================================================================================

                              UNITED STATES
                   SECURITIES AND EXCHANGE COMMISSION
                         Washington, D.C. 20549

                                FORM 10-Q

(mark one)
|X|      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                           EXCHANGE ACT OF 1934

               For the quarterly period ended June 30, 2000

                                   OR

|_|      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF 
         THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                     For the transition period from to

                       Commission file number 0-22418


                                ITRON, INC.
              (Exact name of registrant as specified in its charter)

      Washington                                      91-1011792
 (State of Incorporation)                (I.R.S. Employer Identification Number)


                          2818 North Sullivan Road
                       Spokane, Washington 99216-1897
                                (509) 924-9900
    (Address and telephone number of registrant's principal executive offices)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes__X___ No_____

As of July 31, 2000,  there were  outstanding  15,242,615  shares of the
registrant's  common stock, no par value,  which is the only class of common
or voting stock of the registrant.


================================================================================




<PAGE>




                                 Itron, Inc.

                              Table of Contents



                                                                            Page



Part 1: FINANCIAL INFORMATION


         Item 1: Financial Statements (Unaudited)
                  Consolidated Statements of Operations                        1
                  Consolidated Balance Sheets                                  2
                  Consolidated Statements of Cash Flows                        3


                  Notes to Consolidated Financial Statements
                           Note 1: Basis of Presentation                       4
                           Note 2: Earnings Per Share and Capital Structure    4
                           Note 3: Restructuring                               4
                           Note 4: Balance Sheet Components                    5
                           Note 5: Segment Information                         5
                           Note 6: Contingencies                               6


 
        Item 2: Management's Discussion and Analysis of Financial Condition   
                  and Results of Operations 7-10
                           Revenues                                            7
                           Gross Margin                                        8
                           Operating Expense                                   9
                           Other Income                                        9
                           Income Tax                                         10
                           Extraordinary Item                                 10
                           Cash Flow                                          10

Part 2: Other Information


         Item 1: Legal Proceedings                                            11

         Item 4:  Submission of matters to a vote of security holders         12

         Item 6: Exhibits and Reports on Form 8-K                             12

         Signature                                                            13




<PAGE>



                                        Part 1: Financial Information


Item 1:  Financial Statements


<TABLE>

                                  ITRON, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (Unaudited, in thousands, except per share data)

<CAPTION>

                                                     Three months ended June 30,       Six months ended June 30,
======================================================================================================================
Revenues                                              2000              1999             2000              1999
<S>                                               <C>               <C>              <C>              <C> 
                                                   ------------     -------------    -------------     ------------
   Sales                                              $ 34,706         $ 37,588          $ 70,372         $ 76,797
   Service                                              10,108           13,633            22,100           26,369
                                                   -------------    -------------    --------------    -------------
   Total revenues                                       44,814           51,221            92,472          103,166
Cost of revenues
   Sales                                                21,332           23,593            42,222           47,830
   Service                                               6,309           10,910            15,001           19,954
                                                   -------------    -------------    --------------    -------------
   Total cost of revenues                               27,641           34,503            57,223           67,784
                                                   -------------    -------------    --------------    -------------

Gross profit                                            17,173           16,718            35,249           35,382

Operating expenses
   Sales and marketing                                   5,104            6,577            10,223           12,375
   Product development                                   5,306            6,953            11,482           13,555
   General and administrative                            4,167            3,362             8,683            6,387
   Amortization of intangibles                             465              490               931              980
   Restructuring charges                                     -                -             (185)            1,121
                                                   -------------    -------------    --------------    -------------
   Total operating expenses                             15,042           17,382            31,134           34,418
                                                   -------------    -------------    --------------    -------------
 Operating income (loss)                                  2,131            (664)             4,115              964

Other income (expense)
   Equity in affiliates                                    248            (146)               755            (311)
   Interest, net                                         (974)          (1,530)           (2,541)          (3,405)
   Other                                                     1               87               342              107
                                                   -------------    -------------    --------------    -------------
   Total other income (expense)                          (725)          (1,589)           (1,444)          (3,609)

Income (loss) before income taxes and
     extraordinary item                                  1,406          (2,253)             2,671          (2,645)
Income tax (provision) benefit                           (530)              670           (1,010)              830
                                                   -------------    -------------    --------------    -------------

Income (loss) before extraordinary item                    876          (1,583)             1,661          (1,815)
   Extraordinary gain on early retirement of
     debt, net of income taxes of $570 and $1,970            -                -             1,047            3,660
                                                   -------------    -------------    --------------    -------------
Net income (loss)                                       $  876        $ (1,583)           $ 2,708         $  1,845
                                                   -------------    -------------    --------------    -------------


Earnings per share
Basic and diluted
   Income (loss) before extraordinary item             $  0.06        $  (0.11)           $  0.11         $ (0.12)
   Extraordinary item                                        -                -              0.07             0.25
                                                   -------------    -------------    --------------    -------------
   Net income (loss) share                             $  0.06         $ (0.11)           $  0.18          $  0.12
</TABLE>






The accompanying notes are an integral part of these financial statements.



<PAGE>

<TABLE>



                                                 ITRON, INC.
                                         CONSOLIDATED BALANCE SHEETS
                                          (Unaudited, in thousands)
<CAPTION>
                                                                         June 30,          December 31,
==========================================================================================================
                                                                           2000                1999
  --------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                 <C>    
ASSETS
  Current assets
     Cash and cash equivalents                                               $  30,703           $  1,538
     Accounts receivable, net                                                   35,814             46,561
     Current portion of long-term contracts receivable                           2,246              2,579
     Inventories, net                                                           16,373             15,300
     Equipment held for sale, net                                                    -             32,750
     Deferred income tax asset                                                   6,532              8,016
     Other                                                                         717              1,340
                                                                    -------------------  -----------------
     Total current assets                                                       92,385            108,084
                                                                    -------------------  -----------------

  Property, plant and equipment, net                                            28,939             31,627
  Equipment used in outsourcing, net                                             8,762              5,951
  Intangible assets, net                                                        14,005             15,196
  Deferred income tax asset                                                     25,726             26,922
  Long-term contracts receivable                                                 3,811              1,813
  Other                                                                          3,167              2,486
                                                                    -------------------  -----------------

  Total assets                                                               $ 176,795          $ 192,079
                                                                    -------------------  -----------------

  LIABILITIES AND SHAREHOLDERS' EQUITY
  Current liabilities
     Short-term borrowings                                                   $       -          $   3,646
     Accounts payable and accrued expenses                                      32,121             35,369
     Wages and benefits payable                                                  8,896             16,396
     Deferred revenue                                                            7,476              8,413
                                                                    -------------------  -----------------
     Total current liabilities                                                  48,493             63,824
                                                                    -------------------  -----------------

  Convertible subordinated debt                                                 53,459             57,234
  Mortgage notes and leases payable                                              5,975              6,280
  Project financing                                                              6,949              7,216
  Warranty and other obligations                                                10,822             10,000
                                                                    -------------------  -----------------
     Total liabilities                                                         125,698            144,554
                                                                    -------------------  -----------------

  Shareholders' equity
     Common stock                                                              108,732            107,603
     Retained deficit                                                         (55,798)           (58,506)
     Accumulated other comprehensive income                                    (1,837)            (1,572)
                                                                    -------------------  -----------------
     Total shareholders' equity                                                 51,097             47,525
                                                                    -------------------  -----------------
  Total liabilities and shareholders' equity                                 $ 176,795          $ 192,079
                                                                    -------------------  -----------------
</TABLE>



The accompanying notes are an integral part of these financial statements.



<PAGE>

<TABLE>



                                                  ITRON, INC.
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                           (Unaudited, in thousands)

 <CAPTION>                                                                                Six months ended June 30,
===============================================================================================================
                                                                                 2000                   1999
---------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                 <C>

OPERATING ACTIVITIES
Net income                                                                     $  2,708             $  1,845
Noncash charges (credits) to income:
Depreciation and amortization                                                     7,133                9,347
Deferred income tax provision (benefit)                                           2,110                (841)
Equity in affiliates, net                                                         (564)                  311
Extraordinary gain on early extinguishment of debt, net of taxes                (1,047)              (3,660)
Changes in operating accounts:
    Accounts receivable                                                          10,988               15,960
    Inventories                                                                 (1,073)                  326
    Accounts payable and accrued expenses                                       (2,063)              (3,152)
    Wages and benefits payable                                                  (7,500)                  773
    Long-term contracts receivable                                              (1,665)              (4,570)
    Deferred revenue                                                              (937)              (3,623)
    Other, net                                                                    (475)                  251
                                                                       --------------------    -----------------
Cash provided by operating activities                                             7,615               12,967
                                                                       --------------------    -----------------

INVESTING ACTIVITIES
Acquisition of property, plant and equipment                                    (2,490)              (3,331)
Equipment used in outsourcing                                                   (3,074)              (4,751)
Proceeds from sale of equipment used in outsourcing                              32,690                    -
Proceeds from sale of business interest                                             431                    -
Other, net                                                                        (739)                  153
                                                                       -------------------    ------------------
Cash provided (used) by investing activities                                     26,818              (7,929)
                                                                       -------------------    ------------------

FINANCING ACTIVITIES
Change in short-term borrowings, net                                            (3,646)              (5,176)
Payments on project financing                                                     (267)                (248)
Issuance of common stock                                                          1,129                  744
Purchase and retirement of subordinated debt                                    (2,098)                    -
Other, net                                                                        (386)                (213)
                                                                       -------------------    ------------------
Cash provided (used) by financing activities                                    (5,268)              (4,893)

Increase in cash and cash equivalents                                            29,165                  145
Cash and cash equivalents at beginning of period                                  1,538                2,743
                                                                       -------------------    ------------------
Cash and cash equivalents at end of period                                     $ 30,703              $ 2,888
                                                                       -------------------    ------------------
</TABLE>







The accompanying notes are an integral part of these financial statements.



<PAGE>




                                   ITRON, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


Note 1:  Basis of Presentation

The consolidated  financial statements presented in this Form 10-Q are unaudited
and reflect,  in the opinion of  management,  all normal  recurring  adjustments
necessary  for a fair  presentation  of  operations  for the three and six-month
periods  ended June 30,  2000.  Certain  information  and  footnote  disclosures
normally included in financial  statements prepared in accordance with generally
accepted  accounting  principles have been condensed or omitted  pursuant to the
rules and  regulations  of the  Securities  and  Exchange  Commission  regarding
interim results.  These condensed  consolidated  financial  statements should be
read in conjunction with the audited  consolidated  financial statements and the
notes thereto included in our Form 10-K for the year ended December 31, 1999, as
filed with the Securities and Exchange Commission on March 30, 2000. The results
of operations  for the three and  six-month  periods ended June 30, 2000 are not
necessarily  indicative of the results  expected for the full fiscal year or for
any other fiscal period.

Note 2: Earnings Per Share and Capital Structure

<TABLE>
<CAPTION>

                                                      Three months ended June 30,         Six months ended June 30,
(in thousands)                                              2000             1999              2000             1999
----------------------------------------------        -----------------------------------------------------------------
<S>                                                   <C>              <C>               <C>              <C>   
Weighted average shares outstanding                        15,127           14,807            15,080           14,782
Effect of dilutive securities:
   Stock options                                              211                -               280              556
   Convertible debt                                             -                -                 -                -
                                                      -------------    -------------     -------------    -------------
Weighted average shares outstanding assuming
conversion                                                 15,338           14,807            15,360           15,338
                                                      -------------    -------------     -------------    -------------
</TABLE>



Options to  purchase  common  stock have been  granted at fair  market  value to
directors,  employees  and other key  personnel.  These  options will dilute the
ownership  of our  stock if they are  exercised.  The  dilutive  effect of these
options is included for purposes of calculating diluted earnings per share using
the  "treasury  stock"  method.  We also  have  subordinated  convertible  notes
outstanding. These notes are not included in the above calculation as the shares
are anti-dilutive in all periods when using the "if converted" method.

Note 3: Restructuring

We recorded  charges  totaling $20.6 million in 1998 and 1999 for  restructuring
activities that have improved  efficiencies and reduced costs.  These activities
include workforce  reductions,  the sale or disposition of assets, the write-off
of certain  of our  intangible  assets  and the  closure  and  consolidation  of
facilities.  In 1999, we aggressively  extended our restructuring  activities to
further  reduce  spending  and to realign  the Company  into six  market-focused
business units.

Restructuring  reserves  and  activity  for the first half of 2000 are  detailed
below (in thousands).


<TABLE>
<CAPTION>
                                                          Reserve                                              Reserve
                                          Cash/           Balance          Restructuring                       Balance
                                        Non-Cash          12/31/99             Charge          Activity        6/30/00
                                      -------------    --------------    ------------------   -----------    -----------
<S>                                   <C>              <C>               <C>                  <C>            <C>    

Severance and related charges                Cash            $8,988                  $315        $7,429         $1,874
Asset impairment                         Non-cash             3,600                 (500)         2,620            480
Consolidation of facilities                  Cash             2,981                     -         (108)          3,089
                                                       --------------    ------------------   -----------    -----------
Totals                                                      $15,569                $(185)        $9,941         $5,443
</TABLE>


The reserve  balances for severance and related charges and asset impairment are
expected  to be fully  utilized in 2000.  Facility  consolidation  reserves  are
dependent  on  our  ability  to  sublease   vacant  space,   which  is  under  a
non-cancelable operating lease through 2008.

Note 4:  Balance Sheet Components

<TABLE>
<CAPTION>

                                                                                      June 30,           December 31,
                                                                                        2000                 1999
---------------------------------------------------------------------------------- ---------------- --- ----------------
<S>                                                                                <C>                  <C>
Inventories (in thousands)
  Raw material                                                                             $ 7,807            $ 6,428
  Work in process                                                                              580              1,462
  Finished goods                                                                             6,561              5,702
  Field inventories awaiting installation                                                      473                466
                                                                                   ----------------     --------------
  Total manufacturing inventories                                                           15,421             14,058
  Service inventories                                                                          952              1,242
                                                                                   ----------------     --------------
  Total inventories                                                                        $16,373            $15,300
                                                                                   ----------------     --------------
</TABLE>


Note 5:  Segment Information

Effective  January 2000, we reorganized  internally  around  strategic  business
units  ("SBUs")  focused  on the  customer  segments  that we serve.  These SBUs
include  Electric  Systems,  Natural Gas Systems,  Water & Public Power Systems,
Energy Information Systems,  and International  Systems. As indicated below, our
new business SBU has been merged with Water & Public Power.

Sales for these SBUs include hardware, custom and licensed software, consulting,
project management,  and installation and support  activities.  Service revenues
are derived from post-sale maintenance support and outsourcing  services,  where
we own and operate,  or simply operate systems for a periodic fee.  Intersegment
revenues are immaterial.

Management  intends to review the operating  results of each segment both before
and after  allocations  of  corporate  expenses.  As of the date of this report,
allocations  of such  expenses  have not  been  determined.  It is  management's
intention to finalize  these  allocations  during 2000.  Allocation  methods may
change over time.  Certain  amounts in the 1999 financial  statements  have been
reclassified to conform with the 2000 presentation.

Segment  revenues  and gross  profits for the  comparable  quarters are detailed
below.  In the first quarter Form 10-Q,  information was reported in the Segment
Information   footnote  and   Management's   Discussion  and  Analysis  as  "New
Businesses" and "Other"  respectively.  This  information is now included in the
Water & Public Power segment.



