PART I


Item 1:  BUSINESS

                                     OVERVIEW

         Itron,  Inc.  ("Itron" or the "Company") was incorporated in Washington
in 1977 and is a leading  global  provider to the utility  industry of solutions
for collecting,  communicating and analyzing electric, gas and water usage data.
The Company  designs,  develops,  manufactures,  markets,  sells,  installs  and
services hardware,  software and integrated systems for handheld  computer-based
electronic meter reading ("EMR") and automatic meter reading ("AMR") systems.

         Since  the early  1980s,  Itron has been the  leading  supplier  of EMR
systems to  utilities.  These EMR  systems  allow  meter  readers  using  rugged
handheld  computers to  electronically  record usage data for later  downloading
into a utility's  billing  system.  Today,  Itron's EMR systems are installed at
over 1,500  utility  customers in more than 40  countries  and are being used to
read  approximately  275  million  meters  worldwide.  Itron's  EMR  systems are
installed  at  approximately  80% of the  largest  utilities  in  North  America
(utilities  with  50,000  or  more  meters),  including  21 of  the  largest  25
utilities.   EMR  systems,   products  and   services   currently   account  for
approximately 25% of the Company's total revenues.

         In the early  1990s,  Itron  expanded  its product  line to include AMR
systems and services.  The Company estimates there are approximately 268 million
meters  in North  America,  of  which  only  approximately  15  million,  or 6%,
currently have  installed AMR  technology.  Outside North  America,  the Company
estimates  there are two to three  times that  number of meters and  minimal AMR
installations.  The Company has shipped over 11.1  million AMR meter  modules to
327 utilities as of December 31, 1997; it has thereby  established itself as the
world's leading supplier of AMR systems. Seventy-two of these 327 utilities have
made a sizable  commitment to Itron's AMR products by having  installed at least
10,000  Itron  AMR  meter  modules.  AMR  systems  and  services  now  represent
approximately 75% of the Company's total revenues.

         The  Company's  AMR systems and products  were  initially  developed to
enable  utilities to reduce  operating  costs and improve quality of service and
are being  expanded  to provide a full range of utility  and select  non utility
related data  management  capabilities  and  communications-based  options.  The
Company believes its AMR product  offerings in aggregate are more extensive than
that of any other AMR supplier.  The Company's AMR systems and products  support
electric,  gas, water and  combination  utilities and include  solutions for all
classes  of  utility  customers--residential,  commercial  and  industrial.  The
Company's  AMR solutions  involve the use of radio and  telephone  technology to
collect meter data. The Company's  radio-based  AMR solutions  include  handheld
walk-by  ("Off-Site"),  vehicle-based  drive-by  ("Mobile")  and  fixed  network
("Fixed Network") reading technology  options.  Each of the radio-based  reading
options  utilizes  the same  AMR  meter  module  technology,  which,  therefore,
provides a migration  path with  compatibility  from basic  Off-Site AMR to more
advanced Mobile and Fixed Network  systems.  This  compatibility  allows Itron's
customers to initiate AMR  installation  on a limited  number of meters with the
flexibility  to  expand to  full-scale,  system-wide  implementation  on a large
number of meters for which multiple AMR solutions may be required. The Company's
telephone-based  AMR  solutions  complement  its radio  products  and provide an
economically  attractive  alternative to radio in many situations.  The range of
Itron's AMR product offerings enables its customers to deploy the solutions that
are the most  effective  in each  portion  of  their  service  territory  at the
appropriate time.

         In 1997,  the Company  further  broadened  and enhanced its AMR product
line through internal development,  acquisition  and alliances. During 1997, the
Company acquired Design Concepts,  Incorporated ("DCI"), an Idaho-based supplier
of outage detection,  power quality  monitoring and AMR systems that communicate
over telephone  lines.  The DCI acquisition has greatly expanded Itron's options
for  electric  customers.   DCI's  telephone-based  AMR  meter  modules  provide
attractive   solutions  for  the  most  rural  locations  where  distance  makes
radio-based reads difficult to justify economically. DCI products may also be an
attractive  alternative when Fixed Network  functionality is required for meters
that are geographically  dispersed,  such as the customer base of energy service
providers in competitive electricity markets.

         In the fourth quarter of 1997,  the Company signed two agreements  with
UK  Data  Collections  Services  ("UKDCS"),  the  operator  of  the  meter  data
collection  system  supporting  the  competitive  electricity  supply  market in
England and Wales. One agreement  provides the Company with exclusive  marketing
rights in North America to the STAR Data Management  System.  The STAR system is
designed to handle very large scale metering systems where half-hourly or hourly
data is obtained from meters on a daily basis. With competition increasing,  the
Company  believes  that the number of meters used to measure  energy usage on an
hourly or other interval basis will grow. In a second  agreement with UKDCS, the
Company has formed a jointly-owned  company,  STAR Data Services LLC, to provide
metering, data collection,  load profiling, and settlement services to utilities
and energy service  providers on a fee-for-service  basis in North America.  The
Company  believes many companies will want a third party to perform metering and
data collection.

         The Company made substantial progress in 1997 in its penetration of the
water utility  market with an order for a multi-year  Mobile AMR system from the
City of Philadelphia  Water Department  covering  approximately  487,000 meters.
Upon  completion,  the  Company  believes  this  will be the  largest  water AMR
installation in the world.

         In 1997, Itron, through UTS, its wholly owned subsidiary,  was selected
by the California  Independent  System Operator  ("ISO"),  the entity which will
have operational  control of the transmission  grid in California's  competitive
energy  environment,  to supply the grid's  metering  data  collection  software
system for California's power grid. The Company anticipates it will have similar
opportunities  as regulatory  reform  unfolds in other states and power regions.
Also in 1997, UTS introduced a Power Billing System for complex  revenue billing
and  real-time  pricing.  This system allows  utilities  and power  marketers to
support complex billing for large commercial and industrial customers,  national
accounts,  and aggregators  (companies  which purchase power for or on behalf of
many customers).

         The  Company  made  significant  progress  on  its  Fixed  Network  AMR
deployments  in 1997  with the  expansion  of  fixed  network  functionality  by
year-end   1997  to  more  than  350,000   meters  at  Duquesne   Light  Company
("Duquesne"),  up from approximately  5,000 meters at the beginning of 1997. See
"Description of  Business--Duquesne  Fixed Network AMR Contract." Itron was also
awarded its second large Fixed Network AMR order from Virginia Power to automate
approximately 450,000 of their two million meters.

         Regulatory reform  initiatives are causing  significant  changes in the
utility  industry and have  continued  to cause some utility  customers to delay
implementation  of AMR technology.  The Company believes that over the long term
regulatory reform and competitive pressures will motivate utilities to implement
AMR technology in order to improve service  quality and operating  efficiency as
well as to comply with the  competitive  and  regulatory  requirements  for more
frequent  collection of meter data. For example,  the California  Public Utility
Commission  (  "CPUC")  has  mandated  hourly   time-of-use   metering  for  all
electricity  customers  consuming more than 20 kWh. Additional new opportunities
for the Company may include the  development of  reconciliation  systems for the
supply of power to, and purchase of power from, the electric power  transmission
grids (such as the California  ISO  contract),  sales of the large power billing
systems  developed by UTS,  meter reading  outsourcing,  and products to support
non-traditional  utility applications such as energy management  programs,  home
automation systems and premise monitoring services such as home security.

         The Company believes these regulatory reform  initiatives will motivate
utilities and industry  participants to seek a wide range of AMR alternatives to
address diverse requirements across service territories. The Company believes it
is well positioned to take advantage of the  significant AMR market  opportunity
because  of  its  extensive  product   portfolio,   significant   experience  in
high-volume AMR meter module  production,  established  relationships  with over
1,500 utilities worldwide,  proven interfaces with numerous utility host billing
systems  and advanced software for large commercial and industrial customers and
power exchanges.

                             DESCRIPTION OF BUSINESS

OVERVIEW OF CURRENT ENVIRONMENT IN THE UTILITY INDUSTRY

         The electric  utility  industry is  undergoing  fundamental  structural
changes.  Current  restructuring  in the electric utility industry is focused on
opening  the  electric  power  generation   industry  to  full  competition  and
ultimately  providing retail customers access to multiple suppliers (referred to
as "direct access"). Similar to regulatory changes that have already occurred in
the  transportation  and  telecommunications  industries,  customer  demands and
regulatory  mandates by state and federal  governments are forcing  utilities to
make the  transition  from  regulated  monopolies,  in  certain  respects,  into
competitive enterprises.

         Federal  legislation,  such as the National  Energy  Policy Act of 1992
(the "EP Act"),  eased  restrictions on independent power producers in an effort
to increase  competition in the wholesale  electric power generation  market and
authorized  the  Federal  Energy  Regulatory   Commission  ("FERC")  to  mandate
utilities to transport and deliver ("wheel") energy for a supplier of bulk power
to wholesale customers.  On April 24, 1996, in a landmark ruling, FERC announced
two new rules (Order Nos. 888 and 889)  designed to accelerate  competition  and
bring lower  prices and more choices to energy  consumers.  Order No. 888 opened
wholesale  power sales to  competition  by requiring  public  utilities to offer
nondiscriminatory  pricing to all users of their  transmission  lines. Order No.
889, also known as the Open Access Same-time  Information System ("OASIS") rule,
requires public utilities to obtain information about their transmission  system
for their own wholesale power transactions,  such as available capacity,  in the
same way their competitors do--via OASIS on the Internet.

         Under the EP Act,  individual states have the sole authority to mandate
the wheeling of electric power to retail customers. While regulatory initiatives
vary from state to state,  many  involve  the  separation  of certain  functions
currently performed by utilities, including energy generation,  transmission and
distribution   (functional  unbundling)  and  a  shift  from  rate-of-return  to
performance-based   ratemaking  or  market-based   pricing.   Most  states  have
undertaken some form of regulatory reform. In California,  the CPUC has mandated
retail  wheeling  effective  March 31, 1998 for large  commercial and industrial
customers  and  effective  January  1,  1999  for all  remaining  customers.  In
addition, in the May 1997 CPUC Decision No. 97-05-039 "Opinion on the Unbundling
of Revenue Cycle Services" the CPUC has also unbundled the functions of metering
and customer billing.  This means that electricity  customers in California will
be able to select their meter reading and billing  provider in addition to their
electricity  supplier.  California,  New  York,  Massachusetts,   Michigan,  New
Hampshire, Pennsylvania,  Maryland, Delaware, Maine, Vermont, Arizona, Illinois,
Montana, Nevada, New Jersey, Oklahoma  and Rhode Island have adopted legislation
or commission orders to mandate retail wheeling.

         While  utility  companies  may  retain  some,  most  or  all  of  their
traditional functions, the Company believes that it is likely that some of these
functions  will also be provided by new entities such as ISOs and energy service
providers  ("ESPs").  Utilities may turn the  operational  control of certain of
their  transmission  facilities  over to ISOs. ESPs are expected to provide both
electricity and natural gas to commercial,  industrial and residential customers
and may, in some  jurisdictions,  perform meter reading and customer billing. To
date more than 250 parties have registered with the CPUC as ESPs. In addition to
ESPs, a number of new entities will likely  emerge to provide  metering and data
services.  Such companies also may buy and sell electricity and may have to deal
with the  frequent  specification  of prices and costs for the  transference  of
power.  Thus,  the  Company's  future  customer base will likely be comprised of
traditional utility companies,  ESPs and new market entrants.  As such companies
emerge,  the Company  believes that the ability to measure the supply and use of
energy on a  frequent  basis  will  become  increasingly  critical  and that the
electric service industry will be driven toward hourly or half-hourly  usage and
pricing for certain customers.

         The Company believes the advancement of regulatory  reform  initiatives
will  motivate  utilities  and  industry   participants  to  increase  operating
efficiencies,  enhance  service  quality and offer  services  not  traditionally
offered  by  utilities.   In  light  of  this,  the  Company  believes  industry
participants  will  require a variety of AMR  alternatives  to  address  diverse
characteristics  across service  territories  which the Company believes will in
turn increase demand for its products.

ITRON SOLUTIONS

         The Company believes it has an extensive and  cost-effective  portfolio
of AMR and data management  solutions that provides utilities and other industry
participants with numerous options for responding to evolving operational needs,
marketing opportunities and regulatory reform requirements.

         Broad Product Line Offering.  Itron's core AMR meter module  technology
has been  adapted to read  numerous  types of  electric,  gas and water  meters,
including the most common meter types made by major meter manufacturers. Itron's
broad product line enables utilities and other industry  participants to perform
meter reading functions for themselves,  as well as for other utilities or power
suppliers  serving a particular  geographic area.  Itron's AMR solutions include
the use of both radio and  telephone-based  technologies and support all classes
of utility customers--residential,  commercial, large commercial and industrial.
Itron's UTS products provide the data management software capabilities necessary
to handle the large  volumes  of data  required  by  commercial  and  industrial
electricity customers and the emerging participants in the competitive supply of
electricity such as the ISOs.

         Low Cost Provider. The Company has shipped more than 11.1 million meter
modules  since 1987 and is the AMR  industry's  most  experienced  meter  module
provider.  The Company  believes that its low AMR meter module  production costs
allow it to offer utilities economically  attractive AMR solutions.  The Company
made  substantial  investments in high-speed  manufacturing  automation and test
equipment in 1996 to further  strengthen its position as a low-cost  provider of
meter modules.

         Technology Migration Pathways.  The Company's radio-based AMR solutions
encompass Off-Site, Mobile and Fixed Network reading technology options. Because
the same AMR radio meter modules can be used with any of these alternatives, the
Company's products facilitate the migration from one level of systems automation
to another. This flexibility means that utilities can begin to achieve immediate
economic benefits from their initial  investments in AMR systems,  which systems
can be the foundation for future AMR solutions.

         Data and  Systems  Integration.  The  Company  has  developed  software
applications that integrate data from various data collection systems. This data
integration   provides  utilities  the  flexibility  to  deploy  different  data
collection  technologies  in different  portions of their  service  territories,
depending upon economic and  functionality  requirements,  while integrating the
data into a common  format.  Itron has also  developed  interfaces to over 1,500
utility billing systems worldwide,  enabling smooth transition of collected data
to billing.

         Nationwide Radio Spectrum and Intellectual Property Rights. The Company
has been issued a renewable  nationwide U.S. Federal  Communications  Commission
("FCC")  license to operate in the  1427-1429  MHz band,  providing  it with the
radio frequency spectrum to operate its Fixed Network AMR components  (exclusive
of  current  generation  meter  modules)  throughout  the United  States.  Itron
believes  the  spectrum  available  under this  license is  adequate to meet the
spectrum  requirements  for  Fixed  Network  AMR  and  the  requirements  for  a
substantial implementation of advanced utility functionality, as well as certain
other applications.  Itron also owns what it believes to be a significant patent
relating to network-based AMR that provides it with numerous options for further
AMR deployment, including licensing its technology to others.

         Multiple Financing Solutions.  The Company facilitates alternative ways
in which to finance AMR  technologies.  The Company sells  products,  outsources
entire systems, provides installation,  operations, or maintenance services, and
arranges  customized  financial  solutions for its customers.  These  customized
financial solutions vary from simple third party leases to complex  non-recourse
project financing structures depending on the financial and operational goals of
the Company's customers.

         Benefit Optimized Deployment. The range of AMR solutions offered by the
Company  enables its  customers to deploy the  solutions  that are the most cost
effective in each portion of the utility's  service  territory.  The Company has
developed a conceptual and  analytical  methodology--termed  "Benefit  Optimized
Deployment"--which  facilitates a potential  AMR  customer's  comprehensive  and
quantified analysis of the question: "What technology, where and when?"

ITRON'S STRATEGIES

         Itron's  strategy is to be a leading  provider of AMR  solutions to the
utility   industry  and  to  maintain  over  time  the  broadest   portfolio  of
cost-effective  AMR and related  solutions.  Following  are key  elements of the
Company's strategy:

         Provide  Cost-Effective  Meter Reading Solutions.  The Company offers a
broad range of meter reading solutions that allow utilities to realize immediate
cost savings through automation of their meter reading function.  Investments in
the  Company's  core  business  products  (EMR,  Off-site and Mobile AMR) enable
utilities  to  convert  recurring  operating  expenses  of  meter  reading  into
strategic investments that provide a migration path to Itron's Fixed Network AMR
solution and facilitate  customer retention by enabling utilities to offer value
added services.

         Expand Fixed Network AMR Technology and  Installations.  The Company is
committed to delivering Fixed Network AMR solutions and believes that the demand
for fixed network AMR will continue to grow as electric  utilities  increasingly
focus on the consequences of competition  brought on by regulatory  reform.  The
Company   believes   utilities  will  deploy   wireless  fixed  network  AMR  or
telephone-based AMR in certain parts of their service territories where frequent
reads and other advanced meter reading  functionality are required.  The Company
believes that radio-based  fixed network AMR is the lowest-cost  manner in which
to provide frequent, time-critical meter reads for a large meter population. The
Company believes that  telephone-based  AMR is the most cost effective  solution
for interval  measurement in a base of geographically  dispersed meters or rural
meters.

         Expand Selective  Deployment  Solutions and Installations.  The Company
expanded  its  AMR  product  offering  for  selective  deployment,  or  drop-in,
solutions with the  acquisition  of DCI in 1997. The Company  intends to further
develop telephone-based technologies that can be selectively deployed for direct
access  customers,  regional or national  accounts or  selective  clustering  of
installations   for   aggregation   purposes.    The   solutions   include   DCI
telephone-based AMR products for electric customers, Metscan telephone-based AMR
products  for gas  customers  and  telephone-based  products  read by MV-90  for
commercial and industrial electric and gas customers.

         Develop,  Enhance and Deploy  Products to Serve  Large  Commercial  and
Industrial  Markets.  The Company intends to continue to broaden its AMR product
line for large commercial and industrial  customers,  which represent on average
approximately 35% of an electric utility's total revenues. This includes further
enhancements  and  deployment of the UTS power billing system with utilities and
power  marketers  who must  support  complex  billing for large  commercial  and
industrial customers,  franchise operations,  national accounts and aggregators.
The Company will also continue to expand and modify for use in the United States
its  software   currently   used  in  the  United  Kingdom  and  California  for
reconciliation  of  power  provided  to,  and  withdrawn  from,  electric  power
transmission  grids.  The Company  intends to continue  interfacing UTS software
with the  Company's  other AMR products and  adapting  and  integrating  certain
aspects  of the  Company's  international  fixed  network  solutions  for  large
commercial and industrial customers.

         Develop New  Relationships  for Delivery of AMR  Services.  The Company
intends  to expand  its meter  reading  services  through  joint  ventures  with
partners  that bring  unique  experience  and  strengths  which  complement  the
Company's core  competencies,  such as the STAR Data Services joint venture with
UKDCS.

         Build Upon Extensive Customer Base and Industry  Experience.  Itron has
established itself as the world's leading supplier of AMR systems as a result of
its having  shipped more than 11.1 million AMR meter modules to 327 utilities as
of December  31, 1997.  The  Company's  EMR systems have been  installed at over
1,500  utilities  in  more  than  40  countries  and  are  being  used  to  read
approximately 275 million meters worldwide.  Further, the Company's handheld EMR
systems  have been  installed  at  approximately  80% of the  utilities in North
America that have meter  populations  greater than 50,000.  The Company believes
that its extensive customer base, long-term relationships with its customers and
proven  interfaces  with numerous  utility host billing  systems provide a solid
foundation upon which the Company can expand its product  offerings and services
to  existing  utility  customers,  as well as new  utility  customers  and other
industry participants.

         Pursue Opportunities for Related Non-utility Applications.  The Company
is working  with  strategic  partners and others on the  development  of its AMR
systems and products in order to support  non-utility  services.  These services
could include  premise  automation and monitoring  services such as security and
alarm  services,  remote  status  monitoring  of propane  tanks or other  energy
sources and energy management solutions.

AUTOMATIC METER READING SYSTEMS AND PRODUCTS

         The  Company's AMR product line involves the use of radio and telephone
technology  to collect  meter data.  The  Company's  radio-based  AMR  solutions
encompass  Off-Site AMR,  Mobile AMR and Fixed Network AMR, as well as a variety
of supporting services and products.  Due to the geographic features and varying
population density of a utility's service  territory,  generally no single meter
reading  solution  is  ideally  suited  to all  parts of the  utility's  service
territory.  Itron's AMR applications are intended to provide flexibility ranging
from  selective  installation  for high  cost-to-read  meters or  geographically
dispersed   meters   requiring   advanced   metering   functionality,   to  full
implementation  of an AMR system covering a large portion of a utility's service
area.  This  flexibility  enables the Company's  customers to achieve  immediate
economic  benefits from their initial  investments in the Company's AMR systems,
while enabling migration to a more comprehensive AMR solution in the future.

         Meter  Modules.  The  Company's  AMR product  offerings  are based on a
family of meter modules.  These meter modules,  which can be easily  attached to
utility  meters,  encode  consumption  and tamper  information and transmit this
data, including meter module  identification,  to a remote receiver. The Company
intends to continue to expand its meter module offerings through  development of
meter  modules that read  additional  meter  types,  as well as  development  of
modules with differing  capabilities  that will enable utilities to use the most
cost-effective  module for a particular meter reading need. In 1997, the Company
developed  and  released a variety of new meter  modules for  electric,  gas and
water meters.  For electric  meters,  two new modules were released.  The new 41
series meter  modules  provide a new low-cost  solution  while the new 45 series
meter modules provide certain advanced functionality.  The Company also enhanced
its compatibility with indoor water meters and introduced the 40W-1 below ground
level  pit-set  water meter module which is  compatible  with many pit-set water
meters in the United States.

         The Company began shipping its radio meter modules to customers in late
1986.  Itron has expanded the core technology of its radio meter modules to read
the most common types of electric,  gas and water meters. The Company's compact
radio meter modules for gas and water meters are self-contained low-power units,
powered by long-life  batteries  with an expected  minimum life in excess of ten
years.  Radio meter  modules for electric  meters which are normally  integrated
under the glass of standard residential meters, are electricity line powered and
do not require  batteries.  Radio meter  modules can be  installed  by the meter
manufacturer during the manufacturing  process or easily retrofitted in existing
meters.

         In  addition  to its radio  meter  modules,  the  Company  also  offers
electric and gas  utilities  telephone-based  AMR products  with its DCI product
line for electric  utilities  and Metscan  product line for gas  utilities.  For
residential and commercial applications,  the Company's DCI meter modules attach
under the glass of electric meters and collect and report consumption,  interval
based  time-of-use and demand and load profiling data. In addition,  certain DCI
modules  also  report  power  outages,  restoration  of power and power  quality
information.  For commercial and industrial applications,  the Company's Metscan
meter modules  attach to  large-volume  gas meters and collect  consumption  and
interval-based time-of-use data used to bill transport gas and interruptible gas
customers,  as well as critical load survey data for  applications  such as peak
day forecasting,  supply forecasting and assessments, rate design and marketing.
For residential applications, including hard-to-read meters, Metscan modules are
attached to existing or new  residential  gas meters to provide  consumption and
load survey data.

         In  addition  to AMR modules  attached  to meters,  the Company  offers
telephone-based  modules which are installed inside customer premises to monitor
and report power outages and restoration of power, power quality (under and over
voltages) and connections to selective  circuits or contact  closures inside the
premise, such as circuits for refrigeration or HVAC equipment.

         The  Company  also  offers a  separate  line of meter  modules  for use
outside North America. The primary differences between the meter modules used by
the  Company in North  America and those used in  international  markets are the
radio frequency band in which they operate and the physical configuration of the
module.  In  addition,  the Company has  developed  meter module  technology  to
address opportunities available in international markets that are not present in
North America. For example, in certain European countries usage of steam and hot
water produced by a central  facility for  residential  heating is metered using
devices  known as "heat  allocators"  located  on  radiators.  The  Company  has
developed a  radio-based  meter module that enables  remote  collection  of data
recorded by heat  allocators,  eliminating  the need to access each  radiator in
order to collect consumption data.

         Off-Site Meter  Reading.  The Company's  Off-Site AMR solution  enables
radio-equipped  meters to be read  remotely,  by a person up to 1,000 feet away,
with a handheld  computer  equipped  with a radio  unit.  Off-Site  AMR offers a
practical and cost-effective way for utilities to read high cost-to-read  meters
by eliminating the need for meter readers to gain visual access to those meters.
Once a utility has upgraded its Itron handheld  computers with radio technology,
it can selectively  install meter modules on high  cost-to-read  meters.  System
software  automatically  identifies  radio-equipped  meters within a route. When
remote  reads are needed,  the system  prompts the meter  reader to initiate the
wireless remote read. Meter  information is shown on the handheld display and is
automatically  recorded in the handheld  database,  allowing the meter reader to
move on to the next meter on a route. When a route is completed,  data from both
visual and radio reads are uploaded  from the  handheld  computer to the utility
host  system for  customer  billing.  The  benefits  from  Off-site  AMR include
short-term  payback from the meter reading  productivity  improvements  allowing
some meter  readers to read up to three  times as many  meters per day.  Another
major benefit from  Off-site AMR is greatly  improved  meter  reading  safety by
installing meter modules on the most hazardous meter locations.

