SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

Commission File Number: 01-14010

WATERS CORPORATION

34 Maple Street
Milford, Massachusetts 01757
(Address 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 and 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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Number of shares outstanding of the Registrant’s common stock as of November 3, 2004: 120,839,223.

WATERS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q

INDEX

2

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

4

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

5

WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

1.   Basis of Presentation and Significant Accounting Policies

Waters Corporation (“Waters” or the “Company”), an analytical instrument manufacturer, designs, manufactures, sells and services, through its Waters Division, high performance liquid chromatography (“HPLC”), mass spectrometry (“MS”) instrument systems and associated service and support products including chromatography columns and other “consumable” products. These systems are complementary products that can be integrated together and used along with other analytical instruments. HPLC is a standard technique and 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. MS instruments are used in drug discovery and development, including clinical trial testing, the analysis of proteins in disease processes (known as “proteomics”) and environmental testing. As a result of the acquisitions of Creon Lab Control AG in July 2003 and NuGenesis Technologies Corporation in February 2004, Waters Division has entered the laboratory informatics market (“Laboratory Informatics”). Laboratory Informatics consists of laboratory-to-enterprise scale software systems for managing and storing scientific information collected from a wide variety of instrumental 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’s interim fiscal quarter typically ends on the thirteenth Saturday of each quarter. Since the Company’s fiscal year-end is December 31, the first and fourth fiscal quarters may not consist of thirteen complete weeks. The Company’s third fiscal quarters for 2004 and 2003 ended on October 2, 2004 and September 27, 2003, respectively.

     The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and note disclosures required by generally accepted accounting principles (“GAAP”) in the United States of America. The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated.

     Certain amounts from prior years have been reclassified in the accompanying financial statements in order to be consistent with the current year’s classifications.

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent 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.

     It is management’s opinion that the accompanying interim consolidated financial statements reflect all adjustments (which are normal and recurring) necessary for a fair presentation of the results for the interim periods. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s annual report on Form 10-K filing with the Securities and Exchange Commission for the year ended December 31, 2003.

Stock-Based Compensation:
The Company has five stock-based compensation plans. The Company uses the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion (“APB”) 25, Accounting for Stock Issued to Employees, and related interpretations, including Financial Interpretation (“FIN”) 44, Accounting for Certain Transactions Involving Stock Compensation, for its plans. No compensation expense has been recognized for its fixed employee stock option plans and its employee stock purchase plan since all stock option awards are granted with the exercise price at the current fair value of the Company’s common stock as of the date of the award. The cost of time-based restricted stock awards is initially recorded as deferred compensation and expensed over the respective vesting period. Stock-based compensation expense recorded, related to restricted stock awards, was immaterial for the three months and nine months ended October 2, 2004 and September 27, 2003.

7

WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

     The following table illustrates the effect on net income and earnings per share (“EPS”) had the Company applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) 123 for the Company’s five stock-based compensation plans (in thousands, except per share data).

Product Warranty Costs:
The Company accrues estimated product warranty costs at the time of sale, which are included in cost of sales in the consolidated statements of operations. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component supplies, the Company’s warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. The amount of the accrued warranty liability is based on historical information such as past experience, product failure rates, number of units repaired and estimated costs of material and labor. The liability is reviewed for reasonableness at least quarterly.

     The following is a rollforward of the Company’s accrued warranty liability for the nine months ended October 2, 2004 (in thousands):

Stockholders’ Equity:
On June 25, 2002, the Company’s Board of Directors authorized the Company to repurchase up to $200.0 million of its outstanding common shares over a one-year period. During the three months ended March 29, 2003, the Company purchased 4,399 shares of its common stock for $100.6 million, thus completing its $200.0 million stock buyback program. The total shares purchased under this program were 8,477.

     On May 6, 2003, the Company’s Board of Directors authorized the Company to repurchase up to $400.0 million of its outstanding common shares over a two-year period. During the nine months ended September 27, 2003, the Company purchased 5,210 shares of its common stock for $151.2 million. The Company repurchased 4,270 shares of its common stock for $175.0 million during the six months ended July 3, 2004, thus effectively completing its $400.0 million stock buyback program. The total shares purchased under this program were 11,810.

     At October 2, 2004, the Company had borrowings outstanding under its domestic credit facilities of $382.0 million principally to finance share repurchases under these two programs.

     On October 25, 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 stock buyback 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.

8

11

WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

     The pro forma effects of the Rheometrics and Other acquisitions were immaterial for the nine months ended October 2, 2004 and September 27, 2003.

4.   Expensed In-Process Research and Development

In connection with the acquisition of Creon, in July 2003, 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 $5.2 million in the third quarter of 2003 and $0.8 million in the fourth quarter of 2003. Management determined the valuation of the IPR&D using, among other factors, appraisals. 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.