<PAGE>

<TABLE>
<CAPTION>



                                                                                      June 30,             June 30,
                                                                                        2000                 1999
---------------------------------------------------------------------------------- ---------------- --- ---------------
<S>                                                                                   <C>                   <C>
(in thousands)
Revenues
   Electric                                                                            $12,780               $12,506
   Natural Gas                                                                           9,671                16,915
   Water & Public Power                                                                 13,884                13,901
   Energy Information Systems                                                            5,835                 3,327
   International                                                                         2,644                 4,572
                                                                              -------------------    ------------------
Total revenues                                                                          44,814                51,221
                                                                              -------------------    ------------------
Gross profit
   Electric                                                                              4,422                 (958)
   Natural Gas                                                                           4,254                 9,260
   Water & Public Power                                                                  4,314                 5,284
   Energy Information Systems                                                            3,003                 1,777
   International                                                                         1,180                 1,355
                                                                              -------------------    ------------------
Total gross profit                                                                      17,173                16,718
                                                                              -------------------    ------------------
CORPORATE ITEMS

Operating expenses
   Sales and marketing                                                                   5,104                 6,577
   Product development                                                                   5,306                 6,953
   General and administrative                                                            4,167                 3,362
   Amortization of intangibles                                                             465                   490
   Restructuring charges                                                                     -                     -
                                                                              -------------------    ------------------
Total operating expenses                                                                15,042                17,382

Operating income (loss)                                                                  2,131                 (664)

Other income (expense)
   Equity in affiliates                                                                    248                 (146)
   Interest, net                                                                         (974)               (1,530)
   Other                                                                                     1                    87
                                                                              -------------------    ------------------
   Total other income (expense)                                                          (725)               (1,589)
                                                                              -------------------    ------------------
Income (loss) before income taxes and extraordinary item                                $1,406             $ (2,253)
                                                                              ===================    ==================
</TABLE>


Note 6:  Contingencies

We are a party to various lawsuits and claims,  both as plaintiff and defendant,
and have contingent  liabilities  arising from the conduct of business,  none of
which,  in the opinion of management,  is expected to have a material  effect on
our financial  position or results of  operations.  We believe that we have made
adequate provisions for such contingent liabilities.





<PAGE>



I
tem 2:   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS

OVERVIEW

We are a leading global provider of integrated  systems  solutions for utilities
and other customers to collect,  communicate,  analyze,  and manage  information
about energy and water usage. We design, develop,  manufacture,  market, install
and service hardware,  software and integrated  systems that enable customers to
obtain, analyze and use meter data.

Our   solutions   integrate   a  broad  array  of  meter   modules,   radio  and
telephone-based  communications  systems,  and  data  management,  delivery  and
storage  applications.  In addition,  we have handheld  computers and supporting
products to record visually obtained meter data.

Sales  include  hardware,  custom and  licensed  software,  consulting,  project
management  and  installation  and sales support  activities.  Services  include
post-sale maintenance support and outsourcing services where we own and operate,
or simply operate systems for a periodic fee.

We  currently  derive the  majority of our  revenues  from sales of products and
services to utilities;  however,  our business may increasingly consist of sales
to  other  energy  and  water  industry  participants  such  as  energy  service
providers,  end user  customers,  wholesale power markets,  and others.  We have
experienced  variability of operating  results on both an annual and a quarterly
basis due  primarily to utility  purchasing  patterns  and delays of  purchasing
decisions.  In recent years these delays have generally been a result of changes
or potential  changes to federal and state  regulation  of the electric  utility
industry and mergers and acquisitions in the utility industry.

<TABLE>

RESULTS OF OPERATIONS
<CAPTION>

Revenues                                       Three months ended June 30,             Six months ended June 30,
(in millions)                                          Increase                                 Increase
                                          2000        (Decrease)       1999        2000        (Decrease)        1999
                                          ----        ----------       ----        ----        ----------        ----
<S>                                      <C>            <C>           <C>         <C>           <C>            <C>   
Electric                                  $ 12.8         2%            $ 12.5      $ 28.2        (10%)           $ 31.3
Natural Gas                                  9.7        (43%)            16.9        22.0        (14%)             25.7
Water & Public Power                        13.9         0%              13.9        25.5        (19%)             31.6
Energy Information Systems                   5.8         76%              3.3        11.1         59%               7.0
International                                2.6        (43%)             4.6         5.7        (25%)              7.6
                                         --------     ----------      --------    --------     ---------       ---------
Total revenues                            $ 44.8        (13%)          $ 51.2      $ 92.5        (10%)         $103.2
                                         ========     ==========      ========    ========     =========       =========
</TABLE>



Total  revenues  decreased  13% in the second  quarter of 2000  compared  to the
second quarter of 1999.

Electric  segment revenues in the second quarter were  approximately  level with
the prior year's quarter.  Year-to-date Electric revenues were down 10% from the
same period in 1999. Revenues for the three months and the six months ended June
30, 1999 in this  segment  were net of a $4.2  million  price  concession  for a
network  installation.  Second  quarter  outsourcing  revenues  in the  Electric
segment  were $1.2  million  compared  to $5.1  million  in last  year's  second
quarter.  Outsourcing  revenues decreased  year-over-year due to the sale of our
network  installation  at  Duquesne  in the first  quarter of 2000.  This year's
outsourcing  revenues  are for a mobile AMR  application  that is expected to be
fully  installed by the first quarter of 2001.  Net of the price  concession and
outsourcing  activities,  revenues for the three months and the six months ended
June 30, 2000 were comparable to the same periods in 1999.

Revenues in the Natural Gas segment  decreased 43% in the second quarter of 2000
compared to the second  quarter of 1999 largely due to unusually  high shipments
in 1999 to one customer with a large multi-year contract.


<PAGE>
Second  quarter  revenues  for the Water & Public  Power  ("WPP")  segment  were
relatively level in 2000 compared with the comparable quarter in 1999.  Revenues
for the six months  ended June 30, 2000 were down 19%  compared to 1999  because
the installation of equipment for two direct sales to large  municipalities  was
substantially  completed  in the second  quarter of 1999.  Sales to an affiliate
have lowered  average  selling  prices  compared with last year.  The subsequent
resale by the affiliate to  end-customers is reported using the equity method of
accounting (see "Other Income/Expense" below).

Revenues in the Energy Information Systems ("EIS") segment increased 76% and 59%
respectively  for the three and  six-month  periods ended June 30, 2000 over the
comparable  periods in 1999. EIS revenues primarily consist of product sales for
commercial  and  industrial  customer  energy  usage,  and product  sales to the
wholesale  energy  market.  EIS  revenues  increased  largely  as  a  result  of
substantial  consulting  and software  customization  activities for a wholesale
energy  settlement  system in Ontario,  Canada.  Revenues from wholesale markets
were $2.1  million in the second  quarter of 2000  compared  to  $500,000 in the
second quarter of 1999.

International  revenues of $2.6  million in the second  quarter of 2000 were 43%
less than the second  quarter of 1999.  The 1999  quarter  included  $700,000 of
revenues from a noncore-business  subsidiary that was sold in January 2000. Most
of the remaining  decrease is due the timing of orders and shipments of handheld
systems to the Asia/Pacific region.

Gross Margin

The following table shows gross margin as a percentage of corresponding  revenue
and the percentage change in gross margin by business segment:

<TABLE>
<CAPTION>
                                             Three months ended June 30,               Six months ended June 30,
                                                       Increase                                 Increase
                                         2000         (Decrease)       1999        2000        (Decrease)       1999
                                         ----         ----------       ----        ----        ----------       ----
<S>                                      <C>          <C>             <C>          <C>         <C>              <C>
Electric                                   35%            43%          (8%)         34%            14%           10%
Natural Gas                                44%          (11%)           55%         45%           (8%)           53%
Water and Public Power                     31%           (7%)           38%         30%           (9%)           39%
Energy Information                         51%           (2%)           53%         50%             9%           59%
International                              45%            15%           30%         46%            16%           30%
                                         -----        ----------       -----       -----        ---------       ----
Total gross margin                         38%             4%           34%         38%             4%           34%
                                         =====        ==========       =====       =====        =========       ====
</TABLE>


Total gross  margin was 38% of revenues in the second  quarter of 2000  compared
with 34% of revenues in the second quarter of 1999.  During the three months and
six months ended June 30, 2000, gross margin benefited from the consolidation of
our high volume manufacturing  operations in Minnesota. In an effort intended to
reduce fixed costs and benefit gross  margin,  the Company also  outsourced  low
volume  manufacturing  and service  repair  operations  to Servatron  during the
second quarter of 2000.  Servatron is an affiliated company formed by a group of
former Company employees (see Exhibit 10.22 in Item 6).

Gross margin for the Electric  segment improved to 35% of revenue in the current
quarter  compared  with (8)% for the  second  quarter  last  year.  Last  year's
negative gross margin was caused by the $4.2 million price concession  discussed
above. The 1999 quarter also included significant outsourcing activities for the
Duquesne  project  which  depressed  the  overall  Electric  gross  margin by 13
percentage points when compared to the 2000 quarter. Year-to-date Electric gross
margins of 34% are much higher  than the prior year gross  margin of 10% for the
same reasons.

Higher material costs and lower production  volume  decreased  Natural Gas gross
margins in the second  quarter and six-month  periods of 2000 as compared to the
similar periods in 1999.

Higher  material  costs and a higher mix of sales through  indirect  channels in
2000 has has resulted in lower gross margins in the WPP segment.




<PAGE>

<TABLE>


Operating Expenses
<CAPTION>
                                               Three months ended June 30,             Six months ended June 30,
(in millions)                                          Increase                                 Increase
                                          2000        (Decrease)       1999        2000        (Decrease)       1999
                                          ----        ----------       ----        ----        ----------       ----
<S>                                      <C>          <C>             <C>        <C>           <C>            <C>   
Sales and marketing                        $ 5.1        (22%)           $ 6.6      $ 10.2        (17%)          $ 12.4
Product development                          5.2        (24%)             6.9        11.5        (15%)            13.5
General and administrative                   4.2         24%              3.4         8.7         36%              6.4
Amortization of intangibles                  0.5        (5%)              0.5         0.9        (5%)              1.0
Restructuring charges                          -         0%                 -       (0.2)       (117%)             1.1
                                         --------     ---------       --------    --------     ----------      --------
Total operating expenses                   $15.0        (13%)           $17.4       $31.1        (10%)           $34.4
                                         ========     =========       ========    ========     ==========      ========
</TABLE>


As discussed  earlier,  effective  January 1, 2000 we reorganized into strategic
business units. With the reorganization, certain personnel related to management
and sales  support that had been  classified  as sales and marketing in previous
years are now classified as general and administrative.  Approximately  one-half
of  the   year-to-date   decrease  in  sales  and   marketing  is  due  to  this
reclassification.   The   remaining   decrease   results  from  a  reduction  in
international staff, fewer domestic salespeople for the comparative periods, and
lower commission expense from lower revenues.

The decrease in product development  expenses in 2000 compared with 1999 results
primarily  from  restructuring  measures in 1999 which  included  the closure of
several product development locations and associated staff reductions.

The  increased  general and  administrative  expenses in 2000 compared with 1999
result from: the  reclassification of personnel previously included in sales and
marketing; expenses for executive recruiting and relocation; and increased legal
and  consulting  costs.  Higher  legal costs in the current  year are mostly the
result of increased patent and FCC licensing activity.

Amortization  of intangibles  remained  relatively  constant for the comparative
periods.

Restructuring  charges in the first half of 2000 were  slightly  negative due to
the partial  reversal of expected  losses for  equipment to be sold or disposed.
Restructuring measures are substantially complete.

<TABLE>

Other Income (Expense)
<CAPTION>
                                               Three months ended June 30,             Six months ended June 30,
(in millions)                                          Increase                                 Increase
                                          2000        (Decrease)       1999        2000        (Decrease)       1999
                                          ----        ----------       ----        ----        ----------       ----
<S>                                       <C>         <C>             <C>          <C>         <C>             <C>   
Equity in affiliates                       $ 0.3        270%          $(0.2)        $ 0.8        343%           $(0.3)
Interest, net                              (1.0)         36%            (1.5)       (2.5)         25%            (3.4)
Other                                          -       (100%)             0.1         0.3        220%              0.1
                                         --------     ----------      --------    --------     ---------      --------
Total other income (expense)              $(0.7)         54%          $(1.6)       $(1.4)         60%           $(3.6)
                                         ========     ==========      ========    ========     =========       ========
</TABLE>


We have a 50% ownership  interest in an  affiliate,  which acts as a distributor
for our  products  in  specific  regions of the U.S.  Equity in  affiliates  was
$248,000 in the second quarter of 2000 due to increased sales by this affiliate.
Year-to-date  equity in  affiliates  includes a $150,000 net gain on the sale of
our interest in another partially-owned domestic affiliate.

Net interest  expense  decreased  36% from the similar  quarter last year due to
lower bank borrowings,  a reduction of subordinated  debt  outstanding,  and net
invested  cash  during the current  quarter.  We  received  approximately  $32.7
million from the sale of our outsourcing  installation at Duquesne  through June
of this  year and used the  proceeds  to pay down  short-term  bank  borrowings.
Excess cash is invested in short-term investment grade securities. The reduction
in subordinated  debt resulted from a debt  repurchase  transaction in the first
quarter of 2000. The gain on the early retirement of subordinated  debt for each
period is reflected as an extraordinary item on the statement of operations.




<PAGE>


Income Taxes

The  effective  income  tax  rate  was  approximately  38% for  the  comparative
quarters.  Our effective  income tax rate can vary from period to period because
of  fluctuations  in  foreign  operating  results,   changes  in  the  valuation
allowances for deferred tax assets, new or revised tax legislation,  and changes
in the level of business performed in differing tax jurisdictions.

Extraordinary Item - Gain on Early Retirement of Debt

In the first quarter of 2000 we  repurchased  $3.8 million  principal  amount of
subordinated debt for $2.1 million in cash. The gain on this early retirement of
debt,  net of expenses  and income  taxes,  was $1.0  million.  In March 1999 we
completed  an  offer  to  exchange  $15.8  million   principal   amount  of  new
subordinated  debt for $22.0 million  principal amount of original  subordinated
debt. The after-tax  effect of the transaction,  net of expenses,  was a gain of
$3.7 million.

<TABLE>

FINANCIAL CONDITION
<CAPTION>

                                               Three months ended June 30,             Six months ended June 30,
(in millions)                                          Increase                                 Increase
Cash flow information:                    2000        (Decrease)       1999        2000        (Decrease)       1999
                                          ----        ----------       ----        ----        ----------       ----
<S>                                       <C>         <C>             <C>         <C>          <C>            <C>   
   Operating activities                    $ 0.4        (94%)           $ 6.9       $ 7.6        (41%)          $ 12.9
   Investing activities                    (2.1)         53%            (4.5)        26.8        439%            (7.9)
   Financing activities                    (3.6)       (157%)           (1.4)       (5.2)        (6%)            (4.9)
                                         --------     ---------       --------    --------     ----------      --------
   Increase (decrease) in cash           $ (5.3)       (630%)           $ 1.0      $ 29.2        293%            $ 0.1
                                         ========     =========       ========    ========     ==========      ========
</TABLE>


Year-to-date  cash flow from operating  activities was $7.6 million through June
of 2000  compared  to  $12.9  million  in the same  period  last  year.  We used
approximately $2.6 million and $7.5 million of cash for involuntary  termination
benefits and other  restructuring  related  costs during the second  quarter and
six-month  periods  ending June 30,  2000,  respectively.  Additional  severance
payments of  approximately  $1.9  million  will be made in the third  quarter of
2000.

On March  31,  2000 we  received  $32.0  million  from  the sale of our  network
installation  at Duquesne  Light  Company to an affiliate of Duquesne,  which is
reflected  in  investing  activities.  In the  second  quarter we  collected  an
additional  $700,000  in sales  proceeds  which had been held in escrow  pending
certain  post-closing  items. Other investing  activities used $6 million in the
first half of 2000,  consisting of normal capital  additions and the acquisition
of equipment for our outsourcing contract with Southern California Edison. Total
capital additions for 2000, including  outsourcing equipment  requirements,  are
expected to be approximately $10 million.

During the first half of 2000,  financing  activities used $5.2 million in cash,
$3.6 million of which was used to pay down  short-term  bank borrowings and $2.1
million was used for the repurchase and retirement of subordinated debt.

Management believes that existing cash resources and available  borrowings under
the credit  facility are more than adequate to meet the Company's  needs for the
remainder of 2000.