         Mobile AMR. The Company's  Mobile AMR solution  uses a Data  Collection
Unit ("DCU") mounted in a vehicle to collect and store data transmitted by meter
modules  as  the  vehicle  passes  module-equipped   meters.  The  DCU  receives
information transmitted by multiple meter modules simultaneously. A touch-screen
display  enables the  operator  to observe  and operate the DCU.  The Mobile AMR
application  includes  software that manages and moves information to and from a
utility's billing system.  Once installed,  the software  transfers  information
from the host system to create  route files for the DCU for each route,  manages
the  storage of the meter data as it is  collected  and,  at the end of the day,
uploads the  information to the utility's  billing  system.  A Mobile AMR system
enables an  operator  to read an average of  approximately  10,000  meters in an
eight-hour  day,  compared to an average  walking route of 300 to 500 meters per
day. Factors affecting the actual number of reads per day include, among others,
route density and design, speed limits, weather and environment.  As in the case
of Off-site AMR,  Mobile AMR also  improves  meter reader safety by removing the
need  for  meter   readers  to  gain  visual   access  to  meters  in  dangerous
environments.

         Fixed Network AMR.  Itron's Fixed Network solution  provides  utilities
with the capability of completely  automating  meter reading in desired segments
of a  utility's  service  area and  thereby  eliminating  the need to send meter
readers to or near customer  premises.  Ten of the Company's  North American AMR
customers have pilot  installations  of the Company's  Fixed Network AMR system.
Under a contract with Duquesne, the Company is installing a Fixed Network system
that was reading  over  350,000  meters on a daily basis as of December 31, 1997
and,  when  fully  installed,  will  cover  approximately  615,000  meters.  See
"Duquesne  Fixed Network AMR Contract."  Under a contract with Virginia Power, a
Fixed  Network  system is  currently  being  installed,  and when  expansion  is
complete will cover  approximately  450,000 meters.  The Company's Fixed Network
technology  provides  utilities with a number of  utility-related  applications,
including daily or more frequent meter reads,  time-of-use  pricing,  on-request
meter  reads  for final  reads or  customer  inquiries,  tamper  monitoring  and
reporting,  high-level  outage detection and power restoration  reporting,  load
profiling and virtual connect/disconnect capabilities.

         Meter  data   collected  by  the  Company's   radio  meter  modules  is
transmitted   to  a  Cell  Control  Unit  ("CCU"),   which  is  a   neighborhood
communications  controller. The CCU performs memory and computational functions,
in  addition  to  functioning  as a radio  receiver  and  transmitter.  Weighing
approximately  15 pounds,  Itron's CCU can be easily installed on utility poles,
street lights, or other locations. While the geographic area covered by each CCU
varies depending on local  topography,  physical  structures,  terrain and other
factors,  in  general  the  Company  expects  each CCU to serve an average of 50
homes.  Information  collected by CCUs is then  transmitted to a Network Control
Node  ("NCN"),  which is the primary  routing  and control  device for the Fixed
Network. The Company expects that each NCN will typically support  approximately
500 CCUs.  NCNs manage  information  routing in the network between CCUs and the
system  host  processor  and can  serve  as a  gateway  to  other  communication
networks.  Communications  between  the  CCUs  and NCNs  utilize  the  Company's
nationwide licensed frequencies in the 1427-1429 MHz band.

         The final link in Itron's Fixed Network is from the NCNs to one or more
host computers, known as Genesis Itron Host Processors ("GIHPs"). The GIHP is an
open-architected  control computer and database  management system that provides
network control and advanced AMR functionality, and acts as the interface to the
Fixed Network from other  utility  systems.  The GIHP provides a Standard  Query
Language ("SQL") database server to utility host billing and operating  systems.
Communications  between NCNs and the utility's  GIHP  typically  utilize  radio,
telephone, frame relay or other wired communication media.

         The Company made  substantial  investments  in development of its Fixed
Network in 1996 and 1997 and expects to continue to devote a significant portion
of its  product  development  spending in 1998 to Fixed  Network and  associated
meter module and software application  development.  Current product development
efforts are focused on performance  enhancements  and additional  functionality.
See " Product Development."

         Telephone-Based  Technology.  The Company's DCI products allow electric
utilities to implement telephone-based AMR solutions.  Modules can be programmed
to collect various types of meter reading data including  standard  consumption,
time-of-use,  demand and  interval  data for load  profiling.  DCI  systems  use
inbound  communications  in which the  meter  modules  call in to the  utility's
central  processing  computer at  pre-scheduled  times to report  meter  reading
information.  The devices are connected to and share existing customer telephone
lines.  DCI AMR  functionality  is designed for selective  deployments of direct
access customers or for geographically  dispersed  customers  requiring advanced
metering functionality such as regional or national accounts. DCI technology may
also be used to automate areas not suited for cost effective  implementation  of
radio technologies such as remote or rural areas.

         DCI also provides other telephone-based devices that monitor and report
power outage,  restoration and power quality (over/under  voltage)  information.
The devices are easily  installed  by the end-use  customer.  The devices may be
deployed at key locations throughout a utility's  distribution system to improve
operations,  enhance power quality and improve  overall system  reliability  and
service by allowing  utilities to isolate  outages and determine  when power has
been restored more quickly.

         Metscan  products  are  the  telephone-based  AMR  counterpart  for gas
meters.  Devices can be configured to store daily or hourly consumption data for
monthly or daily  transportation  tariffs.  Metscan products provide many of the
same  implementation  benefits to gas  customers  that DCI  products  provide to
electric customers including  "drop-in"  deployment in areas not suited for cost
effective implementation of radio-based solutions.

EMR HANDHELD SYSTEMS AND PRODUCTS

         Itron's  handheld  systems  allow  utilities to automate a  substantial
portion of their meter reading and billing functions.  Itron provides five basic
models of handheld  computers  to meet the varying  requirements  of its utility
customers.  Each model is designed for use in harsh  environments  with standard
text  and  graphics,   backlit   displays,   several   memory  sizes,   multiple
communications options,  interface devices for electronic meters and easy to use
keyboards that can be customized for the needs of the utility customer.

         Handheld  systems  are  used  as  follows:  (1)  key  customer  data is
downloaded  from an Itron host processor to an Itron handheld  computer prior to
commencement of a meter reader's daily route;  (2) a meter reader visually reads
meters along a route and enters  readings into an Itron handheld  computer;  and
(3) after a meter  reader's  daily route has been  completed,  collected data is
uploaded  directly  into a utility's  host  billing  system.  Itron's  family of
software systems provides data consolidation and storage, reformatting,  linkage
to a utility's  host billing  system,  meter  reading  route  management,  route
downloading  and  time-of-use  and interval data recording  data  management and
distribution.

COMMERCIAL AND INDUSTRIAL SOFTWARE PRODUCTS AND SERVICES

         Commercial   and  industrial   meters  have  much  more   sophisticated
measurement   capabilities  than  do  meters  for  residential   customers  and,
therefore,  have much more data that must be conveyed back to a utility from the
meter.  There  is  a  wide  variety  of  these  meters  with  no  standards  for
communications  agreed upon by the multiple  meter  vendors.  The  Company's UTS
subsidiary is the leading  provider in the United States of software systems for
metering data  acquisition and analysis for the large  commercial and industrial
customers of electric and gas utilities. UTS also has systems installed in about
20 countries  outside the United  States.  The key to UTS's  development  of the
commercial   and   industrial   products  and  services   market  has  been  its
establishment of strategic  relationships  with meter suppliers around the world
to  solve  the  problem  created  by the  absence  of a  standard  communication
protocol.

         UTS's Multiple  Vendor Data  Collection and Analysis  System  ("MV-90")
supports  communication  protocols  for  almost  all the  large  commercial  and
industrial  electric and gas meter  suppliers  in the United  States and Europe.
UTS's  multi-vendor  data retrieval and analysis  systems support all methods of
data retrieval from large commercial and industrial  meters  (handheld  readers,
telephone and other communication technologies).  MV-90 was designed with a full
range of  applications  software to support data  collection  from meters,  data
validation and editing and analysis of energy usage data.  MV-90 software can be
licensed  for use on  single  computers  and on  local/wide  area  networks.  In
addition to the base system there are layered application  packages that support
applications such as load research, real time pricing (hourly price transmission
to commercial and industrial  customers),  gas  transportation and interruptible
rates  (notification  and control of loads at large  commercial  and  industrial
customers).

         UTS has capitalized on a specialized market within the electric utility
industry and now supplies MV-90 software for revenue billing,  load research and
demand-side management to approximately 70% of the major utilities in the United
States and to most of the electric  and gas  utilities  in Canada,  Europe,  the
Middle East, Australia, Central America and South America. The Company estimates
that  approximately  35% of the  $250  billion  annual  revenues  billed  by the
electric utility industry in the United States is billed using data collected by
MV-90 software systems.

         The Company  believes  that  competition  in the utility  industry will
drive  metering   technology  and  systems  toward  enhancing  and  facilitating
communications between large commercial and industrial customers and their power
suppliers.  UTS has developed a "read only" version of the MV-90  software which
allows the commercial and  industrial  customers to read the utility's  delivery
point meters (both  electric and gas) on a frequent  basis to analyze  their own
energy consumption.  This software can also receive hourly pricing data from the
energy  supplier for customers who purchase  power on a real-time  pricing basis
(price varies by the hour). It also supports load  curtailment with messaging to
notify larger  commercial and industrial  customers.  Such read-only,  real-time
pricing,  and load control  software  applications  are sold to  commercial  and
industrial customers by the marketing departments of various utilities.

         In 1997,  UTS  completed  development  of and  delivered  a new product
called large Power  Billing  System  ("MV-PBS")  targeted to utilities and power
marketers  that supports  complex  billing for large  commercial  and industrial
customers,  franchise  operations,  national  accounts and  aggregators.  MV-PBS
allows  utilities and other energy suppliers to bill energy and related services
sold under complex contracts,  where each contract for products and services may
be unique to that  customer.  The current  legacy  billing  systems used by most
utilities  were designed for large  volume,  rate class billing with very little
flexibility  to  bill  complex  contracts   required  for  unbundling  of  power
(generation,  transmission  and  distribution),  as well as new products such as
real-time  pricing and retail  wheeling.  The MV-PBS is used in a  client-server
environment  and  is  fully  integrated  with  UTS's  MV-90   multi-vendor  data
collection system.

         During 1997, the Company acquired the exclusive  distribution rights in
North America for the STAR Data Management  System ("STAR").  STAR was developed
by UKDCS,  the  operator  of the meter data  collection  system  supporting  the
competitive electricity supply market in England and Wales. When integrated with
MV-90,  STAR provides the ability to manage the large volumes of hourly or other
interval data which the Company  believes will be  increasingly  required in the
competitive electricity markets.

         As  the  electric   utility   industry  is   restructured   in  certain
jurisdictions, the metering function of the generation/transmission/distribution
systems used for billing and  settlement  functions will sometimes be managed by
independent  entities such as power  exchanges and ISOs. UTS currently  supplies
software  to collect the  metering  data for the power  exchanges  in the United
Kingdom,  Australia and New Zealand. In 1997, UTS was selected by the California
ISO, the entity which will have operational  control of the transmission grid in
California's competitive energy environment,  to supply the grid's metering data
collection software system. UTS is in an excellent  competitive position to also
supply software to states such as New York, Pennsylvania, Michigan and others as
they establish  similar power  exchange/independent  system operations to manage
the deregulated power supply industry in their states.

JOINT VENTURE SERVICES

         The  Company has entered and expects to continue to enter into a number
of joint  ventures or alliances  with utility  industry  participants  including
utilities and nonregulated  utility entities,  among others. These alliances and
joint ventures offer and are expected to offer a wide range of services, such as
AMR meter module and Fixed  Network  component  installation,  AMR  outsourcing,
Fixed Network-based information services, meter reading services and development
of  additional  applications  to  maximize  the  benefit  and use of Itron's AMR
product offerings.

Currently the Company has three active joint ventures:

 *   SI3 - a 50/50 joint  venture  between the Company and  Firstpoint  Utility
     Solutions,  Inc. (a wholly  owned  subsidiary  of Enron),  which  primarily
     offers AMR equipment installation services nationwide.

 *   EnSite  -  a  50/50  joint  venture   between  the  Company  and  Duquesne
     Enterprises,  which provides for AMR outsourcing to utilities in and around
     Duquesne's service territory and the resale of Itron products.

 *   STAR Data  Services - a 50/50  joint  venture  between UTS and UKDCS which
     will provide  metering,  data collection,  load profiling and settlement to
     utilities and ESPs on a fee-for-service  basis in North America.  STAR Data
     Services  will be  primarily  focused on large  commercial  and  industrial
     accounts.


DUQUESNE FIXED NETWORK AMR CONTRACT

         In January 1996, the Company  entered into a contract with Duquesne for
the Company to  install,  operate  and  maintain a Fixed  Network AMR system and
provide meter reading and advanced  communication services to Duquesne over a 15
year period.  In September 1997, the Company signed an amendment to the contract
which  modified  both the scope of the services  provided and the  corresponding
project schedule, (the "Duquesne Contract").  The Duquesne Contract is currently
in "Phase  II," the  network  construction  phase.  Of a total of  approximately
615,000  meter  modules to be  installed,  at December  31,  1997  approximately
550,000 modules had been installed.  Installation of all remaining meter modules
for which Itron is  responsible is expected to be competed by the fourth quarter
of 1998.


         The Duquesne Contract contains numerous  milestones,  some of which are
"critical" milestones and carry significant monetary penalties.  The Company has
received  acceptance  from  Duquesne  on the  completion  of the first  critical
milestone which required the Company to provide daily reads for at least 350,000
meters  over  the  Company's  Fixed  Network  and to  deliver  certain  software
applications on the network. The Company has in the past missed some milestones.
In March  1998,  the  Company  missed a  non-critical  milestone  related to the
installation  of network  equipment and software and paid a $100,000  penalty to
Duquesne. Several future milestones remain, including two critical milestones in
the  second  quarter  of 1998.  Should  the  Company  fail to meet both of these
remaining critical milestones,  Duquesne would be entitled to monetary penalties
totaling  approximately  $15 million.  The Company and Duquesne are currently in
negotiations to further amend the project schedule and  corresponding  remaining
milestones.  The Company  believes it will  successfully  amend the contract and
fully satisfy these amended  remaining  critical  milestones.  See "Certain Risk
Factors--Dependence  on the  Installation,  Operations  and  Maintenance  of AMR
Systems  Pursuant to  Outsourcing  Contracts" and  "Management's  Discussion and
Analysis  of  Financial   Condition  and  Results  of   Operations--Results   of
Operations." For information on revenue  recognition for outsourcing  contracts,
see Note 1 to the Company's Consolidated Financial Statements.

CUSTOMERS

         Itron has  established  itself as a leading  supplier of  handheld  EMR
systems and AMR meter modules for the AMR market.  The Company believes that its
extensive  customer base,  long-term  customer  relationships  and experience in
meeting the needs of the utility  industry provide a solid foundation from which
it can supply  additional  products and services to its existing  customers,  as
well as new utility customers and other industry participants.

         Itron's EMR systems are installed at over 1,500  electric,  gas,  water
and  combination  utilities in more than 40 countries and are being used to read
approximately 275 million meters worldwide. Itron's EMR systems are installed at
approximately  80% of the largest  utilities in North America (those  utilities,
with  greater  than  50,000  customer  meters).  As a result of the high  market
penetration the Company has already achieved in the United States,  domestic EMR
sales are expected to be  predominantly  system upgrades and  replacements.  The
Company   estimates   that  the  number  of  meters  outside  North  America  is
approximately two to three times the number of meters in North America.  Because
utilities in many  industrialized  countries  outside North America are only now
beginning to automate their meter reading  function,  the Company  believes that
international  markets  represent  a  growth  opportunity  for  sales of its EMR
systems.

         The Company has established  itself as the world's largest  supplier of
meter modules for the  expanding  AMR market as a result of having  shipped over
11.1  million  meter  modules as of  December  31,  1997.  During the year ended
December 31, 1997,  the Company  shipped a record 2.7 million AMR meter  modules
and added 58 utilities to its list of AMR  customers,  bringing the total number
of the Company's AMR customers to 327 utilities,  including 39 utilities located
outside the United States.  Seventy-two of Itron's 327 AMR customers have made a
sizable commitment to Itron AMR products by having each ordered and installed at
least 10,000 of the Company's  meter  modules as of December 31, 1997.  These 72
customers  account for 95% or 10.5  million of the 11.1  million  meter  modules
shipped by the Company.

         The Company  has  installed  the world's  largest AMR system for Public
Service  Company of Colorado  ("PSCo"),  with  currently  over 1.5 million meter
modules. This system is being read with Mobile AMR technology.  The Company also
is in the  process of  installing  what it  believes  is  currently  the world's
largest  radio-based  water  AMR  system  with  the City of  Philadelphia  Water
Department.  When  complete,  this  Mobile AMR system  will  automate  the meter
reading of approximately 487,000 water meters in Philadelphia.

         In addition,  the Company has two large scale Fixed Network deployments
and ten Fixed Network AMR pilot  installations in North America.  The Company is
in the  process  of  installing  a Fixed  Network  system for  Duquesne  that is
currently  reading over 395,000  meters daily and,  when fully  installed,  will
cover  approximately  615,000 meters. See "Duquesne Fixed Network AMR Contract."
In addition to the Duquesne  Fixed  Network,  the Company is  installing a Fixed
Network system at Virginia Power that will cover  approximately  450,000 meters;
approximately 70,000 meters have been installed to date.

SALES, DISTRIBUTION AND MARKETING

         Itron  utilizes a direct sales and technical  support team to serve its
major accounts,  with sales and technical support offices located in a number of
cities throughout the United States. For smaller utilities and municipalities in
North  America,  Itron conducts sales and support  activities  through  numerous
distributors.  As of January 31, 1998, the Company's North American direct sales
force was comprised of 17 account  executives and four vice presidents,  who are
supported by five sales engineers. In addition, the Company's direct sales force
includes  four  officers  who  are   responsible   for  managing  the  Company's
relationships with its approximately 30 distributors. Outside North America, the
Company maintains direct sales organizations within subsidiary operations in the
United Kingdom, France and Australia. To reach the broader international market,
the Company  conducts  sales  through  distributors  in  approximately  45 other
countries.

         In addition to direct sales and sales through distributors, the Company
makes electric and water meter modules  available to utilities  through original
equipment   manufacturer   ("OEM")   arrangements   with  several   major  meter
manufacturers,  which  incorporate  the  Company's  meter  modules  at their own
facilities into new meters.  The Company intends to enter into additional OEM or
other similar arrangements if it has attractive opportunities to do so. Further,
the Company has  licensed  certain  aspects of its meter  module  technology  to
Schlumberger  Ltd.  ("Schlumberger")  and may enter  into  additional  licensing
agreements with other meter manufacturers or other industry  participants in the
future.

         The Company also offers its products  and  services  through  long-term
outsourcing  arrangements,  which may include  providing  AMR  products,  system
installation, meter reading services, meter shop services and other services for
periods  of  typically  15  years or  longer.  Outsourcing  arrangements  can be
structured  in a variety of ways to address a utility's  specific  needs;  these
range from  providing  basic meter  reading  systems and  services to  providing
systems and  services  with  advanced  functionality.  The Company  offers these
services to utilities  directly and through joint  ventures  with  utilities and
other  industry   participants.   Currently  the  Company  has  two  outsourcing
arrangements.   See  "Certain  Risk  Factors--Dependence  on  the  Installation,
Operations and Maintenance of AMR Systems Pursuant to Outsourcing Contracts."

         Key  components  of the Company's  sales and marketing  strategy are to
provide  utilities  with  cost-benefit  analyses of  potential  purchases of the
Company's  products and to help utilities  design a deployment  strategy for the
Company's products that will optimize the benefits realized by the utility.  See
"Itron's  Strategies--Provide   Cost-Effective  Meter  Reading  Solutions."  The
Company  believes that the relatively  short cost recovery period for deployment
of Off-Site and Mobile AMR systems,  particularly on hard-to-read  meters, makes
an investment in such  technology an attractive  solution for a utility's  meter
reading  needs,  despite  uncertainty  caused  by  industry   consolidation  and
regulatory reform. The Company's marketing program also emphasizes the diversity
and  flexibility  of its product line and the  Company's  ability to offer total
product solutions to each of its utility  customers,  including a combination of
radio and telephone-based technologies.

         The  Company's  other  marketing  efforts  focus on  product  awareness
principally through trade shows,  symposiums,  published papers and direct mail.
These marketing efforts include brochures,  newsletters,  exhibits, conferences,
an  annual  user's  forum,  industry  standards  committee   representation  and
regulatory  support.  Several major  industry  conferences  are keystones in the
Company's marketing program,  including the Distribution  Automation/Demand Side
Management  Conference held every January, the Company's Annual Users Conference
held every June in  conjunction  with the  National  Meter  Reading  Association
meetings and the Automatic Meter Reading Association  conference usually held in
September.  The Company maintains  communications with its customers through its
Users  Advisory  Board and its Fixed  Network  Advisory  Group and a program  of
regular mailings, newsletters and new customer announcements.

CUSTOMER SERVICE AND SUPPORT

         Itron provides its utility customers with implementation  services that
include among other things,  system design,  installation,  training and project
management.  Each of these services is tailored to meet a particular  customer's
needs.  In addition,  for Fixed  Network  systems,  the Company  offers  network
design, propagation analysis, mapping support,  centralized operation and system
support.  Itron offers system  maintenance  and support  services to each of its
customers.  Service contract prices are based on a number of factors,  including
system size and complexity and the expected degree of service support  required.
The Company's system maintenance and support services include 24-hour, toll-free
hot  line  support,  customer  service  representatives,   consulting  services,
regional  training  programs,  equipment  repair and  preventative  maintenance,
software support and maintenance,  system troubleshooting and network management
services.

COMPETITION

         Although  the  Company  is the  industry  leader  in sales of AMR meter
modules  and  AMR  systems  and  services  to the  utility  industry,  it  faces
competition  from a variety of companies  in each of the markets it serves.  The
emerging market for Fixed Network AMR systems for the utility industry, together
with the potential market for other applications once such Fixed Network systems
are in place,  have led  communications,  electronics  and utility  companies to
begin developing various systems, some of which currently compete, and others of
which may in the future  compete,  with the Company's  Fixed Network AMR system.
These  competitors  can be  expected  to offer a  variety  of  technologies  and
communications  approaches,  as well as meter  reading,  installation  and other
services to utilities and other industry participants.

         In the  radio-based  Fixed Network AMR market,  for example,  companies
such as CellNet  Data  Systems,  Inc.  ("CellNet")  and  Whisper  Communications
("Whisper")  currently offer  alternative  solutions to the utility industry and
compete  aggressively with the Company.  The Company believes that several large
suppliers of  equipment,  services or  technology  to the utility  industry have
developed or are currently  developing  competitive products for the AMR market.
For example,  Schlumberger  and Asea Brown Boveri  currently  offer  alternative
solutions  and could  expand their  current  products  and  services.  Enron has
announced their intention to utilize radios  developed by Motorola,  and network
transmission  services from MTel (a national two-way paging supplier) to provide
AMR residential products and services.

         The Company believes that it enjoys a number of competitive advantages.
The Company  believes the diversity of its AMR product line is broader than that
of any other AMR  provider.  This  diversity  gives the  Company  the ability to
provide comprehensive solutions to its customers.  The Company's radio-based AMR
solutions  utilize the same AMR radio meter modules and facilitate the migration
from one level of systems automation to another. The Company believes that it is
able to price  its AMR meter  modules  competitively  as a result of its  highly
automated  manufacturing lines as well as high production  volumes.  The Company
has a substantially  larger installed base of handheld-based EMR systems and AMR
meter  modules  than any of its  competitors  which gives it the  advantage of a
proven record of providing cost-efficient, quality products and services and the
proven  ability  to  interface  meter data with a wide  variety of utility  host
billing systems.  In addition,  the Company believes that its nationwide license
of 1-2 MHz of spectrum in the 1427-1429 MHz band is a competitive advantage. See
"FCC Regulation."

         Many  of  the  Company's   present  and  potential   competitors   have
substantially   greater  financial,   marketing,   technical  and  manufacturing
resources,  as well as greater name recognition and experience than the Company.
The Company's competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the  development,  promotion and sale of their products and services than the
Company.  In addition,  current and  potential  competitors  may make  strategic
acquisitions or establish  cooperative  relationships  among  themselves or with
third parties that increase  their ability to address the needs of the Company's
prospective  customers.  Accordingly,  it is possible  that new  competitors  or
alliances  among  current  and new  competitors  may  emerge  and  rapidly  gain
significant  market  share.  There can be no assurance  that the Company will be
able to compete  successfully  against current and future  competitors,  and any
failure to do so would have a material adverse effect on the Company's business,
financial  condition,  results of  operations  and cash flow.  See "Certain Risk
Factors--Competition."

PRODUCT DEVELOPMENT

         The  Company's  product  development  efforts  are  focused  on further
expanding and upgrading AMR product  offerings and  developing  new hardware and
software  platforms for handheld  systems.  The Company has product  development
facilities  located in Spokane,  Washington;  Lakeville  and Waseca,  Minnesota;
Raleigh,  North  Carolina;  Boise,  Idaho;  and  Saratoga,  California.  It also
conducts some development  activities in each of its foreign  subsidiaries.  The
Company has maintained its leadership position in part because of its commitment
to new products and  continued  enhancement  of existing  products.  The Company
spent  approximately  $32.2 million in 1997,  $33.3  million in 1996,  and $27.1
million in 1995 on product development.

