During the second quarter of 2008, the Company identified errors originating in periods prior to the three months ended June 28, 2008. The errors primarily related to (i) an overstatement of the Company's income tax expense of $16 million as a result of errors in recording its income tax provision during the period from 2000 to March 29, 2008 and (ii) an understatement of amortization expense of $9 million for certain capitalized software. The Company incorrectly calculated its provision for income taxes by tax-effecting its tax liability utilizing a U.S. tax rate of 35% instead of an Irish tax rate of 10%. In addition, the Company incorrectly accounted for Irish-based capitalized software and the related amortization expense as U.S. Dollar-denominated instead of Euro-denominated, resulting in an understatement of amortization expense and cumulative translation adjustment. The out-of-period adjustment increased the 2008 Period net income per diluted share by $0.08 per diluted share.
In addition, the Company recorded a one-time $5 million tax provision in the 2008 Quarter and 2008 Period associated with the reorganization of certain foreign legal entities in early October 2008. This $5 million tax provision decreased net income by $0.05 per diluted share in both the 2008 Quarter and 2008 Period. These entities were effectively liquidated into the U.S. to better align the Company's legal entity structure with its current business objectives. The majority of this legal entity reorganization qualifies as a tax-free liquidation and it resulted in the Company being able to utilize $572 million of cash and short-term investments domestically. In October 2008, the Company utilized this cash to voluntarily prepay the $150 million term loan under the credit agreement entered into in March 2008 (the "2008 Credit Agreement"). There was no penalty for prepaying the term loan and the repayment of the term loan effectively terminated all lending arrangements under the 2008 Credit Agreement. In addition, the Company utilized these cash balances to voluntarily repay $340 million of revolving outstanding debt under the credit agreement entered into in January 2007 (the "2007 Credit Agreement"). The Company prepaid debt in order to reduce the Company's exposure to leverage and interest rate risk in the currently volatile capital and investment markets.
Net cash provided by operating activities was $306 million and $267 million in the 2008 Period and 2007 Period, respectively. The $39 million increase is primarily a result of higher net income and the improved cash collections from customers, partially offset by a higher level of inventory on hand and the $13 million one-time transition pension benefit payment into the Waters Employee Investment Plan associated with the September 2007 amendment to freeze the pay credit accrual under the Waters Retirement Plan and the Waters Retirement Restoration Plan, defined benefit plans for U.S. employees.
Within cash flows used in investing activities, capital expenditures related to property, plant, equipment and software capitalization were $49 million and $45 million in the 2008 Period and 2007 Period, respectively. In July 2008, the Company paid $3 million in cash to acquire the net assets of VTI. VTI is estimated to add approximately $4 million of product sales annually to TA and to be neutral to earnings after debt service costs for the remainder of the year. In August 2007, the Company paid $7 million in cash, including the assumption of $1 million of liabilities, to acquire CSC.
Within cash flows used in financing activities, the Company repurchased $211 million and $181 million of the Company's outstanding common stock in the 2008 Period and 2007 Period, respectively. In addition, the Company received $23 million and $51 million of proceeds from stock plans in the 2008 Period and 2007 Period, respectively.
Results of Operations
Net Sales
Net sales for the 2008 Quarter and the 2007 Quarter were $386 million and $353 million, respectively, an increase of 10%. Net sales for the 2008 Period and the 2007 Period were $1,157 million and $1,036 million, respectively, an increase of 12%. Foreign currency translation benefited the 2008 Quarter and 2008 Period sales growth rates by 3% and 5%, respectively. Product sales were $278 million and $258 million for the 2008 Quarter and the 2007 Quarter, respectively, an increase of 7%. Product sales were $835 million and $759 million for the 2008 Period and the 2007 Period, respectively, an increase of 10%. The increase in product sales for both the 2008 Quarter and 2008 Period was primarily due to the overall positive growth in Waters and TA instrument systems, chemistry consumables and foreign currency translation benefits. Service sales were $109 million and $94 million in the 2008 Quarter and the 2007 Quarter, respectively, an increase of 15%. Service sales were $321 million and $277 million in the 2008 Period and the 2007 Period, respectively, an increase of 16%. The increase in service sales for both the 2008 Quarter and 2008 Period was primarily attributable to increased sales of service plans and billings to a higher installed base of customers and foreign currency translation benefits.