5.   Divestiture of Business

On March 26, 2003, the Company sold the net assets of its mass spectrometry inorganic product line for approximately $1.2 million in cash and the balance in notes receivable. Assets sold included inventory and certain accounts receivable, and liabilities assumed by the acquirer consisted of deferred service revenue and advance payment obligations, and warranty and installation obligations. The Company recorded a loss on sale of approximately $5.0 million, including severance costs of approximately $0.3 million. This business generated sales of approximately $14.0 million per year with no contribution to earnings.

6.   Goodwill and Other Intangibles

The carrying amount of goodwill was $226.1 million and $197.4 million at October 2, 2004 and December 31, 2003, respectively. The increase is attributed to the Company’s acquisitions (Note 3) during the period of approximately $30.0 million, including certain adjustments made in the third quarter of 2004, and currency translation adjustments of approximately $(1.3) million.

     The Company’s intangible assets in the consolidated balance sheets are detailed as follows (in thousands):

     For the three months ended October 2, 2004 and September 27, 2003, amortization expense for intangible assets was $4.9 million and $3.0 million, respectively. For the nine months ended October 2, 2004 and September 27, 2003, amortization expense for intangible assets was $13.8 million and $8.7 million, respectively. Amortization expense for intangible assets is estimated to be approximately $18.8 million for each of the next five years. In the second and third quarters of 2004, the Company wrote off $7.9 million of fully amortized purchased intangibles and $2.8 million of fully amortized capitalized software, respectively, related to thermal analysis technology no longer used by the Company. Accumulated amortization for intangible assets increased approximately $0.4 million during the nine months ended October 2, 2004 due to the effect of foreign currency translation adjustments.

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WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

7.   Debt

At October 2, 2004 and December 31, 2003, the Company had borrowings of $205.0 million and $100.0 million, respectively, under its $250.0 million Amended Senior Revolving Credit Agreement (“the Amended Credit Agreement”). At October 2, 2004 and December 31, 2003, the Company’s $125.0 million Term Loan (“the Term Loan”) was fully drawn, of which $110.0 million and $125.0 million, respectively, were classified as long-term. Loans under the Amended Credit Agreement and Term Loan will bear interest for each quarter at a floating rate equal to, at the Company’s option, 1) the applicable LIBOR rate plus a varying margin between 0.60% and 1.50% or 2) prime rate. At October 2, 2004, the interest rates, with respect to the Amended Credit Agreement and Term Loan, ranged from 2.31% to 2.90%. At December 31, 2003, the interest rates, with respect to the Amended Credit Agreement and Term Loan, ranged from 1.78% to 1.95%. In May 2004, the Company put in place an additional $25.0 million committed 364 day revolving credit facility. Loans under the 364 day facility bear interest at a floating rate equal to, at the Company’s option, 1) the applicable LIBOR rate plus 1.00% or 2) prime rate. At October 2, 2004, the Company had borrowings of $24.0 million under this facility. The Company and its foreign subsidiaries had available short-term lines of credit with related short-term borrowings at October 2, 2004 and December 31, 2003 of $38.7 million and $21.3 million, respectively.

     In February 2004, the Company entered into interest rate swap agreements with banks, with notional amounts totaling $125.0 million, the purpose of which are to fix the rate of interest for the $125.0 million floating rate Term Loan. Under the terms of the agreements, the Company makes or receives a quarterly net interest payment to or from the banks based on the differential between the fixed rate on the swaps, which average 1.93%, and the three-month LIBOR rate. The swaps were to mature in December 2005. The Company had designated these interest rate swap agreements as cash flow hedges and, accordingly, the changes in fair value associated with these interest rate swap agreements are recorded in other comprehensive income. In the second quarter of 2004, the Company closed the swaps resulting in a deferred gain of $1.6 million recorded in other comprehensive income, which will be recognized in earnings ratably through December 2005, the term of the related debt.

     Starting in the first quarter of 2004, the Company has entered into zero cost range forward agreements and short-term forward contracts, with a notional value of 75.0 million British Pounds, in order to hedge the value of the Company’s net investment in subsidiaries for which the British Pound is their functional currency. Under the terms of the agreements the Company purchased an option below the current spot rate to sell British Pounds, and sold an option to its banks above the current spot rate to buy British Pounds, with option premiums that offset. The option contracts expired and the forward contracts were closed out prior to the end of the first quarter, resulting in zero realized gain or loss. During the second and third quarters, the Company entered into similar range forward agreements. At October 2, 2004, the notional value outstanding of the range forward agreements was 75.0 million British Pounds ($135.7 million at October 2, 2004). The Company has designated these range forward agreements as a hedge of a net investment and, accordingly, the changes in fair value associated with these range forward agreements are recorded in other comprehensive income.

