee stock purchase plan under SFAS 123, Accounting for Stock-Based Compensation. Had compensation expense for the Company's four stock-based compensation plans been recorded based on the fair value of awards at grant date consistent with the alternative method prescribed by SFAS 123, the Company's pro forma net income for 2001, 2000 and 1999, would have been $95,589, $135,404 and $115,857, respectively. Basic income per share for 2001, 2000, and 1999 would have been $.73, $1.06 and $.94, respectively. Diluted income per share for 2001, 2000, and 1999 would have been $.70, $.99 and $.87, respectively. The pro forma amounts include amortized fair values attributable to options granted after December 31, 1994 only and, therefore, are not likely to be representative of the effects on reported net income for future years.

The fair value of each option grant under SFAS 123 was estimated on the date of grant using the Black-Scholes option-pricing model. Relevant data are described below:

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Significant Assumptions Used to Estimate Option Fair Values                 2001       2000        1999
---------------------------------------------------------------------------------------------------------
Options issued                                                             2,251      1,733       1,868
Risk-free interest rate                                                      5.5%       5.4%        6.2%
Expected life in years                                                       7.5        7.5         7.5
Expected volatility                                                         .565       .524        .437
Expected dividends                                                             0          0           0

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Weighted Average Exercise Price and Fair Values of Options on the Date of Grant              2001         2000         1999
-----------------------------------------------------------------------------------------------------------------------------
   Exercise price                                                                          $36.73       $70.64       $23.06
   Fair value                                                                              $23.79       $42.85       $13.31

The following table details the weighted average remaining contractual life of options outstanding at December 31, 2001 by range of exercise prices:

                                        Weighted                                                 Weighted
                                         Average    Remaining Contractual                         Average
        Exercise    Number of Shares    Exercise          Life of Options    Number of Shares    Exercise
     Price Range         Outstanding       Price              Outstanding         Exercisable       Price
----------------    ----------------    --------    ---------------------    ----------------    ---------
$ 1.02 to $ 2.00                 265      $ 1.02                2.8 years                 265      $ 1.02
$ 2.01 to $ 5.00               7,214      $ 3.71                2.7 years               7,214      $ 3.71
$ 5.01 to $10.00                 860      $ 8.56                4.4 years                 850      $ 8.56
$10.01 to $15.00               1,376      $10.69                5.9 years               1,014      $10.69
$15.01 to $20.00               1,794      $19.68                6.9 years                 992      $19.68
$20.01 to $30.00               1,820      $23.22                8.0 years                 663      $23.09
$30.01 to $40.00               2,177      $36.25                9.9 years                   0      $ 0.00
$40.01 to $80.97               1,690      $71.49                8.9 years                 331      $71.36
                    -----------------------------------------------------    -----------------------------
                              17,196      $18.98                5.6 years              11,329      $ 9.14
                    =====================================================    =============================

Stock Option Plans

On May 7, 1996, the Company's shareholders approved the 1996 Long-Term Incentive Plan ("1996 Plan"), which provides for the granting of 4,000 shares of Common Stock, in the form of incentive or non-qualified stock options, stock appreciation rights ("SARs"), restricted stock or other types of awards. Under the 1996 Plan, the exercise price for stock options may not be less than the fair market value of the underlying stock at the date of grant. On December 2, 1997, the Board of Directors approved an additional 8,000 shares of Common Stock for issue under the 1996 Plan. The 1996 Plan is scheduled to terminate on May 7, 2006, unless extended for a period of up to five years by action of the Board of Directors. Options generally will expire no later than ten years after the date on which they are granted and will become exercisable as directed by the Compensation Committee of the Board of Directors. A SAR may be granted alone or in conjunction with an option or other award. No SARs, restricted stock, or other types of awards were outstanding as of December 31, 2001.

The Company's 1994 Stock Option Plan ("1994 Plan") provided for the granting of 20,141 options to purchase shares of Common Stock to certain key employees of the Company. The exercise price of the options was determined by a committee of the Board of Directors of the Company. Options granted have a term of ten years and vest in five equal installments on the first five anniversaries after the grant.