         The Company  expects to continue to invest  substantial  amounts on new
product  development  for the  foreseeable  future as it continues to expand and
enhance its AMR and other product  offerings.  Utilizing its broad  knowledge of
the utility industry and the regulatory environment, the Company prioritizes its
product  development  opportunities to attempt to satisfy current customer needs
on a timely basis. In the last two years, a significant portion of the Company's
product  development  spending  has been for  development  of its Fixed  Network
technology.  The  Company  expects  that the  largest  categories  of its future
product  development   expenditures  will  be:  (1)  continued  improvement  and
expansion of Fixed Network product offerings  including cost reduction programs;
(2)   expansion  of  meter  modules  in  terms  of  meters  served  as  well  as
functionality;  (3) and development of data management  applications and systems
integration.

         The  Company's  future  success  will  depend in part on its ability to
continue  to design and  manufacture  new  competitive  products,  as well as to
continue to enhance its Fixed  Network and other AMR  products.  There can be no
assurance  that the Company will not  experience  unforeseen  problems or delays
with respect to its product development  efforts.  Delays in the availability of
new and enhanced  products could have a material adverse effect on the Company's
business,  financial  condition  and results of  operations.  See "Certain  Risk
Factors--Dependence on New Product Development."

INTELLECTUAL PROPERTY

         Itron owns or licenses  numerous  United  States,  Canadian and foreign
patents and has filed various patent  applications.  These patents cover a range
of technologies for meter reading,  portable  handheld  computer and AMR-related
technologies.  In September 1996, the U.S. Patent and Trademark Office issued to
the  Company  what the  Company  believes  to be a very  significant  patent for
radio-based  network AMR  systems.  On October 3, 1996,  the Company  brought an
action in the United States District Court for the District of Minnesota against
CellNet  claiming  infringement  of this  patent.  The  discovery  phase of this
proceeding  is underway.  See "-Legal  Proceedings."  The Company also relies on
copyrights to protect its proprietary  software and  documentation.  The Company
has  registered  trademarks  for most of its major  product  lines in the United
States and many foreign countries.

         While the  Company  believes  that its  patents,  trademarks  and other
intellectual  property have  significant  value,  there can be no assurance that
these patents or trademarks,  or any patents or trademarks issued in the future,
will provide meaningful  competitive  advantages.  The Company believes that its
continued success will be based on continued  excellence and innovation,  market
knowledge, technical and marketing capabilities,  existing product relationships
with utilities and a fundamental commitment to customer service excellence.  See
"Certain Risk Factors--Intellectual Property."

FCC REGULATION

         Certain of the Company's products made for use in the United States use
radio  frequencies,  the  access  to and use of which are  regulated  by the FCC
pursuant to the  Communications  Act of 1934,  as amended.  In general,  a radio
station  license  issued  by the FCC is  required  in order to  operate  a radio
transmitter.  The FCC issues these  licenses for a fixed term,  and the licenses
must be periodically renewed. Because of interference  constraints,  the FCC can
generally issue only a limited number of radio station licenses for a particular
frequency band in any one area.

         Although radio licenses generally are required for radio stations, Part
15 of the FCC's rules permit certain low-power radio devices ("Part 15 devices")
to operate on an  unlicensed  basis.  Part 15 devices are designed to be used in
frequencies   licensed  to  and  used  by  others.   Such  licensed  users  have
preferential status within their respective frequencies. Part 15 devices are not
permitted to cause harmful  interference  with such  preferred  uses and must be
designed to accept interference from licensed radio devices. The Company's radio
meter  modules  transmit  information  back to either  the  Company's  handheld,
mobile or fixed network AMR reading devices  in the 910-920 MHz band pursuant to
these rules.

         Itron's  products are designed to eliminate  virtually all interference
to other frequency users, while still enabling a complete and accurate read from
its radio  meter  modules.  However,  if the Company  were  unable to  eliminate
harmful  interference  caused by its Part 15 devices through  technical or other
means, the Company or its customers could be required to cease operations in the
band in the  locations  affected by the harmful  interference.  Further,  in the
event that the  unlicensed  frequencies  used by the Company  and its  customers
become unacceptably  crowded or restrictive,  and no additional  frequencies are
allocated, the Company's business could be materially adversely affected.

         In late February 1997, the FCC adopted a Notice of Proposed Rule Making
seeking comments concerning the rules for multiple address systems ("MAS").  The
Company uses  licensed MAS  frequencies  to  interrogate  or "wake up" its meter
modules.  The FCC is  proposing  to change  the method  for  licensing  some MAS
frequencies  from  individual site licenses to wide area licenses and to conduct
auctions for mutually  exclusive  applications in some MAS frequency  bands. The
FCC has proposed to confine the use of the MAS  frequencies  used by the Company
to "private" use and has instituted a freeze on accepting applications proposing
to use the frequencies for subscriber-based services. The freeze does not affect
license applications for private operations.

         Although the Company's  customers  generally  hold the licenses for the
MAS frequencies used in connection with the Company's  products that the utility
purchases, in limited instances the Company has applied to hold such licenses in
its own name.  For a time it appeared  that the FCC's freeze  might  prevent the
Company (but not the Company's  customers) from applying for additional multiple
address licenses while the FCC rule making is pending because the FCC might deem
the Company to be providing  subscriber-based  services. Based on the Memorandum
Opinion and Order, DA 98-163,  adopted by the FCC on March 4, 1998, however, the
Company  now  believes it will be  permitted  to apply for  additional  multiple
address licenses. Pursuant to the March 1998 decision, the FCC will not consider
the Company to be providing  subscriber-based  services if it uses its system to
collect  utility  consumption  information  that  it  furnishes  to  one  of its
customers.  While the Company does not believe that the proposed  changes to the
method of MAS  frequencies  will  prevent  it or its  customers  from  obtaining
necessary  licenses,  there can be no  assurance  that the rule  changes will be
adopted as proposed or that they will not have a material  adverse effect on the
ability of the Company or its customers to receive necessary licenses.

         The Company also has been issued a renewable  nationwide FCC license to
operate in the  1427-1429  MHz band.  With the  exception of meter modules which
operate in the 910-920 MHz band as described  above, the Company's Fixed Network
products  operate  within this band.  This frequency band currently is under the
exclusive  control of the federal  government,  which has consented to the FCC's
issuance of a license for Itron's use of the band. Current government use of the
band is limited to a discrete number of well-defined locations,  and the Company
believes the secondary  nature of its license does not have a material impact on
its business.

         The 1427-1429 MHz band is scheduled to be  transferred  from  exclusive
federal government jurisdiction to the FCC in 1999. The continued government use
of the frequency  will extend  through 2004, at which time the frequency will be
subject to auction.  The FCC has issued a report  stating  that rule  makings in
this band will not be initiated  until the year 2006. To date the FCC's approach
has been to "grandfather"  incumbent users and permit their continued operation,
or,  alternatively,  to provide a period for  incumbents to make a transition to
other  frequencies,  with the auction winners having to compensate the incumbent
users for relocation expenses.  However,  there can be no assurance that the FCC
will follow  precedent in this respect.  The Company believes that it may have a
significant  installed  base of products  operating in the 1427-1429 MHz band by
the time the band becomes subject to auction. Consequently, the Company believes
that it would be  difficult  for any  potential  bidder to  overcome  the public
interest in the Company's continued use of the spectrum on behalf of the utility
industry and that it likely would be  cost-prohibitive  for any potential bidder
to provide  compensation  to the Company for  relocation of the installed  base.
Further,  the Company believes that commercial demand for the 1427-1429 MHz band
is likely to be  relatively  low due to its  proximity to a worldwide  exclusion
zone of radio  astronomy  frequencies  that  may not be used for any  commercial
purposes.

         The  regulatory  environment  the  Company  operates  in is  subject to
change.  There  can be no  assurance  that  the FCC or  Congress  will  not take
regulatory  actions in the future that would have a material  adverse  effect on
the Company.  See "Certain Risk  Factors--Availability  and  Regulation of Radio
Spectrum."   The  Company  is  also  subject  to  regulatory   requirements   in
international  markets.  These  regulations,  which  vary  by  country,  require
modifications  to the  Company's  products,  including  operating  on  different
frequencies with different power specifications.

MANUFACTURING

         The Company  manufactures  meter modules,  Fixed Network components and
other AMR products, as well as handheld computers and peripheral equipment.  The
Company's  primary  manufacturing  objective is to design and produce  low-cost,
high-quality  meter  modules  and  other  Fixed  Network  components   utilizing
high-volume automation equipment. The Company's primary manufacturing facilities
are located in Spokane,  Washington and Waseca, Minnesota. The Company currently
has the  capacity  to produce  over 4.6  million  meter  modules  annually  on a
two-shift  basis.  With the  addition  of a third  shift and  certain  ancillary
equipment,  the Company has the  capacity to produce  approximately  7.0 million
meter  modules  annually.  In the first half of 1996,  the Company  expanded its
manufacturing  capacity  in  Spokane  through  the  installation  of  high-speed
automation  and test  equipment  in order to support the  anticipated  growth in
meter  module  and CCU  production.  Because  this  anticipated  growth  did not
materialize,  the Company currently has excess manufacturing  capacity which has
resulted  in an  increase  in cost of sales per unit.  Certain of the  Company's
handheld  system products,  telephone  modules  and  international  meter module
products are manufactured for the Company by third parties.

         The  Company's  Waseca  manufacturing  facility  produces  all  of  the
Company's gas and water meter modules,  data collection units used in Mobile AMR
and  AMR  handheld  meter  module  installation  and  programming  devices.  The
Company's   Waseca   operations  are  highly  automated  and  are  designed  for
high-volume manufacturing requirements.  The key manufacturing processes for AMR
meter modules  produced in Waseca include a ceramic board  processing  facility,
automated  surface mount  placement  equipment and both passive and active laser
tuning equipment.

         The  Company's  Spokane  manufacturing   facility  is  responsible  for
electric meter module, CCU and NCN production and was designed for manufacturing
flexibility and automation.  The key processes  include  automated surface mount
placement equipment, laser tuning equipment and automated test capabilities. The
Spokane  facility is also  responsible for  manufacturing  handheld  systems and
peripheral  equipment,  as well as other  lower-volume AMR products,  and is the
primary repair facility for Itron's handheld systems products.

         The Company has installed extensive automated testing equipment in both
its   manufacturing   facilities   to  ensure   quality   control   and  process
repeatability.  The  Company's  testing  includes  both  visual  inspection  and
automated testing of technical parameters  established for each of its products.
The  Company's   quality   control   equipment  also  includes  a  sophisticated
information  system that collects  data from its testing  equipment and provides
extensive reports and analyses of such data. This information system permits the
Company  to  promptly   identify   potential   problems  or  weaknesses  in  its
manufacturing  processes. The Company has been ISO 9000 certified since 1993 and
received  ISO 9002  recertification  of its  Spokane  facility in April 1996 and
expects to receive ISO 9002 certification of its Waseca facility during 1998.

INDUSTRY SEGMENTS AND FOREIGN AND DOMESTIC OPERATIONS

         Itron's foreign operations  consist of three consolidated  subsidiaries
as well as international  distributors.  Subsidiary  operations are located near
Reading,  England;  Lyon,  France;  and  Sydney,  Australia.  These  offices are
responsible for all utility sales and customer  support within their  respective
countries. To reach the broader international market, the Company conducts sales
through distributors appointed in approximately 45 other countries.
See Note 15 of Notes to Consolidated Financial Statements.

BACKLOG OF ORDERS AND INVENTORY

         The revenue backlog of unshipped  factory orders at the end of 1997 and
1996 was approximately $145 million and $73 million,  respectively.  The Company
expects that all the orders in backlog at the end of 1997 will be shipped during
1998. In addition,  the Company has  multi-year  contracts to supply radio meter
modules  and/or for  outsourcing  arrangements  with  several  customers.  Total
backlog  including  revenues  beyond the next twelve months was $406 million and
$313  million  at  December  31,  1997 and 1996,  respectively.  Inventories  at
December 31, 1997 and 1996 were $32.0 million and $35.2 million, respectively.

ENVIRONMENTAL REGULATIONS

         Compliance with environmental regulations has not had a material effect
on the Company's capital expenditures, earnings or competitive position.

EMPLOYEES

         As of December 31, 1997, the Company employed 1,213 full-time  persons:
474 in manufacturing, 284 in product development, 233 in sales and marketing, 98
in customer service and support and 96 in finance and  administration.  Of these
employees,  51 were located in Europe,  28 in Australia and the remainder in the
United  States.   The  Company  continues  to  recruit  and  seeks  to  maintain
highly-qualified management,  marketing, technical and administrative personnel.
None of the Company's employees is represented by a labor union. The Company has
not  experienced  any work stoppages and considers its employee  relations to be
good.

OTHER

         Itron does not have any  contracts  with the  federal  government.  The
Company's business is not significantly seasonal.

CERTAIN RISK FACTORS

         Dependence on Utility Industry;  Uncertainty Resulting From Mergers and
Acquisitions and Regulatory Reform. The Company derives substantially all of its
revenues  from sales of its products and services to the utility  industry.  The
Company has experienced variability of operating results on both an annual and a
quarterly  basis due  primarily  to utility  purchasing  patterns  and delays of
purchasing  decisions  as a result of mergers  and  acquisitions  in the utility
industry  and changes or potential  changes to the state and federal  regulatory
frameworks within which the electric utility industry operates.

         The  utility  industry,   both  domestic  and  foreign,   is  generally
characterized by long budgeting,  purchasing and regulatory  process cycles that
can take up to  several  years to  complete.  The  Company's  utility  customers
typically  issue  requests for quotes and  proposals,  establish  committees  to
evaluate the purchase,  review different technical options with vendors, analyze
performance and cost/benefit  justifications and perform a regulatory review, in
addition  to  applying  the normal  budget  approval  process  within a utility.
Purchases of the Company's products are, to a substantial extent,  deferrable in
the event that utilities reduce capital  expenditures as a result of mergers and
acquisitions,  pending or unfavorable regulatory decisions, poor revenues due to
weather conditions,  rising interest rates or general economic downturns,  among
other factors.

         The  domestic  electric  utility  industry  is  currently  the focus of
regulatory  reform  initiatives in almost every state,  which  initiatives  have
resulted  in  significant  uncertainty  for  industry  participants  and  raised
concerns  regarding  assets that would not be  considered  for recovery  through
ratepayer  charges.   Consequently,   many  utilities  are  delaying  purchasing
decisions  that  involve  significant  capital  commitments.  While the  Company
expects some states will act on these regulatory reform  initiatives in the near
term, there can be no assurance that the current regulatory  uncertainty will be
resolved in the near future or that the advent of new regulatory frameworks will
not  have a  material  adverse  effect  on  the  Company's  business,  financial
condition  and  results  of  operations.  Moreover,  in part as a result  of the
competitive pressures in the utility industry arising from the regulatory reform
process, many utility companies are pursuing merger and acquisition  strategies.
The  Company  has  experienced  considerable  delays in  purchase  decisions  by
utilities  that have  become  parties  to merger  or  acquisition  transactions.
Typically,  such  purchase  decisions are put on hold  indefinitely  when merger
negotiations  begin.  The  pattern  of merger  and  acquisition  activity  among
utilities  may  continue  for  the  foreseeable   future.  If  such  merger  and
acquisition activity continues at its current rate or intensifies, the Company's
revenues may continue to be materially adversely affected.

         Certain state  regulatory  agencies are considering the "unbundling" of
metering,  billing and related  information  services  from the basic  transport
aspects  of the  electricity  distribution  function.  Unbundling  includes  the
identification  of the  separate  costs of metering  and other  services and may
extend to subjecting  metering and other services to  competition.  For example,
the CPUC  issued a decision  that does  subject  metering,  billing  and related
services to  competitive  supply.  The  discontinuance  of a utility's  metering
monopoly  could have a  significant  impact upon the manner in which the Company
markets and sells its products and  services.  As the customer for the Company's
products and services would change from utilities  alone, to utilities and their
competitive  suppliers of metering services,  the Company could also be required
to modify its products  and  services (or develop new products and  services) to
meet the needs of the participants in a competitive meter services market.

         Recent Operating Losses. The Company  experienced  quarterly  operating
losses  in 1996 and  1997.  There  can be no  assurance  that the  Company  will
maintain  consistent  profitability  on a quarterly or annual basis. The Company
has  experienced  variability  of quarterly  results and believes its  quarterly
results  will  continue  to  fluctuate  as a result of factors  such as size and
timing of significant customer orders,  delays in customer purchasing decisions,
timing and levels of operating expenses, shifts in product or sales channel mix,
and increased competition.  Beginning in 1996, the Company increased its rate of
spending on its Fixed Network AMR operations, which has left the Company subject
to net  operating  losses  caused by  fluctuations  in revenues.  The  Company's
operating margins have been adversely affected by excess manufacturing  capacity
in 1996 and 1997. The Company expects  competition in the AMR market to increase
as current competitors and new market entrants introduce  competitive  products.
Operating  margins  may also be  affected by other  factors.  For  example,  the
Company has entered into large Fixed Network contracts such as with Duquesne and
Virginia Power with margins significantly below the Company's historical margins
due to competitive pressures.

         Customer  Concentration.  The Company's revenues in any particular year
tend to be  concentrated  with a limited  number of  customers,  the identity of
which changes from year to year.  The Company is dependent on large,  multi-year
contracts  that are  subject  to  cancellation  or  rescheduling  by  customers.
Cancellation  or  postponement  of one or more of these  contracts  would have a
material  adverse  effect  on the  Company.  See  "Management's  Discussion  and
Analysis  of  Financial   Condition  and  Results  of   Operations--Results   of
Operations" and "Description of Business--Customers."


         Dependence on New Product Development. The Company has made and expects
to continue to make a  substantial  investment in  technology  development.  The
Company's  future  success  will  depend in part on its  ability to  continue to
design and manufacture  new competitive  products and to continue to enhance its
existing products and achieve  large-scale  implementation for its Fixed Network
and  other  AMR  products.  This  product  development  will  require  continued
substantial  investment in order to maintain the Company's market position.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and "Description of Business--Product  Development." There can be no
assurance  that  unforeseen   problems  will  not  occur  with  respect  to  the
development,  performance or market acceptance of the Company's  technologies or
products.  Development  schedules  for  high-technology  products are subject to
uncertainty,  and  there  can be no  assurance  that the  Company  will meet its
product   development   schedules.   The  Company  has  previously   experienced
significant  delays and cost overruns in the  development  of new products,  and
there can be no assurance  that delays or cost overruns will not be  experienced
in the future. Delays in new product development, including software, can result
from a number of causes,  including  changes in  product  definition  during the
development  stage,  changes  in  customer  requirements,  initial  failures  of
products or unexpected behavior of products under certain conditions, failure of
third-party  supplied  components to meet specifications or lack of availability
of such  components,  unplanned  interruptions  caused by problems with existing
products that can result in reassignment of product development  resources,  and
other factors.  Delays in the  availability  of new products or the inability to
develop successfully  products that meet customer needs could result in the loss
of revenue or increased  service and warranty  costs,  any of which would have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

         Dependence  on the  Installation,  Operations  and  Maintenance  of AMR
Systems Pursuant to Outsourcing  Contracts.  A portion of the Company's business
consists of outsourcing,  wherein the Company  installs,  operates and maintains
AMR systems that it continues to own in order to provide meter reading and other
related services to utilities and their customers. The Company currently has two
outsourcing  contracts.  The largest of the  contracts,  which is with Duquesne,
involves  Fixed  Network AMR; the other  utilizes a Mobile AMR  solution.  These
long-term  outsourcing  contracts are subject to  cancellation or termination in
certain  circumstances in the event of a material and continuing  failure on the
Company's part to meet contractual  performance  standards on a consistent basis
over agreed time periods.

         The Company has experienced  delays in performing its obligations under
the Duquesne  Contract.  These delays  relate  primarily to the  development  of
certain  advanced  meter reading  functions and the software  needed to complete
these functions. While the Company recently received acceptance from Duquesne on
the  first  critical  milestone  pursuant  to the  Duquesne  Contract,  numerous
milestones  remain  including two critical  milestones.  The remaining  critical
milestones  consist of the  development  of interfaces  and expansion of network
functionality to 85% of single phase accounts in Duquesne's  service  territory.
The total  amount of the  remaining  penalties,  should the Company fail to meet
both of the remaining  critical  milestones is  approximately  $15 million.  The
remaining two critical milestones  currently must be satisfied during the second
quarter of 1998.  The Company and Duquesne  are  currently  in  negotiations  to
further amend the project schedule and corresponding remaining milestones. While
the  Company  believes  it will be able to  amend  the  contract  and  meet  the
remaining  critical  milestones,  as well as all  other  milestones  that  carry
financial  penalties,  there can be no assurance  that it will be able to do so.
Any  failure by the Company to meet a critical  milestone  would have a material
adverse effect on the Company's  financial  condition and results of operations.
See "Duquesne Fixed Network AMR Contract."

         Increasing Competition.  The Company faces competitive pressures from a
variety of companies in each of the markets it serves.  In the radio-based fixed
network   AMR   market,   companies   such   as   CellNet,   Whisper   and   the
Enron/Motorola/MTel  consortium  currently  offer  alternative  solutions to the
utility industry and compete  aggressively with the Company. The emerging market
for fixed  network  AMR  systems for the  utility  industry,  together  with the
potential market for other  applications  once such fixed network systems are in
place,  have led  communications,  electronics  and utility  companies  to begin
developing various systems, some of which currently compete, and others of which
may in the future compete,  with the Company's  Fixed Network AMR system.  These
competitors   can  be   expected  to  offer  a  variety  of   technologies   and
communications  approaches,  as well as meter  reading,  installation  and other
services to utilities and other industry participants.

         The Company  believes that several other large  suppliers of equipment,
services or  technology to the utility  industry may be  developing  competitive
products for the AMR market. In addition, large meter manufacturers could expand
their current product and services  offerings so as to compete directly with the
Company.  To stimulate  demand,  and due to  increasing  competition  in the AMR
market, the Company has from time to time lowered prices on its AMR products and
may  continue to do so in the future.  The Company also  anticipates  increasing
competition with respect to the features and functions of such products.  In the
handheld  systems  market,  Itron has encountered  competition  from a number of
companies,  resulting  in margin  pressures  in  international  markets  and the
maturing domestic handheld systems business.

         Many of the Company's  present and potential  future  competitors  have
substantially   greater  financial,   marketing,   technical  and  manufacturing
resources,  as well as greater name recognition and experience than the Company.
The Company's competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the  development,  promotion and sale of their products and services than the
Company.  In addition,  current and  potential  competitors  may make  strategic
acquisitions or establish  cooperative  relationships  among  themselves or with
third parties that increase  their ability to address the needs of the Company's
prospective  customers.  Accordingly,  it is possible  that new  competitors  or
alliances  among  current  and new  competitors  may  emerge  and  rapidly  gain
significant  market  share.  There can be no assurance  that the Company will be
able to compete  successfully  against current and future  competitors,  and any
failure to do so would have a material adverse effect on the Company's business,
financial  condition,  results of operations and cash flow. See  "Description of
Business--Competition."

         Uncertainty of Market  Acceptance of New Technology.  The AMR market is
evolving, and it is difficult to predict the future growth rate and size of this
market  with any  assurance.  The AMR market did not grow as quickly in 1996 and
1997 as the Company expected. Further market acceptance of the Company's new AMR
products and systems, such as its Fixed Network products, will depend in part on
the Company's ability to demonstrate the cost effectiveness, strategic and other
benefits of the  Company's  products  and  systems,  the  utilities'  ability to
justify  such  expenditures  and the  direction  and pace of state  and  federal
regulatory reform actions. In the event that the utility industry does not adopt
the Company's technology or does not adopt it as quickly as the Company expects,
the  Company's  future  results  will  be  materially  and  adversely  affected.
International  market  demand for AMR  systems  varies by country  based on such
factors  as the  regulatory  and  business  environment,  labor  costs and other
economic  conditions.  See  "Description of  Business--Sales,  Distribution  and
Marketing."

         Rapid Technological Change. The telecommunications  industry, including
the data  transmission  segment  thereof,  currently is  experiencing  rapid and
dramatic technology advances. The advent of computer-linked electronic networks,
fiber optic transmission,  advanced data digitization  technology,  cellular and
satellite communications capabilities,  and private communications networks have
greatly  expanded  communications  capabilities and market  opportunities.  Many
companies  from  diverse  industries  are  actively  seeking  solutions  for the
transmission  of  data  over   traditional   communications   media,   including
radio-based  and  cellular  telephone  networks.  Competitors  may be capable of
offering  significant cost savings or other benefits to the Company's customers.
There  can be no  assurance  that  technological  advances  will not  cause  the
Company's technology to become obsolete or uneconomical.

         Availability and Regulation of Radio Spectrum. A significant portion of
the Company's  products use radio  spectrum and in the United States are subject
to  regulation  by the FCC.  In the past,  the FCC has  adopted  changes  to the
requirements  for equipment using radio spectrum,  and there can be no assurance
that the FCC or  Congress  will not  adopt  additional  changes  in the  future.
Licenses for radio  frequencies  must be renewed,  and there can be no assurance
that any  license  granted to the  Company or its  customers  will be renewed on
acceptable  terms,  if at all. The Company has  committed,  and will continue to
commit, significant resources to the development of products that use particular
radio  frequencies.  Action  by  the  FCC  could  require  modifications  to the
Company's products, and there can be no assurance that the Company would be able
to modify its products to meet such  requirements,  that it would not experience
delays in completing such  modifications or that the cost of such  modifications
would not have a  material  adverse  effect on the  Company's  future  financial
condition and results of operations.