8.   Income Taxes

The Company’s effective tax rates for the three months ended October 2, 2004 and September 27, 2003, were 19.1% and 25.4%, respectively. The Company lowered its year-to-date effective tax rate from 22% to 21% in the three months ended October 2, 2004, excluding the tax effect of certain net litigation and restructuring credits. This resulted in an effective tax rate of 19.1% in the quarter ended October 2, 2004 reflecting the year-to-date change. The change was deemed appropriate based on management’s assessment of profitability in international jurisdictions with lower effective tax rates. The effective tax rate for the three months ended September 27, 2003 was impacted by the expensed in-process research and development charge not being tax deductible.

     The Company’s effective tax rates for the nine months ended October 2, 2004 and September 27, 2003, were 21.8% and 23.6%, respectively. The change in effective tax rates for the period was impacted by the net tax effect of the Perkin-Elmer litigation settlement received and litigation provisions and restructuring charges made in the nine months ended October 2, 2004, compared to the tax effect of certain net litigation provisions, restructuring charges, expensed in-process research and development and loss on sale of a business incurred in the nine months ended September 27, 2003. The effective tax rates, excluding these unusual items and corresponding tax effects, were 21.0% and 23.0% for the nine months ended October 2, 2004 and September 27, 2003, respectively. This decrease is primarily attributable to the increase in income in international jurisdictions with lower effective tax rates.

13

WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

9.   Patent Litigation

Applera Corporation:
PE Corporation (since renamed Applera Corporation), MDS, Inc. and Applied Biosystems/MDS Sciex (“the Plaintiffs”) 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 “Court”) on February 18, 2000. The Plaintiffs alleged 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 with Applied Biosystems/MDS Sciex Instruments.

     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 found that the infringement was not willful and determined damages in the amount of $47.5 million. The Court entered an injunction in which the Company is enjoined from making, using and selling in the U.S. the Quattro Ultima triple quadrupole mass spectrometer incorporating features of the patent.

     In March 2003, the Court’s decision was affirmed on appeal. In April 2003, the Company paid total damages and interest of approximately $53.7 million to the Plaintiffs. These instruments are manufactured in the United Kingdom and shipments to the rest of the world outside the United States were not subject to this litigation. Similar claims were asserted against the Company by the Plaintiffs in Japan and Canada. Also, in the nine months ended September 27, 2003, the Company reversed approximately $0.9 million of interest as a one-time credit to interest expense.

     Previously, in July 2002, the Company filed a civil action against Applera Corporation alleging patent infringement of U.S. Patent No. 5,304,798 owned by the Company. In November 2002, the University of Manitoba (the “University”) and Applera Corporation, its licensee, filed a civil action against the Company alleging patent infringement of U.S. Patent No. 6,331,702 owned by the University.

     On October 31, 2003, MDS, Inc. and Applied Biosystems/MDS Sciex Instruments filed a civil action against Micromass UK Limited, Waters Limited, wholly owned subsidiaries of the Company, and the Company, in the High Court of Justice, Chancery Division, Patents Courts, UK. The case alleged that certain of the Company’s MS products infringe European Patent (UK) No. 0 373 835 (the “European Patent”). To the Company’s knowledge, the European Patent is owned by MDS, Inc. and licensed to a joint venture with Applied Biosystems/MDS Sciex Instruments. The Plaintiffs in this action were seeking an injunction against the Company to restrain it from infringing the European Patent and an unspecified award of damages.

     On March 2, 2004, the Company and MDS, Inc., through its Applied Biosystems/MDS Sciex Instruments partnership, and Applied Biosystems entered into a settlement agreement (the “Applera Settlement Agreement”) with respect to the various civil actions pending against each of them, both in the United States and internationally. Stipulations of Dismissal or their foreign equivalents (the “Stipulations”) with respect to the disposal of all such actions have been entered in the applicable courts and tribunals in each of the United States, the United Kingdom, Canada and Japan.

     The Applera Settlement Agreement provides for the resolution of all patent infringement claims in the United States made by certain of the parties against the other and of international cases brought by MDS, Inc. and Applied Biosystems/MDS Sciex Instruments against the Company with respect to alleged infringements of those parties’ patents at issue in the United Kingdom, Canada and Japan.

     In consideration of entering into the Applera Settlement Agreement and the Stipulations, the Company and MDS, Inc. and Applied Biosystems/MDS Sciex Instruments have entered into royalty paying license agreements, cross licensing the use of the technology described in the parties’ respective patents at issue. In addition, the Company made a one-time payment to Applied Biosystems/MDS Sciex Instruments of $18.1 million on March 11, 2004.

     The accrued patent litigation expenses in the consolidated balance sheets as of October 2, 2004 and December 31, 2003 were $0.1 million and $19.9 million, respectively. The accrued expense at October 2, 2004 represents the Company’s best estimate of remaining legal expenses necessary to conclude this litigation. The change in the liability from December 31, 2003 is attributed to the one-time payment of $18.1 million and payments of legal fees directly associated with these cases. There were no charges in the statements of operations for the three months and nine months ended October 2, 2004 and September 27, 2003 related to these cases.