On May 7, 1996, the Company's shareholders approved the 1996 Non-Employee Director Deferred Compensation Plan ("Deferred Compensation Plan") and the 1996 Non-Employee Director Stock Option Plan ("Director Stock Option Plan"). Under the Deferred Compensation Plan, outside directors may elect to defer their fees and credit such fees to either a cash account which earns interest at a market-based rate or to a common stock unit account, for which four hundred thousand shares of Common Stock have been reserved. Under the Director Stock Option Plan, each outside director will receive an annual option to purchase four thousand shares of Common Stock. Two hundred thousand shares of Common Stock may be issued under the plan. Options have a term of ten years and, with the exception of options granted in 1996, which vest in one year, vest in five equal installments on the first five anniversaries following the date of grant and have option prices no less than fair market value at the date of grant.

The following table summarizes stock option activity for the plans:

-------------------------------------------------------------------------------------------------------------
                                                                                            Weighted Average
                                             Number of Shares            Price Per Share      Exercise Price
-------------------------------------------------------------------------------------------------------------
   Outstanding at December 31, 1998                    21,148           $ 1.02 to $19.68             $  5.86
Granted                                                 1,868                     $23.06             $ 23.06
Exercised                                              (3,272)          $ 1.02 to $19.68             $  3.03
Canceled                                                  (62)          $ 8.56 to $19.68             $ 12.29
                                                     ----------         ----------------             -------
   Outstanding at December 31, 1999                    19,682           $ 1.02 to $23.06             $  7.94
Granted                                                 1,733           $25.75 to $72.06             $ 70.64
Exercised                                              (5,239)          $ 1.02 to $23.06             $  4.24
Canceled                                                  (85)          $ 8.05 to $23.06             $ 17.59
                                                     ----------         ----------------             -------
   Outstanding at December 31, 2000                    16,091           $ 1.02 to $72.06             $ 15.84
Granted                                                 2,251           $28.23 to $80.97             $ 36.73
Exercised                                              (1,046)          $ 1.02 to $23.06             $  6.51
Canceled                                                 (100)          $ 8.56 to $72.06             $ 44.22
                                                     ----------         ----------------             -------
   Outstanding at December 31, 2001                    17,196           $ 1.02 to $80.97             $ 18.98
                                                     ==========         ================             =======

Options exercisable at December 31, 2001, 2000, and 1999 were 11,329, 10,648 and 14,058, respectively. The weighted average exercise prices of options exercisable at December 31, 2001, 2000, and 1999 were $9.14, $6.03 and $4.45, respectively. Available stock options for grant at December 31, 2001 were 1,241.

Employee Stock Purchase Plan

On February 26, 1996, the Company adopted the 1996 Employee Stock Purchase Plan under which eligible employees may contribute up to 15% of their earnings toward the quarterly purchase of the Company's Common Stock. The plan makes available 1,000 shares of the Company's Common Stock commencing October 1, 1996. As of December 31, 2001, approximately 361 shares have been issued under the plan. Each plan period lasts three months beginning on January 1, April 1, July 1 and October 1 of each year. The purchase price for each share of stock is the lesser of 90% of the market price on the first day of the plan period or 100% of the market price on the last day of the plan period. No compensation expense is recorded in connection with the plan.