         The Company's  radio-based  products currently employ both licensed and
unlicensed radio frequencies.  There must be sufficient radio spectrum allocated
by the FCC for the use the  Company  intends.  As to the  licensed  frequencies,
there is some risk that there may be insufficient  available frequencies in some
markets to sustain the Company's planned operations.  The unlicensed frequencies
are available for a wide variety of uses and are not entitled to protection from
interference by other users. In the event that the unlicensed frequencies become
unacceptably  crowded  or  restrictive,   and  no  additional   frequencies  are
allocated,  the Company's business will be materially  adversely  affected.  See
"Description of Business--FCC Regulation."

         The Company is also subject to regulatory requirements in international
markets  that vary by  country.  To the extent the Company  wishes to  introduce
products  designed  for use in the United  States or another  country into a new
market, such products may require significant  modification or redesign in order
to meet  frequency  requirements  and  power  specifications.  Further,  in some
countries, limitations on frequency availability or the cost of making necessary
modifications may preclude the Company from selling its products.

         Dependence on Key  Personnel.  The Company's  success  depends in large
part upon its  ability  to retain  highly  qualified  technical  and  management
personnel,  the loss of one or more of whom could have a material adverse effect
on the  Company's  business.  The Company  has  retained a  succession  planning
consultant to assist in finding a new  President,  a position  currently held by
Johnny  Humphreys,  who is also CEO. While Mr.  Humphreys  intends to retain his
current  responsibilities as President until a successor is selected and will be
actively  involved in the affairs of the Company for an indefinite  period,  the
Company's  success will be dependent  on the  selection of a qualified  eventual
successor to Mr. Humphreys.  The Company's success also depends upon its ability
to continue to attract and retain highly qualified personnel in all disciplines.
There can be no  assurance  that the  Company  will be  successful  in hiring or
retaining the requisite personnel. See "Executive Officers of the Registrant."

         Intellectual   Property.   While  the  Company  believes  its  patents,
trademarks and other intellectual  property have significant value, there can be
no assurance  that these  patents and  trademarks,  or any patents or trademarks
issued in the future, will provide meaningful competitive advantages.  There can
be no assurance that the Company's  patents or pending  applications will not be
challenged,  invalidated or  circumvented  by competitors or that rights granted
thereunder will provide meaningful proprietary protection. Despite the Company's
efforts to safeguard and maintain its proprietary  rights,  there can also be no
assurance  that  such  rights  will  remain  protected  or  that  the  Company's
competitors will not  independently  develop  patentable  technologies  that are
substantially  equivalent  or  superior  to  the  Company's  technologies.   See
"Description  of  Business--Intellectual  Property."  On October  3,  1996,  the
Company  brought an action in the United Stated  District Court for the District
of Minnesota  against CellNet  claiming  infringement of one of Itron's patents.
That action is pending, and the discovery phase thereof has commenced. There can
be no  assurance  that the  Company  will  prevail in such action or, even if it
prevails,  that the legal costs incurred by the Company in connection  with such
action  will not have a  material  adverse  effect  on the  Company's  financial
condition or results of operations. See "Legal Proceedings."

         Dependence  on Key Vendors  and  Internal  Manufacturing  Capabilities.
Certain of the Company's  products,  subassemblies  and  components are procured
from a single  source,  and others are procured  only from limited  sources.  In
particular,  the Company  currently  obtains  approximately  50% of its handheld
devices  from one vendor  located  in the United  Kingdom  and  obtains  all the
microcontrollers  for its AMR meter modules from single  sources.  The Company's
reliance  on such  components  or on these  sole- or  limited-source  vendors or
subcontractors  involves  certain risks,  including the possibility of shortages
and reduced control over delivery schedules,  manufacturing capability,  quality
and costs. In addition,  Itron may be affected by worldwide shortages of certain
components,  such as memory chips.  A significant  price  increase in certain of
such  components or  subassemblies  could have a material  adverse effect on the
Company's  results of  operations.  Although  the Company  believes  alternative
suppliers of these products,  subassemblies and components are available, in the
event of supply  problems from the Company's sole or  limited-source  vendors or
subcontractors, the Company's inability to develop alternative sources of supply
quickly or  cost-effectively  could materially  impair the Company's  ability to
manufacture its products and, therefore, could have a material adverse effect on
the Company's business,  financial  condition and results of operations.  In the
event of a significant interruption in production at the Company's manufacturing
facilities,  considerable  time and effort  could be  required to  establish  an
alternative  production line.  Depending on which production line were affected,
such a break in production would have a material adverse effect on the Company's
business,  financial  condition  and results of  operations.  See  "Management's
Discussion    and   Analysis   of   Financial    Condition    and   Results   of
Operations--Results of Operations" and "Description of Business--Manufacturing."

         Dependence on  Outsourcing  Financing.  The Company  intends to utilize
limited  recourse,  long-term,  fixed  rate  project  financing  for its  future
outsourcing contracts.  It has established Itron Finance, Inc. as a wholly owned
Delaware subsidiary and plans to establish bankruptcy remote, single and special
purpose  subsidiaries  of Itron  Finance,  Inc. for this  purpose.  Although the
Company has completed financing for what it believes to be the first AMR project
financing,  there can be no  assurance  that the Company  will be able to effect
other project financings.  If the Company is unable to utilize limited resource,
long-term,  fixed rate project  financing  for its  outsourcing  contracts,  its
borrowing  capacity will be reduced and it may be subject to negative effects of
floating interest rates if it cannot hedge this exposure.

         International  Operations.  International  sales and  operations may be
subject  to risks  such as the  imposition  of  government  controls,  political
instability, export license requirements, restrictions on the export of critical
technology,  currency exchange rate  fluctuations,  generally longer receivables
collection  periods,  trade  restrictions,  changes in tariffs,  difficulties in
staffing  and  managing  international   operations,   potential  insolvency  of
international  dealers and  difficulty in  collecting  accounts  receivable.  In
addition, the laws of certain countries do not protect the Company's products to
the same extent as do the laws of the United  States.  There can be no assurance
these factors will not have a material  adverse  effect on the Company's  future
international  sales and,  consequently,  on the Company's  business,  financial
condition  and  results of  operations.  See  "Description  of  Business--Sales,
Distribution and Marketing."

         Antitakeover Considerations.  The Company has the authority to issue 10
million  shares of preferred  stock in one or more series and to fix the powers,
designations,  preferences and relative, participating, optional or other rights
thereof  without any further vote or action by the Company's  shareholders.  The
issuance of  preferred  stock could dilute the voting power of holders of Common
Stock and could have the effect of delaying or preventing a change in control of
the  Company.   Certain   provisions  of  the  Company's  Restated  Articles  of
Incorporation,  Restated  Bylaws,  shareholder  rights plan and employee benefit
plans, as well as Washington law, may operate in a manner that could  discourage
or render more  difficult a takeover of the Company or the removal of management
or may limit the price certain investors may be willing to pay in the future for
shares of Common Stock.




<PAGE>



I
tem 1a: EXECUTIVE OFFICERS OF THE REGISTRANT

         Set forth below are the names,  ages,  titles with Itron, and principal
occupations  and  employment  for the last five years of the persons  serving as
executive officers of Itron as of March 1, 1998.

<TABLE>
<CAPTION>
           Name                             Age   Position
          ------------------------------   -----  --------------------------------------------------------------------
          <S>                            <C>    <C>   

           Johnny M. Humphreys               60     President, Chief Executive Officer and Director

           Carl Robert Aron                  54     Executive Vice President and Chief Strategist

           Richard G. Geiger                 48     Senior Vice President and General Manager, Technical Management

           Klaus O. Huschke                  64     Senior Vice President and General Manager, International
                                                    Operations

           Robert D. Neilson                 41     Senior Vice President, Business Development

           LeRoy D. Nosbaum                  51     Vice President and General Manager, Network Systems

           Michael J. O'Callaghan            58     Senior Vice President and General Manager, Global Handheld and
                                                    Mobile Systems

           Larry A. Panattoni                59     Senior Vice President, Corporate and Manufacturing Services

           David G. Remington                56     Vice President and Chief Financial Officer

           Dennis A. Shepherd                49     Vice President and General Manager, Utility Translation Systems

           John A. Smith                     48     Vice President, Data Collection Systems Integration

           Russell E. Vanos                  41     Vice President and General Manager, Utility and Energy Service
                                                    Division

           S. Edward White                   47     Executive Vice President and Chairman, Utility Translation
                                                    Systems, Inc. and Director
</TABLE>



         Johnny M. Humphreys has been President,  Chief Executive  Officer and a
director of Itron since  1987.  In  addition,  Mr.  Humphreys  is expected to be
appointed as Chairman of the board  immediately  following  the  Company's  1998
annual meeting of shareholders. From 1975 to 1986, Mr. Humphreys was employed by
Datachecker   Systems,   Inc.   ("Datachecker"),   a   subsidiary   of  National
Semiconductor  Corporation  ("NSC"), in various executive  positions,  including
President  from 1980 to 1986. In 1986, Mr.  Humphreys was appointed  Senior Vice
President of NSC's  Information  Systems Group and was responsible for strategic
planning for three operating divisions, National Advanced Systems, Microcomputer
Products Group and Datachecker.

         Carl Robert Aron has been Executive Vice President and Chief Strategist
of Itron since  February 1998. Mr. Aron joined Itron as Executive Vice President
in November 1995, and served as its Chief  Operating  Officer from November 1995
to February  1998.  Prior to joining  Itron,  Mr. Aron had been  employed by EDS
Management  Consulting  Services  as  the  National  Director  of  its  Wireless
Consulting  Practice and its Utilities  Telecommunications  Practice since 1994.
From 1981 to 1994,  Mr.  Aron was Chief  Executive  Officer of RAM  Broadcasting
Corporation,  a provider of mobile communications  services.  From 1967 to 1990,
Mr.  Aron was an  attorney  with the law firm of Rubin  Baum  Levin  Constant  &
Friedman.

         Richard G. Geiger was  promoted to Senior  Vice  President  and General
Manager,  Technical Management of Itron in October 1997. Previously,  Mr. Geiger
had been Vice President,  Product  Development of Itron since 1993. From 1989 to
1992,  Mr. Geiger was Vice  President and General  Manager of AMRplus  Partners.
From 1986 to 1989,  Mr.  Geiger was  President  of Mitsumi  Technology,  Inc., a
research and development  subsidiary of Mitsumi Company Limited,  a developer of
new electronics  products.  From 1984 to 1986, Mr. Geiger was Vice President and
General  Manager  of  Commodore  Amiga,  prior to which he spent four years with
Apple  Computer,  Inc.  as Manager of Advanced  Development  and four years with
Digital Equipment Corporation.

         Klaus O.  Huschke was  promoted to Senior  Vice  President  and General
Manager,  International  Operations  of Itron in October 1997.  Previously,  Mr.
Huschke had been Vice President, International of Itron since 1987. From 1982 to
1987, Mr. Huschke was Vice President,  International  Operations at Datachecker.
Prior to  joining  Datachecker  he spent 21  years  in a  variety  of sales  and
management positions with Anker Data Systems Corporation, a German point-of-sale
manufacturer, in its German, Italian and American headquarters.

         Robert D. Neilson was promoted  to  Senior  Vice  President,   Business
Development  of Itron in October  1997.  Previously,  Mr.  Neilson had been Vice
President,  Marketing since 1993. Mr. Neilson joined Itron in 1983 as manager of
market  development and planning,  and served as Director of Marketing from 1987
to 1993.  As Director of  Marketing,  Mr.  Neilson's  responsibilities  included
marketing for AMRplus Partners.

         LeRoy D. Nosbaum  joined the Company as a Vice  President in March 1996
and was named Vice President and General  Manager,  Network  Systems of Itron in
October 1997. Before joining Itron, Mr. Nosbaum was Executive Vice President and
General Manager of Metricom, Inc.'s UtiliNet Division, and has held a variety of
positions with Metricom since 1989. Prior to joining  Metricom,  Mr. Nosbaum was
employed by Schlumberger  Ltd. and Sangamo Electric for 20 years,  most recently
as General Manager of the Integrated  Metering  Systems  Division of Electricity
Management--North America, an operating group of Schlumberger.

         Michael J.  O'Callaghan  was  promoted  to Senior  Vice  President  and
General  Manager,  Global  Handheld and Mobile Systems of Itron in October 1997.
Mr. O'Callaghan joined Itron in 1987 as Vice President,  Utility Systems. Before
joining Itron, Mr. O'Callaghan was Vice President,  Sales of NSC's microcomputer
division. Prior to joining NSC, he was Vice President, Sales of Byvideo, Inc., a
manufacturer  of  computer-based  video  kiosks for remote  purchases.  Prior to
joining  Byvideo,  Inc.,  he was Vice  President,  Sales and  Marketing  of Onyx
Systems, Inc., a manufacturer of UNIX-based microcomputers,  for three years and
was with NSC for nine years in various sales and marketing management positions.

         Larry A. Panattoni was promoted to Senior Vice President, Corporate and
Manufacturing  Services of Itron in October 1997. Mr.  Panattoni joined Itron in
1990 as Vice President, Manufacturing. He previously spent 21 years in financial
and operation management  positions of increasing  responsibility with NSC, most
recently as Vice  President  of  Administration.  He was also Vice  President of
Manufacturing  Operations and Administration,  and Vice President of Finance and
Administration with Datachecker.

         David G. Remington  joined Itron  in early 1996 as  Vice President  and
Chief  Financial  Officer.  Before joining Itron,  Mr.  Remington was a Managing
Director of Dean Witter  Reynolds  Inc. or Dean Witter  Realty Inc. from 1988 to
1996.  Previously,  he spent 17 years with three financial  services firms and a
high technology firm.  Immediately  prior to Dean Witter  Reynolds,  he was Vice
President-Finance and later President of Steiner Financial Corporation.

        Dennis A. Shepherd joined Itron as Vice President of Marketing and Sales
of Utility Translation Systems, Inc. in March 1996, when Itron acquired UTS. Mr.
Shepherd has worked for UTS for 10 years.  Prior to joining  UTS,  Mr.  Shepherd
worked as an industrial  engineer and marketing  representative for Westinghouse
Electric Corporation.

         John A. Smith joined Itron as Vice  President of Engineering of Utility
Translation Systems,  Inc. in March 1996, when Itron acquired UTS. Mr. Smith has
worked for UTS for 10 years with responsibility for product development.  Before
joining  Itron,  Mr.  Smith  worked  for 12  years  in  the  Meter  Division  of
Westinghouse  Electric  Corporation where he was a software engineer and manager
of software development. Previously, he was a commissioned officer in the United
States  Air  Force   serving  as  the  Chief  of  Computer   Operations  of  the
Environmental Technical Applications Center in Washington, D.C.

         Russell E. Vanos has been Vice President and General  Manager,  Utility
and Energy Services of Itron since October 1997. Previously,  Mr. Vanos had been
the Western area sales  director for Itron since 1988. Mr. Vanos joined Itron in
1980 as a field service representative  installing the first generation of Itron
EMR   systems,   and  has  served  in   numerous   management   positions   with
implementation, customer service and sales responsibilities.

         S. Edward  White  joined  Itron as  President  of Utility  Translation
Systems,  Inc. in March 1996,  when Itron  acquired  UTS.  Mr.  White has been a
director of the Company  since 1996.  Mr. White has been  President of UTS since
its  inception  in  1980.  Prior  to  founding  UTS,  Mr.  White  held  numerous
engineering  and  marketing  management  positions  with  Westinghouse  Electric
Corporation, Meter Division, for 13 years.


Item 2: PROPERTIES

         The Company's  headquarters are located in approximately 137,000 square
feet of owned  space in Spokane,  Washington,  including  60,000  square feet of
manufacturing  space.  The Company also owns a building  adjacent to its Spokane
facility with approximately  28,000 square feet of manufacturing and engineering
space. In Raleigh,  North Carolina, the Company owns approximately 24,000 square
feet  used  for  all  activities  related  to its  UTS  subsidiary.  In  Waseca,
Minnesota,   the  Company  leases  70,000  square  feet  of  manufacturing   and
engineering  space.  The Company also has  facilities  in Saratoga,  California;
Lakeville,  Minnesota; and Boise, Idaho with approximately 63,000 square feet of
total leased space. These facilities are used primarily for product development.
Additionally, the Company leases sales offices in the United Kingdom, France and
Australia and in various cities throughout the United States. The Company's 1997
aggregate   domestic  and   international   base  monthly  lease  obligation  is
approximately  $155,000.  All the above facilities are in good condition and the
Company  believes  its  current  manufacturing  and  other  properties  will  be
sufficient to support its operations for the foreseeable future.


Item 3:  LEGAL PROCEEDINGS

         On October 3, 1996,  Itron  filed a patent  infringement  suit  against
CellNet Data Systems  ("CellNet")  in the United States  District  Court for the
District of Minnesota,  alleging that CellNet is infringing the Company's United
States Patent No. 5,553,094,  entitled "Radio  Communication  Network for Remote
Data Generating  Stations,"  issued on September 3, 1996. The Company is seeking
injunctive  relief as well as monetary  damages,  costs and attorneys' fees. The
discovery  phase of this lawsuit has  commenced.  There can be no assurance that
the Company will prevail in this action or, even if it does prevail,  that legal
costs  incurred by the Company in connection  therewith will not have a material
adverse effect on the Company's financial condition.

         On April  29,  1997,  Itron  was  served by  CellNet  with a  complaint
alleging patent infringement.  The suit is pending in the United States District
Court for the Northern District of California.  Itron's  management has reviewed
the  complaint and believes it to be without  merit.  The patent in question was
issued in 1988.  Itron's  management  is unaware of any  previous  assertion  by
CellNet  of any  claim  of  patent  infringement  by  Itron.  Itron  intends  to
vigorously  defend this suit. The complaint seeks  injunctive  relief as well as
monetary damages, costs and attorneys' fees.

         On May 29, 1997,  Itron and its President and Chief Executive  Officer,
Johnny M.  Humphreys,  were served with a complaint  alleging  securities  fraud
filed by Mark G. Epstein (Epstein v Itron, et al.) on his own behalf and alleged
to be on  behalf  of a class  of all  others  similarly  situated,  in the  U.S.
District  Court  for the  Eastern  District  of  Washington  (Civil  Action  No.
CS-97-214 RHW). The complaint alleges,  among other matters,  that Itron and Mr.
Humphreys  violated  Section  10(b) of the  Securities  Exchange Act of 1934, as
amended,  and  Rule  10b-5  thereunder  by  making  allegedly  false  statements
regarding the development status,  performance and technological capabilities of
Itron's  Fixed  Network  AMR system and  regarding  the  suitability  of Itron's
encoder receiver  transmitter devices for use with an advanced Fixed Network AMR
system.  The complaint  seeks monetary  damages,  costs and attorneys'  fees and
unspecified equitable or injunctive relief.

         On July 28,  1997,  the  Company  and Mr.  Humphreys  filed a motion to
dismiss the  complaint  for failure to state a claim for relief.  On January 23,
1998,  the Court  denied  the motion to  dismiss.  The  discovery  phase of this
lawsuit has commenced.  The Company  believes it has good defenses to the claims
alleged and intends to defend itself vigorously against this action.

         On September 3, 1997,  Itron and Mr. Humphreys agreed to accept service
of process of a complaint  which was filed in the Superior Court of the State of
Washington,  County of  Spokane,  (Civil  Action  No.  97204889-8)  against  the
Company, its President and Chief Executive Officer,  Johnny M. Humphreys,  Itron
Board Chairman Paul A. Redmond,  Itron Director Jon E. Eliassen,  and Washington
Water Power Company.  The complaint,  filed by plaintiff Katya M. Haub, purports
to be brought on behalf of herself and a class of all others similarly situated.
The class period  alleged is  identical  to that  alleged in a  previously-filed
proposed  class  action  (Epstein v. Itron,  et al.) filed in the United  States
District Court for the Eastern District of Washington at Spokane.  The complaint
alleges,  among other matters,  that defendants are liable for claims made under
the Washington State  Securities Act, the Washington  State Consumer  Protection
Act,  and the  common  law of  negligent  misrepresentation  and seeks  monetary
damages,  costs,  attorneys'  fees  and  equitable  or  injunctive  relief.  The
complaint  generally  alleges that  defendants  were  responsible for materially
incorrect  statements  about Itron's  business,  markets,  and future  prospects
including  allegedly  misleading  statements with respect to the development and
deployment of Itron's Fixed  Network  system.  The Company has filed a motion to
stay. A hearing on this motion was held on October 31,  1997,  at which time the
court issued a temporary stay pending  determination  of the Company's motion to
dismiss in the Epstein case, and took the motion under  advisement.  On February
18,  1998 the Court  orally  denied the motion to stay.  The  Company and Johnny
Humphreys, joined by all of the other defendants, have filed a motion to dismiss
this  action.  A hearing on this motion is now set for May 1, 1998.  The Company
believes  it has good  defenses  to the claims  alleged,  and  intends to defend
itself vigorously against this action.

         The Company is not involved in any other material legal proceedings.


Item 4:  SUBMISSION OF MATTERS  TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of shareholders of Itron during the
fourth quarter of 1996.






<PAGE>



PART II



Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER   MATTERS

Market Information for Common Stock

         Itron's  common  stock is traded on the  NASDAQ  National  Market.  The
following  table reflects the range of high and low closing sales prices for all
four quarters of 1997 and 1996 as reported by the NASDAQ National Market.

<TABLE>
<CAPTION>
                                            1997                              1996
                              --------------------------------------------------------------------
                                    HIGH             LOW              HIGH             LOW
                              --------------------------------------------------------------------
<S>                         <C>                   <C>             <C>               <C>   
         First Quarter             $26.00           $16.75           $51.50           $29.50
         Second Quarter             28.13            18.50           $60.00           $27.75
         Third Quarter              27.50            22.00           $36.75           $19.75
         Fourth Quarter             27.00            14.25           $26.00           $14.50
</TABLE>

 

HOLDERS

         At February 27, 1998, there were approximately 12,000 holders of record
of the Company's Common Stock.

DIVIDENDS

         The Company  has never  declared  or paid cash  dividends.  The Company
intends to retain future  earnings,  if any, for the development of its business
and does not anticipate paying cash dividends in the foreseeable  future.  Prior
to the merger with the Company, UTS paid dividends of $1,650,000 and $200,000 in
the years ended December 31, 1995 and 1996, respectively.





<PAGE>



Item 6:  SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)          1997         1996         1995          1994         1993
- -------------------------------------------- ---------- ------------ -------------- ----------- ------------
Statement of Operations Data
<S>                                        <C>         <C>          <C>           <C>         <C>        
Revenues
   AMR systems                                $143,472     $129,576        $98,724     $65,009      $43,679
   Handheld systems                             49,409       45,084         60,952      60,905       49,021
   Outsourcing                                  23,236        2,924          1,659           -            -
                                             ---------- ------------ -------------- ----------- ------------
     Total revenues                            216,117      177,584        161,335     125,914       92,700
Cost of revenues                               135,359      104,708         89,596      69,481       49,527
                                             ---------- ------------ -------------- ----------- ------------

Gross profit                                    80,758       72,876         71,739      56,433       43,173

Operating expenses
   Sales and marketing                          29,613       28,847         20,054      17,159       13,353
   Product development                          32,220       33,285         27,080      18,071       12,619
   General and administrative                   12,064       10,970          7,589       5,727        5,260
   Amortization of intangibles                   2,190        1,542          2,336       2,266        2,240
                                              ---------- ------------ -------------- ----------- ------------
     Total operating expenses                   76,087       74,644         57,059      43,223       33,472
                                              ---------- ------------ -------------- ----------- ------------
Operating income (loss)                          4,671      (1,768)         14,680      13,210        9,701

Other income (expense)
   Equity in affiliates                        (1,120)         (50)              -           -            -
   Gain on sale of business interest             2,000            -              -           -            -
   Interest, net                               (3,916)        (316)          1,721         983        (555)
                                              ---------- ------------ -------------- ----------- ------------
   Total other income (expense)                (3,036)        (366)          1,721         983        (555)

Income (loss) before taxes                       1,635      (2,134)         16,401      14,193        9,146
Income tax (provision) benefit                   (625)          670        (5,250)     (3,930)      (3,110)
                                              ---------- ------------ -------------- ----------- ------------
Net income (loss)                               $1,010     $(1,464)        $11,151     $10,263       $6,036
                                              ---------- ------------ -------------- ----------- ------------
Per Share Data
Basic earnings (loss) per share                   $.07       $(.11)           $.85        $.86         $.64
Diluted earnings (loss) per share                  .07        (.11)            .81         .80          .59

Weighted average shares outstanding             14,118       13,297         13,095      11,959        9,483
Diluted shares outstanding                      14,562       13,297         13,775      12,851       10,234

Balance Sheet Data
Working capital                                $68,307      $26,239        $64,536     $63,357      $43,784
Total assets                                   240,211      186,671        149,718     122,333      102,076
Total debt                                      73,814       39,502          5,668         391        1,284
Shareholders' equity                           120,427      114,222        111,273      97,477       73,735
</TABLE>




Item 7:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         The following  discussion  and analysis  should be read in  conjunction
with   "Selected   Consolidated   Financial   Information"   and  the  Company's
Consolidated Financial Statements and Notes thereto.