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WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

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. The Company believes it has meritorious defenses to this new action. At a hearing held in the U.K. on June 8, 2004, the U.K. 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 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 has appealed the German decision and believes it has meritorious defenses.

     The Company recorded a provision of $7.8 million in the first quarter of 2004 for estimated damages and fees to be incurred with respect to the ongoing litigation for the England and France suits, excluding the effect of the recent suit filed in March 2004. This provision represents management’s best estimate of the probable and reasonably estimable loss related to this litigation. No provision has been made for the Germany suit and the Company believes the outcome, if the plaintiff ultimately prevails, will not have a material impact on the Company’s financial position. The accrued patent litigation expense in the consolidated balance sheets at October 2, 2004 was $5.0 million for the England and France suits. The liability includes a provision of $0.8 million made in 2002. The change in the liability through October 2, 2004 is attributable to a payment of initial deposits of potential damages of $3.2 million and payments of legal fees directly associated with the cases.

Perkin-Elmer Corporation:
The Company, through its subsidiary TA, asserted a claim against The Perkin-Elmer Corporation (“PE”) alleging patent infringement of three patents owned by TA (the “TAI patents”). PE counterclaimed for infringement of a patent owned by PE (the “PE patent”). The U.S. District Court for the District of Delaware granted judgment as a matter of law in favor of TA and enjoined PE from infringing the TAI patents. PE appealed the District Court judgment in favor of TA to the federal appellate court. The District Court’s judgment, with respect to PE’s infringement of the TAI patents, was affirmed. The District Court’s judgment with respect to TA’s non-infringement of the PE patent was reversed and remanded to the District Court for further proceedings.

     On remand to the District Court in October 2002, a jury found PE liable to TA for damages of $13.3 million and found TA did not infringe the PE patent. In May 2003, the District Court entered judgment on the jury’s verdict in favor of the Company. PE has appealed the judgment with respect to TA’s non-infringement of the PE patent. A hearing on the matter was held on May 4, 2004. On May 5, 2004, the United States Court of Appeals for the Federal Circuit affirmed the judgment of non-infringement of the PE Patent. On May 11, 2004, PE, now known as Applera Corporation, paid the Company $17.4 million, including $0.2 million in post-judgment interest which has been classified as interest income in the consolidated statements of operations. Approximately $0.1 million in legal fees were incurred and were offset against the recording of settlement proceeds.

10.   Environmental Contingency

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, 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 has agreed to conduct Supplemental Environmental Projects 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 has 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. A provision of $1.2 million was included in the statement of operations for the three months ended March 29, 2003.

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WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

11.   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 to be terminated, all of which had left the Company as of October 2, 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 the Company’s field sales, service and distribution organizations of its Micromass and HPLC operations. In May 2003, the Company took action to restructure and combine the Company’s Micromass and HPLC manufacturing operations. The objective of these integrations 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 to be terminated, all of which had left the Company as of October 2, 2004. In addition, the Company committed to closing two sales and distribution facilities, both of which were closed as of October 2, 2004. During the nine months ended October 2, 2004, the Company reversed approximately $2.2 million in restructuring accruals, 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.

     The following is a rollforward of the Company’s 2002 integration restructuring liability (in thousands):

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WATERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

16.   Recent Accounting Standards Changes and Developments

On March 31, 2004, the Financial Accounting Standards Board (“FASB”) issued an Exposure Draft, “Share-Based Payments”, which is a proposed amendment to SFAS No. 123, “Accounting for Stock-Based Compensation”. The Exposure Draft would require all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. The FASB recently announced that a final standard would be effective for public companies for fiscal periods beginning after June 15, 2005. The final standard is expected to offer alternative methods for determining fair value. At the present time, the Company has not yet determined which valuation method it will use.

     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. multinational 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. 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.

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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business and Financial Overview:

Waters business in the third quarter continued to benefit from stable pharmaceutical customer demand, improved industrial chemical customer demand and the impact of new product initiatives. Sales grew 15% in the three month period ended October 2, 2004 (the “2004 Quarter”) over the three month period ended September 27, 2003 (the “2003 Quarter”). Sales for the nine month period ended October 2, 2004 (the “2004 Period”) were $780.4 million, an increase of 14% over the nine month period ended September 27, 2003 (the “2003 Period”). Excluding currency effects, sales grew 11% in the 2004 Quarter and 9% in the 2004 Period. Geographically, business was strongest in the U.S. and Asia, trended positively in Europe from lower second quarter results and was particularly weak in Canada as government spending for research initiatives appeared to decline.