Certain Forward-Looking Statements
  When included in this discussion,  the words "expects," "intends," "believes,"
  "anticipates,"  "plans,"  "projects" and "estimates," and 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 laws or regulations (including FCC licensing actions), the
  rate of  customer  demand  for our  products,  the  effectiveness  of our cost
  reductions programs,  our ability to effect additional  initiatives for growth
  and  profitability,  delays or  difficulties  in introducing  new products and
  acceptance of those products,  ability to obtain project  financing in amounts
  necessary to fund future  outsourcing  agreements,  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 "FCC  Regulations"
  section in this  document  and "Certain  Risk  Factors"  and  "Description  of
  Business - FCC  Regulation"  included in the  Company's  Annual Report on Form
  10-K for the year ended December 31, 1999.  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>
 
                           Part 2: Other Information


Item 1:  Legal Proceedings

         Benghiat Patent Litigation

         On April 3, 1999,  the Company  served Ralph  Benghiat,  an individual,
         with a complaint seeking a declaratory judgement that a patent owned by
         Benghiat is invalid and not infringed by Itron's handheld meter reading
         devices. Benghiat has filed a counterclaim alleging patent infringement
         by the same  devices.  Both  lawsuits  were filed in the United  States
         District Court for the District of Minnesota.  The lawsuit is currently
         in the  motion  and  discovery  stage  with a  tentative  trial date in
         October 2000. Because of pending summary judgement  motions,  the trial
         date will probably be rescheduled in 2001.  While the Company  believes
         that its products do not infringe the Benghiat patent,  there can be no
         assurance  that it will  prevail  in  this  matter,  or that if it does
         prevail,  that legal costs  incurred in connection  therewith  will not
         have a material adverse effect on its financial condition.

         FCC Regulation

         In 1994 the  Company  was  issued a  non-exclusive  nationwide  Federal
         Communications Commission (FCC) license to operate in the 1427-1432 MHz
         band. With the exception of meter modules that operate in MAS bands and
         the 910-920 MHz band,  our  network  products  operate in parts of this
         band.  At the time our license was issued,  the  1427-1432 MHz band was
         allocated primarily for use by the federal government,  which consented
         to our use of the band on a secondary,  non-interference basis. Current
         government  use  of  the  band  is  limited  to a  discrete  number  of
         well-defined  locations,  and we did not  expect  the fact that we were
         secondary to federal government  operations to have either a present or
         future material impact on our business.

         The  1427-1432  MHz band is  among  235 MHz of  spectrum  that has been
         earmarked for  reallocation  from federal  government  users to private
         sector  users (to be  licensed  by the  FCC).  The band is  subject  to
         continuing  federal government use in specified areas through 2004. The
         FCC  initially  decided to include the 1427-1432 MHz band in a spectrum
         reserve that would not be reallocated  and assigned until 2006. In July
         1999,  however,  the FCC  proposed to  accelerate  this  timetable  and
         allocate the upper  portion of the band to wireless  medical  telemetry
         operations.  We filed a petition with the FCC for rulemaking  proposing
         instead  that the band be allocated  for  automatic  meter  reading and
         utility telemetry operations.

         On June 8, 2000, the FCC issued a Report and Order allocating three MHz
         of the band  (1429-1432MHz)  on a  primary  basis  for use by  wireless
         medical telemetry.  Use of the remaining two MHz (1427-1429MHz) will be
         the subject of further rulemaking  proceedings by the FCC, which may or
         may not grant Itron the right to use that band. Until that time, we may
         continue  operating in the  1427-1429MHz  band. We have had discussions
         with the FCC and the medical telemetry community concerning the sharing
         of the entire five MHz of the band.  In  addition,  we are working with
         our  congressional  delegations  in  Washington,  Minnesota  and  North
         Carolina to provide a  legislative  solution that would permit Itron to
         use the entire 5 MHz of the band on a  co-primary  basis with  wireless
         medical  telemetry.  While  we  believe  we will  reach  an  acceptable
         solution for use of the band, there can be no assurance that there will
         be an allocation for the band that is compatible with Itron's business.

         If we are not  successful in our efforts to continue  operations in the
         1427-1432  MHz band,  we believe  that  current  installations  will be
         permitted to continue under a grandfathering provision.  However, there
         can be no assurance that such  grandfathering will be permitted or that
         we will have any rights  whatsoever in the band after final  rulemaking
         by the FCC. In such event,  our network  products  (other than modules)
         would  have  to be  redesigned  to  operate  at a  different  frequency
         spectrum,  which could have a material  adverse effect on our business.
         For  further  discussion,   please  see  "FCC  Regulation  Intellectual
         Property" and "Certain Risk Factors -  Availability  and  Regulation of
         Radio Spectrum" in our Annual Report on Form 10K on file with the SEC.




<PAGE>


         CellNet Patent Litigation

         On  October 3,  1996,  the  Company  filed a patent  infringement  suit
         against CellNet Data Systems  ("CellNet") in the United States District
         Court for the District of  Minnesota.  The suit alleges that CellNet is
         infringing on its 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. On January 28, 1999, the
         Court  issued its  decision  on motions  and cross  motions for summary
         judgement that had previously been filed by the Company and CellNet. In
         its  decision,  the Court  held the  Company's  patent  valid,  but not
         infringed.  The Company  believes  the  non-infringement  decision  was
         incorrect and has filed an appeal.  The litigation  stay resulting from
         CellNet's filing for bankruptcy  protection has been lifted. All briefs
         have been filed and oral arguments are expected this October. There can
         be no assurance that the Company will prevail on appeal in this action.

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


Item 4:  Submission of Matters to a Vote of Security Holders

         The Company held its annual meeting of  shareholders  on June 28, 2000.
         Two directors were elected for a term of one year until 2001,  Michael 
         J. Chesser and LeRoy D. Nosbaum.  Three directors were elected for a
         term of  three  years,  Michael  B.  Bracy,  Mary Ann  Peters,  and  
         Graham  M.  Wilson.  Ted C. DeMerritt,  Jon E. Eliassen,  Paul A. 
         Redmond and S. Edward White  continued their terms as directors.

         The following summarizes all matters voted on at the meeting:

<TABLE>
<CAPTION>

                  Matter 1.  Election of Directors:
                    Nominee                               In Favor                   Withheld
                  --------------------------------------- -------------------------- ---------------------------
                  <S>                                     <C>                        <C>    
                  Michael J. Chesser                      14,245,560                 154,181
                  LeRoy D. Nosbaum                        14,270,255                 129,486
                  Michael B. Bracy                        14,248,880                 150,861
                  Mary Ann Peters                         14,235,864                 163,877
                  Graham M. Wilson                        14,251,711                 148,030
                  --------------------------------------- -------------------------- ---------------------------
</TABLE>


<TABLE>
<CAPTION>


                  Matter 2.  Approval of the Company's 2000 Stock Incentive Compensation Plan:
                  For                    Against              Abstain                   Broker Non-Votes
                  ---------------------- -------------------- ------------------------- ------------------------
                  <S>                    <C>                  <C>                       <C>                            
                  8,282,903              2,122,349            35,971                    3,968,518
                  ---------------------- -------------------- ------------------------- ------------------------
</TABLE>



Item 6:  Exhibits and Reports on Form 8-K

a)       Exhibits

         Exhibit 10.21 - Form of Change of Control Agreement between Registrant
                         and executive officers Tim Gelvin and Bob Whitney.
                        (A) (10.1)

         Exhibit 10.22 - Contribution Agreement between Itron, Inc. and 
                         Servatron, Inc. dated May 15, 2000.

         Exhibit 10.23 - Credit Agreement between Itron, Inc. and Servatron,
                         Inc. dated June 22, 2000.

         Exhibit 27 - Financial Data Schedule

-------------------------------------------------------------------------------
(A) Incorporated by reference to designated  exhibit included in the
    Company's 1999 Annual Report on Form 10-K dated March 26, 2000.




<PAGE>




                                    SIGNATURE


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


                                               ITRON, INC.
                                              (Registrant)



                                           By:      /s/ David G Remington
                                                    David G. Remington
                                                    Vice President and
                                                    Chief Financial Officer
                                                    (Authorized Officer and
                                                    Principal Financial Officer)


Date:  August 14, 2000















                             CONTRIBUTION AGREEMENT

                                     BETWEEN

                                 SERVATRON, INC.

                                       AND

                                   ITRON, INC.





                                  May 15, 2000










<PAGE>


                                               

                                               TABLE OF CONTENTS


                                                                            Page

ARTICLE I
SALE OF ASSETS AND CLOSING.....................................................1

         1.1      Assets Transferred...........................................1
         1.2      Liabilities..................................................1
         1.3      Purchase Price; Allocation...................................2
         1.4      Closing......................................................2
         1.5      Further Assurances; Post-Closing Cooperation.................2

ARTICLE II
REPRESENTATIONS AND WARRANTIES OF ITRON........................................3

         2.1      Organization of ITRON........................................3
         2.2      Authority; Binding Nature of Agreement.......................3
         2.3      Noncontravention.............................................4
         2.4      Books and Records.................................... .......4
         2.5      No Undisclosed Liabilities...................................4
         2.6      No Warranties................................................4
         2.7      Brokers............................................... ......4
         2.8      Product Liability............................................4
         2.9      Transition Benefits..........................................4

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SERVATRON....................................4

         3.1      Organization.................................................4
         3.2      Authority....................................................5
         3.3      Capitalization...............................................5
         3.4      Noncontravention.............................................5
         3.5      Brokers......................................................5
         3.6      Legal Proceedings............................................5
         3.7      Insurance....................................................6
         3.8      Labor Matters................................................6
         3.9      Environmental, Health, and Safety Matters....................6
         3.10     Employee Benefits............................................6
         3.11     Tax Matters..................................................6
         3.12     Intellectual Property........................................7

ARTICLE IV
COVENANTS OF ITRON.............................................................7

         4.1      Regulatory and Other Approvals...............................7
         4.2      Securities Law Matters.......................................8
         4.3      Notice and Cure..............................................8
         4.4      Fulfillment of Conditions....................................8




<PAGE>



ARTICLE V
COVENANTS OF SERVATRON.........................................................8

         5.1      Regulatory and Other Approvals...............................8
         5.2      Notice and Cure..............................................9
         5.3      Fulfillment of Conditions....................................9

ARTICLE VI
CONDITIONS TO OBLIGATIONS OF SERVATRON.........................................9

         6.1      Representations
 and Warranties...............................9
         6.2      Performance.................................................10
         6.3      Closing Certificates........................................10
         6.4      Orders and Laws.............................................10
         6.5      Regulatory Consents and Approvals...........................10
         6.6      Opinion of Counsel..........................................10
         6.7      Shareholders' Agreement.....................................10
         6.8      Deliveries..................................................10
         6.9      Completion of Due Diligence.................................11
         6.10     Proceedings.................................................11

ARTICLE VII
CONDITIONS TO OBLIGATIONS OF ITRON............................................11

         7.1      Representations and Warranties..............................11
         7.2      Performance.................................................11
         7.3      Closing Certificates........................................11
         7.4      Orders and Laws.............................................11
         7.5      Regulatory Consents and Approvals...........................11
         7.6      Opinion of Counsel..........................................12
         7.7      Shareholders' Agreement.....................................12
         7.8      Completion of Due Diligence.................................12
         7.9      Proceedings.................................................12

ARTICLE VIII
NON-SOLICITATION..............................................................12


ARTICLE IX
SURVIVAL OF REPRESENTATIONS, WARRANTIES,
         COVENANTS AND AGREEMENTS.............................................12


ARTICLE X
INDEMNIFICATION...............................................................13

         10.1     ITRON's Indemnification.....................................13
         10.2     Servatron's Indemnification.................................13
         10.3     Indemnification Procedure...................................13
         10.4     Exclusivity.................................................14

ARTICLE XI
TERMINATION...................................................................14

         11.1     Termination.................................................14
         11.2     Effect of Termination.......................................14

ARTICLE XII
DEFINITIONS...................................................................15

         12.1     Defined Terms...............................................15
         12.2     Construction of Certain Terms and Phrases...................19

ARTICLE XIII
MISCELLANEOUS.................................................................19

         13.1     Notices.....................................................19
         13.2     Entire Agreement............................................20
         13.3     Expenses....................................................20
         13.4     Public Announcements........................................20
         13.5     Confidentiality.............................................21
         13.6     Waiver......................................................21
         13.7     Amendment...................................................21
         13.8     No Third Party Beneficiary..................................21
         13.9     No Assignment; Binding Effect...............................21
         13.10    Headings 22
         13.11    Arbitration.................................................22
         13.12    Invalid Provisions..........................................22
         13.13    Governing Law...............................................22
         13.14    Remedies................................................... 23
         13.15    Attorneys'Fees..............................................23
         13.16    Counterparts................................................23







<PAGE>


                                                    

                         CONTRIBUTION AGREEMENT BETWEEN
                         SERVATRON, INC. AND ITRON, INC.


         THIS  CONTRIBUTION  AGREEMENT,  dated as of May 15,  2000,  is made and
entered  into  by  and  between  SERVATRON,   INC.,  a  Washington   corporation
("Servatron"),  and ITRON, INC., a Washington corporation ("ITRON"). Capitalized
terms not otherwise defined herein have the meanings set forth in Section 12.1.

                                                   RECITALS

         A.       ITRON is engaged in the business of  manufacturing  and 
selling data acquisition and wireless communication equipment for collecting and
 analyzing electric, gas, and water usage data; and

         B.  ITRON  desires  to sell,  transfer  and  assign to  Servatron,  and
Servatron  desires to purchase and acquire from ITRON,  certain of the assets of
ITRON  relating to the  operation  of ITRON's  manufacturing  and depot  service
business.

         C. As  consideration  for  the  sale  of the  manufacturing  equipment,
Servatron has agreed to issue, and ITRON has agreed to accept,  3,000,000 shares
of Servatron's Series A Preferred Stock.

                                    AGREEMENT

         NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration,  the
receipt and sufficiency of which are hereby  acknowledged,  the parties agree as
follows:

ARTICLE I
                           SALE OF ASSETS AND CLOSING

1.1 Assets Transferred.  On the terms and subject to the conditions set forth in
this  Agreement,  ITRON  will sell,  transfer,  convey,  assign  and  deliver to
Servatron,  and Servatron  will  purchase and pay for, at the Closing,  free and
clear of all Liens other than Permitted Liens,  all of ITRON's right,  title and
interest  in, to and under the  assets  of ITRON  listed in  Section  1.1 of the
Disclosure Schedule,  as the same shall exist on the Closing Date (collectively,
the "Assets"):

1.2  Liabilities.  Except for  obligations  assumed in connection with the Depot
Repair Services Agreement and the Manufacturing  Agreement,  Servatron shall not
assume by virtue of this Agreement or the transactions  contemplated hereby, and
shall  have  no  liability  for,  any  Liabilities  of  ITRON.  ITRON  shall  be
responsible  for any and all  Liabilities of any kind,  character or description
arising  from  the  Assets  prior  to  the  Closing  Date.  Servatron  shall  be
responsible  for any and all  Liabilities of any kind,  character or description
arising from the Assets as of the Closing Date.

1.3      Purchase Price; Allocation.

(a) Purchase Price.  The  consideration to be paid by Servatron to ITRON for the
Assets is the issuance to ITRON of 3,000,000 shares of preferred  stock,  $0.001
par value per share, of Servatron ("Servatron Preferred Stock"), which number of
shares shall be equal to thirty  percent (30%) of the fully  diluted  issued and
outstanding  shares  of  common  stock of  Servatron  as of the date of  Closing
(including any issued and outstanding  convertible  preferred stock of Servatron
and any  shares of stock of  Servatron  reserved  or set aside for  issuance  by
Servatron pursuant to stock options, warrants or other rights).

(b)  Servatron  and ITRON agree that the Assets have a fair market  value of One
Million Dollars  ($1,000,000) and agree to allocate that amount to the Assets as
set forth in Disclosure Schedule 1.1.