OVERVIEW

         Itron is a leading global provider to the utility industry of solutions
for collecting,  communicating and analyzing electric, gas and water usage data.
The Company  designs,  develops,  manufactures,  markets,  sells,  installs  and
services  hardware,  software and  integrated  systems for  utilities to obtain,
analyze and use meter data. The Company's major product lines include  Automatic
Meter Reading ("AMR")  systems and Electronic  Meter Reading ("EMR") or Handheld
systems. The Company both sells its products and provides outsourcing services.

         The Company's AMR solutions involve the use of both radio and telephone
technology to collect and communicate meter data. The Company's  radio-based AMR
solutions  include  Off-Site AMR,  Mobile AMR and Fixed  Network AMR  technology
reading  options.  Off-Site  AMR  utilizes a radio  device  attached to an Itron
handheld  computer that  interrogates  meters  equipped with the Company's radio
meter modules up to 1,000 feet away. Mobile AMR uses a transceiver  mounted in a
vehicle to collect  data from meters  equipped  with the  Company's  radio meter
modules as the vehicle passes by. Fixed Network AMR collects and transmits meter
information  via  radio  components  that  are  mounted  in a  variety  of fixed
locations.  The Company's EMR systems product line includes  ruggedized handheld
computers to record  visually  obtained meter data, and supporting  products and
services. Outsourcing services may encompass the installation,  operation and/or
maintenance of meter reading  systems to provide meter  information to a utility
for billing and management purposes.
Outsourcing contracts typically have terms of 15 or more years.

         The Company derives substantially all of its revenues from sales of its
products  and  services to the  utility  industry.  The Company has  experienced
variability  of  operating  results on both an annual and a quarterly  basis due
primarily to utility  purchasing  patterns and delays of  purchasing  decisions.
These delays have most recently been a result of changes or potential changes to
the state and federal  regulatory  frameworks  within which the electric utility
industry operates and mergers and acquisitions in the utility industry.





<PAGE>



RESULTS OF OPERATIONS
Revenues
         Total revenues for the Company  increased  $38.5 million,  or 22%, to
$216.1  million in 1997,  compared to $177.6  million and $161.3 million in 1996
and 1995, respectively.

<TABLE>
<CAPTION>
                                                                                                  Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
Revenues (in millions)                                  Increase                             Increase
                                          1997         (Decrease)             1996          (Decrease)               1995
- --------------------------------------------------------------------------------------------------------------------------
<S>                               <C>                <C>                <C>               <C>               <C>                 
 
   AMR systems                          $143.5                11%            $129.6                31%              $98.7
   Handheld systems                       49.4                10%              45.1              (26%)               61.0
   Outsourcing                            23.2               695%               2.9                76%                1.6
                                   ---------------   ----------------   ----------------   ---------------   -------------
   Total revenues                       $216.1                22%            $177.6                10%             $161.3
                                   ---------------   ----------------   ----------------   ---------------   -------------
</TABLE>



         AMR systems revenues increased $13.9 million,  or 11%, in 1997 over the
prior year.  The  increased  revenues  were  primarily  related to a contract to
supply  metering  data  collection   software  for  the  state  of  California's
transmission  grid,  sales of  telephone-based  systems from the Company's newly
acquired  DCI  subsidiary,  increased  international  AMR sales and sales of AMR
hardware and software products introduced in late 1996 and 1997. Average selling
prices in 1997 for the Company's meter modules remained approximately level with
1996.  Excluding  shipments  for  outsourcing  contracts,  the  Company  shipped
approximately  2.3 million  and 2.1 million AMR meter  modules in 1997 and 1996,
respectively. AMR systems revenues increased $30.9 million, or 31%, in 1996 over
1995  because  more AMR meter  modules  were  shipped  in the 1996  period.  The
increased volumes resulted from the addition of 88 new AMR customers in 1996, as
well as accelerated  installation  schedules for a significant customer,  Public
Service  Company of Colorado  ("PSCo").  PSCo  accounted for 30% of AMR revenues
(22% of total  revenues) in 1996 and 22% of AMR revenues (14% of total revenues)
in 1995,  but only  represented  11% of AMR revenues  (8% of total  revenues) in
1997.  The  Company  believes  that AMR  revenues  will  continue to grow in the
future.  However, this growth continues to depend upon the timing and resolution
of  industry  regulatory  reform  issues  in  the  United  States,  mergers  and
acquisitions in the utility industry, acceptance of new products, development of
international markets, and other factors.

         Handheld systems revenues for 1997 increased $4.3 million, or 10%, from
1996 as a result  of a large  international  EMR sale to  Korea  Electric  Power
Company ("KEPCo"). Handheld systems revenues for 1996 declined $15.9 million, or
26%, from 1995 due to unusually large system sales to two Japanese  utilities in
1995.  These sales  represented over 23% of total handheld system sales in 1995.
Handheld  systems  revenues  have  steadily  declined  from 38% of total Company
revenues in 1995 to 23% in 1997. The Company believes that revenues for handheld
systems  will  continue  to decline as a  percentage  of total  revenues as more
utilities  adopt and expand  AMR system  deployments.  Future  handheld  systems
revenues  are  expected  to be  derived  primarily  from  domestic  upgrade  and
replacement business and further penetration into international markets.

         The Company had a substantial  increase in outsourcing revenues in 1997
primarily  due  to  initial  revenue   recognition  for  the  Company's  largest
outsourcing  contract with the Duquesne Light Company  ("Duquesne")  for a Fixed
Network  AMR  system.  Additional  outsourcing  revenues  in 1997  consisted  of
revenues  from a Mobile AMR  outsourcing  agreement  as well as  revenue  from a
customer  exercising its option to convert its  outsourcing  contract to a sale.
The Company currently has two remaining  outsourcing contracts under which it is
recognizing revenue. For the years ended December 31, 1996 and 1995, the Company
had  insignificant  revenues from its first outsourcing  contract.  Revenues for
outsourcing     contracts    are    recognized    using    the     cost-to-cost,
percentage-of-completion method of long-term contract accounting under which the
revenue  recognized  in any given period is measured by the  percentage of costs
incurred  to  date to  estimated  total  costs  for  each  contract.  (For  more
information on revenue  recognition for outsourcing  contracts see Note 1 to the
financial statements.)

         In February 1998, the Company received  acceptance from Duquesne on the
first Critical  Milestone as defined in the Company's amended contract agreement
with Duquesne.  The amended agreement,  which was signed in the third quarter of
1997, included revised completion dates for a number of Critical Milestones.  As
in the original  contract,  the amended agreement  provides for certain one-time
monetary penalties for failure to meet certain specified  milestones.  The total
amount of the remaining  penalties,  should the Company fail to meet each of the
remaining  specified  Critical  Milestones,  is approximately  $15 million.  The
Company is currently in compliance with its agreement with Duquesne and believes
it  will  fully  satisfy  all  future  Critical   Milestones.   (For  additional
information see "Amended  Duquesne  Agreement," an exhibit to the Company's Form
10-Q filed on November 14, 1997,  and  "Description  of  Business--Certain  Risk
Factors--Dependence  on the  Installation,  Operations  and  Maintenance  of AMR
Systems  Pursuant  to  Outsourcing  Contracts"  included  elsewhere  herein  and
"Duquesne  Fixed Network AMR  Contract.")  Outsourcing  revenues are expected to
decrease in 1998 from the level  experienced in the current year,  both in terms
of absolute  dollars and as a percentage of total  revenues,  as the Company did
not sign any new outsourcing contracts during 1997.

Cost of Revenues
         Total cost of revenues increased by $30.7 million, or 29%, in 1997 over
1996 and $15.1 million,  or 17%, in 1996 over 1995. Gross margin was 37% in 1997
compared  to 41% and 44% in 1996 and 1995,  respectively.  The  percentages  for
1997,  1996 and 1995 in the table below reflect cost of revenues as a percentage
of corresponding revenue:


<TABLE>
<CAPTION>
                                                                                                   Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
Cost of revenues                            1997          Increase               1996           Increase               1995
                                                         (Decrease)                            (Decrease)
- ------------------------------ ------------------ ----------------- ------------------ ------------------ ------------------
<S>                           <C>                <C>               <C>                <C>                <C>                 
AMR systems                                  59%               10%                59%                43%                54%
Handheld systems                             67%               26%                59%              (25%)                58%
Outsourcing                                  78%              786%                70%                97%                63%
Total cost of revenues                       63%               29%                59%                17%                56%
Gross margin                                 37%               11%                41%                 2%                44%
</TABLE>


         AMR systems cost of revenues  were 59% of AMR systems  revenues in each
of 1997 and 1996.  The  comparatively  higher  costs in 1997 and 1996 than those
experienced in 1995 were primarily caused by additional  overhead  expenses from
the  Company's  expansion of  manufacturing  capacity.  The Company  expects AMR
systems  costs as a  percentage  of revenues  in 1998 to increase  slightly as a
result of a large Fixed Network AMR order with a  below-average  margin that was
received in 1997.

         Handheld systems cost of revenues were 67% of revenues in 1997 compared
to 58% in 1996 and 1995,  respectively.  The cost  increase was primarily due to
the lower than average margin sale to KEPCo.  The Company  expects that handheld
systems costs as a percentage  of revenues  will decrease  somewhat in 1998 from
the level experienced in 1997 due to an improved mix of business.

         As a  percentage  of  revenues,  outsourcing  costs  were  78% in  1997
compared to 70% in 1996 and 63% in 1995. The higher  percentage in 1997 reflects
lower than average margins for the Company's first large scale Fixed Network AMR
system.  The Company  expects  outsourcing  costs as a percentage of revenues in
1998 to be comparable to those in 1997.




<PAGE>



Operating Expenses
         Total 1997 operating  expenses of $76.1 million increased $1.4 million,
or 2%, over 1996 but  decreased  as a  percentage  of revenues  from 42% to 35%.
Operating  expenses increased $17.6 million in 1996 over 1995 and also increased
as a percentage of revenues from 35% to 42%.

<TABLE>
<CAPTION>
                                                                                                Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
Operating expenses (in millions)                                Increase                       Increase
                                                  1997        (Decrease)           1996      (Decrease)            1995
- ----------------------------------------- --------------- ----------------- ------------ --------------- ---------------
<S>                                     <C>              <C>               <C>          <C>             <C>             
   Sales and marketing                           $29.6                3%          $28.8             44%           $20.1
   Product development                            32.2              (3%)           33.3             23%            27.1
   General and administrative                     12.1               10%           11.0             45%             7.6
   Amortization of intangibles                     2.2               42%            1.5           (34%)             2.3
                                          --------------- ----------------- ------------ --------------- ---------------
   Total operating expenses                      $76.1                2%          $74.6             31%           $57.1
                                          --------------- ----------------- ------------ --------------- ---------------
</TABLE>


         Total sales and  marketing  expenses in 1997  increased  slightly  over
1996,  but  decreased  as a  percentage  of revenues  from 16% to 14%. The lower
percentage  was  driven  by the  Company's  focus  on cost  containment  and the
discontinuance of the Genesis Services division.  Genesis Services was formed in
late 1995 for sales and marketing of AMR Fixed Networks. These efforts have been
absorbed by the Company's  current sales and marketing  organization.  Sales and
marketing  expenses for 1996 of $28.8 million  increased  both in total and as a
percentage of revenues to 16% in 1996 from 12% in 1995. The year-to-year  growth
was  primarily  due to  the  formation  of the  Genesis  Services  division  and
expansion of technical sales and  implementation  staff for Fixed Networks.  The
Company expects sales and marketing  expenses in 1998 to increase in total,  but
to decrease somewhat as a percentage of revenues from 1997.

         Total  product  development  expenses in 1997  decreased  slightly from
1996, but decreased  significantly  as a percentage of revenues from 19% to 15%.
The decrease was caused by the Company's focus on cost  containment,  as well as
the  absence of a one-time  materials  charge of $2.1  million  incurred in 1996
related to the redesign of the cell  control  unit and a new handheld  computer.
Partially  offsetting these decreases were expenses from DCI, which was acquired
in the second  quarter of 1997.  Product  development  expenses  increased  $6.2
million  in 1996,  or 23%,  over  1995 and also  increased  as a  percentage  of
revenues to 19% from 17%.  The higher  spending  in 1996 was due to  accelerated
development   of  Fixed   Network  AMR  products,   development   of  water  and
international  meter modules,  continued  cost  reduction  programs and the $2.1
million one-time materials charge. The Company expects that product  development
expenses  will increase in 1998,  but will decrease  somewhat as a percentage of
revenues compared to 1997.

         Total general and administrative expenses increased by $1.1 million, or
10%, in 1997 over 1996, but remained at 6% of revenues.  The higher  expenses in
1997 were primarily due to incentive  compensation costs which were not incurred
in 1996,  as well as  expenses  from DCI.  General and  administrative  expenses
increased $3.4 million,  or 45%, from 1995 to 1996 and increased as a percentage
of revenue  from 5% to 6%.  The 1996  increase  was  related  to  operating  and
maintenance  expenses  associated  with  expanded  facilities,  executive  staff
additions and third quarter  severance  charges related to a 5% reduction in the
Company's  workforce.  The  Company  expects  that  general  and  administrative
expenses will increase in 1998,  but are expected to remain equal to or somewhat
lower than 1997 as a percentage of revenues.

         The Company has conducted a review of its computer  systems to identify
those areas that could be affected by "Year 2000"  issues and has  developed  an
implementation  plan to resolve  the  issues.  The  Company is in the process of
modifying its software  products and presently  believes,  with  modification to
existing software and converting to new software, that Year 2000 issues will not
pose significant  operational problems and are not anticipated to be material to
its financial position or results of operations in any given year.




<PAGE>



Other Income (Expense)

<TABLE>
<CAPTION>
                                                                                                Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
Other income (expense) (in millions)                                         1997               1996               1995
- --------------------------------------------------------------- ------------------ ------------------ ------------------
<S>                                                           <C>                <C>                <C>    
   Equity in affiliates                                                    $(1.1)             $(0.1)                 -
   Gain on sale of business interest                                         2.0                  -                  -
   Interest, net                                                            (3.9)              (0.3)                1.7
                                                                ------------------ ------------------ ------------------
   Total other income (expense)                                            $(3.0)             $(0.4)               $1.7
                                                                ------------------ ------------------ ------------------
</TABLE>


         The Company  incurred a loss of $1.1 million during the year related to
business activities from a joint venture with a utility partner. Offsetting this
loss,  was a gain from the sale to this partner of certain  business  activities
previously  performed by the joint  venture  including  meter shop  services and
utility meter reading services. Gross interest expense was $4.9 million and $1.4
million for 1997 and 1996, respectively.  The expense in 1997 resulted primarily
from  interest on the $63.4 million  convertible  notes placed by the Company in
the first quarter of the year.  The expense in 1996 was the result of borrowings
under  the  Company's  revolving  line of  credit  in the last half of the year.
Interest on long-term mortgages also contributed to the expense in both 1997 and
1996. The Company capitalized  interest expense of $994,000 and $533,000 in 1997
and  1996,  respectively,  primarily  related  to  construction  of  outsourcing
equipment.  The Company  generated net interest income in 1995 from investments,
which were a result of positive  cash flows from  operations  in the 1995 period
and remaining cash balances from the Company's stock offerings in 1994 and 1993.

Income Taxes
         The Company's 1997 effective income tax rate was  approximately  38% of
pre-tax  income.  This compares to a 1996 effective rate of 31% of pre-tax loss.
The lower 1996 effective rate was a result of foreign operating losses for which
no tax benefit was recorded and a cash-to-accrual  accounting adjustment related
to the merger with UTS in March of 1996. The reported 1995 effective  income tax
rate was 32%. The Company's effective income tax rate may vary from year to year
because  of  fluctuations  in  foreign   operating   results,   changes  in  tax
jurisdictions in which the Company operates, and changes in tax legislation.

Financial Condition

<TABLE>
<CAPTION>
                                                                                                 Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
Cash flow information (in millions)                               Increase                       Increase
                                                     1997       (Decrease)           1996      (Decrease)           1995
- -------------------------------------------- ------------- ----------------- ------------- --------------- --------------
<S>                                        <C>            <C>               <C>           <C>             <C>           
   Operating activities                            $(3.2)              81%        $(16.9)          (251%)          $11.2
   Investing activities                            (34.1)            (38%)         (24.8)             43%         (17.4)
   Financing activities                              38.1               2%           37.5           2106%            1.7
                                             ------------- ----------------- ------------- --------------- --------------
   Net increase (decrease) in cash                   $0.8           (119%)         $(4.2)            (7%)         $(4.5)
                                             ------------- ----------------- ------------- --------------- --------------
</TABLE>


         Net  operating  activities  consumed  $3.2 million in 1997  compared to
$16.9 million in 1996.  Increases in operating accounts during the year included
$19.2 million more in accounts receivable and an additional $18.4 million growth
in  long-term   contracts   receivable.   Accounts   receivable   balances  grew
significantly  during the last six  months of 1997  primarily  due to  increased
revenues  during the third and fourth quarters and due to the timing of revenues
during those quarters.  Long-term  contracts  receivable balances grew due to an
increase in  outsourcing  revenues  for the  Company.  Outsourcing  revenues are
recognized on a  percentage-of-completion  basis while billing  occurs as meters
are read.  Therefore,  in the installation years of an outsourcing agreement the
contract's long-term receivable balance will grow. It will begin to decline once
the system is fully  installed and all meters  subject to the contract are being
read. During 1997, increases in receivables were offset, to a large degree, by a
decrease  in  inventory  balances  and  increased  accounts  payable and accrued
expenses.  Net  operating  activities  consumed  $16.9  million  in cash in 1996
compared with  providing  $11.2  million in cash in 1995.  Most of the 1996 cash
consumption  was  driven  by  growth  in   inventories,   which  were  built  in
anticipation of AMR customer orders in excess of what was realized.  The Company
expects to generate cash from operating activities in 1998.

         Net  investing  activities  consumed  $34.1  million  of cash in  1997,
compared  to $24.8  million in 1996 and $17.4  million in 1995.  In 1997,  $27.5
million was used to purchase equipment for outsourcing agreements. This compares
to $17.3 million of purchases for outsourcing equipment in 1996 and $2.4 million
in 1995.  New  equipment  investments  from  outsourcing  contracts  in 1998 are
expected to be  approximately  one-half the 1997 level.  During 1997 the Company
invested  considerably  less for property and equipment than during the previous
two years,  having spent $9.4 million in 1997  compared to $27.5 million in 1996
and $16.6 million in 1995.  Additions to production capacity and an expansion of
facilities at the Company's  headquarters  in Spokane  accounted for most of the
capital additions in both 1996 and 1995. The Company substantially completed its
capacity  expansion  program in the fourth  quarter of 1996 and believes its AMR
meter module production capacity is sufficient for 1998. Capital acquisitions in
1998 are  expected to be  slightly  more than the 1997  level.  Other  investing
activities  in 1997  were  not  material.  Other  investing  activities  in 1996
consisted  primarily  of  proceeds  from the  liquidation  of $25.1  million  of
short-term investments.

         Net financing  activities  generated  $38.1 million in 1997 compared to
$37.5  million in 1996 and $1.7 million in 1995.  Net cash of $61.0 million from
the Company's  offering of  convertible  subordinated  debt in March of 1997 was
used to repay $31.5  million of borrowings  under the  Company's  line of credit
agreement.  Other  financing  activities in 1997 consisted of project  financing
borrowings of $2.4 million,  and $6.2 million of cash received from the exercise
of options, warrants and employee stock purchases.  Financing activities in 1996
consisted  principally  of borrowings  under the  Company's  bank line of credit
agreement, as well as funds received from the exercise of employee stock options
and the related tax benefit.  Net cash provided by financing  activities in 1995
consisted  primarily  of cash  proceeds  from the  Company's  stock  offering in
December 1994.

         The Company  believes its cash position at the end of 1997 and expected
cash  generation  from  operations  in 1998,  together  with  renewal of its $50
million  credit  facility  in May 1998,  will be more than  adequate to fund its
operations  throughout 1998. While the Company expects its credit facility to be
renewed in the ordinary  course of business,  there can be no assurance  that it
will be  renewed,  or will be renewed on terms  acceptable  to the Company or at
sufficient  levels.  The  Company  expects to  finance  the  majority  of future
outsourcing contract investments with project financing.

CERTAIN FORWARD-LOOKING STATEMENTS
         When  included  in this  discussion,  the words  "expects,"  "intends,"
"anticipates,"  "plans,"  "projects,"  "estimates,"  and  analogous  or  similar
expressions are intended to identify forward-looking statements. Such statements
are inherently  subject to a variety of risks and uncertainties that could cause
actual results to differ materially from those reflected in such forward-looking
statements.  Such risks and uncertainties  include, among others, changes in the
utility  regulatory  environment,  delays or  difficulties  in  introducing  new
products and acceptance of those  products,  increased  competition  and various
other  matters,  many of which are  beyond  the  Company's  control.  For a more
complete   description   of  these  and  other  risks,   see   "Description   of
Business--Certain Risk Factors" included elsewhere herein. These forward-looking
statements  speak  only as of the date of this  report.  The  Company  expressly
disclaims  any  obligation  or  undertaking  to release  publicly any updates or
revisions  to any  forward-looking  statement  contained  herein to reflect  any
change on the  Company's  expectations  with  regard  thereto  or any  change in
events, conditions or circumstances on which any such statement is based.





<PAGE>




I
tem 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF MANAGEMENT

To the Board of Directors and Shareholders of Itron, Inc.

         Management  is  responsible   for  the  preparation  of  the  Company's
consolidated  financial  statements  and related  information  appearing in this
annual report.  Management believes that the consolidated  financial  statements
fairly  reflect the form and  substance of  transactions  and that the financial
statements  reasonably  present the Company's  financial position and results of
operations  in  conformity  with  generally  accepted   accounting   principles.
Management has included in the Company's  financial  statements amounts based on
estimates and judgments that it believes are reasonable under the circumstances.

         Management's  explanation and  interpretation  of the Company's overall
operating results and financial  position,  with the basic financial  statements
presented,  should be read in conjunction  with the entire report.  The Notes to
Consolidated  Financial  Statements,  an  integral  part of the basic  financial
statements,  provide  additional  detailed financial  information.  The Board of
Directors  of the Company  has an Audit  Committee  composed  of  non-management
Directors.  The Committee meets with financial  management and Deloitte & Touche
LLP to review accounting control, auditing and financial reporting matters.


Johnny M. Humphreys                              David G. Remington
President and Chief                              Vice President and
Executive Officer                                Chief Financial Officer
                                                 





<PAGE>



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of Itron, Inc.

         We have audited the accompanying  consolidated balance sheets of Itron,
Inc.  and  subsidiaries  as of  December  31,  1997 and  1996,  and the  related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three  years in the period  ended  December  31,  1997.  Our audits  also
included the financial  statement schedule listed in the Index at Item 14. These
financial  statements and financial statement schedule are the responsibility of
the management of Itron, Inc. and subsidiaries. Our responsibility is to express
an opinion on the financial statements and financial statement schedule based on
our audits.

         We conducted our audits in accordance with generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, such consolidated financial statements presents fairly,
in all material respects, the financial position of Itron, Inc. and subsidiaries
at December  31, 1997 and 1996,  and the results of their  operations  and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.  Also, in our opinion,
such  financial  statement  schedule,  when  considered in relation to the basic
consolidated  financial  statements taken as a whole,  presents  fairly,  in all
material respects, the information set forth therein.