Waters Division Net Sales
The Waters Division net sales grew 9% in the 2008 Quarter and 11% in the 2008 Period. The effect of foreign currency translation benefited the Waters Division across all product lines, resulting in a benefit to total sales growth of 3% in the 2008 Quarter and 5% in the 2008 Period. Chemistry consumables sales grew 9% in the 2008 Quarter and 12% in the 2008 Period. This growth was driven by increased column sales of ACQUITY UPLC proprietary column technology and sales of HPLC columns. Waters Division service sales grew 14% in the 2008 Quarter and 15% in the 2008 Period due primarily to increased sales of service plans and billings to the higher installed base of customers. Waters instrument system sales (LC and MS) grew 6% in the 2008 Quarter and 9% in the 2008 Period. The increase in instrument systems sales during both the 2008 Quarter and 2008 Period is primarily attributable to higher sales of ACQUITY UPLC and Synapt HDMS system sales. Waters Division sales by product mix were essentially unchanged in the 2008 Quarter and 2008 Period with instrument systems, chemistry and service representing approximately 54%, 17% and 29%, respectively. Geographically, Waters Division sales in Europe and Asia strengthened approximately 11%, and 14%, respectively, while U.S. sales were flat in the 2008 Quarter. Sales growth in the U.S., Europe and Asia were 4%, 12% and 17% in the 2008 Period, respectively. The sales growth in the 2008 Quarter and 2008 Period was primarily due to higher demand from the Company's government, academic and industrial customers. Asia's sales growth for both the 2008 Quarter and 2008 Period was primarily driven by increased sales in India and China, with sales growth of 19% in Japan also benefiting the 2008 Quarter performance. Sales in the rest of the world increased 23% in the 2008 Quarter and 17% in the 2008 Period and were driven primarily by increased sales in Latin America. The effects of foreign currency translation increased sales growth in Europe and Asia by 7% and 3% in the 2008 Quarter and 11% and 5% in the 2008 Period, respectively. TA Division Net Sales
TA's sales grew 16% in the 2008 Quarter and 17% in the 2008 Period primarily as a result of TA's new product introductions, acquisitions and the effect of foreign currency translation which benefited the TA sales growth by approximately 2% in the 2008 Quarter and 3% in the 2008 Period. Instrument system sales grew 12% in the 2008 Quarter and 14% in the 2008 Period. Instrument system sales represented approximately 78% of sales in both the 2008 Quarter and 2008 Period. Instrument system sales represented approximately 80% of sales in the 2007 Quarter and 2007 Period. TA service sales grew 31% in the 2008 Quarter and 29% in the 2008 Period and can be primarily attributed to the higher installed base of customers and new service sales to the customers of recently acquired companies. Geographically, sales growth for both the 2008 Quarter and 2008 Period were predominantly in the U.S., Europe and Asia. The July 2008 VTI acquisition and the August 2007 acquisition of CSC added 4% to TA's sales growth for the 2008 Quarter and 3% to TA's sales growth for the 2008 Period. Gross Profit
Gross profit for the 2008 Quarter was $228 million compared to $199 million for the 2007 Quarter, an increase of $29 million, or 14%. Gross profit as a percentage of sales increased to 59.0% in the 2008 Quarter compared to 56.4% for the 2007 Quarter. Gross profit for the 2008 Period was $668 million compared to $587 million for the 2007 Period, an increase of $81 million, or 14%. Gross profit as a percentage of sales increased to 57.7% for the 2008 Period compared to 56.6% for the 2007 Period, respectively. The increase in gross profit for the 2008 Quarter and 2008 Period can be attributed to the higher sales volume, the increased comparative benefits of foreign currency translation and, to a lesser extent, lower manufacturing costs. The 2008 Quarter gross profit increase can also be attributed to the one-time $3 million expense relating to the contribution into the Waters Employee Investment Plan recorded in the 2007 Quarter. The overall 2008 Period gross profit increase was negatively impacted by the $9 million out-of-period capitalized software amortization adjustment recorded during the three months ended June 28, 2008. Selling and Administrative Expenses
Selling and administrative expenses for the 2008 Quarter and the 2007 Quarter were $107 million and $106 million, respectively, an increase of 2%. Selling and administrative expenses for the 2008 Period and the 2007 Period were $325 million and $302 million, respectively, an increase of 8%. Included in the selling and administrative expenses in the 2007 Quarter and 2007 Period is the impact of the one-time $7 million expense related to the contribution into the Waters Employee Investment Plan. The remaining increase in total selling and administrative expenses for the 2008 Quarter and 2008 Period is primarily due to annual merit increases across most divisions, modest headcount additions to support the increased sales volume and the comparative unfavorable impact of foreign currency translation. As a percentage of net sales, selling and administrative expenses were 27.8% for the 2008 Quarter and