1.4  Closing.  The  Closing  will take place at the offices of Graham & Dunn PC,
located at 1420 Fifth Avenue, 33rd Floor, Seattle,  Washington 98101, or at such
other  place as  Servatron  and ITRON  mutually  agree,  at 11:00  A.M.  Pacific
Standard  Time, on May 15, 2000, or if the  conditions  specified in Articles VI
and VII are not  satisfied  on the  Closing  Date,  at such later date when such
conditions  are  satisfied,  as agreed to by the parties.  ITRON will assign and
transfer to Servatron  good and valid title in and to the Assets (free and clear
of all Liens by delivery of the duly executed: (a) Bill of Sale substantially in
the form of Exhibit A hereto (the "Bill of Sale"), (b) Manufacturing  Agreement;
(c) Depot Repair Services  Agreement;  (d) Shareholders  Agreement;  (e) Closing
Certificate of ITRON;  (f) Secretary's  Certificate of ITRON; and (g) Opinion of
Counsel from ITRON's  Counsel.  At Closing  Servatron shall deliver to ITRON the
duly  executed:  (a)  original  Stock  Certificate  representing  the  Servatron
Preferred  Stock;  (b)  Manufacturing   Agreement;  (c)  Depot  Repair  Services
Agreement; (d) Shareholders Agreement; (e) Closing Certificate of Servatron; (f)
Secretary's   Certificate  of  Servatron;   and  (g)  Opinion  of  Counsel  from
Servatron's Counsel.

1.5      Further Assurances; Post-Closing Cooperation.

(a) At any time or from time to time after the Closing,  at Servatron's  request
and without further consideration,  ITRON shall execute and deliver to Servatron
such  other   instruments  of  sale,   transfer,   conveyance,   assignment  and
confirmation, provide such materials and information and take such other actions
as  Servatron  may  reasonably   deem  necessary  or  desirable  in  order  more
effectively  to  transfer,  convey  and  assign  to  Servatron,  and to  confirm
Servatron's  title to, all of the Assets,  and, to the full extent  permitted by
Law, to put Servatron in actual  possession and operating  control of the Assets
(the "Assignment  Instruments") and to assist Servatron in exercising all rights
with respect  thereto,  and otherwise to cause ITRON to fulfill its  obligations
under this Agreement and the Operative Agreements.

(b) Following the Closing,  each party will afford the other party,  its counsel
and its  accountants,  during normal  business hours,  reasonable  access to the
books,  records  and other data  relating to the Assets in its  possession  with
respect  to  periods  prior to the  Closing  and the  right to make  copies  and
extracts therefrom, to the extent that such access may be reasonably required by
the requesting party in connection with (i) the preparation of Tax Returns, (ii)
the  determination or enforcement of rights and obligations under this Agreement
or any  Operative  Agreement,  (iii)  compliance  with the  requirements  of any
Governmental or Regulatory  Authority,  (iv) the determination or enforcement of
the rights and  obligations of any  Indemnified  Party or (v) in connection with
any actual or threatened  Action or Proceeding.  Further each party agrees for a
period  extending  six (6)  years  after  the  Closing  Date not to  destroy  or
otherwise  dispose of any such  books,  records and other data unless such party
shall first offer in writing to surrender such books,  records and other data to
the other  party  and such  other  party  shall  not  agree in  writing  to take
possession thereof during the ten (10) day period after such offer is made.

(c) If, in order properly to prepare its Tax Returns, other documents or reports
required  to be  filed  with  Governmental  or  Regulatory  Authorities  or  its
financial  statements or to fulfill its obligations  hereunder,  it is necessary
that a party be  furnished  with  additional  information,  documents or records
relating  to the  Assets  not  referred  to in  paragraph  (c)  above,  and such
information,  documents or records are in the possession or control of the other
party,  such other party shall use its best efforts to furnish or make available
such  information,  documents or records (or copies  thereof) at the recipient's
request,  cost  and  expense.  Any  information  obtained  by  either  party  in
accordance  with this  paragraph  shall be held  confidential  by such  party in
accordance with Section 13.5.

(d)  Notwithstanding  anything to the contrary contained in this Section 1.5, if
the parties are in an adversarial relationship in litigation or arbitration, the
furnishing of information,  documents or records in accordance paragraphs (b) or
(c) of this Section shall be subject to applicable rules relating to discovery.

ARTICLE II
                        REPRESENTATIONS AND WARRANTIES OF
                                      ITRON

ITRON hereby represents and warrants to Servatron as follows:

2.1  Organization of ITRON.  ITRON is a corporation  validly  existing under the
Laws of the State of Washington,  and has full corporate  power and authority to
own, use and lease the Assets.

2.2 Authority;  Binding Nature of Agreement.  ITRON has full corporate power and
authority to execute and deliver this Agreement and the Operative  Agreements to
which it is a party, to perform its obligations  hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby, including,  without
limitation,  to sell and transfer  (pursuant to this Agreement) the Assets.  The
execution and delivery by ITRON of this  Agreement and the Operative  Agreements
to  which  it is a  party,  and the  performance  by  ITRON  of its  obligations
hereunder and thereunder,  have been duly and validly authorized by the Board of
Directors  of ITRON.  This  Agreement  has been duly and  validly  executed  and
delivered  by  ITRON,  and  upon  the  execution  and  delivery  by ITRON of the
Operative  Agreements to which it is a party,  such  Operative  Agreements  will
constitute,  legal, valid and binding  obligations of ITRON enforceable  against
ITRON in accordance with their terms.

2.3 Noncontravention.  The execution,  delivery and performance by ITRON of each
of this Agreement and the consummation of the transactions  contemplated hereby,
do not violate or  contravene  any provision of its articles or  certificate  of
incorporation  or by-laws and do not violate any applicable rule of Governmental
or Regulatory Authorities or result in a breach of or constitute a default under
any contract,  obligation,  indenture or other instrument to which it is a party
or by which it may be bound,  which  violation,  breach or default would have an
ITRON Material Adverse Effect.

2.4 Books and  Records.  Except as set forth in  Section  2.4 of the  Disclosure
Schedule,  none of the Books  and  Records  are  recorded,  stored,  maintained,
operated  or  otherwise  wholly  or partly  dependent  upon or held by any means
(including  any  electronic,   mechanical  or  photographic   process,   whether
computerized or not) which (including all means of access thereto and therefrom)
are  not  under  the  exclusive  ownership  and  direct  control  of one or more
Employees.

2.5 No  Undisclosed  Liabilities.  Except as  disclosed  in  Section  2.5 of the
Disclosure Schedule, ITRON has good, indefeasible, and merchantable title to and
ownership of the Assets free and clear of all Liens. There are no Liabilities or
Liens against, relating to or affecting any of the Assets.

2.6 No  Warranties.  ITRON does not warrant  the  condition  of the Assets.  All
Assets are provided "as is, where is," FOB ITRON's plant.

2.7 Brokers.  All  negotiations  relative to this Agreement and the transactions
contemplated  hereby have been  carried  out by ITRON  directly  with  Servatron
without the  intervention  of any Person on behalf of ITRON in such manner as to
give rise to any valid claim by any Person against Servatron for a finder's fee,
brokerage commission or similar payment.

2.8 Product Liability.  To the Knowledge of ITRON,  ITRON has no Liability,  and
there is no known  basis for any  present or future  action,  suit,  proceeding,
hearing, investigation, charge, complaint, claim, or demand against ITRON giving
rise to any Liability, arising out of any injury to individuals or property as a
result of the ownership,  possession, or use of any product distributed, sold or
delivered by ITRON that was manufactured using the Assets.

2.9 Transition Benefits.  ITRON shall provide those Servatron employees who were
previously  employed by ITRON and who are listed on Schedule 2.9 attached hereto
("Former  Employees")  with the transition  benefits listed on such schedule for
the time periods  specified  thereon.  The Former  Employees and Larry Panattoni
shall not be subject to the non-solicitation provisions of Article VIII.

ARTICLE III
                   REPRESENTATIONS AND WARRANTIES OF SERVATRON

Servatron hereby represents and warrants to ITRON as follows:

3.1 Organization.  Servatron is a corporation validly existing under the Laws of
the State of  Washington.  Servatron has full  corporate  power and authority to
enter into this  Agreement and the Operative  Agreements to which it is a party,
to perform its  obligations  hereunder  and  thereunder  and to  consummate  the
transactions contemplated hereby and thereby.

3.2 Authority.  Servatron has full corporate  power and authority to execute and
deliver this Agreement and the Operative  Agreements to which it is a party,  to
perform  its  obligations   hereunder  and  thereunder  and  to  consummate  the
transactions contemplated hereby and thereby, including,  without limitation, to
sell and transfer  (pursuant to this  Agreement)  the Assets.  The execution and
delivery by Servatron of this Agreement and the Operative Agreements to which it
is a party,  and the performance by Servatron of its  obligations  hereunder and
thereunder,  have been duly and validly  authorized by the Board of Directors of
Servatron  and the  Shareholders.  This  Agreement  has been  duly  and  validly
executed and  delivered by  Servatron,  and upon the  execution  and delivery by
Servatron of the  Operative  Agreements to which it is a party,  such  Operative
Agreements will constitute,  legal,  valid and binding  obligations of Servatron
enforceable against Servatron in accordance with their terms.

3.3 Capitalization. The authorized capital stock of Servatron is as set forth in
Section 3.3 of the  Disclosure  Schedule.  No shares of such  capital  stock are
issued and outstanding except for the shares as identified in Section 3.3 of the
Disclosure  Schedule.  The shares of  capital  stock of  Servatron  are owned of
record and beneficially by the Persons in the number set forth in Section 3.3 of
the Disclosure  Schedule.  All such shares of capital stock are validly  issued,
fully  paid  and  nonassessable.  Except  as set  forth  on  Section  3.3 of the
Disclosure   Schedule,   there  are  no  (i)  securities   convertible  into  or
exchangeable for any of the capital stock or other securities of Servatron, (ii)
options,  warrants or other rights to purchase or subscribe to capital  stock or
other  securities  of  Servatron or  securities  which are  convertible  into or
exchangeable  for  capital  stock  or  other  securities  of  Servatron,   (iii)
contracts, commitments,  agreements,  understandings or arrangements of any kind
relating to the issuance,  sale or transfer of any capital stock or other equity
securities of Servatron,  any such convertible or exchangeable securities or any
such  options,  warrants or other rights or (iv) other Persons with an ownership
interest in the assets, properties or business of Servatron.

3.4  Noncontravention.  The execution,  delivery and performance by Servatron of
each of this Agreement and the  consummation  of the  transactions  contemplated
hereby,  do  not  violate  or  contravene  any  provision  of  its  articles  or
certificate of  incorporation  or by-laws and do not violate any applicable rule
of Governmental or Regulatory Authorities or result in a breach of or constitute
a default under any contract, obligation, indenture or other instrument to which
it is a party or by which it may be bound,  which  violation,  breach or default
would have a Servatron Material Adverse Effect.

3.5 Brokers.  All  negotiations  relative to this Agreement and the transactions
contemplated  hereby have been  carried  out by  Servatron  directly  with ITRON
without the  intervention of any Person on behalf of Servatron in such manner as
to give rise to any valid claim by any Person  against  Servatron for a finder's
fee, brokerage commission or similar payment.

3.6 Legal  Proceedings.  Except as  disclosed  in Section 3.6 of the  Disclosure
Schedule there are no pending or, to Servatron's knowledge,  threatened actions,
claims,  investigations,  suits or  proceedings,  by or before any  governmental
authority,  arbitrator,  court  or  administrative  agency  that  could  have an
Servatron Material Adverse Effect.

3.7 Insurance.  All current policies of insurance of any kind or nature owned by
or issued to Servatron,  including, without limitation, policies of fire, theft,
product liability,  public liability,  property damage, other casualty, employee
fidelity,  workers' compensation and employee health and welfare insurance,  are
in full force and effect and are of a nature and  provide  such  coverage  as is
sufficient and as is customarily carried by companies of its size and character.

3.8 Labor Matters.  Other than any of the following  which in the aggregate have
no reasonable  likelihood of having an Servatron  Material  Adverse Effect:  (i)
there are no  strikes,  work  stoppages,  slowdowns  or  lockouts  pending or to
Servatron's  knowledge  threatened  against or  involving  it; (ii) there are no
arbitrations  or grievances  pending or to its knowledge  threatened  against or
involving it; (iii) there is no organizing  activity  involving it pending or to
its knowledge  threatened  by any labor union or group of employees;  (iv) there
are  no  representation  proceedings  pending  against  it or to  its  knowledge
threatened with the National Labor Relations Board; (v) no labor organization or
group of its employees  has made a pending  demand on it for  recognition;  (vi)
there are no unfair labor practice charges,  grievances or complaints pending or
in process or to its  knowledge  threatened  by or on behalf of any  employee or
group of its  employees;  (vii) there are no  complaints  or charges  against it
pending or to its knowledge  threatened  to be filed with any federal,  state or
local court,  governmental  agency or  arbitrator  based on,  arising out of, in
connection with, or otherwise relating to its employment of any individual;  and
(viii) it is in  material  compliance  with all  applicable  rules and orders of
Governmental  or  Regulatory  Authorities,  and all  orders of any  Governmental
Authority or arbitrator,  relating to the employment of labor including all such
laws relating to wages,  hours,  collective  bargaining,  discrimination,  civil
rights, and the payment of withholding and/or social security and similar taxes.
As of the date hereof Servatron is not a party to, and has no obligations under,
any collective bargaining agreement.

3.9 Environmental, Health, and Safety Matters. Except as disclosed in Disclosure
Schedule  3.9,  Servatron is in  compliance  in all material  respects  with all
Environmental  Laws  applicable to it, other than such  noncompliance  as in the
aggregate will not have an Servatron Material Adverse Effect.  Servatron has not
received  notice that it is the  subject of any  federal or state  investigation
evaluating whether any Remedial Action is needed. There have been no Releases by
Servatron that could  reasonably be expected to result in an Servatron  Material
Adverse Effect.

3.10  Employee  Benefits.  Except as  disclosed  in  Disclosure  Schedule  3.10,
Servatron  is in  compliance  in  all  material  respects  with  the  applicable
provisions  of ERISA.  Servatron  has not  violated  any  provision  of any Plan
maintained or  contributed  to by it in a manner that could result in a Material
Adverse  Effect.  No  "reportable  event" (as  defined in Title IV of ERISA) has
occurred and is continuing with respect to any Plan initiated by it.

3.11 Tax Matters. Except as disclosed in Disclosure Schedule 3.11, Servatron has
filed, or caused to be filed, all federal,  state, local and foreign tax returns
required to be filed by it, and has paid, or caused to be paid, all taxes as are
shown on such returns,  or on any assessment  received by it, to the extent that
such taxes  have  become  due,  except as  otherwise  contested  in good  faith.
Servatron  has set aside proper  amounts on its books,  determined in accordance
with GAAP, for the payment of all taxes for the years that have not been audited
by the respective tax authorities and for taxes being contested by it.

3.12  Intellectual  Property.  Except as disclosed in Disclosure  Schedule 3.12,
Servatron  owns or  licenses  or  otherwise  has the  right to use all  material
licenses,   Permits,   patents,  patent  applications,   trademarks,   trademark
applications,  service marks, trade names,  copyrights,  copyright applications,
franchises,  authorizations  and other  intellectual  property  rights  that are
necessary  for the operation of its  businesses,  without  infringement  upon or
conflict  with the rights of any other  Person with respect  thereto,  including
without  limitation,  all trade names.  No slogan or other  advertising  device,
product, process, method, substance, part or other material now employed, or now
contemplated to be employed,  by Servatron  infringes upon or conflicts with any
rights owned by any other Person,  which  infringement or conflict is reasonably
likely to have an Servatron  Material Adverse Effect, and no claim or litigation
regarding any of the foregoing is pending or, to its knowledge,  threatened, the
existence of which is reasonably  likely to have an Servatron  Material  Adverse
Effect. No patent,  invention,  device,  application,  principle or any statute,
law,  rule,  regulation,  standard  or code is  pending  or,  to its  knowledge,
proposed,  other than those the  consequences  of which in the aggregate have no
reasonable likelihood of having an Servatron Material Adverse Effect.