                                                         ------------------------------------------------
                                                                           Year Ended 2001
                                                         ------------------------------------------------
                                                              Income            Shares        Per Share
                                                           (Numerator)      (Denominator)       Amount
                                                         ---------------   ---------------   ------------
Net income per basic common share before cumulative
   effect of change in accounting principle                   $114,543             130,559         $.88
                                                         ===============   ===============   ============
Effect of dilutive securities:
   Options outstanding                                                               6,782
   Options exercised and cancellations                                                 168
                                                         ---------------   ---------------   ------------
Net income per diluted common share before cumulative
   effect of change in accounting principle                   $114,543             137,509         $.83
                                                         ===============   ===============   ============

                                                         ------------------------------------------------
                                                                           Year Ended 2000
                                                         ------------------------------------------------
                                                              Income            Shares        Per Share
                                                           (Numerator)      (Denominator)       Amount
                                                         ---------------   ---------------   ------------
Net income per basic common share before cumulative
   effect of change in accounting principle                   $156,113             127,568        $1.22
                                                         ===============   ===============   ============

Effect of dilutive securities:
   Options outstanding                                                               7,882
   Options exercised and cancellations                                               1,293
                                                         ---------------   ---------------   ------------
Net income per diluted common share before cumulative
   effect of change in accounting principle                   $156,113             136,743        $1.14
                                                         ===============   ===============   ============

                                                         ------------------------------------------------
                                                                           Year Ended 1999
                                                         ------------------------------------------------
                                                              Income            Shares        Per Share
                                                           (Numerator)      (Denominator)       Amount
                                                         ---------------   ---------------   ------------
Net income per basic common share before cumulative
   effect of change in accounting principle                   $122,318
Accretion of and 6% dividend on preferred stock                   (825)
Gain on redemption of preferred stock                              383
                                                         ---------------
Income per basic common share                                 $121,876             123,013         $.99
                                                         ===============   ===============   ============

Effect of dilutive securities:
   Options outstanding                                                               8,787
   Options exercised and cancellations                                                 832
                                                         ---------------   ---------------   ------------
Income per diluted common share                               $121,876             132,632         $.92
                                                         ===============   ===============   ============

For the years ended December 31, 2001, 2000, and 1999, the Company had 1,688, 114 and 0 stock option securities that were antidilutive, respectively. These securities were not included in the computation of diluted EPS. The effect of dilutive securities was calculated using the treasury stock method.

-------------------------------------------------------------------------------------------------------
Year Ended December 31                                                  2001         2000         1999
-------------------------------------------------------------------------------------------------------
Net income                                                          $114,543     $145,342     $122,318

   Foreign currency adjustments
   Foreign currency translation before income taxes                  (11,497)     (17,548)      (7,012)
   Income tax (benefit)                                               (4,024)      (6,142)      (2,454)
                                                                   -----------  -----------  -----------
   Foreign currency translation, net of tax                           (7,473)     (11,406)      (4,558)

   Net appreciation and realized gains on derivative instruments       7,800       15,202        5,516
   Income tax                                                          2,730        5,320        1,931
                                                                   -----------  -----------  -----------
   Net appreciation and realized gains on derivative
      instruments, net of tax                                          5,070        9,882        3,585
                                                                   -----------  -----------  -----------

Net foreign currency adjustments                                      (2,403)      (1,524)        (973)

Minimum pension liability adjustment                                  (4,679)          --           --

Unrealized (loss) on investments before income taxes                   1,148       (1,148)          --
Income tax (benefit)                                                     402         (402)          --
                                                                   -----------  -----------  -----------
   Unrealized (loss) on investments, net of tax                          746         (746)          --
                                                                   -----------  -----------  -----------
   Other comprehensive (loss)                                         (6,336)      (2,270)        (973)

                                                                   -----------  -----------  -----------
   Comprehensive income                                             $108,207     $143,072     $121,345
                                                                   ===========  ===========  ===========

As described in Note 3 of these financial statements, the Company reclassified the unrealized loss on its investment in Variagenics, Inc. to other expense in the consolidated statements of operations in 2001. The $746 unrealized loss on investments, net of tax, in Variagenics at December 31, 2000 has been included in the asset impairment charge recorded in other expense in the consolidated statements of operations for 2001.

13 | RETIREMENT PLANS

The Company has two retirement plans for U.S. employees: the Waters Employee Investment Plan, a defined contribution plan, and the Waters Retirement Plan, a defined benefit cash balance plan.