Deloitte & Touche LLP
Seattle, Washington
February 6, 1998




<PAGE>


CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                    Year ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)                                                1997             1996              1995
- ------------------------------------------------------------------------ ----------------- ---------------- -----------------
<S>                                                                     <C>              <C>               <C>         
Revenues
   AMR systems                                                                   $143,472         $129,576           $98,724
   Handheld systems                                                                49,409           45,084            60,952
   Outsourcing                                                                     23,236            2,924             1,659
                                                                           ----------------- ---------------- -----------------
   Total revenues                                                                 216,117          177,584           161,335

Cost of revenues
   AMR systems                                                                     84,069           76,286            53,441
   Handheld systems                                                                33,108           26,370            35,111
   Outsourcing                                                                     18,182            2,052             1,044
                                                                           ----------------- ---------------- -----------------
   Total cost of revenues                                                         135,359          104,708            89,596
                                                                           ----------------- ---------------- -----------------
Gross profit                                                                       80,758           72,876            71,739
Operating expenses
   Sales and marketing                                                             29,613           28,847            20,054
   Product development                                                             32,220           33,285            27,080
   General and administrative                                                      12,064           10,970             7,589
   Amortization of intangibles                                                      2,190            1,542             2,336
                                                                                    -----            -----             -----
   Total operating expenses                                                        76,087           74,644            57,059

Operating income (loss)                                                             4,671           (1,768)           14,680
Other income (expense)
   Equity in affiliates                                                            (1,120)             (50)                -
   Gain on sale of business interest                                                2,000                -                 -
   Interest, net                                                                   (3,916)            (316)            1,721
                                                                           ----------------- ---------------- -----------------
   Total other income (expense)                                                    (3,036)            (366)            1,721

Income (loss) before income taxes                                                   1,635           (2,134)           16,401
Income tax (provision) benefit                                                       (625)             670            (5,250)
                                                                           ----------------- ---------------- -----------------
Net income (loss)                                                                  $1,010          $(1,464)          $11,151
                                                                           ----------------- ---------------- -----------------
Basic earnings (loss) per share                                                      $.07            $(.11)             $.85
Diluted earnings (loss) per share                                                     .07             (.11)              .81

Weighted average shares outstanding                                                14,118           13,297            13,095
Diluted average shares outstanding                                                 14,562           13,297            13,775

</TABLE>


<PAGE>


CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                              December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)                                                                                   1997                 1996
- --------------------------------------------------------------------------------- -------------------- --------------------
<S>                                                                              <C>                  <C>                 
Assets
Current assets
   Cash and cash equivalents                                                                   $3,023               $2,243
   Accounts receivable, net                                                                    61,442               42,166
   Current portion of long-term contracts receivable                                            8,445                  118
   Inventories                                                                                 31,985               35,179
   Deferred income tax asset                                                                    5,668                4,171
   Other                                                                                        1,888                6,116
                                                                                  -------------------- --------------------
   Total current assets                                                                       112,451               89,993
                                                                                  -------------------- --------------------
Property, plant and equipment, net                                                             49,067               51,699
Equipment used in outsourcing, net                                                             42,848               19,650
Intangible assets, net                                                                         21,472               23,344
Long-term contracts receivable                                                                 11,119                1,187
Deferred income tax asset                                                                       1,125                  230
Other                                                                                           2,129                  568
                                                                                  -------------------- -------------------- 
   Total assets                                                                              $240,211             $186,671
                                                                                  -------------------- --------------------
Liabilities and shareholders' equity
Current liabilities
   Short-term borrowings                                                                       $1,560              $33,062
   Accounts payable and accrued expenses                                                       26,644               19,921
   Wages and benefits payable                                                                   9,181                4,004
   Deferred revenue                                                                             6,759                6,767
                                                                                  -------------------- --------------------
   Total current liabilities                                                                   44,144               63,754
                                                                                  -------------------- --------------------
Mortgage notes payable                                                                          6,440                6,440
Convertible subordinated debt                                                                  63,400                    -
Project financing                                                                               2,414                    -
Deferred income tax liability                                                                   2,499                    -
Warranty and other obligations                                                                    887                2,255
                                                                                  -------------------- --------------------
   Total liabilities                                                                          119,784               72,449
                                                                                  -------------------- --------------------
Commitments and contingencies (Note 7)

Shareholders' equity
   Common stock, no par value, 75 million shares authorized, 14,602,312
   and 13,387,042 shares issued and outstanding                                               105,136               98,686
   Warrants                                                                                        57                  338
   Foreign currency translation adjustment                                                     (1,081)                (107)
   Retained earnings                                                                           16,315               15,305
                                                                                  -------------------- --------------------
   Total shareholders' equity                                                                 120,427              114,222
                                                                                  -------------------- --------------------
   Total liabilities and shareholders' equity                                                $240,211             $186,671
                                                                                  -------------------- --------------------
</TABLE>



<PAGE>


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                   Common Stock                                                  Retained
                                          -------------------------------
(In thousands)                                Shares              Amount        Warrants            Other        Earnings
- ----------------------------------------- --------------- --------------- --------------- ---------------- ---------------
<S>                                     <C>             <C>             <C>             <C>              <C>    

Balances at December 31, 1994                     12,910         $90,186            $338             $(515)        $7,468
                                          --------------- --------------- --------------- ---------------- ---------------
Net income                                             -               -               -                -          11,151
Stock Issues:
   Public offering                                    75           1,351               -                -               -
   Options exercised and related tax                 161           2,291               -                -               -
   benefits
   Employee savings plan                              11             280               -                -
Dividends paid                                                                                                     (1,650)
Unrealized gain on investments                         -               -               -              236               -
Foreign currency translation                           -               -               -              137               -
                                          --------------- --------------- --------------- ---------------- ---------------
Balances at December 31, 1995                     13,157          94,108             338             (142)         16,969
                                          --------------- --------------- --------------- ---------------- ---------------
Net (loss)                                             -               -               -                -          (1,464)
Stock Issues:
   Options exercised and related tax                 199           3,480               -                -               -
   benefits
   Employee savings plan                              23             670               -                -               -
   Employee stock purchase plan                        8             428               -                -               -
Dividends paid                                         -               -               -                -            (200)
Unrealized loss on investments                         -               -               -             (158)              -
Foreign currency translation                           -               -               -              193               -
                                          --------------- --------------- --------------- ---------------- ---------------
Balances at December 31, 1996                     13,387          98,686             338             (107)         15,305
                                          --------------- --------------- --------------- ---------------- ---------------
Net income                                             -               -               -                -           1,010
Stock Issues:
   Options exercised and related tax                  57             827               -                -               -
benefits
   Employee savings plan                              44             935               -                -               -
   Employee stock purchase plan                       43             451               -                -               -
   Warrants exercised                                312           3,915             (281)              -               -
   DCI acquisition                                   759             322               -                -               -
Foreign currency translation                           -               -               -             (974)              -
                                          --------------- --------------- --------------- ---------------- ---------------
Balances at December 31, 1997                     14,602        $105,136             $57          $(1,081)        $16,315
                                          --------------- --------------- --------------- ---------------- ---------------
</TABLE>





<PAGE>


CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                 Year ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)                                                                       1997            1996           1995
- -------------------------------------------------------------------------- --------------- --------------- --------------
<S>                                                                       <C>             <C>            <C>           
Operating Activities
Net income (loss)                                                                  $1,010          $(1,464)      $11,151
Noncash charges (credits) to income:
   Depreciation and amortization                                                   16,781          10,522          8,370
   Deferred income tax                                                                107          (1,545)           758
   Equity in affiliates, net                                                         (879)            (50)             -
Changes in operating accounts, net of acquisitions:
   Accounts receivable                                                            (19,158)         (4,151)        (9,659)
   Inventories                                                                      3,194         (17,114)        (5,509)
   Accounts payable and accrued expenses                                            7,107           3,631          3,935
   Wages and benefits payable                                                       5,177            (510)           744
   Deferred revenue                                                                    (8)         (1,439)           857
   Long-term contracts receivable                                                 (18,377)         (1,305)             -
   Other, net                                                                       1,828          (3,437)           579
                                                                           --------------- --------------- --------------
Cash provided (used) by operating activities                                       (3,218)        (16,862)        11,226

Investing Activities
Change in short-term investments                                                        -          25,074          5,614
Acquisition of property, plant and equipment                                       (9,329)        (27,500)       (16,584)
Acquisition of equipment used in outsourcing                                      (27,478)        (17,254)        (2,396)
Proceeds from sale of equipment used in outsourcing                                 3,035               -              -
Proceeds from sale of business interest                                             1,000               -              -
Acquisitions of intangibles and patent defense costs                               (1,703)         (4,728)        (3,808)
Other, net                                                                            410            (441)          (283)
                                                                           --------------- --------------- --------------
Cash used by investing activities                                                 (34,065)        (24,849)       (17,457)
Financing Activities
Change in short-term borrowings, net                                              (31,502)         33,062              -
Issuance of convertible subordinated debt                                          63,400               -              -
Debt issuance costs                                                                (2,355)              -              -
Project financing                                                                   2,414               -              -
Issuance of common stock                                                            6,169           4,578          3,642
Dividends paid                                                                          -            (200)        (1,650)
Other, net                                                                            (63)             41           (288)
                                                                           --------------- --------------- --------------
Cash provided by financing activities                                              38,063          37,481          1,704
                                                                           --------------- --------------- --------------
Increase (decrease) in cash and cash equivalents                                      780          (4,230)        (4,527)
                                                                           --------------- --------------- --------------
Cash and cash equivalents at beginning of period                                    2,243           6,473         11,000
                                                                           --------------- --------------- --------------
Cash and cash equivalents at end of period                                         $3,023          $2,243         $6,473
                                                                           --------------- --------------- --------------

</TABLE>



<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business
         Itron, Inc. (the "Company") is a leading global provider to the utility
industry of solutions for collecting,  communicating and analyzing electric, gas
and water usage data.  The Company  designs,  develops,  manufactures,  markets,
sells,  installs and services  hardware,  software  and  integrated  systems for
handheld  computer-based  electronic  meter reading  (EMR) and  automatic  meter
reading (AMR).

Basis of Consolidation
         The consolidated  financial  statements  include the accounts of Itron,
Inc.  and its wholly  owned  subsidiaries.  As described in Note 5, on March 25,
1996,  Utility  Translation  Systems,  Inc.  ("UTS"),  which was  acquired  in a
pooling-of-interests  transaction,  became  a  wholly  owned  subsidiary  of the
Company.  These consolidated financial statements reflect the combined financial
position and operating results of Itron and UTS for all periods  presented.  All
significant intercompany  transactions and balances are eliminated.  Investments
in affiliates are accounted for using the equity method.

Cash and Cash Equivalents
         The Company  considers  all highly  liquid  instruments  with  original
maturities of three months or less to be cash equivalents.  Cash equivalents are
recorded at cost, which approximates fair value.

Short-Term Investments
         The    Company's    short-term    investments    are    classified   as
available-for-sale  and are recorded at market value.  Investments are accounted
for on a trade date basis and market  value is based upon quoted  market  prices
for  each   security.   Realized   gains  and   losses  are   determined   on  a
security-by-security  basis (the  specific  identification  method).  Unrealized
holding gains and losses,  net of any tax effect, are recorded as a component of
shareholders' equity.

Inventories
         Inventories  are  stated  at the  lower  of cost or  market  using  the
first-in,  first-out method. Cost includes raw materials and labor, plus applied
direct  and  indirect   costs.   Service   inventories   consist   primarily  of
sub-assemblies and components necessary to support post-sale maintenance.

Property, Plant and Equipment
         Property  and  equipment  are stated at cost and are  depreciated  over
their  estimated  useful lives of three to seven years,  or over the term of the
applicable capital lease, if shorter, using the straight-line method.  Equipment
used in outsourcing contracts is depreciated using the straight-line method over
the shorter of the useful life or the term of the contract,  generally 15 years.
Plant is depreciated over 30 years using the straight-line  method. The carrying
value of  property,  plant and  equipment  is  reviewed  on a regular  basis for
impairment.  The Company  capitalizes  interest  as a  component  of the cost of
property,  plant and  equipment  constructed  for its own use.  In 1997 and 1996
total interest expense was $5.2 million and $1.4 million, respectively, of which
$994,000 and  $533,000,  respectively,  was  capitalized.  There was no interest
capitalized in 1995.

Intangible Assets
         Goodwill  represents  the excess cost of acquired  businesses  over the
fair value of their net assets and is amortized using the  straight-line  method
over periods ranging from three to 20 years.  Patents,  distribution and product
rights are amortized using the  straight-line  method over their remaining lives
of three to 17 years. Capitalized software includes costs incurred subsequent to
the  establishment  of  technological  feasibility of the related product and is
amortized using the straight-line  method for a period not to exceed five years.
Management  regularly  reviews  the  carrying  value of  intangible  assets  for
impairment.



Warranty
         The  Company  offers  standard  warranty  terms on its  product  sales.
Provision  for  estimated  warranty  costs is  recorded  at the time of sale and
periodically  adjusted to reflect actual  experience.  The  noncurrent  warranty
reserve covers future  expected costs of testing and  replacement of radio meter
module  batteries.  Warranty  expense was $3.8 million in 1997,  $3.1 million in
1996, and $1.8 million in 1995.

Income Taxes
         The Company  accounts  for income  taxes using the asset and  liability
method. Under this method,  deferred income taxes are recorded for the temporary
differences between the financial reporting basis and tax basis of the Company's
assets and  liabilities.  These deferred taxes are measured by the provisions of
currently enacted tax laws.  Management believes that it is more likely than not
that  the  Company  will  generate   sufficient  taxable  income  to  allow  the
realization of its deferred tax asset.

Foreign Exchange
         The  consolidated  financial  statements  are prepared in United States
dollars.  Assets and  liabilities  of foreign  subsidiaries  are  denominated in
foreign  currencies  and are translated to United States dollars at the exchange
rates in effect on the balance  sheet  date.  Revenues,  costs of  revenues  and
expenses for these  subsidiaries  are  translated  using an average rate for the
related reporting period.  Translation  adjustments  resulting from this process
are a component of shareholders' equity.

Revenue Recognition
         System sales:  Revenues from hardware  sales and software  licenses are
generally recognized upon shipment. Service revenues are recognized ratably over
the periods covered by the service contracts,  or as the services are performed.
Revenues for shipments or post-sale  maintenance  not yet billed are included in
accounts  receivable or other noncurrent assets depending on the expected period
of collection.  Deferred revenue is recorded for products or services which have
been paid for by a customer but have not yet been provided.

         Large custom systems and  outsourcing  contracts:  Large custom systems
include  those in  which  there  is a  substantial  amount  of  custom  software
development.  Outsourcing  services may  encompass the  installation,  operation
and/or  maintenance of meter reading  systems to provide meter  information to a
utility for billing and management  purposes.  Revenues are recognized using the
cost-to-cost,  percentage-of-completion long-term contract method of accounting.
Under this method, revenues reported during a period are based on the percentage
of estimated  total revenues to be received  under the contract  measured by the
percentage of costs incurred to date to estimated total costs for each contract.
This method is used  because  management  believes  costs  incurred are the best
available  measure of progress on these  contracts.  Contract  costs include all
direct  material and labor costs and other  indirect  costs  related to contract
performance such as indirect labor,  supplies,  tools,  repairs and depreciation
costs.  Provisions for estimated losses on uncompleted  contracts are recognized
in the  period  in which  such  losses  are  determined.  Changes  in  estimated
profitability,  including  those arising from contract  penalty  provisions  and
final contract settlements,  may result in revisions to costs and income and are
recognized in the period in which the revisions  are  determined.  Revenues from
large custom systems and  outsourcing  revenues that are recognized in excess of
amounts billed,  are included in long-term  contracts  receivable or the current
portion of long-term  contracts  receivable  depending on the expected period of
collection.

Earnings Per Common Share
         Basic  earnings  per share is  computed  on the  basis of the  weighted
average number of common shares outstanding during the period.  Diluted earnings
per share is  computed  on the basis of the  weighted  average  number of common
shares  outstanding plus the effect of "in the money"  outstanding stock options
and warrants using the "treasury stock" method and convertible subordinated debt
using the "if converted"  method, to the extent the use of these methods are not
anti-dilutive.  The Company has adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share" effective December 31,
1997. The Statement requires the calculation and disclosure of basic and diluted
earnings  per share.  All prior  period  earnings  per share and average  shares
outstanding data has been restated to reflect the adoption of this statement.



Use of Estimates
         The  preparation of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenues and expenses during the reporting  period.  The
Company  uses the  cost-to-cost,  percentage-of-completion  method of  long-term
contract  accounting  which  requires  the Company to estimate the total cost of
providing outsourcing and other services over long periods of time, typically 15
years. Because of various factors affecting future costs and operations,  actual
results could differ from estimates.

Reclassifications
         Certain amounts in the 1996 and 1995  financial  statements  have  been
reclassified to conform with 1997 presentation.






<PAGE>



Note 2: Balance Sheet Components

<TABLE>
<CAPTION>
                                                                                                              December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)                                                                                 1997                    1996
- ---------------------------------------------------------------------------- ----------------------- -----------------------
<S>                                                                        <C>                     <C>             
Accounts receivable
Trade (net of allowance for doubtful accounts of $752 and $752)                             $40,023                 $30,646
Unbilled revenue                                                                             21,419                  11,520
                                                                             ----------------------- -----------------------
Total accounts receivable                                                                   $61,442                 $42,166
                                                                             ----------------------- -----------------------
Inventories
Material                                                                                    $14,418                 $22,687
Work in process                                                                               3,138                   1,570
Finished goods                                                                                7,304                   9,047
Field inventories awaiting installation                                                       5,178                   1,342
                                                                             ----------------------- -----------------------
Total manufacturing inventories                                                              30,038                  34,646
Service inventories                                                                           1,947                     533
                                                                             ----------------------- -----------------------
Total inventories                                                                           $31,985                 $35,179
                                                                             ----------------------- -----------------------
Property, plant and equipment
Machinery and equipment                                                                     $39,821                 $37,715
Equipment used in outsourcing                                                                44,093                  19,650
Computers and purchased software                                                             22,716                  21,535
Buildings, furniture and improvements                                                        21,191                  20,345
Land                                                                                          2,052                   2,078
                                                                             ----------------------- -----------------------
Total cost                                                                                  129,873                 101,323
Accumulated depreciation                                                                    (37,958)                (29,974)
                                                                             ----------------------- -----------------------
Property, plant and equipment, net                                                          $91,915                 $71,349

Intangible assets
Goodwill                                                                                    $16,991                 $16,991
Capitalized software                                                                          6,370                   6,370
Distribution and product rights                                                               3,308                   2,491
Patents                                                                                       5,706                   4,860
                                                                             ----------------------- -----------------------
Total cost                                                                                   32,375                  30,712
Accumulated amortization                                                                    (10,903)                  (7,368)
                                                                             ----------------------- -----------------------
Intangible assets, net                                                                      $21,472                 $23,344
                                                                             ----------------------- -----------------------
</TABLE>





<PAGE>



Note 3: Statement of Cash Flows Data


         Supplemental disclosure of cash flow information:

<TABLE>
<CAPTION>
                                                                                                              December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)                                                     1997                     1996                      1995
- ---------------------------------------------- ------------------------- ------------------------ -------------------------
<S>                                          <C>                       <C>                      <C>                     
Income taxes paid                                                  $569                   $1,418                    $3,076
Interest paid                                                     3,580                    1,172                       197
</TABLE>


Note 4: Notes Payable

Short-term Borrowings
         The  Company  may  borrow  up to $50  million  under  the  terms  of an
unsecured  revolving credit  agreement with two banks.  Interest rates depend on
the form of borrowing and vary based on published rates. As of December 31, 1997
the weighted average interest rate was  approximately  7.4%.  Additionally,  the
Company is required to pay an annual facility fee of .05% of the total available
loan  commitment  and a fee of .25% on the  unused  commitment.  Any  borrowings
mature on May 31,  1998.  The  agreement  contains  covenants  that  require the
Company to maintain  certain  minimum  working  capital and  tangible  net worth
ratios and dollar limits with which the Company is in compliance.

Mortgage Notes Payable
         Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                                              December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)                                                                                1997                   1996
- --------------------------------------------------------------------------- ----------------------- -----------------------
<S>                                                                       <C>                     <C>   
Secured mortgage note payable to a shareholder with interest only                           $5,600                 $5,600
payments of 7 1/2% until August 1, 1998 and then principal and interest
payments of 9% until maturity on August 1, 2015.
Secured mortgage note payable to a shareholder with interest only                             $840                   $840
payments of 7 1/2% until June 1, 1999 and then principal and interest
payments equal to 8 1/2% until maturity on June 1, 2019.
</TABLE>


         The Company  incurred the above notes in conjunction  with the purchase
of the Company's  headquarters  and additional  manufacturing  space in Spokane,
Washington.  Principal  payments  due under  these  notes are  $12,000  in 1998,
$46,000  in 1999,  $61,000 in 2000,  $66,000  in 2001,  $72,000 in 2002 and $6.2
million thereafter.

Convertible Subordinated Debt

<TABLE>
<CAPTION>
                                                                                                              December 31,
- ---------------------------------------------------------------------------------------------------------------------------
                                                                                              1997                   1996
- --------------------------------------------------------------------------- ----------------------- ----------------------
<S>                                                                       <C>                     <C> 
Unsecured, convertible subordinated notes                                                  $63,400                      -
</TABLE>


         The Company  completed a $63.4 million  convertible  subordinated  note
offering in March 1997. Interest of 6-3/4% on the notes is payable semi-annually
on March 31 and September 30 of each year until  maturity on March 31, 2004. The
notes have no sinking  fund  requirements  and are  convertible,  in whole or in
part,  at the option of the holder at any time prior to  maturity  at a price of
$23.70 per common share.  The notes are redeemable,  in whole or in part, at the
option  of the  Company  at any time on or  after  April  4,  2000 at  specified
redemption prices.




<PAGE>



Note 5: Fair Values of Financial Instruments

         Under  SFAS  No.  107,   "Fair  Value   Disclosures   about   Financial
Instruments,"  the Company is required to disclose  the fair value of  financial
instruments when fair value can reasonably be estimated. The values provided are
representative  of fair values only as of December  31, 1997 and 1996 and do not
reflect  subsequent  changes in the economy,  interest and tax rates,  and other
variables that may impact determination of fair value. The following methods and
assumptions were used in estimating fair values:

         Cash and cash equivalents:  The carrying value  approximates fair value
due to the short maturity of these instruments.

         Long-term  contracts  receivable:  The fair  value  of the  non-current
portion of long-term  contracts  receivable is based on the discounted  value of
expected future cash flows.

         Mortgage  notes  payable:  The  fair  value is  estimated  based on the
current borrowing rates available for similar issues.

         Convertible subordinated debt: The fair value is estimated based on the
current trading activity of the notes.

<TABLE>
<CAPTION>
                                                                                                              December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)                                           1997                                      1996
- --------------------------------------- --------------------------------------- -------------------------------------------
<S>                                   <C>                                     <C>
                                            Carrying Amount          Fair Value   Carrying Amount               Fair Value

Cash and cash equivalents                            $3,023              $3,023            $2,243                   $2,243
Long-term contracts receivable                       11,119               9,736             1,187                    1,066
Mortgage notes payable                                6,440               6,897             6,440                    6,230
Convertible subordinated debt                        63,400              61,181                 -                        -
</TABLE>


Note 6: Business Combinations

Design Concepts, Inc. (DCI)
         On May 2, 1997, the Company acquired Design Concepts,  Inc. ("DCI"), an
Idaho-based company that supplies outage detection, power quality monitoring and
AMR systems which  communicate  collected data over telephone lines for electric
meters.  Pursuant to the Agreement and Plan of Merger dated April 30, 1997, (the
"Merger  Agreement"),  the Company issued 759,297 shares of  unregistered  Itron
common stock to the  shareholders of DCI in exchange for all outstanding  shares
of DCI. Certificates representing 75,930 shares issued in the Merger were placed
in escrow and are  available  to  compensate  Itron for any losses  incurred  by
reason of any breach by DCI of the Merger  Agreement.  The escrow  terminates on
May 2, 1998 at which  time any shares  not  subject to a disputed  claim will be
released to DCI shareholders.

         The Merger was  accounted  for as a  pooling-of-interests  transaction.
Because DCI's results of operations  and financial  position were  immaterial to
the Company's  financial  statements,  no  restatement of prior periods has been
made.  Balances  related  to  DCI  have  been  included  in the  1997  financial
statements of the Company.

Utility Translation Systems (UTS)
         On March 25, 1996 the  Company  merged with UTS, a provider of software
and  support  services  that   translates,   communicates  and  analyzes  energy
consumption data. The Company issued 971,427 shares of unregistered Itron Common
Stock to the  shareholders of UTS in exchange for all of the outstanding  shares
of UTS. The Merger was accounted for as a pooling-of-interests.




<PAGE>



Metscan
         In September 1995, the Company purchased the assets of Metscan, Inc., a
manufacturer of  telephone-based  data collection  technology for gas meters. Of
the $4.6 million purchase price, $3.8 million was paid in cash at closing,  with
a $735,000 holdback pending  settlement of potential warranty or other claims as
of December 31, 1995.  As of December 31, 1996 the entire amount of the holdback
had been used to settle such warranties and claims.  Approximately  $2.3 million
of the purchase  price was allocated to tangible  assets and the remaining  $2.3
million to  intangible  assets which are being  amortized  over five years.  The
acquisition was accounted for as a purchase.

Note 7: Commitments and Contingencies

Commitments
         The Company has noncancelable  operating leases for office,  production
and storage space  expiring at various  dates  through June 2008.  The Company's
obligations  under capital leases are  insignificant.  Future  minimum  payments
required under  operating  leases at December 31, 1997 are $1.7 million in 1998,
$1.7 million in 1999,  $1.6 million in 2000,  $1.2 million in 2001, $1.0 million
in 2002 and $2.2 million thereafter.

         Total rent expense under noncancelable operating leases is as follows:

<TABLE>
<CAPTION>
                                                                                                   Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)                                                           1997                  1996                   1995
- ------------------------------------------------------- ---------------------- --------------------- ----------------------
<S>                                                   <C>                    <C>                   <C> 
Related parties                                                            $7                    $7                   $430
Unrelated parties                                                       1,616                 1,505                  1,396
                                                        ---------------------- --------------------- ----------------------
Total                                                                  $1,623                $1,512                 $1,826
                                                        ---------------------- --------------------- ----------------------
</TABLE>

 
        In order to  maintain  certain  distribution  rights,  the  Company has
agreed to purchase  minimum  quantities  of components  from various  suppliers.
Minimum  purchase  requirements  under these agreements are  approximately  $7.4
million in 1998,  $6.5 million in 1999,  $5.1  million in 2000,  $3.7 million in
2001 and $4.2 million in 2002. The Company believes these commitments are not in
excess of anticipated requirements.

Contingencies
         The  Company,  together  with  certain  directors  and  officers,  is a
defendant in two  shareholder-initiated  proposed  class actions (one in Federal
court and one in Washington State court) alleging securities and other statutory
and common law  violations  arising  out of alleged  misleading  disclosures  or
omissions made by the Company regarding its business and technology. The Company
is also a  defendant  in a patent  infringement  lawsuit  filed by CellNet  Data
Systems.  The Company  believes  these  actions are without merit and intends to
vigorously  defend against them. At this time, it is not possible to predict the
ultimate outcome of these proceedings.