     From a product line perspective and excluding the impact of currency translation, high performance liquid chromatography (“HPLC”) grew 10% in the 2004 Quarter and benefited from initial volume shipments of the ACQUITY UPLC™ system. In mass spectrometry (“MS”), sales grew 5% in the 2004 Quarter, slower than orders, as bookings increased for the newly launched Q-Tof Premier™, an instrument that the Company plans to begin shipping in the fourth quarter, and displaced orders and sales for the existing Q-Tof Ultima™ product. Waters Laboratory Informatics sales grew at a slower rate than expected due to a delay in shipments of the E-Lab Notebook product, now planned to begin in the fourth quarter, and continued efforts to fully integrate the newly acquired NuGenesis Technologies Corporation (“NuGenesis”) business into Waters’ operations. However, in the Laboratory Informatics area, the acquisitions of NuGenesis and Creon Lab Control AG contributed an incremental $3.9 million and $14.2 million to sales growth in the 2004 Quarter and 2004 Period, respectively. Thermal Analysis (“TA”) continued a strong 2004 performance with sales growth of 17% in the 2004 Quarter, benefiting from stronger industrial chemical customer demand and performance differentiated the products.

     Operating income was $63.8 million and $193.5 million in the 2004 Quarter and 2004 Period, respectively, increases of 35% over the same periods in 2003. The 2004 Period included the benefit of a litigation judgment in the amount of $17.1 million from Perkin-Elmer Corporation. The 2004 Period also included litigation provisions and restructuring charges of $7.8 million. The 2003 Quarter and 2003 Period included expensed in-process research and development of $5.2 million. The 2003 Period included a loss on sale of a business of $5.0 million, restructuring charges of $1.1 million and litigation provisions of $1.5 million. The remaining increase in operating income of $11.3 million and $28.5 million for the 2004 Quarter and 2004 Period is primarily a result of sales volume growth, reductions in manufacturing costs and operating expense leverage, and the effects of currency translations.

     Operating cash flows increased to $191.0 million in the 2004 Period compared to $91.4 million in the 2003 Period. The 2003 Period included approximately $59.6 million in litigation payments while the 2004 Period included net litigation payments of approximately $4.0 million. The remaining increase of approximately 29% is primarily due to the increase in net income. Capital expenditures related to property, plant, equipment, software capitalization and other intangibles in the 2004 Period were $47.4 million compared to $27.0 million in the 2003 Period. The 2004 Period included an $18.1 million purchase of 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 later in 2004 and early 2005. 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.

     On October 25, 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 that it is likely to have adequate financial flexibility to fund these share repurchases given current cash and debt levels.

21

Results of Operations

Sales:
Sales for the 2004 Quarter and the 2004 Period were $264.8 million and $780.4 million, respectively, compared to $230.4 million for the 2003 Quarter and $683.1 million for the 2003 Period, an increase of 15% for the quarter and 14% for the period. Currency translation increased reported sales growth in the 2004 Quarter and 2004 Period by 4% and 5%, respectively, primarily due to the strengthening of the Euro, British Pound, Japanese Yen and Canadian dollar against the U.S. dollar. Product sales were $190.5 million and $564.4 million in the 2004 Quarter and 2004 Period, respectively, compared to $173.0 million and $513.2 million in the 2003 Quarter and 2003 Period, increases of 10% both for the quarter and period. The increase in product sales, aside from the effect of foreign currency translation, is primarily due to the continued strength of the HPLC, MS and TA sales growth in the 2004 Quarter and Period, the recent launch of the ACQUITY UPLC™ system and the impact of acquired businesses. Service sales were $74.3 million and $216.0 million in the 2004 Quarter and 2004 Period, respectively, compared to $57.3 million and $169.9 million in the 2003 Quarter and 2003 Period, an increase of 30% for the quarter and 27% for the period. The increase, aside from the effect of foreign currency translation, is primarily attributed to growth in the Company’s instrument installed base and sales of service contracts, including the effect of the Company’s recent acquisitions.

     The following commentary is with respect to the Company’s sales performance by product line excluding the effects of currency translation.

     Within the Waters Division, chromatography sales grew approximately 10% in the 2004 Quarter and 11% in the 2004 Period. Chemistry grew approximately 9% in the 2004 Quarter and 12% in the 2004 Period, primarily as a result of continued strength in sales related to pharmaceutical production. Service grew 13% in the 2004 Quarter and 14% in the 2004 Period due to increased sales of service plans to the installed base of customers. HPLC instrument sales grew 9% in the 2004 Quarter compared with the 2003 Quarter and grew 9% in the 2004 Period. The increase in sales during the 2004 Quarter and 2004 Period is attributable to the launch and delivery of the Company’s new ACQUITY UPLC system and purchase decisions for other instruments by the Company’s customers for new and replacement products. Geographically, HPLC sales in the U.S. and Asia strengthened approximately 12% and 8%, respectively, in the 2004 Quarter and 14% and 18%, respectively, in the 2004 Period. Sales in Europe grew 10% and 5% in the 2004 Quarter and 2004 Period, respectively, as business conditions within pharmaceutical accounts improved, while weak government spending depressed sales to Canada.