U.S. employees are eligible to participate in the Waters Employee Investment Plan after one month of service. Employees may contribute from 1% to 20% of eligible pay on a pre-tax basis. In 2002, the maximum employee contribution percentage of eligible pay increased from 20% to 30%. After one year of service, the Company makes a matching contribution of 50% for contributions up to 6% of eligible pay. Employees are 100% vested in employee and company matching contributions. For the years ended December 31, 2001, 2000 and 1999, the Company's matching contributions amounted to $2,431, $2,136 and $1,984, respectively.

U.S. employees are eligible to participate in the Waters Retirement Plan after one year of service. Annually, the Company credits each employee's account as a percentage of eligible pay based on years of service. In addition, each employee's account is credited for investment returns at the beginning of each year for the prior year at the average 12 month Treasury Bill rate plus 0.5%, limited to a minimum rate of 5% and a maximum rate of 10%. An employee does not vest until the completion of five years of service at which time the employee becomes 100% vested.

The net periodic pension cost under SFAS 87, Employers' Accounting for Pensions, is made up of several components that reflect different aspects of the Company's financial arrangements as well as the cost of benefits earned by employees. These components are determined using the projected unit credit actuarial cost method and are based on certain actuarial assumptions. The Company's accounting policy is to reflect in the projected benefit obligation all benefit changes to which the Company is committed as of the current valuation date; use a market-related value of assets to determine pension expense; amortize increases in prior service costs on a straight-line basis over the expected future service of active participants as of the date such costs are first recognized; and amortize cumulative actuarial gains and losses in excess of 10% of the larger of the market-related value of plan assets and the projected benefit obligation over the expected future service of active participants. Summary data for the Waters Retirement Plan are presented in the following tables:

--------------------------------------------------------------------------------------------------------
Reconciliation of Projected Benefit Obligation                                       2001          2000
--------------------------------------------------------------------------------------------------------
Benefit obligation, January 1                                                   $  27,849     $  22,710
 Service cost                                                                       2,994         2,695
 Interest cost                                                                      2,305         2,010
 Employee rollovers                                                                    76           149
 Actuarial loss                                                                     1,408           941
 Disbursements                                                                       (493)         (656)
                                                                               -----------   -----------
Benefit obligation, December 31                                                 $  34,139     $  27,849
                                                                               ===========   ===========

--------------------------------------------------------------------------------------------------------
Reconciliation of Fair Value of Assets                                               2001          2000
--------------------------------------------------------------------------------------------------------

Fair value of assets, January 1                                                 $  22,953     $  22,886
 Actual return on plan assets                                                      (2,085)       (2,666)
 Company contributions                                                              3,265         3,240
 Disbursements                                                                       (493)         (656)
 Employee rollovers                                                                    76           149
                                                                               -----------   -----------
Fair value of assets, December 31                                               $  23,716     $  22,953
                                                                               ===========   ===========

--------------------------------------------------------------------------------------------------------
Reconciliation of Funded Status, December 31                                         2001          2000
--------------------------------------------------------------------------------------------------------

Projected benefit obligation                                                    $ (34,139)    $ (27,849)
 Fair value of plan assets                                                         23,716        22,953
                                                                               -----------   -----------
 Projected benefit obligation (in excess of) fair value of plan assets            (10,423)       (4,896)
 Unrecognized prior service cost                                                   (1,027)       (1,126)
 Unrecognized net actuarial loss                                                    9,219         3,186
 Minimum pension liability adjustment (Note 12)                                    (4,679)           --
                                                                               -----------   -----------
Accrued (liability)                                                             $  (6,910)    $  (2,836)
                                                                               ===========   ===========

The projected benefit obligation was calculated using the following
   weighted average assumptions:
 Discount rate                                                                       7.25%         7.50%
 Return on assets                                                                    9.00%         9.00%
 Increases in compensation levels                                                    4.75%         4.75%