28.1% for the 2008 Period compared to 29.9% for the 2007 Quarter and 29.1% for the 2007 Period. Management expects selling and administrative expenses to grow at a slightly lower rate for the remainder of 2008. Research and Development Expenses
Research and development expenses were $20 million and $22 million for the 2008 Quarter and 2007 Quarter, respectively, a decrease of $2 million, or 9%. The decrease in research and development expenses for the 2008 Quarter as compared to the 2007 Quarter is primarily due to the $2 million of expense recorded in the 2007 Quarter related to the contribution into the Waters Employee Investment Plan and timing of project costs on new products.
Research and development expenses were $62 million and $60 million for the 2008 Period and 2007 Period, respectively, an increase of $2 million, or 4%. Included in the 2007 Period is $2 million of expense related to the contribution into the Waters Employee Investment Plan. The remaining increase in research and development expenses for the 2008 Period is primarily due to new product introduction costs, annual merit increases, headcount additions and the comparative unfavorable impact of foreign currency translation. Interest Expense
Interest expense was $11 million and $15 million for the 2008 Quarter and 2007 Quarter, respectively. Interest expense was $32 million and $41 million for the 2008 Period and 2007 Period, respectively. The decrease in interest expense for both the 2008 Quarter and 2008 Period is primarily attributable to a decrease in average borrowing costs during the 2008 Quarter and 2008 Period even though debt levels were $117 million higher at September 27, 2008 compared to September 29, 2007.
Interest Income
Interest income was $6 million and $8 million for the 2008 Quarter and 2007 Quarter, respectively. Interest income was $18 million and $21 million for the 2008 Period and 2007 Period, respectively. The decrease in interest income is primarily due to lower yields on cash and short-term investment balances even though cash and short-term investment levels were $266 million higher at September 27, 2008 compared to September 29, 2007. Provision for Income Taxes
The Company's effective tax rates for the 2008 Quarter and 2007 Quarter were 23.5% and 14.8%, respectively. The Company's effective tax rates for the 2008 Period and 2007 Period were 14.1% and 15.0%, respectively. The 2008 Quarter and 2008 Period include a $5 million tax provision associated with the reorganization of certain foreign legal entities. This one-time provision increased the Company's effective tax rate by 5.4 percentage points and 2.0 percentage points for the 2008 Quarter and 2008 Period, respectively. The 2008 Period also contains out-of-period adjustments to correct errors relating to capitalized software amortization and the income tax provision. The $16 million tax benefit of the out-of-period adjustments reduced the Company's effective tax rate by 5.6 percentage points for the 2008 Period. The 2007 Quarter and 2007 Period include a $4 million tax benefit associated with the one-time contribution into the Waters Employee Investment Plan. This one-time benefit reduced the Company's effective tax rate by 3.5 percentage points and 1.2 percentage points for the 2007 Quarter and 2007 Period, respectively. The remaining increase in the effective tax rate for the 2008 Period is primarily attributable to proportionately greater growth in income in jurisdictions with comparatively high effective tax rates.

Liquidity and Capital Resources
Condensed Consolidated Statements of Cash Flows (in thousands):

                                                                 Nine Months Ended
                                                   September 27, 2008         September 29, 2007
Net income                                        $            223,126        $           169,129
Depreciation and amortization                                   52,465                     39,685
Stock-based compensation                                        23,181                     20,902
Deferred income taxes                                          (14,313 )                   (2,199 )
Change in accounts receivable                                   28,255                     14,863
Change in inventories                                          (42,506 )                  (22,473 )
Change in accounts payable and other current
liabilities                                                        459                     37,359
Change in deferred revenue and customer
advances                                                        14,135                     10,759
Other changes                                                   21,228                     (1,132 )

Net cash provided by operating activities                      306,030                    266,893
Net cash provided by (used in) investing
activities                                                      43,621                   (162,235 )
Net cash used in financing activities                          (41,040 )                 (107,205 )
Effect of exchange rate changes on cash and
cash equivalents                                               (13,344 )                    7,547

Increase in cash and cash equivalents             $            295,267        $             5,000

Cash Flow from Operating Activities
Net cash provided by operating activities was $306 million and $267 million in the 2008 Period and 2007 Period, respectively. The $39 million increase in net cash provided from operating activities in the 2008 Period compared to the 2007 Period is attributed primarily to the following significant changes in the sources and uses of the net cash provided from operating activities, aside from the increase in net income:
• The change in accounts receivable in the 2008 Period compared to the 2007 Period is primarily attributable to the timing of payments made by customers and the higher sales volume in the 2008 Period as compared to the 2007 Period. The days-sales-outstanding ("DSO") was 68 days at September 27, 2008 and 70 days at September 29, 2007. The effect of foreign currency was neutral to DSO at September 27, 2008 as compared with September 29, 2007.

• The change in inventories in the 2008 Period and the 2007 Period is attributable to the increase in sales volume and an increase in ACQUITY UPLC and new mass spectrometry and TA products. Inventory levels are also higher in anticipation of higher sales in the fourth quarter and are expected to decline by year end.