ARTICLE IV
                               COVENANTS OF ITRON

         ITRON hereby  covenants  and agrees with  Servatron  that, at all times
from and after the date of this Agreement until the Closing and, with respect to
any covenant or agreement by its terms to be performed in whole or in part after
the  Closing,  for the period  specified  herein  or, if no period is  specified
herein, for a period of two (2) years after the Closing,  ITRON will comply with
all covenants and provisions of this Article IV, except to the extent  Servatron
may otherwise consent in writing.

4.1  Regulatory  and  Other  Approvals.  ITRON  will (a)  take all  commercially
reasonable  steps  necessary or desirable,  and proceed  diligently  and in good
faith and use all commercially reasonable efforts, as promptly as practicable to
obtain all  consents,  approvals  or actions of, to make all filings with and to
give all notices to Governmental  or Regulatory  Authorities or any other Person
required of ITRON to consummate the transactions  contemplated hereby and by the
Operative  Agreements,  (b) provide such other information and communications to
such  Governmental  or Regulatory  Authorities  or other Persons as Servatron or
such  Governmental  or Regulatory  Authorities  or other Persons may  reasonably
request in connection  therewith and (c) cooperate with Servatron as promptly as
practicable  in obtaining  all  consents,  approvals  or actions of,  making all
filings with and giving all notices to Governmental or Regulatory Authorities or
other Persons required of Servatron to consummate the transactions  contemplated
hereby and by the Operative  Agreements.  ITRON will provide prompt notification
to Servatron when any such consent,  approval, action, filing or notice referred
to in clause (a) above is obtained,  taken,  made or given,  as applicable,  and
will advise  Servatron  of any  communications  (and,  unless  precluded by Law,
provide  copies  of any  such  communications  that  are in  writing)  with  any
Governmental  or  Regulatory  Authority  or other  Person  regarding  any of the
transactions contemplated by this Agreement or any of the Operative Agreements.

4.2 Securities Law Matters.  ITRON agrees to hold the Servatron  Preferred Stock
received  pursuant to this  Agreement  pursuant  to the terms of the  investment
letter attached hereto as Exhibit B.

4.3 Notice and Cure. ITRON will notify Servatron in writing (where  appropriate,
through  updates to the  Disclosure  Schedule)  of, and  contemporaneously  will
provide  Servatron with true and complete  copies of any and all  information or
documents relating to, and will use all commercially  reasonable efforts to cure
before  the  Closing,  any  event,  transaction  or  circumstance,  as  soon  as
practicable  after it becomes Known to ITRON,  occurring  after the date of this
Agreement  that causes or will cause any  covenant or  agreement  of ITRON under
this  Agreement  to be  breached  or that  renders  or will  render  untrue  any
representation  or warranty of ITRON  contained in this Agreement as if the same
were made on or as of the date of such event, transaction or circumstance. ITRON
also will notify Servatron in writing (where appropriate, through updates to the
Disclosure  Schedule) of, and will use all  commercially  reasonable  efforts to
cure, before the Closing,  any violation or breach, as soon as practicable after
it  becomes  Known  to  ITRON,  of any  representation,  warranty,  covenant  or
agreement made by ITRON in this Agreement,  whether occurring or arising before,
on or after the date of this Agreement. No notice given pursuant to this Section
shall  have  any  effect  on  the  representations,   warranties,  covenants  or
agreements contained in this Agreement for purposes of determining  satisfaction
of any condition contained herein or shall in any way limit Servatron's right to
seek indemnity under Article X.

4.4  Fulfillment  of  Conditions.  ITRON will execute and deliver at the Closing
each Operative Agreement that ITRON is required hereby to execute and deliver as
a  condition  to the  Closing,  will  take  all  commercially  reasonable  steps
necessary or desirable and proceed  diligently and in good faith to satisfy each
other condition to the obligations of Servatron  contained in this Agreement and
will not take or fail to take any action  that could  reasonably  be expected to
result in the nonfulfillment of any such condition.

ARTICLE V
                             COVENANTS OF SERVATRON

         Servatron  covenants  and agrees with ITRON that, at all times from and
after the date of this  Agreement  until the Closing  and,  with  respect to any
covenant or agreement by its terms to be performed in whole or in part after the
Closing,  for the period specified herein or, if no period is specified  herein,
for a period of two (2) years after the Closing,  Servatron will comply with all
covenants  and  provisions  of this  Article V,  except to the extent  ITRON may
otherwise consent in writing.

5.1 Regulatory  and Other  Approvals.  Servatron will (a) take all  commercially
reasonable  steps  necessary or desirable,  and proceed  diligently  and in good
faith and use all commercially reasonable efforts, as promptly as practicable to
obtain all  consents,  approvals  or actions of, to make all filings with and to
give all notices to Governmental  or Regulatory  Authorities or any other Person
required of Servatron to consummate the transactions  contemplated hereby and by
the Operative Agreements,  (b) provide such other information and communications
to such Governmental or Regulatory Authorities or other Persons as ITRON or such
Governmental or Regulatory  Authorities or other Persons may reasonably  request
in connection  therewith and (c) cooperate with ITRON as promptly as practicable
in obtaining all consents,  approvals or actions of, making all filings with and
giving all notices to  Governmental  or Regulatory  Authorities or other Persons
required of ITRON to consummate the transactions  contemplated hereby and by the
Operative  Agreements.  Servatron will provide prompt notification to ITRON when
any such consent,  approval,  action, filing or notice referred to in clause (a)
above is obtained, taken, made or given, as applicable, and will advise ITRON of
any  communications  (and,  unless  precluded by Law, provide copies of any such
communications  that  are  in  writing)  with  any  Governmental  or  Regulatory
Authority or other Person regarding any of the transactions contemplated by this
Agreement or any of the Operative Agreements.

5.2  Notice  and  Cure.   Servatron   will  notify  ITRON  in  writing  of,  and
contemporaneously  will provide  ITRON with true and complete  copies of any and
all  information  or  documents  relating  to,  and  will  use all  commercially
reasonable  efforts  to cure  before the  Closing,  any  event,  transaction  or
circumstance,  as soon as  practicable  after it  becomes  Known  to  Servatron,
occurring  after  the date of this  Agreement  that  causes  or will  cause  any
covenant or agreement of Servatron  under this  Agreement to be breached or that
renders or will  render  untrue any  representation  or  warranty  of  Servatron
contained  in this  Agreement  as if the same  were made on or as of the date of
such event,  transaction  or  circumstance.  Servatron also will notify ITRON in
writing of, and will use all commercially reasonable efforts to cure, before the
Closing,  any violation or breach, as soon as practicable after it becomes Known
to Servatron, of any representation,  warranties,  covenant or agreement made by
Servatron in this Agreement,  whether  occurring or arising before,  on or after
the date of this Agreement.  No notice given pursuant to this Section shall have
any effect on the representations, warranties, covenants or agreements contained
in this  Agreement  for purposes of  determining  satisfaction  of any condition
contained herein or shall in any way limit ITRON's right to seek indemnity under
Article X.

5.3 Fulfillment of Conditions. Servatron will execute and deliver at the Closing
each  Operative  Agreement  that  Servatron  is hereby  required  to execute and
deliver as a condition to the  Closing,  will take all  commercially  reasonable
steps necessary or desirable and proceed diligently and in good faith to satisfy
each other condition to the obligations of ITRON contained in this Agreement and
will not take or fail to take any action  that could  reasonably  be expected to
result in the nonfulfillment of any such condition.

ARTICLE VI
                     CONDITIONS TO OBLIGATIONS OF SERVATRON

         The  obligations  of  Servatron  hereunder  to purchase  the Assets are
subject to the fulfillment,  at or before the Closing,  of each of the following
conditions  (all or any of which may be waived in whole or in part by  Servatron
in its sole discretion):

6.1 Representations  and Warranties.  Each of the representations and warranties
made by ITRON in this  Agreement  (other than those made as of a specified  date
earlier  than  the  Closing  Date)  shall be true and  correct  in all  material
respects on and as of the Closing Date as though such representation or warranty
was made on and as of the Closing Date, and any  representation or warranty made
as of a specified  date  earlier  than the Closing Date shall have been true and
correct in all material respects on and as of such earlier date.

6.2  Performance.  ITRON shall have performed and complied with, in all material
respects, each agreement,  covenant and obligation required by this Agreement or
any  Operative  Agreement  to be so  performed  or complied  with by ITRON at or
before the Closing.

6.3 Closing Certificates. ITRON shall have delivered to Servatron a certificate,
dated the Closing Date and executed by the Chairman of the Board,  the President
or any Vice President of ITRON,  substantially  in the form and to the effect of
Exhibit C hereto, and a certificate,  dated the Closing Date and executed by the
Secretary or any Assistant Secretary of ITRON,  substantially in the form and to
the effect of Exhibit D hereto.

6.4 Orders and Laws.  There shall not be in effect on the Closing Date any Order
or Law  restraining,  enjoining or otherwise  prohibiting  or making illegal the
consummation of any of the transactions contemplated by this Agreement or any of
the  Operative  Agreements  or which could  reasonably  be expected to otherwise
result in a material diminution of the benefits of the transactions contemplated
by this  Agreement or any of the Operative  Agreements  to Servatron,  and there
shall not be pending or  threatened on the Closing Date any Action or Proceeding
or any other action in, before or by any  Governmental  or Regulatory  Authority
which could  reasonably  be expected to result in the issuance of any such Order
or the  enactment,  promulgation  or deemed  applicability  to  Servatron or the
transactions  contemplated by this Agreement or any of the Operative  Agreements
of any such Law.

6.5 Regulatory Consents and Approvals.  All consents,  approvals and actions of,
filings with and notices to any Governmental or Regulatory  Authority  necessary
to permit Servatron and ITRON to perform their  obligations under this Agreement
and the Operative  Agreements  and to consummate the  transactions  contemplated
hereby and thereby (a) shall have been duly obtained,  made or given,  (b) shall
be in form and substance reasonably satisfactory to Servatron,  (c) shall not be
subject to the  satisfaction  of any  condition  that has not been  satisfied or
waived  and (d)  shall be in full  force and  effect,  and all  terminations  or
expirations  of  waiting  periods  imposed  by any  Governmental  or  Regulatory
Authority  necessary for the  consummation of the  transactions  contemplated by
this Agreement and the Operative Agreements shall have occurred.

6.6 Opinion of Counsel.  Servatron  shall have  received  the opinion of Perkins
Coie. LLP, counsel to ITRON,  dated the Closing Date,  substantially in the form
and to the effect of Exhibit E hereto.

6.7  Shareholders'  Agreement.  ITRON shall have  entered  into a  shareholders'
agreement and a stock  restriction  agreement,  substantially in the form and to
the effect of Exhibit F hereto (the "Shareholders' Agreement").

6.8 Deliveries. ITRON shall have delivered to Servatron the Bill of Sale and the
other Assignment Instruments.

6.9  Completion  of Due  Diligence.  Servatron  shall  have  completed  its  due
diligence review of ITRON and shall have been satisfied, in its sole discretion,
with the results thereof.

6.10  Proceedings.  All proceedings to be taken on behalf of ITRON in connection
with the transactions  contemplated by this Agreement and all documents incident
thereto shall be reasonably satisfactory in form and substance to Servatron, and
Servatron  shall have received  copies of all such documents and other evidences
as Servatron may reasonably  request in order to establish the  consummation  of
such transactions and the taking of all proceedings in connection therewith.

ARTICLE VII
                       CONDITIONS TO OBLIGATIONS OF ITRON

         The  obligations  of ITRON  hereunder to sell the Assets are subject to
the fulfillment,  at or before the Closing, of each of the following  conditions
(all or any of  which  may be  waived  in  whole or in part by ITRON in its sole
discretion):

7.1 Representations  and Warranties.  Each of the representations and warranties
made by  Servatron in this  Agreement  shall be true and correct in all material
respects on and as of the Closing Date as though such representation or warranty
was made on and as of the Closing Date.

7.2  Performance.  Servatron  shall have  performed  and complied  with,  in all
material  respects,  each  agreement,  covenant and obligation  required by this
Agreement or any  Operative  Agreement  to be so  performed or complied  with by
Servatron at or before the Closing.

7.3 Closing Certificates. Servatron shall have delivered to ITRON a certificate,
dated the Closing Date and executed by the Chairman of the Board,  the President
or any Vice President of Servatron,  substantially in the form and to the effect
of Exhibit G hereto,  and a certificate,  dated the Closing Date and executed by
the Secretary or any Assistant Secretary of Servatron, substantially in the form
and to the effect of Exhibit H hereto.

7.4 Orders and Laws.  There shall not be in effect on the Closing Date any Order
or Law that  became  effective  after  the date of this  Agreement  restraining,
enjoining or otherwise  prohibiting or making illegal the consummation of any of
the transactions contemplated by this Agreement or any of the Operative or which
could reasonably be expected to otherwise result in a material diminution of the
benefits  of the  transactions  contemplated  by  this  Agreement  or any of the
Operative  Agreements to ITRON,  and there shall not be pending or threatened on
the Closing Date any Action or  Proceeding  or any other action in, before or by
any  Governmental or Regulatory  Authority which could reasonably be expected to
result in the  issuance  of any such  Order or the  enactment,  promulgation  or
deemed applicability to ITRON or the transactions contemplated by this Agreement
or any of the Operative Agreements of any such Law.

7.5 Regulatory Consents and Approvals.  All consents,  approvals and actions of,
filings with and notices to any Governmental or Regulatory  Authority  necessary
to permit ITRON and Servatron to perform their  obligations under this Agreement
and the Operative  Agreements  and to consummate the  transactions  contemplated
hereby and thereby (a) shall have been duly obtained,  made or given,  (b) shall
not be subject to the  satisfaction of any condition that has not been satisfied
or waived and (c) shall be in full force and  effect,  and all  terminations  or
expirations  of  waiting  periods  imposed  by any  Governmental  or  Regulatory
Authority  necessary for the  consummation of the  transactions  contemplated by
this Agreement and the Operative Agreements shall have occurred.

7.6 Opinion of Counsel.  ITRON shall have  received the opinion of Graham & Dunn
PC, counsel to Servatron,  dated the Closing Date, substantially in the form and
to the effect of Exhibit I hereto.

7.7 Shareholders' Agreement. The shareholders of Servatron listed in Section 3.3
of the Disclosure Schedule shall have entered into the Shareholders' Agreement.

7.8  Completion of Due  Diligence.  ITRON shall have completed its due diligence
review of Servatron and shall have been satisfied, in its sole discretion,  with
the results thereof.

7.9  Proceedings.  All  proceedings  to be  taken on the  part of  Servatron  in
connection  with  the  transactions  contemplated  by  this  Agreement  and  all
documents  incident  thereto  shall  be  reasonably  satisfactory  in  form  and
substance to ITRON,  and ITRON shall have received  copies of all such documents
and other  evidences as ITRON may  reasonably  request in order to establish the
consummation  of  such  transactions  and  the  taking  of  all  proceedings  in
connection therewith.

ARTICLE VIII
                                NON-SOLICITATION

         Servatron  agrees not to solicit or hire any employees of ITRON for one
year from the date of this Agreement.  ITRON agrees not to hire any employees of
Servatron  for one year  from the date of this  Agreement.  Notwithstanding  the
foregoing,  Servatron  may hire  employees of ITRON who have been  terminated by
ITRON or who have  resigned at ITRON's  request and ITRON may hire  employees of
Servatron who have been terminated by Servatron who have resigned at Servatron's
request.