---------------------------------------------------------------------------------------------------
Components of Net Periodic Pension Cost, Year Ended December 31       2001        2000        1999
---------------------------------------------------------------------------------------------------
Service cost                                                       $ 2,994     $ 2,695     $ 2,878
Interest cost                                                        2,305       2,010       1,696
Return on plan assets                                               (2,540)     (2,171)     (1,645)
Net amortization:
  Prior service cost                                                   (99)        (99)        (99)
  Net actuarial (gain)                                                  --          (5)         --
                                                                  ---------   ---------   ---------
Net periodic pension cost                                          $ 2,660     $ 2,430     $ 2,830
                                                                  =========   =========   =========

---------------------------------------------------------------------------------------------------
Reconciliation of (Accrued) Pension Cost                              2001        2000        1999
---------------------------------------------------------------------------------------------------

(Accrued) pension cost, January 1                                  $(2,836)    $(3,646)    $(4,894)
  FAS 87 (cost)                                                     (2,660)     (2,430)     (2,830)
  Contributions made during the year                                 3,265       3,240       4,078
  Minimum pension liability adjustment (Note 12)                    (4,679)         --          --
                                                                  ---------   ---------   ---------
(Accrued) pension cost, December 31                                $(6,910)    $(2,836)    $(3,646)
                                                                  =========   =========   =========

The Company sponsors various non-U.S. retirement plans. The Company's accrued pension cost for the Japanese defined benefit plan was $4,314 and $4,552 at December 31, 2001 and 2000, respectively, and is included in other liabilities in the consolidated balance sheets.

The Company also sponsors other unfunded employee benefit plans in the U.S., including a post-retirement health care plan. This plan provides reimbursement for medical expenses and is contributory. The Company's accrued post-retirement benefit obligation for this plan was $2,678 and $2,636 at December 31, 2001 and 2000, respectively, and is included in other liabilities in the consolidated balance sheets.

14 | RELATED PARTY TRANSACTIONS

In 1996 and 1995, the Company made loans to certain executive officers of the Company. The loans were collateralized by a pledge of shares of common stock held by these executive officers. The 1995 loans bore interest at 5.83% per annum and matured on December 1, 2000. The 1996 loans bore interest at 5.65% per annum and matured on January 8, 2001. Loans receivable of $723 at December 31, 2000 are included in other assets in the consolidated balance sheets and were collected during 2001.

15 | BUSINESS SEGMENT INFORMATION

SFAS 131 establishes standards for reporting information about operating segments in annual financial statements of public business enterprises. It also establishes standards for related disclosures about products and service, geographic areas and major customers. 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 three operating segments: Waters, Micromass and TAI.

Waters is in the business of manufacturing and distributing HPLC instruments, columns and other consumables, and related service; Micromass is in the business of manufacturing and distributing mass spectrometry instruments that can be integrated and used along with other analytical instruments, particularly HPLC; and TAI is in the business of manufacturing and distributing thermal analysis and rheology instruments. For all three of these operating segments within the analytical instrument industry; economic characteristics, production processes, products and services, types and classes of customers, methods of distribution, and regulatory environments are similar. Because of these similarities, the three segments have been aggregated into one reporting segment for financial statement purposes. The accounting policies of the reportable segment are the same as those described in the Summary of Significant Accounting Policies. Please refer to the consolidated financial statements for financial information regarding the one reportable segment of the Company. The Company sells products and service within this reportable segment, detailed as follows:

--------------------------------------------------------------------------------
Revenue                                   2001             2000             1999
--------------------------------------------------------------------------------
Products                              $696,613         $652,106         $569,504
Service                                162,595          142,965          134,896
                                     -------------------------------------------
   Total                              $859,208         $795,071         $704,400
                                     ===========================================

Geographic information is presented below:

