Letter to Shareholders

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During 1997, we significantly expanded our technological and market reach within the broad $12 billion analytical instrument marketplace. We began this expansion Doug Berthiaumewith the 1996 acquisition of TA Instruments™,Inc., the world leader
in thermal analysis, and continued this year with the acquisition of Micromass Limited in September which brought to Waters a world leader in mass spectrometry. We have increased the market we serve by 50% from the approximate $2 billion liquid chromatography market to a total of $3 billion of the analytical
laboratory market and stand well-positioned to increase our penetration of this expanded market.

Over the past several years as we have evaluated important developments in both the analytical instrument marketplace and in liquid chromatography, we have focused, in particular, on the growing importance of mass spectrometry and adopted a long-term strategy to develop this capability.
In 1994, we introduced a first generation benchtop LC-MS System with our Integrity™ product. Then in 1997, we accelerated our efforts in mass spectrometry with the completion of the merger between Waters and Micromass Limited. We can now offer our customers state-of-the-art capabilities utilizing quadrupole, magnetic sector and time-of-flight technologies, and we can deliver these capabilities through a sales, marketing and distribution organization that is unsurpassed in the industry. Although Micromass has been part of Waters for only a brief period, it appears that the combination will be even more powerful than our original expectations. Optimism is very high at Waters and, more importantly, within our worldwide customer base. We believe that the field of LC-MS will be the fastest growing segment of the analytical marketplace over the next five years and, with the Waters-Micromass combination, no other competitor is better positioned to develop and advance this technology.

Our core business also performed extremely well in 1997. Led by our Alliance™ System’s
success, our chromatography business ended the year with strong double-digit unit growth, and
we have continued to introduce innovative products and maintain a rich new product pipeline to
sustain our growth into the future. In the fourth quarter alone, we introduced a new UV absorbance detector (2487), a system for combinatorial drug discovery, and our keynote Millennium,®32 which expands and extends our industry leading chromatography software position. Millennium32, which takes full advantage of the Windows NT® platform, is well suited for the needs of large customers, particularly pharmaceutical customers, to control and network large numbers of liquid chromatographs.

Other areas of our business have also continued to keep pace. Our TA Instruments thermal analysis and rheology product lines grew at double-digit rates in 1997, and we believe, continued to gain marketshare. We also extended our chromatography consumables position with the acquisition of YMC, Inc. in August, received very good response to our new Oasis™ HLB sample preparation
product line and continued to introduce successful extensions of our Symmetry® column product line.

Finally, through the Waters ConnectionsSM Program, we reemphasized that extraordinary customer assurance and support is a foundation of Waters’ commitment to its customers. Waters is earmarking significant resources to maintain our well-earned reputation for service and support.

Our efforts have been rewarded with outstanding financial performance in 1997. Sales grew 19% to $465.5 million, while earnings per diluted share before nonrecurring charges grew by 39% to $1.94 per share. Operating cash flow was an impressive $113 million for the year. Fourth quarter performance was particularly outstanding with the strongest incoming order rate in over five years.

This is an exciting time for Waters. We are challenged by scientists who are looking for innovative solutions. They have growing requirements for more productivity, ease-of-use and higher throughput in their analytical laboratories. Their needs are driving them to more sophisticated systems incorporating powerful mass detectors and state-of-the-art computer software, with networking capabilities to link their global research activities. Their companies are allocating unprecedented levels of human and financial resources to speed their products to market. I believe Waters is superbly positioned with products and technologies to continue to aid these chemists in their mission.


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Douglas A. Berthiaume
Chairman, President, and Chief Executive Officer

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