ARTICLE IX
                    SURVIVAL OF REPRESENTATIONS, WARRANTIES,
                            COVENANTS AND AGREEMENTS

         Notwithstanding  any right of Servatron to investigate  the accuracy of
the  representations  and  warranties  of the  other  party  contained  in  this
Agreement,   ITRON  and  Servatron  have  the  right  to  rely  fully  upon  the
representations,  warranties, covenants and agreements of the other contained in
this Agreement.  The  representations,  warranties,  covenants and agreements of
ITRON and  Servatron  contained in this  Agreement  will survive the Closing (a)
until  sixty  (60) days  after the  expiration  of all  applicable  statutes  of
limitation (including all periods of extension, whether automatic or permissive)
with respect to the  representations  and  warranties or (b) with respect to the
covenants  or  agreements  contained  in this  Agreement,  until sixty (60) days
following  the last date on which such  covenant or agreement is to be performed
or, if no such date is stated for twelve (12) months after Closing,  except that
any  representation,  warranty,  covenant  or  agreement  that  would  otherwise
terminate in accordance with clause (a) or (b) above will continue to survive if
a claim for indemnity  shall have been made under Article IX on or prior to such
termination date, until such claim has been satisfied or otherwise resolved.

ARTICLE X
                                 INDEMNIFICATION

10.1 ITRON's  Indemnification.  ITRON shall indemnify the Servatron  Indemnified
Parties in respect of, and hold each of them harmless from and against,  any and
all Losses  suffered,  incurred or  sustained  by any of them or to which any of
them  becomes  subject,  resulting  from,  arising  out  of or  relating  to any
misrepresentation, breach of warranty or nonfulfillment of or failure to perform
any  covenant or  agreement  on the part of ITRON  contained  in this  Agreement
(determined  in all cases as if the terms  "material" or  "materially"  were not
included  therein)  and for any Losses or  Liabilities  arising  from the Assets
incurred prior to the Closing Date.

10.2   Servatron's   Indemnification.   Servatron   shall  indemnify  the  ITRON
Indemnified  Parties in  respect  of,  and hold each of them  harmless  from and
against, any and all Losses suffered, incurred or sustained by any of them or to
which any of them becomes subject, resulting from, arising out of or relating to
any  misrepresentation,  breach of warranty or  nonfulfillment  of or failure to
perform any covenant or  agreement  on the part of  Servatron  contained in this
Agreement  (determined in all cases as if the terms  "material" or  "materially"
were not included  therein) and for any Losses or  Liabilities  arising from the
Assets arising on or after the Closing Date.

10.3     Indemnification Procedure.

(a) Upon obtaining knowledge thereof, the party to be indemnified hereunder (the
"Indemnitee")  shall  promptly  notify the  indemnifying  party  hereunder  (the
"Indemnitor")  in writing of any damage,  claim,  loss,  liability or expense or
other matter which the Indemnitee has determined has given or could give rise to
a claim for which  indemnification  rights are granted  hereunder  (such written
notice referred to as the "Notice of Claim"). The Notice of Claim shall specify,
in all  reasonable  detail,  the nature and  estimated  amount of any such claim
giving rise to a right of indemnification, to the extent the same can reasonably
be estimated.  Any failure on the part of an Indemnitee to give timely notice to
the Indemnitor of a claim shall not affect the right of the Indemnitee to obtain
indemnification  from the  Indemnitor  with  respect  to such  claim  unless the
Indemnitor is actually harmed by such failure to notify, and, in such case, only
to the extent of such actual harm.

(b) With  respect  to any matter  set forth in a Notice of Claim  relating  to a
third party claim the Indemnitor shall defend, in good faith and at its expense,
any such claim or demand,  and the  Indemnitee,  at its expense,  shall have the
right to  participate  in the defense of any such third party claim.  So long as
Indemnitor  is  defending,  in good  faith,  any such  third  party  claim,  the
Indemnitee shall not settle or compromise such third party claim. The Indemnitee
shall make  available to the Indemnitor or its  representatives  all records and
other  materials  reasonably  required by them for use in  contesting  any third
party claim and shall  cooperate fully with the Indemnitor in the defense of all
such claims.  If the Indemnitor does not defend any such third party claim or if
the  Indemnitor  does not provide  the  Indemnitee  with  prompt and  reasonable
assurances  that  the  Indemnitor  will  satisfy  the  third  party  claim,  the
Indemnitee  may, at its option,  elect to defend any such third party claim,  at
the Indemnitor's  expense,  but subject to the Indemnitor's right to assume such
defense  from the  Indemnitee  at any  time.  An  Indemnitor  may not  settle or
compromise any claim without obtaining a full and  unconditional  release of the
Indemnitee,  unless the  Indemnitee  consents in writing to such  settlement  or
compromise.

10.4  Exclusivity.  After the  Closing,  to the  extent  permitted  by Law,  the
indemnities  set forth in this  Article  X shall be the  exclusive  remedies  of
Servatron, ITRON and their respective officers, directors, employees, agents and
Affiliates for any  misrepresentation,  breach of warranty or  nonfulfillment or
failure  to be  performed  of  any  covenant  or  agreement  contained  in  this
Agreement,  and the  parties  shall  not be  entitled  to a  rescission  of this
Agreement  or to any  further  indemnification  rights or  claims of any  nature
whatsoever in respect thereof, all of which the parties hereto hereby waive.

ARTICLE XI
                                   TERMINATION

11.1  Termination.  This  Agreement  may be  terminated,  and  the  transactions
contemplated hereby may be abandoned:

(a) at any time before the Closing, by mutual written agreement of ITRON and
 Servatron;

(b) at any time before the Closing, by ITRON or Servatron, in the event (i) of a
material  breach  hereof by the  non-terminating  party if such  non-terminating
party  fails to cure  such  breach  within  five  (5)  Business  Days  following
notification  thereof by the terminating  party or (ii) upon notification of the
non-terminating  party by the  terminating  party that the  satisfaction  of any
condition to the terminating  party's  obligations  under this Agreement becomes
impossible or impracticable  with the use of commercially  reasonable efforts if
the failure of such  condition to be satisfied is not caused by a breach  hereof
by the terminating party; or

(c) at any time  after  June  30,  2000  (the  "Termination  Date")  by ITRON or
Servatron upon  notification  of the  non-terminating  party by the  terminating
party if the  Closing  shall not have  occurred  on or before such date and such
failure  to  consummate  is not  caused  by a breach  of this  Agreement  by the
terminating party.

11.2 Effect of Termination.  If this Agreement is validly terminated pursuant to
Section 11.1, this Agreement will forthwith become null and void, and there will
be no liability or obligation on the part of ITRON or Servatron (or any of their
respective officers,  directors,  employees,  agents or other representatives or
Affiliates), except as provided in the next succeeding sentence. Notwithstanding
any other provision in this Agreement to the contrary,  upon termination of this
Agreement  pursuant  to Section  11.1(b) or (c),  ITRON  will  remain  liable to
Servatron for any breach of this Agreement by ITRON existing at the time of such
termination,  and  Servatron  will remain liable to ITRON for any breach of this
Agreement by Servatron  existing at the time of such  termination,  and ITRON or
Servatron  may seek such  remedies,  including  damages  and fees of  attorneys,
against  the other  with  respect  to any such  breach as are  provided  in this
Agreement or as are otherwise available at Law or in equity.

ARTICLE XII
                                   DEFINITIONS

12.1     Defined Terms.

(a)      Defined Terms.  As used in this  Agreement,  the following  defined 
terms have the meanings  indicated below:

                  "AAA" has the meaning ascribed to it in Section 13.11.

                  "Actions or Proceedings" means any action,  suit,  proceeding,
arbitration or Governmental or Regulatory Authority investigation or audit.

                  "Affiliate"  means any Person  that  directly,  or  indirectly
through one of more  intermediaries,  controls or is  controlled  by or is under
common  control  with the Person  specified.  For  purposes of this  definition,
control of a Person means the power, direct or indirect,  to direct or cause the
direction of the  management  and policies of such Person whether by contract or
otherwise and, in any event and without limitation of the previous sentence, any
Person  owning ten  percent  (10%) or more of the voting  securities  of another
Person shall be deemed to control that Person.

                  "Agreement"   means  this   Contribution   Agreement  and  the
Exhibits,  the Disclosure Schedule and the Schedules hereto and the certificates
delivered in accordance  with Sections 6.3 and 7.3, as the same shall be amended
from time to time.

                  "Assets" has the meaning ascribed to it in Section 1.1.

                   "Assignment Instruments" has the meaning ascribed to it in
Section 1.5.

                   "Books and Records" of any Person means all files, documents,
instruments,  papers,  books and records  relating to the business,  operations,
condition of  (financial  or other),  results of  operations  and Assets of such
Person,  including,  without limitation,  financial statements,  Tax Returns and
related work papers and letters from accountants,  budgets,  pricing guidelines,
ledgers,  journals,  deeds, title policies, minute books, stock certificates and
books,  stock transfer ledgers,  contracts,  customer lists,  computer files and
programs, retrieval programs, operating data and plans and environmental studies
and plans.

                   "Business Day" means a day other than Saturday, Sunday or any
day on  which  banks  located  in the  State of  Washington  are  authorized  or
obligated to close.

                  "Closing" means the closing of the transactions contemplated
 by Section 1.5.

                  "Closing Date" means the date specified in Section 1.5.

                  "Code"  means the Internal  Revenue Code of 1986,  as amended,
and the rules and regulations promulgated thereunder.

                  "Condition  of  the  Assets"  means  the  business,  condition
(financial or otherwise), results of operations, and Assets.

                  "Disclosure  Schedule"  means  the  record  delivered  by  the
parties and dated as of the date  hereof,  containing  all lists,  descriptions,
exceptions  and other  information  and materials as are required to be included
therein by Servatron and ITRON pursuant to this Agreement.

                  "Employee"  means each employee or officer of ITRON  primarily
engaged in the conduct of the business dependent upon the Assets.

                  "Environmental  Law" means all applicable  federal,  state and
local laws, statutes, ordinances and regulations, and any applicable judicial or
administrative  interpretation,  order, consent decree or judgment,  relating to
the regulation and protection of the environment. Environmental Laws include but
are not limited to the Comprehensive Environmental Response,  Compensation,  and
Liability  Act of 1980, as amended (42 U.S.C.  ss. 9601 et seq.);  the Hazardous
Material Transportation Act, as amended (49 U.S.C. ss. 180 et seq.); the Federal
Insecticide,  Fungicide,  and Rodenticide  Act, as amended (7 U.S.C.  ss. 136 et
seq.);  the Resource  Conservation  and Recovery Act, as amended (42 U.S.C.  ss.
6901 et seq.);  the Toxic Substance  Control Act, as amended (42 U.S.C. ss. 7401
et seq.); the Clean Air Act, as amended (42 U.S.C. ss. 740 et seq.); the Federal
Water Pollution  Control Act, as amended (33 U.S.C.  ss. 1251 et seq.);  and the
Safe  Drinking  Water Act,  as amended (42 U.S.C.  ss. 300f et seq.);  and their
state and local  counterparts  or  equivalents  and any  applicable  transfer of
ownership notification or approval statutes.

                  "GAAP"  means  generally   accepted   accounting   principles,
consistently  applied  throughout  the specified  period and in the  immediately
prior comparable period.

                  "Governmental  or  Regulatory   Authority"  means  any  court,
tribunal,   arbitrator,   authority,  agency,  commission,   official  or  other
instrumentality  of the United  States,  any foreign  country or any domestic or
foreign state, county, city or other political subdivision.

                  "Indebtedness"  of any Person  means all  obligations  of such
Person (i) for borrowed  money,  (ii) evidenced by notes,  bonds,  debentures or
similar instruments,  (iii) for the deferred purchase price of goods or services
(other  than trade  payables  or accruals  incurred  in the  ordinary  course of
business),  (iv) under capital leases and (v) in the nature of guarantees of the
obligations described in clauses (i) through (iv) above of any other Person.

                  "Indemnified Party" means a Servatron Indemnified Party or a 
ITRON Indemnified Party.

                  "Indemnitee" has the meaning ascribed to it in Section 10.3.

                  "Indemnitor" has the meaning ascribed to it in Section 10.3.

                  "Intellectual  Property"  means all patents and patent rights,
trademarks  and  trademark  rights,  trade names and trade name rights,  service
marks and service mark  rights,  service  names and service  name rights,  brand
names, inventions,  processes,  formulae, copyrights and copyright rights, trade
dress,  business and product names, logos,  slogans,  trade secrets,  industrial
models, processes, designs, methodologies,  Software and other computer programs
(including  all source  codes) and  related  documentation,  research  products,
technical  information,  manufacturing,   engineering  and  technical  drawings,
know-how  and  all  pending  applications  for  and  registrations  of  patents,
trademarks, service marks and copyrights.

                  "IRS" means the United States Internal Revenue Service.

                  "ITRON" has the meaning ascribed to it in the forepart of this
 Agreement.

                  "ITRON Indemnified Parties" means Servatron and its respective
officers, directors, employees, agents and Affiliates.

                  "ITRON Material  Adverse Effect" means any event,  occurrence,
fact, condition,  change or effect that is materially financially adverse to the
business, operations, results of operations, condition (financial or otherwise),
prospects,  properties  (including  intangible  properties),  assets  (including
intangible assets) or liabilities of ITRON.

                  "Knowledge of  Servatron"  or "Known to  Servatron"  means the
knowledge of any officer, director or key employees of Servatron.

                  "Knowledge  of ITRON" or "Known to ITRON" means the  knowledge
of any officer, director or key employee of ITRON.

                  "Laws"   means  all  laws,   statutes,   rules,   regulations,
ordinances  and other  pronouncements  having  the  effect of law of the  United
States,  any foreign country or any domestic or foreign state,  county,  city or
other political subdivision or of any Governmental or Regulatory Authority.

                  "Liabilities"  means all  Indebtedness,  obligations and other
liabilities  of a  Person  (whether  absolute,  accrued,  contingent,  fixed  or
otherwise, or whether due or to become due).

                  "Licenses"  means  all  licenses,  permits,   certificates  of
authority,  authorizations,  approvals,  registrations,  franchises  and similar
consents granted or issued by any Governmental or Regulatory Authority.

                  "Liens"  means  any  mortgage,  pledge,  assessment,  security
interest,  lease,  lien, adverse claim, levy, charge or other encumbrance of any
kind,  or any  conditional  sale  contract,  title  retention  contract or other
contract to give any of the foregoing.

                  "Loss"  means any and all  damages,  fines,  fees,  penalties,
deficiencies,  losses and expenses  (including,  without  limitation,  interest,
court costs, fees of attorneys,  accountants and other experts or other expenses
of litigation or other proceedings or of any claim, default or assessment).

                  "Manufacturing  Agreement" means the  Manufacturing  Agreement
  between  Servatron,  Inc. and ITRON, Inc. dated May 15, 2000.

                  "Notice of Claim" has the meaning ascribed to it in 
Section 10.3.

                  "Operative Agreements" means,  collectively,  the Bill of Sale
and  the  other  Assignment  Instruments,   the  Shareholders'   Agreement,  the
Manufacturing  Agreement, the Depot Repair Services Agreement and any support or
other agreements to be entered into in connection with this transaction.

                  "Order"  means  any  writ,  judgment,  decree,  injunction  or
similar order of any  Governmental  or  Regulatory  Authority (in each such case
whether preliminary or final).

                  "Permit" means any permit, approval,  authorization,  license,
variance  or  permission  required  from  a  Governmental   Authority  under  an
applicable governmental rule.

                  "Permitted  Lien"  means (i) any Lien for Taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings for which
adequate  reserves  have been  established  in  accordance  with GAAP,  (ii) any
statutory  Lien arising in the  ordinary  course of business by operation of Law
with  respect to a  Liability  that is not yet due or  delinquent  and (iii) any
minor  imperfection  of title  or  similar  Lien  which  individually  or in the
aggregate  with other such  Liens  does not  materially  impair the value of the
property subject to such Lien.

                  "Person"  means  any  natural  person,  corporation,   general
partnership,  limited  partnership,  limited liability company,  proprietorship,
other  business  organization,  trust,  union,  association or  Governmental  or
Regulatory Authority.

                  "Purchase Price" has the meaning ascribed to it in 
Section 1.3(a).

                  "Release"  means,  as to any Person,  any  unpermitted  spill,
emission, leaking, pumping, injection, deposit, disposal, discharge,  dispersal,
leaching or migration of a Contaminant into the environment.