------------------------------------------------------------------------------------------------------------------------------------
                                                   United
                                                   States      Europe       Japan        Asia Other Int'l  Elimination       Total
------------------------------------------------------------------------------------------------------------------------------------
2001
Sales:
    Unaffiliated sales                          $ 373,000   $ 250,231   $  63,281   $  40,561   $  73,951    $      --   $ 801,024
    Unaffiliated export sales to Japan                 17      21,038          --          --          --           --      21,055
    Unaffiliated export sales to Asia               7,679      15,402          --          --          --           --      23,081
    Unaffiliated export sales to Other Int'l       10,350       3,698          --          --          --           --      14,048
    Transfers between areas                       191,629      92,751          --          --          --     (284,380)         --
                                                ---------   ---------   ---------   ---------   ---------    ---------   ---------
Total sales                                     $ 582,675   $ 383,120   $  63,281   $  40,561   $  73,951    $(284,380)  $ 859,208
                                                =========   =========   =========   =========   =========    =========   =========

Long-lived assets:
    Unaffiliated                                $ 235,531   $ 113,454   $   2,252   $   6,096   $   6,834    $      --   $ 364,167
    Between affiliates                            269,978      24,011       2,181          --         511     (296,681)         --
                                                ---------   ---------   ---------   ---------   ---------    ---------   ---------
Total long-lived assets                         $ 505,509   $ 137,465   $   4,433   $   6,096   $   7,345    $(296,681)  $ 364,167
                                                =========   =========   =========   =========   =========    =========   =========

2000
Sales:
    Unaffiliated sales                          $ 343,336   $ 228,971   $  64,228   $  34,512   $  60,982    $      --   $ 732,029
    Unaffiliated export sales to Japan                 --      26,581          --          --          --           --      26,581
    Unaffiliated export sales to Asia               7,677      10,927          --          --          --           --      18,604
    Unaffiliated export sales to Other Int'l       12,929       4,928          --          --          --           --      17,857
    Transfers between areas                       162,935      93,344          --          --          --     (256,279)         --
                                                ---------   ---------   ---------   ---------   ---------    ---------   ---------
Total sales                                     $ 526,877   $ 364,751   $  64,228   $  34,512   $  60,982    $(256,279)  $ 795,071
                                                =========   =========   =========   =========   =========    =========   =========

Long-lived assets:
    Unaffiliated                                $ 230,048   $  97,606   $   3,298   $   3,407   $  14,190    $      --   $ 348,549
    Between affiliates                            272,294      24,011       2,181          --       3,811     (302,297)         --
                                                ---------   ---------   ---------   ---------   ---------    ---------   ---------
Total long-lived assets                         $ 502,342   $ 121,617   $   5,479   $   3,407   $  18,001    $(302,297)  $ 348,549
                                                =========   =========   =========   =========   =========    =========   =========

1999
Sales:
    Unaffiliated sales                          $ 289,538   $ 228,181   $  65,137   $  27,603   $  51,134    $      --   $ 661,593
    Unaffiliated export sales to Japan                 --      16,119          --          --          --           --      16,119
    Unaffiliated export sales to Asia               5,831       5,007          --          --          --           --      10,838
    Unaffiliated export sales to Other Int'l       14,326       1,524          --          --          --           --      15,850
    Transfers between areas                       182,471      59,510          --          --          --     (241,981)         --
                                                ---------   ---------   ---------   ---------   ---------    ---------   ---------
Total sales                                     $ 492,166   $ 310,341   $  65,137   $  27,603   $  51,134    $(241,981)  $ 704,400
                                                =========   =========   =========   =========   =========    =========   =========

Long-lived assets:
    Unaffiliated                                $ 221,907   $ 100,516   $   3,279   $     192   $  11,213    $      --   $ 337,107
    Between affiliates                            227,246      24,011       2,181          --       3,795     (257,233)         --
                                                ---------   ---------   ---------   ---------   ---------    ---------   ---------
Total long-lived assets                         $ 449,153   $ 124,527   $   5,460   $     192   $  15,008    $(257,233)  $ 337,107
                                                =========   =========   =========   =========   =========    =========   =========

The United States category includes Puerto Rico. The Other category includes Canada, South America, Australia, India, Eastern Europe and Central Europe. Transfer sales between geographical areas are generally made at a discount from list price. None of the Company's individual customers account for more than 3% of annual Company sales.