     Within the Waters Division, MS sales grew 5% in the 2004 Quarter and declined 5% in the 2004 Period. The sales in the U.S. and Asia/Japan grew 11% and 39%, respectively, in the 2004 Quarter largely due to sales of the Quattro Premier and Quattro Micro tandem quadrupole systems. Offsetting this growth in the 2004 Quarter were declines in Europe of approximately 9%. MS sales growth was impacted by a decline of Q-Tof system sales as the Company is in the transition of launching a new Q-Tof Premier™ instrument in the fourth quarter of 2004.

     Through the acquisitions of Creon Lab Control AG in July 2003 and NuGenesis Technologies Corporation in February 2004, sales of Laboratory Informatics products were $4.8 million in the 2004 Quarter and $15.1 million in the 2004 Period, compared to $0.9 million in the 2003 Quarter and 2003 Period.

     Within the TA Instruments Division, sales continued to be strong with sales growth of 17% and 12% for the 2004 Quarter and 2004 Period, respectively. The growth of this business was predominantly in Europe, North America and Asia with increased steady spending by core industrial chemical and pharmaceutical companies. The Company recently established a direct operation in China, which augmented Asia’s growth in the quarter.

Gross Profit:
Gross profit for the 2004 Quarter and 2004 Period was $153.8 million and $455.7 million, respectively, compared to $135.3 million and $398.4 million for the 2003 Quarter and 2003 Period, respectively, increases of 14% for the quarter and period. Gross profit as a percentage of sales decreased to 58.1% in the 2004 Quarter from 58.7% in the 2003 Quarter. Gross profit as a percentage of sales increased to 58.4% in the 2004 Period from 58.3% in the 2003 Period. While the Company continues to benefit from lower costs resulting from material and manufacturing supply chain cost reduction programs particularly in the HPLC product line, in the 2004 Quarter the Company experienced a decline in gross profit percentage as a result of additional service resources added to the Waters division and Laboratory Informatics service businesses in support of the service product line growth. In addition, within mass spectrometry there was a product mix shift away from the high margin Q-Tof product line. For the 2004 Period, the slight increase in gross profit percentage is a result of the continuing manufacturing cost reductions and the impact of currency translation offset by the costs of additional service resources.

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Selling and Administrative Expenses:
Selling and administrative expenses for the 2004 Quarter and 2004 Period were $72.0 million and $219.2 million, respectively, compared to $66.7 million for the 2003 Quarter and $197.0 million for the 2003 Period. As a percentage of sales, selling and administrative expenses decreased to 27.2% for the 2004 Quarter and 28.1% for the 2004 Period compared to 29.0% in the 2003 Quarter and 28.8% in the 2003 Period. The Company has benefited from leveraging its field sales and support workforce and related overhead costs. The $5.3 million or 8% increase in total selling and administrative expenses for the 2004 Quarter included an increase of approximately $2.0 million as a result of currency translation and $2.0 million from the Laboratory Informatics acquisitions. Annual merit increases effective April 2004 across most divisions, other headcount additions and related fringe benefits and indirect costs, offset by reductions in legal patent litigation expenses accounted for approximately $1.3 million of the increase over the 2003 Quarter. The $22.2 million or 11% increase in total selling and administrative expenses for the 2004 Period included an increase of approximately $8.7 million as a result of currency translation and $8.6 million from the Laboratory Informatics acquisitions. Annual merit increases effective in April of both years across most divisions, other headcount additions and related fringe benefits and indirect costs, offset by reductions in legal patent litigation expenses, accounted for approximately $4.9 million of the increase over the 2003 Period.

Research and Development Expenses:
Research and development expenses were $17.0 million for the 2004 Quarter and $48.8 million for the 2004 Period compared to $15.1 million for the 2003 Quarter and $42.5 million for the 2003 Period, an increase of 13% for the quarter and 15% for the period. Research and development expenses increased $1.9 million for the 2004 Quarter and $6.3 million for the 2004 Period due to the effects of currency translation and the inclusion of acquisitions, specifically Laboratory Informatics, and development of new and improved HPLC, mass spectrometry, thermal analysis and rheometry products.

Litigation Provisions:
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 of $7.8 million in the first quarter of 2004. The benefit received in the 2004 Period was related to the conclusion of the Company’s litigation with Perkin-Elmer. The provision in the 2004 Period is related to the ongoing patent infringement suit with Hewlett-Packard. There were no charges incurred in the 2003 Quarter and 2003 Period related to these cases. The Company recorded a $1.2 million charge in the 2003 Period for a previously disclosed environmental matter concerning the Company’s Taunton facility.