                  "Remedial  Action"  means all  actions  required  to clean up,
remove,  prevent  or  minimize  a Release  or threat of  Release  or to  perform
pre-remedial studies and investigations and post-remedial monitoring and care.

                  "Servatron" has the meaning ascribed to it in the forepart of
this Agreement.

                  "Servatron Indemnified Parties" means ITRON and its respective
officers, directors, employees, agents and Affiliates.

                  "Servatron Preferred Stock" has the meaning ascribed to it in 
Section 1.3(a).

                  "Servatron   Material   Adverse   Effect"   means  any  event,
occurrence,  fact, condition, change or effect that is materially adverse to the
business, operations, results of operations, condition (financial or otherwise),
prospects,  properties  (including  intangible  properties),  assets  (including
intangible assets) or liabilities of Servatron.

                  "Shareholders" mean all the holders of capital stock of ITRON.

                  "Shareholders' Agreement" has the meaning ascribed to it in 
Section 6.7.

                  "Tax  Returns"  means any return  (including  any  information
return),   report,   statement,   declaration,   estimate,   schedule,   notice,
notification, form, election, certificate or other document or information filed
with or  submitted  to,  or  required  to be filed  with or  submitted  to,  any
Governmental Body in connection with the determination,  assessment,  collection
or payment of any Tax or in connection with the  administration,  implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.

                  "Taxes"  means any tax  (including  any income tax,  franchise
tax, capital gains tax, gross receipts tax, value-added tax, surtax, excise tax,
ad valorem tax,  transfer  tax,  stamp tax,  sales tax, use tax,  property  tax,
business tax,  withholding tax or payroll tax), levy,  assessment,  tariff, duty
(including  any customs  duty),  deficiency  or fee,  and any related  charge or
amount (including any fine, penalty or interest), imposed, assessed or collected
by or under the authority of any Governmental or Regulatory Authority.

                  "Termination Date" has the meaning ascribed to it in 
Section 11.1(c).

12.2  Construction  of Certain  Terms and  Phrases.  Unless the  context of this
Agreement otherwise requires, (i) words of any gender include each other gender;
(ii) words  using the  singular  or plural  number  also  include  the plural or
singular number, respectively;  (iii) the terms "hereof," "herein," "hereby" and
derivative  or similar  words  refer to this  entire  Agreement;  (iv) the terms
"Article"  or  "Section"  refer to the  specified  Article  or  Section  of this
Agreement;  and (v) the phrases  "ordinary  course of  business"  and  "ordinary
course of business  consistent  with past  practice"  refer to the  business and
practice of ITRON in  connection  with the  business.  Whenever  this  Agreement
refers to a number of days,  such number  shall  refer to  calendar  days unless
Business Days are specified.  All accounting terms used herein and not expressly
defined herein shall have the meanings given to them under GAAP.

ARTICLE XIII
                                  MISCELLANEOUS

13.1 Notices. All notices,  requests and other communications  hereunder must be
in  writing  and will be  deemed  to have  been  duly  given  only if  delivered
personally or by facsimile  transmission or mailed (first class postage prepaid)
to the parties at the following addresses or facsimile numbers:

                  If to Servatron, to:

                  Servatron, Inc.
                  East 15520 Fairview Avenue
                  Spokane, WA  99216
                  (502) 891-3110
                  Facsimile No.: (509) 891-3110
                  Attn: Larry Panattoni (509) 891-3100

                  with a copy to:

                  Graham & Dunn PC
                  1420 Fifth Avenue, 33rd Floor
                  Seattle, WA  98101
                  Facsimile No.: (206) 340-9599
                  Attn:  Michael Tobiason, Esq.

                  If to ITRON, to:

                  ITRON, Inc.
                  2818 North Sullivan Road
                  Spokane, WA  99216
                  Facsimile No.: (509) 891-3334
                  Attn: Chief Executive Officer

All such  notices,  requests  and  other  communications  will (i) if  delivered
personally  to the  address as provided in this  Section,  be deemed  given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number as
provided in this Section,  be deemed given upon receipt,  and (iii) if delivered
by mail in the  manner  described  above  to the  address  as  provided  in this
Section,  be deemed given upon receipt (in each case  regardless of whether such
notice, request or other communication is received by any other Person to whom a
copy of such notice,  request or other communication is to be delivered pursuant
to this Section). Any party from time to time may change its address,  facsimile
number or other  information  for the purpose of notices to that party by giving
notice specifying such change to the other party hereto.

13.2 Entire Agreement. This Agreement and the Operative Agreements supersede all
prior discussions and agreements between the parties with respect to the subject
matter hereof and thereof, including, without limitation, that certain letter of
intent dated March 15, 2000, and contain the sole and entire  agreement  between
the parties hereto with respect to the subject matter hereof and thereof.

13.3  Expenses.  Except  as  otherwise  expressly  provided  in  this  Agreement
(including, without limitation, as provided in Section 11.2), whether or not the
transactions  contemplated  hereby are consummated,  each party will pay its own
costs and expenses  incurred in connection with the  negotiation,  execution and
closing of this  Agreement and the  Operative  Agreements  and the  transactions
contemplated hereby and thereby.

13.4  Public  Announcements.  At all times at or before the  Closing,  ITRON and
Servatron  will not issue or make any  reports,  statements  or  releases to the
public or generally to the employees,  customers,  suppliers or other Persons to
whom ITRON  sells goods or provides  services in  connection  with the Assets or
with whom ITRON otherwise has significant  business  relationships in connection
with the Assets with respect to this Agreement or the transactions  contemplated
hereby without the consent of the other, which consent shall not be unreasonably
withheld. If either party is unable to obtain the approval of its public report,
statement or release from the other party and such report,  statement or release
is, in the opinion of legal  counsel to such party,  required by Law in order to
discharge such party's disclosure obligations, then such party may make or issue
the legally required report, statement or release and promptly furnish the other
party  with a copy  thereof.  ITRON and  Servatron  will also  obtain  the other
party's prior approval of any press release to be issued  immediately  following
the Closing announcing the consummation of the transactions contemplated by this
Agreement.

13.5 Confidentiality. Each party hereto will hold, and will use its best efforts
to cause its Affiliates, and their respective Representatives to hold, in strict
confidence from any Person (other than any such Affiliate), unless (a) compelled
to  disclose  by  judicial  or  administrative   process   (including,   without
limitation,  in  connection  with  obtaining  the  necessary  approvals  of this
Agreement and the transactions contemplated hereby of Governmental or Regulatory
Authorities)  or by other  requirements  of Law or (b) disclosed in an Action or
Proceeding brought by a party hereto in pursuit of its rights or in the exercise
of its remedies  hereunder,  all documents and information  concerning the other
party or any of its Affiliates  furnished to it by the other party or such other
party's  Representatives  in connection with this Agreement or the  transactions
contemplated hereby, except to the extent that such documents or information can
be shown to have been (i) previously known by the party receiving such documents
or  information,  (ii) in the  public  domain  (either  prior  to or  after  the
furnishing of such documents or information  hereunder) through no fault of such
receiving  party or (iii) later  acquired by the  receiving  party from  another
source  if the  receiving  party  is not  aware  that  such  source  is under an
obligation  to  another  party  hereto to keep such  documents  and  information
confidential;  provided that  following  the Closing the foregoing  restrictions
will not apply to Servatron's  use of documents and  information  concerning the
Assets furnished by ITRON hereunder.

13.6 Waiver.  Any term or condition of this  Agreement may be waived at any time
by the party that is entitled to the benefit  thereof,  but no such waiver shall
be effective  unless set forth in a written  instrument  duly  executed by or on
behalf of the party  waiving such term or  condition.  No waiver by any party of
any term or condition of this Agreement, in any one or more instances,  shall be
deemed to be or construed as a waiver of the same or any other term or condition
of this  Agreement  on any future  occasion.  All  remedies,  either  under this
Agreement  or  by  Law  or  otherwise  afforded,  will  be  cumulative  and  not
alternative.

13.7 Amendment. This Agreement may be amended,  supplemented or modified only by
a written instrument duly executed by or on behalf of each party hereto.

13.8 No Third Party Beneficiary.  The terms and provisions of this Agreement are
intended  solely  for the  benefit of each  party  hereto  and their  respective
successors or permitted  assigns,  and it is not the intention of the parties to
confer  third-party  beneficiary  rights  upon any other  Person  other than any
Person entitled to indemnity under Article X.

13.9 No  Assignment;  Binding  Effect.  Neither  this  Agreement  nor any right,
interest or obligation hereunder may be assigned by any party hereto without the
prior written consent of the other party hereto and any attempt to do so will be
void,  except (a) for assignments and transfers by operation of Law and (b) that
Servatron  may  assign  any  or all of its  rights,  interests  and  obligations
hereunder (including,  without limitation,  its rights under Article X) to (i) a
wholly-owned subsidiary,  provided that any such subsidiary agrees in writing to
be bound by all of the terms, conditions and provisions contained herein, but no
such assignment shall relieve Servatron of its obligations hereunder. Subject to
the preceding sentence, this Agreement is binding upon, inures to the benefit of
and is  enforceable by the parties  hereto and their  respective  successors and
assigns.

13.10  Headings.  The headings  used in this  Agreement  have been  inserted for
convenience of reference only and do not define or limit the provisions hereof.

13.11  Arbitration.  Any controversy or claim arising out of or relating to this
Agreement shall be submitted to and be finally resolved by arbitration, pursuant
to the provisions of the United States Arbitration Act (9 U.S.C. ss. 1 et seq.),
to be conducted by an arbitration  service  mutually agreed upon by the parties,
with such  arbitration to be held in Spokane,  Washington in accordance with the
American Arbitration  Association's ("AAA") Commercial Arbitration Rules then in
effect. If the parties cannot agree upon the arbitration  service to conduct the
arbitration  in Spokane,  then the  arbitration  shall be  conducted by Judicial
Dispute Resolution, LLC, and shall be held in Seattle, Washington. If the amount
in controversy is less than $500,000,  the  arbitration  shall be conducted by a
single  arbitrator;  if the  amount in  controversy  is  $500,000  or more,  the
arbitration   shall  be  conducted  by  a  panel  of  three   arbitrators.   The
arbitrator(s)  shall be  selected by mutual  agreement  of the  parties.  If the
parties   cannot  agree  on  the  selection  of  the   arbitrator(s)   then  the
arbitrator(s)  shall be chosen by Judicial Dispute  Resolution,  LLC. Each party
hereby  irrevocably  agrees that service of process,  summons,  notices or other
communications  related to the arbitration  procedure shall be deemed served and
accepted by the other party if given in  accordance  with  Section  13.1 of this
Agreement.  The  arbitrator(s)  shall  render a judgment of default  against any
party who fails to appear in a  properly  noticed  arbitration  proceeding.  Any
award or  decision  rendered in such  arbitration  shall be final and binding on
both  parties,  and  judgment  may be entered  thereon in any court of competent
jurisdiction if necessary;  provided, however, that the arbitrators' decision is
subject to judicial review as provided by applicable law. Either party may apply
for and obtain from any court of competent  jurisdiction relief in the nature of
temporary  interlocutory relief,  provided such party simultaneously submits the
matter in controversy to arbitration for final  resolution of the merits of such
controversy or claim pursuant to this Section 13.11.

13.12  Invalid  Provisions.  If any  provision  of this  Agreement is held to be
illegal,  invalid or  unenforceable  under any present or future Law, and if the
rights or  obligations  of any party  hereto  under this  Agreement  will not be
materially  and adversely  affected  thereby,  (a) such  provision will be fully
severable, (b) this Agreement will be construed and enforced as if such illegal,
invalid or  unenforceable  provision had never comprised a part hereof,  (c) the
remaining  provisions of this Agreement will remain in full force and effect and
will not be affected by the illegal,  invalid or  unenforceable  provision or by
its  severance  here  from  and  (d)  in  lieu  of  such  illegal,   invalid  or
unenforceable  provision,  there will be added  automatically  as a part of this
Agreement a legal,  valid and enforceable  provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.

13.13  Governing  Law.  This  Agreement  shall be governed by and  construed  in
accordance  with the Laws of the State of  Washington  applicable  to a contract
executed and performed in such State,  without giving effect to the conflicts of
laws principles  thereof.  This Agreement shall be governed by, and construed in
accordance  with, the laws of the State of Washington  without  reference to its
choice of law  rules.  The  parties  hereby  irrevocably  consent  to  exclusive
personal  jurisdiction  and venue in the state and  federal  courts  located  in
Spokane County,  Washington  with respect to any actions,  claims or proceedings
arising out of or in connection with this  Agreement,  and agree not to commence
or  prosecute  any  such  action,   claim  or  proceeding   other  than  in  the
aforementioned courts.

13.14 Remedies.  With respect to the obligations of Section 2.9 hereof,  each of
the  parties  expressly  acknowledges  and agrees  that the other party would be
damaged  irreparably  in the event that any of the  provisions of this Agreement
are not  performed in  accordance  with their  specific  terms or otherwise  are
breached.  Accordingly,  each of the parties  hereto agrees that the other party
shall be entitled to an injunction to prevent breaches of the provisions of this
Agreement  and  to  enforce  specifically  this  Agreement  and  the  terms  and
provisions  hereof in any court of  competent  jurisdiction,  in addition to any
other remedy to which they may be entitled at law or in equity.

13.15  Attorneys'  Fees.  The  prevailing  party  in any  arbitration,  legal or
equitable  proceedings  brought hereunder will be awarded reasonable  attorneys'
fees,  expert  witness  costs and  expenses,  and all other  costs and  expenses
incurred directly or indirectly in connection with such proceeding.

13.16   Counterparts.   This   Agreement  may  be  executed  in  any  number  of
counterparts,  each of  which  will be  deemed  an  original,  but all of  which
together will constitute one and the same instrument.

PURCHASER:                                ITRON:
Servatron, Inc., a Washington             ITRON, Inc., a Washington corporation
corporation             



  By: ________________________            By: ____________________
      /s/Larry Panattoni                      /s/Robert Nielsen
      President                               COO


                                CREDIT AGREEMENT


         THIS CREDIT AGREEMENT is entered into as of May __, 2000 by and between
SERVATRON,  INC.,  a Washington  corporation  ("Borrower"),  and ITRON,  INC., a
Washington corporation ("Lender").

                                    RECITALS

         Borrower has  requested  the credit  facilities  described  herein from
Lender,  and Lender has agreed to provide said credit  facilities to Borrower on
the terms and conditions contained herein.

         NOW,  THEREFORE,  in consideration of the mutual covenants and promises
of the parties contained herein, Lender and Borrower hereby agree as follows:

ARTICLE I.            DEFINITIONS

         1.1          DEFINED TERMS

         All terms  defined  above shall have the meanings set forth above.  Any
accounting term used in this Agreement that is not  specifically  defined herein
shall have the meaning  customarily  given to it under GAAP, and all other terms
contained  in this  Agreement  that are not  defined  herein  shall,  unless the
context  indicates  otherwise,  have the  meanings  provided  in the Code to the
extent  such terms are  defined  therein.  The  following  terms  shall have the
meanings  set forth below (with all such  meanings to be equally  applicable  to
both the singular and plural forms of the terms defined):

         "Agreement"  means  this  Credit  Agreement  as  amended,  modified
  or
supplemented from time to time.

         "Applicable  Rate"  means,  at any date,  the lesser of (a) a per annum
rate equal to the sum of the Prime Rate plus 100 basis points,  plus; during the
continuation of an Event of Default,  an additional 300 basis points, or (b) the
Highest Lawful Rate.

         "Bankruptcy  Code" means the  Bankruptcy  Reform  Act,  Title 11 of the
United  States  Code,  as amended  or  recodified  from time to time,  including
(unless the context  otherwise  requires) any rules or  regulations  promulgated
thereunder.

         "Business Day" means any day other than a Saturday, Sunday or other day
on which  commercial  banks are  authorized or required to be closed in Spokane,
Washington.

         "Closing Date" means the date of this Agreement.

         "Code" means the Uniform Commercial Code of the State of Washington, as
amended from time to time.