Note 8: Warrants

         At December 31, 1997 and 1996, the Company had outstanding  warrants to
purchase  62,500 and 375,000  shares,  respectively,  of common  stock at $11.63
each. The remaining warrants at December 31, 1997 were granted in September 1990
at fair market value and expire in September 1998.

Note 9: Employee Benefits

         The  Company  has  an  employee   incentive   savings   plan  in  which
substantially   all  employees  are  eligible  to  participate.   Employees  may
contribute  on a  tax-deferred  basis up to 15% of their  salary,  50% of which,
subject to certain limitations,  is matched by the Company by issuance of common
stock. The expense for the Company's  matching  contribution was $1.1 million in
1997,  $798,000  in 1996  and  $310,000  in 1995.  The  Company  does not  offer
post-employment or post-retirement benefits.

Note 10: Stock Based Compensation Plans

         At December  31,  1997,  the Company had two  stock-based  compensation
plans, which are described below. The Company applies APB Opinion 25 and related
interpretations in accounting for its plans.  Accordingly,  no compensation cost
has been recognized for its stock option plans.  Had  compensation  cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant  dates for awards  under  those  plans  consistent  with the method
prescribed in SFAS No. 123, the  Company's  net income and diluted  earnings per
share would have been reduced to the proforma amounts indicated below:

<TABLE>
<CAPTION>
                                                                                                   Year Ended December 31,
- ----------------------------------------------------- ---------------- ----------------- ----------------- ----------------
(In thousands, except per share data)                                              1997              1996             1995
- ----------------------------------------------------- ---------------- ----------------- ----------------- ----------------
<S>                                                 <C>              <C>                <C>              <C>
Net income (loss)                                         As reported            $1,010           $(1,464)         $11,151
                                                             Proforma            (3,679)           (7,763)           8,232
Diluted earnings (loss) per share                         As reported               .07              (.11)             .81
                                                             Proforma              (.25)             (.58)             .60
</TABLE>


         The weighted  average fair value of options granted was $12.86,  $18.64
and $11.74 for 1997, 1996 and 1995, respectively.  The fair value of each option
granted  during 1997,  1996 and 1995 is estimated on the date of grant using the
Black-Scholes option-pricing model using the following assumptions:

<TABLE>
<CAPTION>
                                                                       1997                   1996                  1995
- ----------------------------------------------------- ---------------------- ---------------------- ---------------------
<S>                                                 <C>                    <C>                    <C>
Dividend yield                                                           0%                     0%                    0%
Expected volatility                                                     57%                    55%                   44%
Risk-free interest rate                                                6.5%                   6.2%                  6.4%
Expected life (years)                                                   6.0                    6.0                   4.8
</TABLE>


         For  various  price  ranges,   weighted  average   characteristics   of
outstanding stock options at December 31, 1997 were as follows:

<TABLE>
<CAPTION>
(Shares in thousands)                                      Outstanding Options                  Exercisable Options
- ---------------------------------------------- -------------------------------------------- -----------------------------
Range of                                             Shares      Remaining         Price          Shares          Price
Exercise Prices                                                 Life (years)
- ---------------------------------------------- -------------- --------------- ------------- --------------- --------------
<S>                                          <C>            <C>             <C>           <C>             <C>  
$  .17 - 10.00                                           118            3.1          $4.98             108          $5.47
 10.01 - 20.00                                           922            7.8          17.31             505          15.97
 20.01 - 30.00                                         1,040            8.9          22.00             161          25.05
 30.01 - 58.75                                            16            8.3          53.35              13          58.16
                                               --------------                               --------------- --------------
                                                       2,096            8.1         $19.17             787         $17.10
                                               --------------                               --------------- --------------
</TABLE>



<PAGE>



1989 Restated Stock Option Plan
         Under the  Company's  1989  Restated  Stock  Option  Plan,  options  to
purchase  shares of common stock have been granted to directors and employees at
prices  no less  than  the fair  market  value  on the  date of  grant.  Options
outstanding under the plan become fully  exercisable  within three or four years
from the date granted and terminate  ten years from the date granted.  Qualified
and  nonqualified  options are exercisable at prices ranging from $.17 to $51.19
per  share.  The price  range of options  exercised  was $.86 to $24.25 in 1997,
$2.91 to $24.50 in 1996 and $2.91 to $17.88 in 1995. At December 31, 1997, there
were 3,177,995  shares of unissued  common stock reserved for issuance under the
plan, of which options for the purchase of 1,179,239  shares were  available for
future grants. Share amounts (in thousands) and weighted-average exercise prices
are as follows:

<TABLE>
<CAPTION>
                                                                                                 Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
                                                   1997                       1996                       1995
- --------------------------------------- --------------------------- -------------------------- --------------------------
                                             Shares          Price        Shares        Price        Shares        Price
- --------------------------------------- ------------ -------------- ------------- ------------ ------------- ------------
<S>                                   <C>          <C>            <C>           <C>          <C>           <C>   
Outstanding at beginning of year              1,267         $17.24         1,038       $17.36           864       $11.52
Granted                                         843          21.29         1,016        31.34           412        25.47
Exercised                                       (57)         10.98          (152)       11.56          (159)       8.50
Canceled                                        (54)         23.27          (635)       41.38           (79)      13.64
                                         ------------               -------------              -------------            
Outstanding at end of year                    1,999         $18.78         1,267       $17.24         1,038       $17.36
                                         ------------               -------------              -------------            
Options exercisable at year end                 690         $15.69           483       $13.44           411       $10.01
</TABLE>


1992 Stock Option Plan for Nonemployee Directors
         The Company's 1992 Stock Option Plan for Nonemployee Directors provides
for the annual grant of nonqualified  options to purchase 2,000 shares of common
stock to  nonemployee  directors of the Company at an exercise price that is not
less than the fair  market  value  per  share at the date of grant.  Outstanding
options  granted under the plan are exercisable at prices ranging from $13.50 to
$58.75  per  share.  The  options  granted  are  fully  vested  and  immediately
exercisable.  At December 31, 1997, there were 153,000 shares of unissued common
stock reserved for issuance under the plan, of which options for the purchase of
56,000 shares were available for future grant.  Share amounts (in thousands) and
weighted-average exercise prices are as follows:

<TABLE>
<CAPTION>
                                                                                                 Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
                                                    1997                      1996                       1995
- ----------------------------------------- ------------------------- -------------------------- --------------------------
                                               Shares        Price        Shares        Price       Shares         Price
- ----------------------------------------- ------------ ------------ ------------- ------------ ------------ -------------
<S>                                     <C>          <C>          <C>           <C>          <C>          <C>   
Outstanding at beginning of year                   85       $28.14            87       $22.92           19        $16.47
Granted                                            12        19.88            12        58.75           70         24.50
Exercised                                           -            -           (14)       21.96           (2)        17.00
                                          ------------              -------------              ------------ 
Outstanding at end of year                         97       $27.11            85       $28.14           87        $22.92
                                          ------------              -------------              ------------ 
Options exercisable at year end                    97       $27.11            85       $28.14           87        $22.92
</TABLE>



Employee Stock Purchase Plan
         Under the  Company's  Employee  Stock  Purchase  Plan,  the  Company is
authorized  to  issue up to  80,000  shares  of  common  stock  to its  eligible
employees who have  completed  three months of service,  work more than 20 hours
each week and are employed more than five months in any calendar year. Employees
who own 5% or more of the Company's Common Stock are not eligible to participate
in the Plan. Under the terms of the Plan,  eligible employees can choose payroll
deductions  each  year of up to 10% of their  regular  cash  compensation.  Such
deductions  are applied  toward the  discounted  purchase price of the Company's
Common Stock.  The purchase  price of the Common Stock is 85% of the fair market
value  of the  stock as  defined  in the  Plan.  Approximately  27% of  eligible
employees  have  participated  in the Plan since its  inception on July 1, 1996.
Under the Plan the Company  sold 43,057  shares to  employees  in 1997 and 8,331
shares in 1996.

Note 11: Shareholder Rights Plan

         The Company  adopted a  Shareholder  Rights  Plan and in November  1993
declared a dividend of one common  share  purchase  right (a  "Right")  for each
outstanding share of the Company's Common Stock. Under certain conditions,  each
Right may be exercised to purchase one share of Common Stock at a purchase price
of $135 per share, subject to adjustment. The Rights will be exercisable only if
a person  or group has  acquired  15% or more of the  outstanding  shares of the
Company's Common Stock (excluding certain persons who owned more than 15% of the
Common Stock when the Shareholder Rights Plan was adopted). If a person or group
acquires 15% or more of the then outstanding  shares of Common Stock, each Right
will entitle its holder to receive, upon exercise,  Common Stock having a market
value equal to two times the exercise  price of the Right.  In addition,  if the
Company is acquired in a merger or other business combination transaction,  each
Right will entitle its holder to purchase that number of the acquiring company's
common shares  having a market value of twice the Right's  exercise  price.  The
Company is entitled to redeem the Rights at $.001 per Right at any time prior to
the  earlier  of the  expiration  of the  Rights in July 2002 or the time that a
person  has  acquired  a  15%  position.  The  Rights  do  not  have  voting  or
distribution  rights,  and until they become  exercisable they have no effect on
the Company's earnings.

Note 12: Income Taxes

         A reconciliation  of income taxes at the U.S. Federal statutory rate of
35% to the consolidated effective tax for continuing operations is as follows:

<TABLE>
<CAPTION>
                                                                                                   Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)                                                                     1997              1996             1995
- ---------------------------------------------------------------------- ----------------- ----------------- ----------------
<S>                                                                  <C>               <C>               <C>    
Expected federal income tax (benefit)                                              $572             $(747)          $5,740
State income taxes                                                                   89               (19)             533
Goodwill amortization                                                               302               309              349
Exempt interest                                                                       -              (152)            (593)
Foreign sales corporation                                                          (107)              (68)             (49)
Tax credits                                                                        (348)             (762)            (433)
Foreign operations                                                                 (174)               59             (234)
UTS acquisition                                                                     152               376             (372)
Meals and entertainment                                                             134               243              132
Other, net                                                                            5                91              177
Provision (benefit) for income taxes                                               $625             $(670)          $5,250

</TABLE>




<PAGE>


The domestic and foreign components of income before taxes were:

<TABLE>
<CAPTION>
                                                                                                   Year Ended December 31,
- ---------------------------------------------------------------------- ----------------------------------------------------
(In thousands)                                                                     1997              1996             1995
- ---------------------------------------------------------------------- ----------------- ----------------- ----------------
<S>                                                                  <C>               <C>               <C>    
Domestic                                                                         $2,965            $1,525          $15,507
Foreign                                                                          (1,330)           (3,659)             894
                                                                       ----------------- ----------------- ----------------
Income (loss) before income taxes                                                $1,635           $(2,134)         $16,401
                                                                       ----------------- ----------------- ----------------
</TABLE>


<TABLE>
<CAPTION>
The provision for income taxes consists of the following:                                          Year Ended December 31,
- ---------------------------------------------------------------------- ----------------------------------------------------
(In thousands)                                                                     1997              1996             1995
- ---------------------------------------------------------------------- ----------------- ----------------- ----------------
<S>                                                                  <C>               <C>               <C>
Current:
Federal                                                                            $331              $678           $4,104
State and local                                                                     133               197              388
Foreign                                                                              54                 -                -
Total current                                                                       518               875            4,492
Deferred:
Federal                                                                             762              (844)           1,033
State and local                                                                      38               130             (275)
Foreign                                                                            (693)             (831)               -
                                                                       ----------------- ----------------- ----------------
Total deferred                                                                      107            (1,545)             758
                                                                       ----------------- ----------------- ----------------
Total provision (benefit) for income taxes                                         $625             $(670)          $5,250
                                                                       ----------------- ----------------- ----------------
</TABLE>



<TABLE>
<CAPTION>
The components of the provision (benefit) for deferred income taxes are:                           Year Ended December 31,
- -------------------------------------------------------------------------------------- ------------------------------------
(In thousands)                                                                     1997              1996             1995
- ---------------------------------------------------------------------- ----------------- ----------------- ----------------
<S>                                                                  <C>               <C>               <C> 
Tax credits and loss carryforwards                                              $(4,979)          $(1,440)            $370
Accrued expenses                                                                   (866)             (865)            (442)
Acquisitions                                                                         16               375                -
Depreciation and amortization                                                     1,496               981             (289)
Inventory                                                                         (218)            (1,270)            (257)
Long-term contracts                                                               4,643               712            1,384
Other, net                                                                           15               (38)              (8)
                                                                       ----------------- ----------------- ----------------
Total deferred income taxes                                                        $107           $(1,545)            $758
                                                                       ----------------- ----------------- ----------------
</TABLE>


<TABLE>
<CAPTION>
Deferred income taxes consisted of the following:                                                             December 31,
- ---------------------------------------------------------------------- ----------------------------------------------------
(In thousands)                                                                     1997              1996             1995
- ---------------------------------------------------------------------- ----------------- ----------------- ----------------
<S>                                                                  <C>               <C>               <C>
Deferred tax asset:
Tax credits                                                                      $4,999            $3,765           $3,145
Loss carryforwards                                                                4,589               844                -
Accrued expenses                                                                  4,033             3,167            1,707
Inventory valuation                                                               2,175             1,957              622
Other, net                                                                           97               112              278
                                                                       ----------------- ----------------- ----------------
Total deferred tax asset                                                         15,893             9,845            5,752
Deferred tax liability:
Acquisitions                                                                       (391)             (375)               -
Depreciation and amortization                                                    (4,469)           (2,973)          (2,896)
Long term contracts                                                              (6,739)           (2,096)               -
<CAPTION>
Total deferred tax liability                                                    (11,599)           (5,444)          (2,896)
                                                                       ----------------- ----------------- ----------------
Net deferred tax asset                                                           $4,294            $4,401           $2,856
                                                                       ----------------- ----------------- ----------------
</TABLE>


         Valuation  allowances of $70,000 and  $1,616,000 in 1997,  $129,000 and
$802,000 in 1996 and $35,000 and  $379,000 in 1995,  were  provided  for capital
loss carryforwards and foreign net operating loss  carryforwards,  respectively,
for which the Company may not receive future benefits.

  The Company has research and  development  tax credits and net operating  loss
carryforwards available to offset future income tax liabilities. The tax credits
of $4.8 million and the loss  carryforwards  of $4.6 million  expire from 2004 -
2012,  respectively.  The Company  also has  alternative  minimum  tax  credits,
totaling   $170,000  that  are  available  to  offset  future  tax   liabilities
indefinitely.

Note 13: Other Related Party Transactions

         Certain of the Company's customers are also shareholders with more than
10%  ownership  interest  and/or hold  positions on Itron's  Board of Directors.
Revenues from such  customers  were $4.8 million in 1997,  $4.3 million in 1996,
and $2.1 million in 1995.  Accounts  receivable  from these  customers were $1.1
million  and  $362,000  at December  31,  1997 and 1996  respectively.  Interest
expense related to notes payable to a shareholder was $483,000 in 1997, $456,000
in 1996 and $157,000 in 1995.

Note 14: Earnings Per Share and Capital Structure

<TABLE>
<CAPTION>
                                                                                                   Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)                                                                     1997              1996             1995
- ---------------------------------------------------------------------- ----------------- ----------------- ----------------
<S>                                                                  <C>               <C>               <C>   
Weighted average shares outstanding                                              14,118            13,297           13,095
Effect of dilutive securities:
Warrants                                                                            107                 -              210
Stock options                                                                       337                 -              470
                                                                       ----------------- ----------------- ----------------
Weighted average shares outstanding assuming conversion                          14,562            13,297           13,775
                                                                       ----------------- ----------------- ----------------
</TABLE>



         The Company has granted  options to purchase common stock to directors,
employees  and other key  personnel  for fair market value on the date of grant.
Additionally,  the  Company  issued  warrants  in  conjunction  with  a  Private
Placement in 1989 and 1990 for the formation of AMRplus  Partners.  The dilutive
effect of these  options and warrants is included  for  purposes of  calculating
dilutive earnings per share using the "treasury stock" method.

         The Company also has subordinated convertible notes outstanding.  These
notes are not included in the above  calculation as the shares are anti-dilutive
when using the "if converted" method.  There is no dilutive effect of securities
in 1996 as the Company incurred a loss for the year and including the securities
would have been anti-dilutive.

Note 15: Sale of Business Interest

         The Company  incurred a loss of $1.1  million  during  1997  related to
business activities from a joint venture with a utility partner. Offsetting this
loss was a gain from the sale to this  partner  of certain  business  activities
previously  performed by the joint  venture,  including  meter shop services and
utility meter reading services.




<PAGE>



Note 16: Segment Information

         Summarized   information   regarding   the   Company's   domestic   and
international operations is as follows:

<TABLE>
<CAPTION>
                                                                                                              Consolidated
(In thousands)                                                                 Domestic     International       Operations
- ---------------------------------------------------------------------- ----------------- ----------------- ----------------
Year ended December 31, 1997
<S>                                                                  <C>               <C>               <C>     
Revenue                                                                        $193,250           $22,867         $216,117
Income (loss) before income taxes                                                 4,075            (2,440)           1,635
Identifiable assets                                                             231,062             9,149          240,211

Year ended December 31, 1996
Revenue                                                                         162,494           $15,090         $177,584
Income (loss) before income taxes                                                 6,009            (8,143)          (2,134)
Identifiable assets                                                             175,074            11,597          186,671

Year ended December 31, 1995
Revenue                                                                        $134,111           $27,224         $161,335
Income (loss) before income taxes                                                18,020            (1,619)          16,401
Identifiable assets                                                             139,223            10,495          149,718
</TABLE>


         Domestic   information   includes   the  United   States  and   Canada.
Approximately  8% of  1997,  22% of 1996  and 14% of 1995  consolidated  revenue
relates to a contract with a  significant  customer.  International  information
includes wholly owned  subsidiaries  located in the United  Kingdom,  France and
Australia  as well as sales  to  international  distributors,  which  were  $9.7
million in 1997,  $5.9 million in 1996 and $15.7 million in 1995.  International
revenue includes sales to customers located in Asia, Europe,  Australia,  Japan,
Latin America, and the Middle East.

Note 17: Development Agreements

         The Company  receives  funding to develop certain  products under joint
development  agreements with several companies.  Intellectual property rights to
such developed  products remain with the Company.  Funding  received under these
agreements is credited  against  product  development  expenses.  The agreements
provide for royalty payments by the Company if successful products are developed
and sold.  Additionally the Company is required to pay royalties on future sales
of products incorporating certain AMR technologies.

         Funding  received and royalty  expense under these  arrangements  is as
follows:

<TABLE>
<CAPTION>
                                                                                                   Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)                                                                     1997              1996             1995
- ---------------------------------------------------------------------- ----------------- ----------------- ----------------
<S>                                                                  <C>               <C>               <C> 
Funding received                                                                   $731              $143             $657
Royalties paid                                                                    1,524             1,614           $1,889
</TABLE>




<PAGE>



Note 18: Quarterly Results (Unaudited)

         Quarterly results are as follows:

<TABLE>
<CAPTION>
(In thousands, except per share data)                         Fourth Quarter   Third Quarter  Second Quarter  First Quarter
- ------------------------------------------------------------- --------------- --------------- --------------- -------------
<S>                                                         <C>             <C>             <C>             <C>
1997 Statement of operations data:
Total revenues                                                        64,375         $58,427         $52,732       $40,583
Gross profit                                                          25,748          22,100          19,291        13,619
Net income (loss)                                                      3,301           1,643            (675)       (3,259)
Diluted earnings (loss) per share                                        .22            $.11           $(.05)        $(.24)
1996 Statement of operations data:
Total revenues                                                       $42,594         $38,743         $48,195       $48,052
Gross profit                                                          15,814          14,566          20,994        21,502
Net income (loss)                                                     (2,301)         (4,546)          2,355         3,028
Diluted earnings (loss) per share                                      $(.17)          $(.34)           $.17          $.21
</TABLE>



S
chedule II:  VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
(In thousands of dollars)                              Additions                                   Balance at end of period
                                       -------------------------------------------              ----------------------------
                                        Balance at    Charged to     Charged to
                                        beginning      costs and        other                                       Non 
             Description                of period      expenses     accounts (1)    Deductions      Current       current
- -------------------------------------- ------------- -------------- -------------- -------------- ------------ -------------
<S>                                   <C>           <C>            <C>            <C>            <C>          <C>
Year ended December 31, 1995:
   Inventory obsolescence                   1,365          2,121                         1,623        1,863
   Warranty                                 2,327          1,452                           794          882         2,103
   Allowance for doubtful accts.              302            327             78            198          509

Year ended December 31, 1996:
   Inventory obsolescence                   1,863          5,722                         3,454        4,131
   Warranty                                 2,985          2,664                         2,280        1,212         2,157
   Allowance for doubtful accts.              509            550                           307          752

Year ended December 31, 1997:
   Inventory obsolescence                   4,131          8,938                         8,528        4,541
   Warranty                                 3,369          7,600                         7,451        2,666           852
   Allowance for doubtful accts.              752            747                           745          754
</TABLE>


(1)  Additions charged to other accounts consist of reserves of acquired
     businesses.



<PAGE>



Item  9:  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

                  None.





<PAGE>



PART III


Item 10:  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  section  entitled   "Election  of  Directors"   appearing  in  the
Registrant's  Proxy  Statement for the Annual Meeting of Shareholders to be held
on May 6, 1998 (the "1998 Proxy Statement") sets forth certain  information with
regard  to  the  directors  of the  Registrant  and is  incorporated  herein  by
reference.  Certain information with respect to persons who are or may be deemed
to be  executive  officers  of the  Registrant  is set forth  under the  caption
"Executive  Officers of the  Registrant" in Part I of this Annual Report on Form
10-K.


Item 11:  EXECUTIVE COMPENSATION

         The section  entitled  "Executive  Compensation"  appearing in the 1998
Proxy  Statement  sets forth  certain  information  (except  for those  sections
captioned   "Compensation   Committee  Report  on  Executive  Compensation"  and
"Performance  Graph",  which are not  incorporated  by  reference  herein)  with
respect to the  compensation of management of the Registrant and is incorporated
herein by reference.


Item 12:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The section entitled  "Security  Ownership of Certain Beneficial Owners
and  Management"  appearing  in the 1998  Proxy  Statement  sets  forth  certain
information with respect to the ownership of the  Registrant's  Common Stock and
is incorporated herein by reference.


Item 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The section entitled "Certain  Relationships and Related  Transactions"
appearing  in the 1998 Proxy  Statement  sets  forth  certain  information  with
respect to the  certain  business  relationships  and  transactions  between the
Registrant  and  its  directors  and  officers  and is  incorporated  herein  by
reference.



PART IV



Item 14:  EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K

1)  List of Consolidated Financial Statements:

         The following  consolidated financial statements of Itron, Inc. and its
subsidiaries  as  contained  in its  1997  Annual  Report  to  Shareholders  are
incorporated  in Part II, item 8.

            *  Consolidated Statements of Operations
            *  Consolidated Balance Sheets
            *  Consolidated Statements of Shareholders' Equity
            *  Consolidated Statements of Cash Flows
            *  Notes to Consolidated Financial Statements
            *  Independent Auditors' Report

2)  List of Financial Statement Schedules:

            Schedule II - Valuation and Qualifying Accounts




<PAGE>


3)  Exhibits:

EXHIBIT
NUMBER            DESCRIPTION OF EXHIBITS

3.1               Restated Articles of Incorporation of the Registrant. (A) 
                  (Exhibit 3.1)

3.2               Restated Bylaws of the Registrant. (A) (Exhibit 3.2)

4.1               Rights  Agreement  between the Registrant and Chemical Trust 
                  Company of California  dated as of July 15, 1992. 
                  (A) (Exhibit 4.1)

4.2               Indenture dated as of March 12, 1997 between the and  Chemical
                  Trust  Company  of  California, as trustee. *(I) (Exhibit 4.1)

10.1              Form of Change of  Control Agreement  between Registrant  and 
                  certain of  its  executive  officers,  together with schedule 
                  executive officers who are parties thereto. *(D)(Exhibit 10.1)

10.2              Employment  Agreement  between the  Registrant and Johnny M. 
                  Humphreys  dated  February 9, 1987,  First  Addendum  dated
                  November 22, 1988 and Second Addendum dated July 21, 1992. 
                  *(A) (Exhibit 10.2)

10.3              Form of Confidentiality Agreement normally  entered into with 
                  employees. (A) (Exhibit 10.7)

10.4              Amended and Restated Registration Rights Agreement among the 
                  Registrant  and certain  holders of its securities dated 
                  March 25, 1996. (E) (Exhibit 10.4)

10.5              1989 Restated Stock Option Plan.(C) (Exhibit 10.7)

10.6              1992  Restated  Stock Option Plan for Nonemployee Directors.
                  (F)(G)

10.7              Executive Deferred Compensation Plan. *(A) (Exhibit 10.12)

10.8              Form  of Class A Warrant Certificates for shares of  Common 
                  Stock of the Registrant dated from July 10, 1989 to March 5, 
                  1992, together between the company and BG  Holding Inc.
                  (Exhibit 10.8) (C)

10.10             Form of  Indemnification  Agreements  between the  Registrant
                  and certain officers and directors.  (D)(Exhibit 10.14)

10.11             Schedule of officers and directors who are parties to 
                  Indemnification Agreements  (see  Exhibit 10.10 hereto) with 
                  the Registrant.