-------------------------------------------------------------------------------------------------------------------------
  2001                                                          First       Second        Third      Fourth
                                                              Quarter      Quarter      Quarter     Quarter      Total
-------------------------------------------------------------------------------------------------------------------------
Net sales                                                    $201,032     $206,803     $202,694    $248,679     $859,208
Cost of sales                                                  73,298       75,545       73,120      89,269      311,232
                                                           -----------  -----------  -----------  ----------  -----------
   Gross profit                                               127,734      131,258      129,574     159,410      547,976

Selling, general and administrative expenses                   65,907       67,169       66,913      69,717      269,706
Research and development expenses                              11,038       11,741       11,794      12,029       46,602
Patent litigation provision                                        --           --           --      75,000       75,000
Goodwill and purchased technology amortization                  1,748        1,771        1,755       1,867        7,141
                                                           -----------  -----------  -----------  ----------  -----------
   Operating income                                            49,041       50,577       49,112         797      149,527
Other expense                                                      --           --           --      (7,066)      (7,066)
Interest income, net                                            1,486        1,151        1,211       1,117        4,965
                                                           -----------  -----------  -----------  ----------  -----------
   Income (loss) from operations before income taxes           50,527       51,728       50,323      (5,152)     147,426
Provision for income taxes                                     12,127       12,415       12,077      (3,736)      32,883
                                                           -----------  -----------  -----------  ----------  -----------
   Net income (loss)                                         $ 38,400     $ 39,313     $ 38,246    $ (1,416)    $114,543
                                                           ===========  ===========  ===========  ==========  ===========

Net income (loss) per basic common share                     $    .30     $    .30     $    .29    $   (.01)    $    .88
                                                           ===========  ===========  ===========  ==========  ===========

Weighted average number of basic common shares                130,166      130,564      130,752     130,815      130,559
                                                           ===========  ===========  ===========  ==========  ===========

Net income (loss) per diluted common share                   $    .28     $    .29     $    .28    $   (.01)    $    .83
                                                           ===========  ===========  ===========  ==========  ===========

Weighted average number of diluted common shares
and equivalents                                               137,933      137,564      136,704     130,815      137,509
                                                           ===========  ===========  ===========  ==========  ===========

-------------------------------------------------------------------------------------------------------------------------
  2000                                                          First       Second        Third      Fourth
                                                              Quarter      Quarter      Quarter     Quarter      Total
-------------------------------------------------------------------------------------------------------------------------

Net sales                                                    $180,202     $197,408     $191,953    $225,508     $795,071
Cost of sales                                                  66,340       71,777       70,293      79,854      288,264
                                                           -----------  -----------  -----------  ----------  -----------
   Gross profit                                               113,862      125,631      121,660     145,654      506,807
Selling, general and administrative expenses                   60,395       61,060       59,712      65,223      246,390
Research and development expenses                              10,362       10,557       10,394      11,200       42,513
Goodwill and purchased technology amortization                  1,811        1,760        1,755       1,751        7,077
                                                           -----------  -----------  -----------  ----------  -----------
   Operating income                                            41,294       52,254       49,799      67,480      210,827
Interest (expense) income, net                                   (701)        (343)         322         857          135
                                                           -----------  -----------  -----------  ----------  -----------
   Income from operations before income taxes                  40,593       51,911       50,121      68,337      210,962
Provision for income taxes                                     10,545       13,506       13,030      17,768       54,849
                                                           -----------  -----------  -----------  ----------  -----------
   Income before cumulative effect of change in
      accounting principle                                     30,048       38,405       37,091      50,569      156,113
Cumulative effect of change in accounting principle           (10,771)          --           --          --      (10,771)
                                                           -----------  -----------  -----------  ----------  -----------
   Net income                                                $ 19,277     $ 38,405     $ 37,091    $ 50,569     $145,342
                                                           ===========  ===========  ===========  ==========  ===========