Loss on Sale of Business:
The Company recorded a $5.0 million charge relating to the loss on sale of the inorganic mass spectrometry product line in the 2003 Period. There was no such charge in the 2004 Period.

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 October 2, 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):

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2002 Restructuring:
In July 2002, the Company took action to restructure and combine the Company’s field sales, service and distribution organizations of its Micromass and HPLC operations. In May 2003, the Company took action to restructure and combine the Company’s Micromass and HPLC manufacturing operations. The objective of these integrations is 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 October 2, 2004. In addition, the Company committed to closing two sales and distribution facilities, both of which were closed as of October 2, 2004. During the nine months ended October 2, 2004, the Company reversed approximately $2.2 million in restructuring accruals, 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.

     The following is a rollforward of the Company’s 2002 integration restructuring liability (in thousands):

Interest Expense:
Interest expense was $2.6 million for the 2004 Quarter and $6.3 million for the 2004 Period, compared to $0.3 million for the 2003 Quarter and $1.1 million for the 2003 Period. Interest expense for the 2003 Period included an adjustment of an estimate for interest expense, due to a reduction of $0.9 million relating to the final calculation of interest expense paid in connection with the Applera litigation. Excluding this change in estimate, interest expense for the 2003 Period would have been $2.0 million. The increase for the quarter and the adjusted increase for the period are due primarily to interest expense on additional borrowings against the Company’s credit facility to fund the stock repurchase program.

Interest Income:
Interest income was $3.0 million for the 2004 Quarter and $8.0 million for the 2004 Period, compared to $1.9 million for the 2003 Quarter and $5.4 million for the 2003 Period. The increase in interest income for the 2004 Quarter and the 2004 Period is primarily attributed to increases in the Company’s cash balances and the recording of $0.2 million in the 2004 Period for post-judgment interest income from the settlement of the litigation with Perkin-Elmer.

Provision for Income Taxes:
The Company’s effective tax rates for the three months ended October 2, 2004 and September 27, 2003, were 19.1% and 25.4%, respectively. The Company lowered its year-to-date effective tax rate from 22% to 21% in the three months ended October 2, 2004, excluding the tax effect of certain net litigation and restructuring credits. This resulted in an effective tax rate of 19.1% in the quarter ended October 2, 2004 reflecting the year-to-date change. The change was deemed appropriate based on management’s assessment of profitability in international jurisdictions with lower effective tax rates. The effective tax rate for the three months ended September 27, 2003 was impacted by the expensed in-process research and development charge not being tax deductible.

     The Company’s effective tax rates for the nine months ended October 2, 2004 and September 27, 2003, were 21.8% and 23.6%, respectively. The change in effective tax rates for the period was impacted by the net tax effect of the Perkin-Elmer litigation settlement received and litigation provisions and restructuring charges made in the nine months ended October 2, 2004, compared to the tax effect of certain net litigation provisions, restructuring charges, expensed in-process research and development and loss on sale of a business incurred in the nine months ended September 27, 2003. The effective tax rates, excluding these unusual items and corresponding tax effects, were 21.0% and 23.0% for the nine months ended October 2, 2004 and September 27, 2003, respectively. This decrease is primarily attributable to the increase in income in international jurisdictions with lower effective tax rates.

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     Net cash used in investing activities totaled $89.8 million in the 2004 Period compared to $11.1 million in the 2003 Period. Additions to fixed assets and intangible assets were $47.4 million in the 2004 Period and $27.0 million in the 2003 Period. Included in the 2004 Period was a 250,000 square foot building purchase 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 later in 2004 and early 2005. Aside from the purchase of this building, fixed 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 respective 2004 and 2003 Periods, as the Company continues to seek growth opportunities through acquisitions. Included in the 2003 Period 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 completed its $200.0 million stock repurchase program during the 2003 Period by purchasing $100.6 million of the Company’s common stock. On May 6, 2003 the Company’s Board of Directors authorized the Company to repurchase up to an additional $400.0 million in outstanding common shares over a two-year period. During the 2003 Period, the Company purchased 5,210 shares of its common stock for $151.2 million. 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. The Company repurchased 4,270 shares of its common stock for approximately $175.0 million during the 2004 Period. As of October 2, 2004, 11,810 shares have been purchased under the 2003 program for $399.0 million, effectively concluding the 2003 program. The Company believes it has the resources to fund this effort as well as to pursue acquisition opportunities in the future. From other financing activities, the Company received $38.8 million of proceeds from the exercise of stock options and the purchase of shares pursuant to employee stock purchase plans.

     On October 25, 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.