10.12             Employment Agreement between the Registrant and Carl Robert
                  Aron dated  November  22,  1995.  * (D)   (Exhibit 10.15)

10.13             Second  Amendment to  Employment  Agreement  between the 
                  Registrant  and Carl Robert Aron dated December 17, 1997. *

10.14             Employment  Agreement  between the  Registrant  and David G.  
                  Remington  dated  February 29, 1996. * (D)(Exhibit 10.16)

10.15             Office Lease between the  Registrant  and  Woodville  Leasing
                  Inc.  dated October 4, 1993.  (B) (Exhibit 10.24).

10.16             Contract between the Registrant and Duquesne Light Company 
                  dated January 15, 1996. (DELTA) (D) (Exhibit 10.18)

10.17             Amendment No. 1 to Amended and Restated  Utility  Automated  
                  Meter Data  Acquisition  Lease and Services Agreement  between
                  the  Registrant  and Duquesne  Light  Company dated  September
                  11, 1997.  (DELTA) (H) (Exhibit 10)

10.18             Purchase  Agreement  between  the  Registrant  and  Pentzer
                  Development Corporation dated July 11, 1995.(D)(Exhibit 10.19)

10.19             Loan Agreement between Itron, Inc. and  Washington  Trust Bank
                  dated July 1, 1996, as amended  January 15, 1997. (E)

10.20             Third Amendment to Employment Agreement between the Registrant
                  and Carl Robert Aron dated March 20, 1997 * 

11                Computation of Earnings per Share

12                Statement of Computation of Ratios

21.1              Subsidiaries of the Registrant

23.1              Independent Auditors' Consent

27.               Financial Data Schedule Fiscal year end 1997.


- -------------------------------------------------------------------------------

(A)      Incorporated  by  reference  to  designated  exhibit  included  in  the
         Company's Registration Statement on Form S-1 (Registration  #33-49832),
         as amended, filed on July 22, 1992.

(B)      Incorporated by reference to  designated exhibit included  in the 
         Company's 1993 Annual Report on Form 10-K filed on March 30, 1994.

(C)      Incorporated by reference to designated exhibit included in the
         Company's 1994 Annual Report on Form 10-K filed on March 30, 1995.

(D)      Incorporated by reference to designated exhibit included in the
         Company's 1995 Annual Report on Form 10-K filed on March 30, 1996.

(E)      Incorporated by reference to designated exhibit included in the
         Company's 1996 Annual Report on Form 10-K filed on March 5, 1997.

(F)      Incorporated  by  reference to Appendix A to the  Company's  designated
         Proxy  Statement  dated  April  4,  1997  for  its  annual  meeting  of
         shareholders held on April 29, 1997.

(G)      Incorporated  by  reference to Appendix A to the  Company's  designated
         Proxy  Statement  dated  April  1,  1995  for  its  annual  meeting  of
         shareholders held in April 25, 1995.

(H)      Incorporated  by  reference  to  designated  exhibit  included  in  the
         Company's Quarterly Report on Form 10-Q for the quarter ended September
         30, 1997.

(I)      Incorporated  by reference to designated  exhibit  included in the 
         Company's 1996 Annual Report on Form 8-K dated March 18, 1997.

*        Management contract or compensatory plan or arrangement.

(DELTA) Confidential treatment requested for a portion of this agreement.


4)  Reports on Form 8-K:

         A current report on Form 8-K, dated November 14, 1997, was filed during
the fourth quarter of 1997 regarding an amendment to the agreement with Duquesne
Light Company.




<PAGE>



SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) 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,  in the  City of
Spokane, State of Washington, on the 30th day of March 1998.

                                                 ITRON, INC.

                                                 By      /s/DAVID G. REMINGTON
                                                 -----------------------------
                                                         David G. Remington
                                                         Chief Financial Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this report has been signed by the following persons in the capacities indicated
below on the 30th day of March, 1998.


Signature                                Title
- ---------                                -----


/s/PAUL A. REDMOND                       Chairman of the Board
- -------------------------
Paul A. Redmond

/s/JOHNNY M. HUMPHREYS                   President, Chief Executive Officer and 
- -------------------------                Director (Principal Executive Officer)
Johnny M. Humphreys                     

/s/DAVID G. REMINGTON                    Chief Financial Officer (Principal
- -------------------------                Financial and Accounting Officer)
David G. Remington                       

/s/MICHAEL B. BRACY                      Director
- -------------------------
Michael B. Bracy

/s/TED C. DEMERRITT                      Director
- -------------------------
Ted C. DeMerritt

/s/JON E. ELIASSEN                       Director
- ------------------------- 
Jon E. Eliassen

/s/MARY ANN PETERS                       Director
- ------------------------- 
Mary Ann Peters

/s/GRAHAM M. WILSON                      Director
- ------------------------- 
 Graham M. Wilson

/s/STUART E. WHITE                       Director
 Stuart E. White







ITRON, INC.                                                Exibit 10.10
Indemnification Agreements:

     (a) Michael B. Bracy
     (b) Jon E. Eliassen
     (c) Richard G. Geiger
     (d) Johnny M. Huphreys
     (e) Klaus O. Huschke
     (f) Michael j. O'Callaghan
     (g) Larry A. Panattoni
     (h) Paul A. Redmond
     (I) Graham M. Wilson
     (j) Robert D. Neilson
     (k) Ted C. DeMerritt
     (l) Mary Ann Peters
     (m) Russell E. Vanos
     (n) Carl R. Aron
     (o) David G. Remington
     (p) Stuart Edward White
     (q) LeRoy D. Nosbaum






                    SECOND AMENDMENT TO EMPLOYMENT AGREEMENT      Exhibit 10.13



         THIS SECOND  AMENDMENT TO EMPLOYMENT  AGREEMENT,  which shall be deemed
effective as of the 17th day of December,  1997, is entered into by ITRON,  INC.
(hereinafter  referred to as the  "Company")  and CARL ROBERT ARON  (hereinafter
referred to as "Executive").

                                     RECITAL

         The Company and Executive are parties to an Employment Agreement, dated
as of  November  22,  1995  (the  "Employment  Agreement").  Section  5.3 of the
Employment  Agreement  defines  "Good  Reason" for  Executive to  terminate  his
employment  with the  Company,  including  inter alia  failure by the Company to
offer  Executive the position of Chief  Executive  Officer  within two (2) years
after  Executive's  Start Date. The Company desires  additional time to select a
successor  Chief  Executive  Officer.   Executive  desires  to  continue  to  be
considered for the position of Chief Executive Officer of the Company beyond the
two (2) year period originally  contemplated,  to expand the definition of "Good
Reason"  set forth in Section  5.3 of the  Employment  Agreement  to include the
occurrence of his death or disability during a defined period and to convert the
Termination  Amount  described in Section 5.1 of the  Employment  Agreement
 to a
fixed cash amount.  The Company and Executive  therefore mutually agree to amend
with  this  document  Sections  5.1  and  5.3 of the  Employment  Agreement,  in
accordance with the provisions of Section 10.3 of the Employment Agreement.

                                    AGREEMENT

         For good and valuable  consideration,  the receipt and  sufficiency  of
which is hereby acknowledged, the parties hereto agree as follows:

1.       TERMINATION OTHER THAN FOR CAUSE

         Subsection  5.1 of the  Employment  Agreement is amended to convert the
Termination Amount described therein to a fixed cash amount. The amended Section
5.1 of the Employment Agreement reads as follows:

                  "In the event that (a) the Company  terminates  this Agreement
                  for any reason other than Cause (as hereinafter defined),  (b)
                  the Company  gives  written  notice  pursuant to Section  10.1
                  hereof  that  this  Agreement  shall  not  be  extended,   (c)
                  Executive  terminates  this  Agreement  for  Good  Reason  (as
                  hereinafter  defined),  or (d) Executive  gives written notice
                  pursuant  to  Section  10.1  hereof  that  the  second  or any
                  subsequent  automatic  renewal  of this  Agreement  shall  not
                  occur,  then, and in any such event, (x) the dates as of which
                  any  and all  options  theretofore  granted  to  Executive  to
                  purchase the  Company's  common stock would have become vested
                  in and  exercisable  by  Executive  but for the effect of this
                  Section 5 shall forthwith upon such termination be accelerated
                  by one  year,  (y)  within  ten  (10)  business  days  of such
                  termination,  the Company  shall pay  Executive a  Termination
                  Amount of $750,000,  and (z) all salary,  bonuses and payments
                  under  employee  benefit  plans  to  which  Executive  may  be
                  entitled (including,  without limitation,  the bonus described
                  in Section 2.2 hereof) shall become due and payable."

2.       TERMINATION FOR GOOD REASON

         Subsection (a) of Section 5.3 of the Employment Agreement is amended to
extend by six (6) months the time period of two (2) years described  therein and
to expand the  definition of "Good Reason" to include the  executive's  death or
disability within the defined period.  The amended Section 5.3 of the Employment
Agreement reads as follows:

                  "'Good  Reason' shall mean (a) any failure to offer  Executive
                  the position of Chief  Executive  Officer of the Company on or
                  before May 24, 1998,  (b) any offer to and  acceptance  of the
                  position  of Chief  Executive  Officer  of the  Company by any
                  person other than  Executive on or before May 24, 1998,  (c) a
                  reduction  in  Executive's  base  salary,  (d)  any  purported
                  termination of Executive's  employment by the Company which is
                  not  effected  pursuant to the material  requirements  of this
                  Agreement,  (e) a Change  in  Control  (as  identified  in the
                  Change in Control  Agreement annexed hereto as Exhibit II), or
                  (f) the death or disability (as defined and limited by Section
                  5.4 of the  Agreement) of the  Executive  before May 24, 1998.
                  (In  case  of  Executive's  death  before  May 24,  1998,  the
                  termination  payment described in Section 5.1 of the Agreement
                  will be paid to Executive's estate.)"

3.       COUNTERPARTS

         This  Second  Amendment  to  Employment  Agreement  may be  executed in
counterparts,  each of which counterpart shall be deemed an original, but all of
which together shall constitute one and the same instrument.

         IN WITNESS  WHEREOF,  the parties  have  executed and entered into this
Second Amendment to Employment Agreement as of the date set forth above.

                                     ITRON, INC.

                                     By:  /s/ JOHNNY M. HUMPHREYS
                                     -----------------------------------------
                                     Its President and Chief Executive Officer


                                     /s/ CARL R. ARON
                                     -----------------------------------------
                                          Carl Robert Aron






                     THIRD AMENDMENT TO EMPLOYMENT AGREEMENT       Exhibit 10.20



         THIS THIRD  AMENDMENT TO  EMPLOYMENT  AGREEMENT,  which shall be deemed
effective  as of the 20th day of March,  1998,  is entered  into by ITRON,  INC.
(hereinafter  referred to as the  "Company")  and CARL ROBERT ARON  (hereinafter
referred to as "Executive").

                                     RECITAL

         The Company and Executive are parties to an employment agreement, dated
as of November 22, 1995 (the "Original Agreement"),  and two amendments thereto,
the first of which (the "First  Amendment")  is dated as of April 29, 1996,  and
the second of which (the "Second  Amendment")  is dated as of December 17, 1997.
The  Company  and  Executive  agree that Good  Reason,  as defined in the Second
Amendment,  exists for  termination  of the  Employment  Agreement by Executive.
Notwithstanding  the  existence of Good Reason for  Executive  to terminate  the
Employment  Agreement,  the  Company  and  Executive  desire to  continue  their
employment  relationship  and modify the terms of the employment of Executive by
the Company,  changing  Executive's title and  responsibilities,  establishing a
minimum fixed term for Executive's  employment,  and setting forth certain terms
and conditions of his compensation and stock vesting  benefits.  The Company and

Executive  therefore mutually agree to amend with this document Sections 1, 2.1,
4.3,  5.1, 5.3, 8, and 10.1 of the Original  Agreement,  as amended in the First
Amendment and the Second  Amendment  (together the "Employment  Agreement"),  in
accordance with the provisions of Section 10.3 of the Employment Agreement.

                                    AGREEMENT

         For good and valuable  consideration,  the receipt and  sufficiency  of
which is hereby acknowledged, the parties hereto agree as follows:

1.       EMPLOYMENT

         Section  1 of  the  Employment  Agreement  is  amended  to  change  the
description of Executive's title and responsibilities.  The amended Section 1 of
the Employment Agreement reads as follows:




<PAGE>



                  "The Company will employ Executive,  and Executive will accept
                  employment by the Company, as the Executive Vice President and
                  Chief Strategist.  Executive will have such authority, subject
                  to the Company's  Articles of Incorporation and Bylaws, as may
                  be granted from time to time by the Chief Executive Officer or
                  the Board of Directors of the Company.  Executive will perform
                  the duties customarily  performed by the Chief Strategist of a
                  corporation  and  such  other  duties,   consistent  with  and
                  appropriate to the  Executive's  position as an Executive Vice
                  President  and  Chief  Strategist  of  the  Company,   as  may
                  reasonably  be  assigned  from  time  to  time  by  the  Chief
                  Executive Officer or the Board of Directors of the Company."

2.       COMPENSATION

         Section  2.1  of the  Employment  Agreement  is  amended  to  establish
Executive's  base salary during the remaining term of the Employment  Agreement.
The amended Section 2.1 of the Employment Agreement reads as follows:

                  "The Company  shall pay  Executive a base salary rate of Three
                  Hundred Fifteen  Thousand  Dollars  ($315,000) per year, which
                  shall be subject to all customary payroll deductions and shall
                  be  payable at the same  intervals  as are  applicable  to the
                  payment  of  the  base  salaries  of  other  officers  of  the
                  Company."

3.       STOCK OPTIONS

         Section 4.3 of the  Employment  Agreement  is amended to  describe  the
period  during  which  Executive  may  exercise  stock  options   following  the
termination  of his  employment  and to provide for the expection of granting of
additional  stock options in 1998. The third  paragraph of Section 4.3 is hereby
deleted, and a new third paragraph is added that reads as follows:

                  "It  is  anticipated   that,   assuming  due   performance  of
                  Executive's  duties  hereunder as Executive Vice President and
                  Chief  Strategist,  the Chief Executive Officer of the Company
                  will recommend to the Compensation  Committee of the Company's
                  Board of  Directors  the granting to Executive at the May 1998
                  meeting of the  Compensation  Committee of options to purchase
                  Thirty Thousand  (30,000) shares of the Company's common stock
                  (in addition to those options already  granted).  Any granting
                  to Executive of  additional  stock options will be at the sole
                  discretion  of  the  Compensation  Committee.   Following  the
                  termination  of  Executive's  employment  under the Employment
                  Agreement for any reason,  Executive  will have a period of up
                  to ninety (90) days to exercise  any and all options that have
                  vested as of the date of such  termination  or pursuant to the
                  acceleration described in Section 5.1."

4.       TERMINATION OTHER THAN FOR CAUSE

         Subsection 5.1 of the Employment  Agreement is hereby amended to extend
the  acceleration  period for  Executive's  stock  options upon  termination  of
employment  and to add a description of the benefits to be received by Executive
in case of  termination  other than for Cause  before  February  28,  1999.  The
amended Section 5.1 of the Employment Agreement reads as follows:

                  "5.1 TERMINATION OTHER THAN FOR CAUSE

                  5.1.1  In the  event  that  (a) the  Company  terminates  this
                  Agreement  for any reason  other  than  Cause (as  hereinafter
                  defined),or  (b) Executive  terminates this Agreement for Good
                  Reason (as hereinafter  defined),  then, and in either of such
                  events,  (x)  the  dates  as of  which  any  and  all  options
                  theretofore  granted to Executive  to purchase  the  Company's
                  common stock would have become  vested in and  exercisable  by
                  Executive but for the effect of this Section 5 shall forthwith
                  upon such  termination be accelerated by fifteen  months,  (y)
                  within ten (10) business days of such termination, the Company
                  shall pay Executive a Termination Amount of $750,000,  and (z)
                  all salary,  bonuses and payments under employee benefit plans
                  to  which  Executive  may  be  entitled  (including,   without
                  limitation,  the bonus  described in Section 2.2 hereof) shall
                  become due and payable.

                  "5.1.2 In the event that the  Company  terminates  Executive's
                  employment without Cause at any time before February 28, 1999,
                  the Company  shall,  in addition to the  payments and benefits
                  set forth in the foregoing  Section 5.1.1, (i) continue to pay
                  Executive  an amount  equal to his base  salary at the time of
                  termination for the period through February 28, 1999, paid out
                  in installments at the same intervals as the Company's  normal
                  executive payroll,  (ii) within ten (10) business days of such
                  termination  pay to Executive  all bonuses and payments  under
                  employee  benefit  plans to which  Executive  would  have been
                  entitled (including,  without limitation,  the bonus described
                  in Section 2.2 hereof),  had his employment  continued through
                  February  28,  1999,  and  (iii)  add to the  acceleration  of
                  options'  vesting and  exercisability  pursuant to 5.1.1 (x) a
                  period   equal  to  the  number  of  days  from  the  date  of
                  termination to February 28, 1999."

5.       TERMINATION FOR GOOD REASON

         Subsection  (a) of Section 5.3 of the Employment  Agreement,  is hereby
amended to change the  definition of "Good  Reason." The amended  Section 5.3 of
the Employment Agreement reads as follows:

                  "'Good  Reason'  shall mean (a) a decision by Executive in his
                  sole  discretion at any time that he does not wish to continue
                  his   employment   with  the  Company,   (b)  a  reduction  in
                  Executive's  base salary,  (c) any  purported  termination  of
                  Executive's  employment  by the Company  which is not effected
                  pursuant to the material requirements of this Agreement, (d) a
                  Change in  Control  (as  identified  in the  Change in Control
                  Agreement  annexed  hereto as Exhibit II), or (e) the death or
                  disability  (as  defined  and  limited by  Section  5.4 of the
                  Agreement) of the Executive during the term of this Agreement.
                  (In  case of  Executive's  death  while in the  employ  of the
                  Company  under this  Agreement or any extension  thereof,  the
                  termination   payment  described  in  Section  5.1.1  of  this
                  Agreement will be paid to Executive's estate.)"

6.       DURATION

         Section  8 of the  Employment  Agreement  is  amended  to  establish  a
termination date for Executive's employment with the Company, subject to earlier
termination  as provided in other  provisions  of the  Employment  Agreement  or
extension  pursuant to this  amendment.  The amended Section 8 of the Employment
Agreement reads as follows:

                  "This Agreement  shall terminate on February 28, 1999,  unless
                  terminated  earlier by either party hereto pursuant to Section
                  5 of the  Agreement  or  extended  on a  month-to-month  basis
                  thereafter  through  agreement of the parties.  Termination of
                  this  Agreement  on  February  28,  1999,  or  termination  of
                  Executive's  emloyment  by the  Company  following  any agreed
                  extension of this Agreement, shall, unless termination is 'For
                  Cause,' as defined in Section 5.3 of the Agreement,  be deemed
                  a 'Termination Other Than for Cause,' triggering the Company's
                  obligations  described  in  Section  5.1.1 of this  Agreement.
                  Termination  by Executive of this  Agreement for 'Good Reason'
                  as defined in  subsections  (b),  (c),  (d), or (e) of Section
                  5.3, whether before, on or after February 28, 1999, shall also
                  trigger the Company's  obligations  described in Section 5.1.1
                  of this Agreement."

7.       NOTICES

         Section 10.1 of the Amended  Employment  Agreement is hereby amended to
read as follows:

                  "Every notice required by the terms of this Agreement shall be
                  given in writing by serving the same upon the party to whom it
                  was addressed  personally or by registered or certified  mail,
                  return receipt requested, at the address set forth below or at
                  such other  address as may  hereafter be  designated by notice
                  given in compliance with the terms hereof:

                  If to Executive:          Carl Robert Aron
                                            2024 East Southeast Blvd.
                                            Spokane, Washington  99203

                  With a copy to:           Stuart E. Seigel, Esq.
                                            Arnold & Porter
                                            399 Park Avenue
                                            New York, New York 10022

                  If to Company:            ITRON, Inc.
                                            2818 North Sullivan Road
                                            Spokane, Washington  99215
                                            Attention:  President

     or such other  address as shall be  provided in  accordance  with the terms
hereof. If notice is mailed, such notice shall be effective upon mailing."

8.       COUNTERPARTS

         This  Third  Amendment  to  Employment  Agreement  may be  executed  in
counterparts,  each of which counterpart shall be deemed an original, but all of
which together shall constitute one and the same instrument.

         IN WITNESS  WHEREOF,  the parties  have  executed and entered into this
Third Amendment to Employment Agreement as of the date set forth above.

                                   ITRON, INC.
                                   By:  /s/ JOHNY M. HUMPHREYS
                                   ----------------------------------------
                                   Its President and Chief Executive Officer



                                       /s/ CARL R. ARON 
                                    ---------------------------------------
                                    Carl Robert Aron



ITRON, INC.                                                          Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
(In thousands)

<TABLE>
<CAPTION>
                                                                                           Year ended December 31,
                                                                              -------------------------------------
                                                                                   1995        1996           1997
                                                                              ----------   ---------   ------------
<S>                                                                         <C>          <C>         <C>
Weighted average number of common shares                                         13,095      13,297         14,118
outstanding
                                                                              ==========   =========   ============

Basic EPS                                                                         $0.85     ($0.11)          $0.07


                                                                                   1995        1996           1997
                                                                              ----------   ---------   ------------

Weighted average number of common shares                                         13,095      13,297         14,118
outstanding

Dilutive effect of outstanding common stock options and                             680           0            444
warrants at average market price
                                                                              ----------   ---------   ------------

Weighted average shares outstanding based on ending                              13,775      13,297         14,562
market price
                                                                              ==========   =========   ============

Diluted EPS based on average market price                                         $0.81     ($0.11)          $0.07
</TABLE>







ITRON, INC.                                                          Exhibit 12
Statement of Computation of Ratios

<TABLE>
<CAPTION>

                                                             Year Ended December 31,
                                                -----------  -----------------------------------  -----------
                                                      1993        1994         1995        1996         1997
                                                -----------  ----------  -----------   ---------  -----------
                                                             (in thousands, except ratios)
<S>                                           <C>          <C>         <C>           <C>         <C>
Earnings:
     Pre-tax income (loss)                           7,373      14,193       16,401      (2,134)       1,635

Fixed Charges:
     Convertible debt amort                                                                              357
     Interest capitalized                                -           -            -         533          994
     Interest expense,Gross                            619         138          252         923        3,834
                                                -----------  ----------  -----------   ---------  -----------
a)   Fixed charges                                     619         138          252       1,456        4,828
                                                -----------  ----------  -----------   ---------  -----------

b)   Earnings for ratio                              7,992      14,331       16,653        (678)       6,463


Ratios:
Ratio of Earnings to Fixed Charges (b/a)           12.9111      103.85        66.08         n/a        1.3386

</TABLE>






                                  EXHIBIT 21.1

                   ITRON SUBSIDIARIES AND AFFILIATED COMPANIES

           Itron, Inc.   (Washington)
           Corporate Headquarters
           2818 N. Sullivan Rd.
           Spokane, WA. 99216-1897
           P.O. Box 15288 Spokane, WA. 99215-5288

           Itron Canada, Ltd.   (Canada)
           160 Wilkinson Rd., #22
           Brampton, ON.  L6T 4Z4

           Itron S.A.   (France)
           Immeuble Merblanc
           1, rue du Port au Prince
           38200 Vienne, Lyon, France

           Itron Ltd.   (England)
           Kilnbrook House
           Rose Kiln Lane
           Reading, Berkshire RG2 0BY
           United Kingdom

           Itron Australisia Pty Ltd.   (Australia)
           BHP Building
           Level 6, 55 Sussex Street
           Sydney, NSW 2000 Australia

           Utility Translation Systems, Inc.   (North Carolina)
           200 UTS Centre
           5909 Falls of the Neuse Road
           Raleigh, North Carolina, 27609

           Design Concepts, Inc.    (Idaho)
           679 North Five Mile Road
           Boise, ID  83713

           Itron Manufacturing, Inc.
           2818 N. Sullivan Rd.
           Spokane, WA. 99216-1897
           P.O. Box 15288 Spokane, WA. 99215-5288

           Itron Minnesota, Inc.
           2401 North State Street
           Waseca, MN  56093






                                                            Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT                                 

         We consent to the incorporation by reference in Registration Statement
Nos.  333-41573 and 333-28451,  of Itron,  Inc. and subsidiaries on Form S-3 and
Registration  Statement  Nos.  333-28933  and  333-04685,  of  Itron,  Inc.  and
subsidiaries on Form S-8 of our report dated February 6, 1998, appearing in this
Annual Report on Form 10-K of Itron, Inc. for the year ended December 31, 1997.

DELOITTE & TOUCHE

Seattle, Washington
March 27, 1998






<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) ANNUAL
CONSOLIDATED FINANCIAL STATEMENTS OF ITRON, INC. AND IS QUALIFIED IN ITS
ENTRIETY BY REFERENCE TO SUCH (B) CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
       
<S>                           <C>                    
<PERIOD-TYPE>                   YEAR                
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               DEC-31-1997
<CASH>                                            3023       
<SECURITIES>                                         0  
<RECEIVABLES>                                    62194   
<ALLOWANCES>                                      (752)
<INVENTORY>                                      31985         
<CURRENT-ASSETS>                                112451         
<PP&E>                                          129873          
<DEPRECIATION>                                  (37958)          
<TOTAL-ASSETS>                                  240211        
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<EPS-PRIMARY>                                      .07                   
<EPS-DILUTED>                                      .07 
          

</TABLE>