• The 2008 Period change in accounts payable and other current liabilities includes a $13 million one-time transition pension benefit payment into the Waters Employee Investment Plan. The 2007 Period change in accounts payable and other current liabilities includes the accrual related to the one-time transition benefit. In addition, accounts payable and other current liabilities changed as a result of the timing of payments to vendors.

• Net cash provided from deferred revenue and customer advances in both the 2008 Period and 2007 Period was a result of the installed base of customers renewing annual service contracts.

• Other changes are comprised of the timing of various provisions, expenditures and accruals in other current assets, other assets and other liabilities.

Cash Provided by (Used in) Investing Activities Net cash provided by investing activities totaled $44 million in the 2008 Period. Net cash used in investing activities totaled $162 million in the 2007 Period. Additions to fixed assets and capitalized software were $49 million in the 2008 Period and $45 million in the 2007 Period. Capital spending and software capitalization additions during the 2008 and 2007 Periods were consistent with historical capital spending trends. Future capital spending may increase periodically in order to fund facility expansion to accommodate future sales growth. During the 2008 Period, the Company purchased $20 million of short-term investments while $115 million of short-term investments matured. During the 2007 Period, the Company purchased $305 million of short-term investments while $197 million of short-term investments matured. Business acquisitions, net of cash acquired, were $3 million and $7 million during the 2008 Period and 2007 Period, respectively. In the 2007 Period, the Company made an equity investment in Thar Instruments, Inc., a privately held global leader in the design, development and manufacture of analytical and preparative supercritical fluid chromatography and supercritical fluid extraction systems, for $4 million in cash. The Company also received $1 million in the 2007 Period from the former shareholders of Environmental Resources Associates, Inc. in connection with the finalization of the purchase price in accordance with the purchase and sale agreement.
Cash Used in Financing Activities
During the 2008 Period and 2007 Period, the Company's net debt borrowings increased by $143 million and $7 million, respectively.
In March 2008, the Company entered into the 2008 Credit Agreement that provides for a $150 million term loan facility. The Company used the proceeds of the term loan to repay amounts outstanding under the revolving tranche of the Company's existing credit agreement. In January 2007, the Company entered into the 2007 Credit Agreement that provides for a $500 million term loan facility and $600 million in revolving facilities, which include both a letter of credit and a swingline subfacility. Both the 2007 and 2008 Credit Agreements mature on January 11, 2012 and require no scheduled prepayments before that date.
The interest rates applicable to the 2008 and 2007 Credit Agreements are, at the Company's option, equal to either the base rate (which is the higher of the prime rate or the federal funds rate plus 1/2%) or the applicable 1, 2, 3, 6, 9 or 12 month LIBOR rate, in each case plus an interest rate margin based upon the Company's leverage ratio, which can range between 33 basis points and 137.5 basis points for LIBOR rate loans and range between zero basis points and 37.5 basis points for base rate loans. The 2008 Credit Agreement contains provisions which are similar in nature to those in the 2007 Credit Agreement.
As of September 27, 2008, the Company had a total of $990 million borrowed under the 2008 and 2007 Credit Agreements that mature in 2012. The Company has classified $340 million of the total debt as short-term debt since it is the Company's intention to repay this amount within the next twelve months. As of September 27, 2008, the total amount available to borrow under the 2007 and 2008 Credit Agreements was $258 million after outstanding letters of credit.
In October 2008, the Company utilized cash balances associated with the effective liquidation of certain foreign legal entities into the U.S. to voluntarily prepay the $150 million term loan under the 2008 Credit Agreement. The Company prepaid the term loan in order to reduce interest expense and there was no penalty for prepaying the term loan. The repayment of the term loan effectively terminated all lending arrangements under the 2008 Credit Agreement. In addition, the Company utilized these cash balances to voluntarily repay $340 million of revolving outstanding debt under the 2007 Credit Agreement. The Company prepaid debt in order to reduce future interest expense since the yield on the Company's existing cash and short-term investments had recently declined significantly. There were no penalties for prepaying this debt.
In February 2007, the Company's Board of Directors authorized the Company to repurchase up to $500 million of its outstanding common stock over a two-year period. During the 2008 Period, the Company repurchased 3.4 million shares at a cost of $209 million under this program, leaving $125 million authorized for future repurchases. During the 2007 Period, the Company repurchased 3.1 million shares at a cost of $181 million under the February 2007 program and a previously announced program.
The Company received $23 million and $51 million of proceeds from the exercise of stock options and the purchase of shares pursuant to employee stock purchase plan in the 2008 Period and 2007 Period, respectively.

The Company believes that the cash and cash equivalents balance of $893 million at the end of the 2008 Period and expected cash flow from operating activities, together with borrowing capacity from committed credit facilities, will be sufficient to fund working capital, capital spending requirements, . . .