Income per basic common share:
   Net income per basic common share before
      cumulative effect of change in accounting principle    $    .24     $    .30     $    .29    $    .39     $   1.22
   Cumulative effect of change in accounting principle           (.09)          --           --          --         (.08)
                                                           -----------  -----------  -----------  ----------  -----------
   Net income per basic common share                         $    .15     $    .30     $    .29    $    .39     $   1.14
                                                           ===========  ===========  ===========  ==========  ===========

Weighted average number of basic common shares                125,602      126,914      128,485     129,347      127,568
                                                           ===========  ===========  ===========  ==========  ===========
Income per diluted common share:
   Net income per diluted common share before
      cumulative effect of change in accounting principle    $    .22     $    .28     $    .27    $    .37     $   1.14
   Cumulative effect of change in accounting principle           (.08)          --           --          --         (.08)
                                                           -----------  -----------  -----------  ----------  -----------
   Net income per diluted common share                       $    .14     $    .28     $    .27    $    .37     $   1.06
                                                           ===========  ===========  ===========  ==========  ===========

Weighted average number of diluted common shares
and equivalents                                               135,184      136,222      137,430     137,795      136,743
                                                           ===========  ===========  ===========  ==========  ===========

17 | SUBSEQUENT EVENT

PE Corporation (since renamed Applera Corporation), MDS Inc. and Applied Biosystems/MDS Sciex ("the plaintiffs") have filed a civil action against Micromass UK Limited and Micromass, Inc., wholly owned subsidiaries of the Company, in the U.S. District Court for the District of Delaware. The plaintiffs allege that the Quattro Ultima triple quadrupole mass spectrometer infringes U.S. Patent No. 4,963,736 ("the patent"). The patent is owned by MDS Inc. and licensed to a joint venture, Applied Biosystems/MDS Sciex. The Company believes that it does not infringe the patent and alleges the patent is invalid and unenforceable based on inequitable conduct in the course of obtaining the patent and the Reexamination Certificate therefor.

In March 2002, the Company was informed of a jury's finding that the Quattro Ultima with Mass Transit ion tunnel technology infringes the patent. The same jury has found that the infringement was not willful and determined damages in the amount of $47.5 million. As of the date the Company's Annual Report was published, the Court had not addressed claims brought by the Company of inequitable conduct. Favorable rulings on these claims could render the patent unenforceable, although the outcome is not certain. The Court may also enter an injunction in which the Company is enjoined from making, using and selling the Quattro Ultima triple quadrupole mass spectrometer. These instruments are manufactured in the United Kingdom and shipments to the rest of the world outside of the United States are not subject to the present litigation. There is a possibility that similar claims may be asserted against the Company in other countries and for other products in the mass spectrometry product line. Based on the facts available to management, the Company believes the outcome of any such claims should they be brought, cannot be predicted with certainty, but could be material to the Company's financial position, results of operations and liquidity.

The Company intends to contest both the jury's verdict and the district court's underlying patent claim construction vigorously both in post-trial motions and, if necessary, by way of an appeal to the United States Court of Appeals for the Federal Circuit. It believes that it has meritorious arguments and has filed counter claims in connection with the above, alleging antitrust violations and the invalidity of the asserted patent, among other things. Management, after reviewing available information relating to this matter, has determined that it is probable some liability has been incurred. The Company believes that any liability ultimately incurred will not likely exceed the provision described below recorded in the quarter ended December 31, 2001 including interest, court costs, legal fees and other charges. However, in the event of an unanticipated adverse final determination in respect of certain matters, the Company's consolidated net income for the period in which such determination occurs could be materially affected. Although sufficient uncertainties exist to preclude the Company from precisely determining the amount of its liability, the $75.0 million recorded as a patent litigation provision in the quarter ended December 31, 2001 in the consolidated statements of operations, is the Company's best estimate of its exposure based on information currently available.