     The Company had net borrowings at the end of the 2004 Period of $392.7 million, primarily relating to borrowings in the U.S. under the Company’s $250.0 million Amended Senior Revolving Credit Agreement (the “Amended Credit Agreement”) and $125.0 million Term Loan Facility (the “Term Loan”), for the stock repurchases. Loans under the Amended Credit Agreement bear 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 0.60% and 1.50% or 2) the prime rate. At October 2, 2004, the interest rates, with respect to the Amended Credit Agreement and Term Loan, ranged from 2.31% to 2.90%. At December 31, 2003, the interest rates, with respect to the Amended Credit Agreement and Term Loan, ranged from 1.78% to 1.95%. In May 2004, the Company put in place an additional $25.0 million committed 364 day revolving credit facility. Loans under the 364 day facility will bear interest at a floating rate equal to, at the Company’s option, 1) the applicable LIBOR rate plus 1.00% or 2) prime rate. At October 2, 2004, the Company had borrowings of $24.0 million under this facility. The Company and its foreign subsidiaries had available short-term lines of credit with related short-term borrowings at October 2, 2004 and December 31, 2003 of $38.7 million and $21.3 million, respectively.

     The Company believes that the cash and cash equivalent balance of $471.2 million at the end of the 2004 Period and expected cash flow from operating activities together with borrowings available from the Amended Credit Agreement and other short-term domestic 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.

Contractual Obligations and Commercial Commitments:

A summary of the Company’s contractual obligations and commercial commitments is included in the Company’s annual report on Form 10-K for the year ended December 31, 2003. The Company reviewed its contractual obligations and commercial commitments as of October 2, 2004, and determined that there were no significant changes.

     The Company paid $42.9 million in the first quarter of 2004 for the acquisition of NuGenesis Technologies Corporation (“NuGenesis”). As part of this acquisition, the Company assumed a facility lease which is expected to increase rent expense for 2004 by approximately $1.0 million. Capital expenditures in 2004 are expected to be modestly higher than 2003 levels, excluding the recent building purchase, due to expected capital needs to support the growth in the business. The Company has commitments for lease agreements, expiring at various dates through 2019, covering certain buildings, office equipment and automobiles.

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     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 that any outcome of such matters, either individually or in the aggregate, will not be material to its financial position or results of operations.

     During the third fiscal quarter of 2004, the Company contributed $10.0 million to the Company’s retirement plans. The Company does not expect to make any additional contributions for the rest of the year.

     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 364 day credit facility. The Company also believes there are no provisions in the Amended Credit Agreement, its real estate leases, or its 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

In the Company’s annual report on Form 10-K for the year ended December 31, 2003, the Company’s most critical accounting policies and estimates upon which its financial status depends were identified as those relating to revenue recognition, loss provisions on accounts receivable and inventory, valuation of equity investments, long-lived assets, intangible assets and goodwill, warranty, income taxes and litigation. The Company reviewed its policies and determined that those policies remain the Company’s most critical accounting policies for the 2004 Period. The Company did not make any changes in those policies during the 2004 Period.

Forward-Looking Information

Safe Harbor Statement under Private Securities Litigation Reform Act of 1995
The statements included in this quarterly report on Form 10-Q may contain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) regarding future results and events, including statements regarding expected financial results, future growth and customer demand and uncertainty relating to patent litigation that involve a number of risks and uncertainties. For this purpose, any statements contained herein that are not statements of historical fact may be deemed forward-looking statements. Without limiting the foregoing, the words, “believes”, “anticipates”, “plans”, “expects”, “intends”, “appears”, “estimates”, “projects”, and similar expressions are intended to identify forward-looking statements. The Company’s actual future results may differ significantly from the results discussed in the forward-looking statements within this quarterly report for a variety of reasons, including and without limitation, inability of the Company to effect purchases of Company stock at prices or on terms acceptable to the Company, or as a result of market conditions or the restrictions, if any, placed on trading in the Company’s stock, shipments of new product introductions expected in the upcoming quarters, such as the ACQUITY UPLC and tandem quadrupole systems, loss of market share through competition, introduction of competing products by other companies, pressures on prices from competitors and/or customers, the outcome of ongoing patent litigation, regulatory obstacles to new product introductions, lack of acceptance of new products, changes in the demands of the Company’s healthcare and pharmaceutical company customers, changes in the healthcare market and the pharmaceutical industry, changes in the distribution of the Company’s products, the availability of component parts from suppliers, and foreign exchange fluctuations. Such factors and others are discussed more fully in the section entitled “Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission (the “SEC”), which “Risk Factors” discussion is incorporated by reference in this quarterly report. The forward-looking statements included in this quarterly report represent the Company’s estimates or views as of the date of this quarterly report and should not be relied upon as representing the Company’s estimates or views as of any date subsequent to the date of this quarterly report. The Company specifically disclaims any obligation to update these forward-looking statements in the future.

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WATERS CORPORATION AND SUBSIDIARIES

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 10, 2004	Waters Corporation
	/s/ John Ornell
	John Ornell
	Authorized Officer and Vice President, Finance and Administration and Chief Financial Officer

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