         "Collateral" means (a) all of Borrower's right,  title, and interest in
and to all accounts,  goods, general intangibles,  money,  instruments,  chattel
paper, deposit accounts,  documents and investment  property;  (b) all products,
proceeds,  rents and  profits of the  foregoing;  and (c) all of the  foregoing,
whether  now owned or  existing  or  hereafter  acquired  or arising or in which
Borrower now has or hereafter acquires any rights.

         "Contaminant"   means  any  pollutant,   hazardous   substance,   toxic
substance,  hazardous waste or other substance regulated or forming the basis of
liability under any Environmental Law.

         "Default"  means (i) an Event of  Default,  (ii) an event or  condition
that with the giving of notice or the passage of time, or both, would constitute
an  Event of  Default,  or (iii)  the  filing  against  Borrower  of a  petition
commencing an involuntary case under the Bankruptcy Code.

         "Disclosure Schedule" means Schedule I attached hereto.

         "ERISA" means the Employee  Retirement  Income Security Act of 1974, as
amended or recodified from time to time, including (unless the context otherwise
requires) any rules or regulations promulgated thereunder.

         "Environmental Law" means all applicable federal, state and local laws,
statutes,   ordinances  and   regulations,   and  any  applicable   judicial  or
administrative  interpretation,  order, consent decree or judgment,  relating to
the regulation and protection of the environment. Environmental Laws include but
are not limited to the Comprehensive Environmental Response,  Compensation,  and
Liability  Act of 1980, as amended (42 U.S.C.  ss. 9601 et seq.);  the Hazardous
Material Transportation Act, as amended (49 U.S.C. ss. 180 et seq.); the Federal
Insecticide,  Fungicide,  and Rodenticide  Act, as amended (7 U.S.C.  ss. 136 et
seq.);  the Resource  Conservation  and Recovery Act, as amended (42 U.S.C.  ss.
6901 et seq.);  the Toxic Substance  Control Act, as amended (42 U.S.C. ss. 7401
et seq.); the Clean Air Act, as amended (42 U.S.C. ss. 740 et seq.); the Federal
Water Pollution  Control Act, as amended (33 U.S.C.  ss. 1251 et seq.);  and the
Safe  Drinking  Water Act,  as amended (42 U.S.C.  ss. 300f et seq.),  and their
state and local  counterparts  or  equivalents  and any  applicable  transfer of
ownership notification or approval statutes.

         "Environmental  Liabilities  and Costs"  means,  as to any Person,  all
liabilities, obligations,  responsibilities,  Remedial Actions, losses, damages,
punitive  damages,  consequential  damages,  treble damages,  costs and expenses
(including, without limitation, all fees, disbursements and expenses of counsel,
experts and consultants  and costs of  investigation  and feasibility  studies),
fines,  penalties,  sanctions and interest  incurred as a result of any claim or
demand by any other Person, whether based in contract,  tort, implied or express
warranty,  strict  liability,  criminal  or civil  statute,  including,  without
limitation,  any thereof arising under any Environmental  Law, Permit,  order or
agreement with any Governmental  Authority or other Person,  and which relate to
any violation or alleged  violation of an  Environmental  Law or a Permit,  or a
Release or threatened Release.

         "Event of Default" has the meaning set forth in Section 8.1 hereof.

         "GAAP" means generally accepted  accounting  principles as in effect in
the United States from time to time, consistently applied.

         "Governmental  Authority" means any domestic or foreign national, state
or local government, any political subdivision thereof, any department,  agency,
authority  or bureau of any of the  foregoing,  or any other  entity  exercising
executive,  legislative,  judicial, regulatory or administrative functions of or
pertaining to government,  including the Federal Deposit Insurance  Corporation,
the Federal Reserve Board, the Comptroller of the Currency,  any central bank or
any comparable authority.

         "Governmental  Rule"  means  any  applicable  law,  rule,   regulation,
ordinance, order, code interpretation,  judgment, decree, directive, guidelines,
policy or similar form of decision of any Governmental Authority.

         "Highest Lawful Rate" means, at the particular time in question, the
 maximum rate of interest  which,under  applicable law, Lender is then permitted
to charge  Borrower on the  applicable  Loan, and if the maximum rate changes at
any time, the Highest  Lawful Rate shall  increase or decrease,  as the case may
be, as of the effective time of each such change, without notice to Borrower.

         "Indebtedness"  of any  Person  means,  without  duplication,  (a)  all
liabilities  of such  Person as  determined  in  accordance  with GAAP,  (b) all
obligations  of such Person  created or arising  under any  conditional  sale or
other title retention agreement with respect to property acquired by such Person
(even  though  the  rights  and  remedies  of the  seller or lender  under  such
agreement  in the event of default are limited to  repossession  or sale of such
property),  (c) all  lease  obligations  of  such  Person,  (d)  all  contingent
obligations  of such  Person,  (e) all  obligations  of such Person to purchase,
redeem,  retire,  defease  or  otherwise  acquire  for  value any Stock or Stock
Equivalents  of such Person with a mandatory  repurchase or  redemption  date of
less than ten  years  from the date of  issuance  thereof,  (f) all  obligations
secured by (or for which the holder of such  obligations  has an existing right,
contingent or otherwise, to be secured by) any Lien upon or in property owned by
such  Person,  even though such Person has not assumed or become  liable for the
payment  of such  obligations,  and  (g)  all  liabilities  of  such  Person  in
connection  with the  failure  to make  when  due any  contribution  or  payment
pursuant  to or under  any Plan.  For  purposes  of  determining  the  amount of
Indebtedness in a circumstance  when the creditor has recourse only to specified
assets,  the amount shall be the lesser of (i) the amount of such  obligation or
(ii) the fair market value of such assets.

         "Indemnitees" has the meaning set forth in Section 9.3 hereof.

         "Lien"  means  any  mortgage,  deed of  trust,  pledge,  hypothecation,
assignment,  deposit  arrangement,   encumbrance,  lien  (statutory  or  other),
security  interest,   priority  or  other  security  agreement  or  preferential
arrangement of any kind or nature whatsoever, including, without limitation, any
conditional sale or other title retention  agreement or the interest of a lessor
under any capital lease.

         "Loan" means an advance made by Lender to Borrower pursuant to 
Section 2.1.

         "Loan  Documents"  means  this  Agreement,  the  Note  and  each  other
agreement, note, notice, document,  contract or instrument to which Borrower now
or  hereafter is a party and that is required by Lender in  connection  with the
Obligations.

         "Material  Adverse  Effect" means a material  adverse effect on (a) the
condition  (financial  or  otherwise),  business,  performance,   operations  or
properties of Borrower,  (b) the ability of Borrower to perform its  obligations
under the Loan  Documents,  or (c) the rights and  remedies of Lender  under the
Loan Documents.

         "Maturity  Date"  means the earlier of January 18, 2004 or the due date
determined pursuant to Section 8.2.

         "Note" means a promissory  note executed by Borrower in favor of Lender
evidencing Loans, substantially in the form attached as Exhibit A hereto.

         "Obligations"  means  all of  Borrower's  obligations  under  the  Loan
Documents,  whether direct or indirect, absolute or contingent, due or to become
due, now existing or hereafter arising.

         "PBGC"  means the  Pension  Benefit  Guaranty  Corporation  established
pursuant to Title IV of ERISA.

         "Permit" means any permit, approval,  authorization,  license, variance
or  permission  required  from a  Governmental  Authority  under  an  applicable
Governmental Rule.

         "Permitted Liens" means

         (a)      Liens arising by operation of law for taxes, assessments or 
governmental charges not yet due;

         (b) statutory Liens of mechanics, materialmen,  shippers, warehousemen,
carriers,  and other  similar  persons for services or materials  arising in the
ordinary course of business for which payment is not yet due;

         (c)  nonconsensual  Liens  incurred  or deposits  made in the  ordinary
course of  business  in  connection  with  workers'  compensation,  unemployment
insurance and other types of social security;

         (d) Liens  for  taxes or  statutory  Liens of  mechanics,  materialmen,
shippers,  warehousemen,  carriers  and other  similar  persons for  services or
materials that are due but are being  contested in good faith and by appropriate
and lawful proceedings promptly initiated and diligently conducted and for which
reserves satisfactory to Lender have been established;

         (e)      Liens listed on the Disclosure Schedule;

         (f)      Liens granted in the Loan Documents;

         (g)  purchase  money Liens upon or in any property of Borrower and used
by  Borrower in the  ordinary  course of  business  and Liens to secure  capital
leases and any related payment and performance obligations if, in each case, the
incurrence of such Indebtedness is permitted by Section 7.2; provided,  however,
that:  (i)  any  such  Lien  is  created  solely  for the  purpose  of  securing
Indebtedness representing, or incurred to finance, refinance or refund, the cost
(including, without limitation, the cost of construction and the reasonable fees
and expenses  relating to such  Indebtedness)  of the property  subject thereto,
(ii) the  principal  amount of the  Indebtedness  secured  by such Lien does not
exceed  such  cost,  and (iii)  such Lien does not  extend to or cover any other
property other than such item of property,  any  improvements  on such item, and
the proceeds from the disposition of such items;

         (h) zoning restrictions,  easements,  rights of way, survey exceptions,
encroachments,   covenants,   licenses,   reservations,   leasehold   interests,
restrictions  on the use of  real  property  or  minor  irregularities  incident
thereto which do not in the aggregate  materially  detract from the value or use
of the property or assets of Borrower or impair, in any material manner, the use
of such property for the purposes for which such property is held by Borrower;

         (i)      the interests of lessors or lessees of property leased
pursuant to leases permitted hereunder;

         (j) Liens of a depository  institution  arising solely by virtue of any
statutory or common law provision relating to banker's liens,  rights of setoff,
or similar rights and remedies as to deposit  accounts or other funds maintained
with such institution, provided that (i) such deposit account is not a dedicated
cash  collateral  account and is not subject to  restrictions  against access by
Borrower  in  excess  of those  set  forth  by  regulations  promulgated  by any
Government Authority,  and (ii) such deposit account is not intended by Borrower
to provide collateral to the depository institution;

         (k) judgment  Liens to the extent the existence of such Liens is not an
Event of Default under Section 8.1(g);  (l) Liens granted to secure  obligations
to the Senior Lender provided that the principal amount secured thereby does not
exceed $_________;  (m) any Lien securing Indebtedness ("New Indebtedness") that
constitutes a refinancing of any Indebtedness (in whole or in part) secured,  at
the time of refinancing, by a Permitted Lien ("Old Indebtedness"), provided that
(i) any such Lien is limited to all or part of the property that secured the Old
Indebtedness  and  (ii)  the  New  Indebtedness  is not  greater  than  the  Old
Indebtedness; and (n) Liens (other than Liens on the Collateral) on the property
of Borrower or any  Subsidiary  securing (i) the  non-delinquent  performance of
bids,  trade contracts (other than for borrowed money),  operating  leases,  and
statutory  obligations,  (ii) contingent obligations on surety and appeal bonds,
and  (iii)  other  non-delinquent  obligations  of a like  nature;  in each case
incurred in the  ordinary  course of  business,  provided  all such Liens in the
aggregate would not (even if enforced) cause a Material Adverse Effect.

         "Person"  means an  individual,  partnership,  corporation  (including,
without limitation,  a business trust),  joint stock company,  limited liability
company, trust, unincorporated association,  joint venture or other entity, or a
Governmental Authority.

         "Plan" means an employee  benefit  plan,  as defined in Section 3(3) of
ERISA,  which  Borrower  maintains,  contributes  to or  has  an  obligation  to
contribute to on behalf of participants who are or were employed by any of them.

         "Prime  Rate" means,  for any day, an interest  rate per annum equal to
the rate of interest  most recently  announced by Bank of America,  N.A. Bank at
its principal  office as its prime rate, with any change in the prime rate to be
effective  as of the day such change is publicly  announced  by Bank of America,
N.A.

         "Release"  means, as to any Person,  any unpermitted  spill,  emission,
leaking, pumping, injection, deposit, disposal,  discharge,  dispersal, leaching
or migration of a Contaminant into the environment.

         "Remedial  Action"  means all  actions  required  to clean up,  remove,
prevent or  minimize  a Release or threat of Release or to perform  pre-remedial
studies and investigations and post-remedial monitoring and care.

         "Senior Lender" means Sterling Savings Bank and its successors and
assigns.

         "Stock"  means  shares of  capital  stock,  beneficial  or  partnership
interests, participations or other equivalents (regardless of how designated) of
or in a corporation or other entity, whether voting or nonvoting,  and includes,
without limitation, common stock and preferred stock.

         "Stock   Equivalents"   means  all  securities   convertible   into  or
exchangeable for Stock and all warrants,  options or other rights to purchase or
subscribe for any Stock, whether or not presently  convertible,  exchangeable or
exercisable.

         1.2          HEADINGS

         Headings in this Agreement and each of the other Loan Documents are for
convenience  of  reference  only and are not  part of the  substance  hereof  or
thereof.

         1.3          ADDITIONAL DEFINITION PROVISIONS

         Whenever  the  terms   "herein,"   "hereof,"   "hereto,"   "hereunder,"
"therein,"  "thereof,"  "thereto,"  "thereunder," and similar terms contained in
this  Agreement  or any Loan  Document  refer to this  Agreement  or other  Loan
Document, such terms refer to the whole of this Agreement or other Loan Document
and not to any particular article, section, paragraph or provision.

ARTICLE II.           THE CREDIT

         2.1          REVOLVING LOANS

         (a) On the  terms  and  subject  to the  conditions  contained  in this
Agreement,  Lender agrees to make loans (each a "Loan") to Borrower from time to
time until the Maturity  Date in an aggregate  amount not to exceed  $500,000 at
any time outstanding. Borrower may from time to time borrow, partially or wholly
repay its outstanding  borrowings  (subject to the limitations of Section 2.1(c)
below),  and  reborrow,  subject to all the  limitations,  terms and  conditions
contained herein.  Borrower shall repay the outstanding principal balance of the
Loans,  together  with all accrued and unpaid  interest  and related fees on the
Maturity  Date.  The Loans shall be  evidenced by a Note payable to the order of
Lender.

         (b) Borrower  shall  request  each  advance of a Loan by giving  Lender
irrevocable  written notice at least one Business Day in advance of the proposed
date of borrowing,  which  specifies  (i) the principal  amount of the requested
advance (which amount must be a minimum of $50,000 with increments above $50,000
being in integral multiples of $50,000) and (ii) the proposed date of borrowing,
which shall be a Business  Day.  Borrower  may not make more than one  borrowing
request in any week.

         (c)  From  time  to time  on any  Business  Day,  Borrower  may  make a
voluntary  prepayment,  in whole or in part, of the outstanding principal amount
of the Loans; provided, however, that (i) each voluntary partial prepayment must
be in a minimum  amount of $_______  with  increments  above  $_______  being in
integral multiples of
$-------.

         2.2          INTEREST

         The outstanding  principal  balance of the Loans shall bear interest at
the  Applicable  Rate.  All fees,  expenses and other  amounts not paid when due
shall  bear  interest  (from the date due until  paid) at the  Applicable  Rate.
Interest shall be computed on the basis of a 360-day year,  actual days elapsed,
and shall be payable monthly,  in arrears, on the first day of each month and on
the Maturity Date.

         2.3          OTHER PAYMENT TERMS

         (a) Manner.  Borrower  shall make all  payments due to Lender under the
Loan  Documents by payment to Lender in lawful money of the United States and in
same day or immediately available funds not later than 11:00 a.m. (Spokane time)
on the date due.

         (b) Date.  Whenever any payment due  hereunder  shall fall due on a day
other than a Business  Day,  such payment  shall be made on the next  succeeding
Business Day, and such extension of time shall be included in the computation of
interest or fees, as the case may be.

         (c)  Application  of Payments.  All payments  under the Loan  Documents
(including  prepayments)  shall be  applied  first to  unpaid  fees,  costs  and
expenses  then due and  payable  under the Loan  Documents,  second  to  accrued
interest then due and payable under the Loan Documents and finally to reduce the
principal amount of the outstanding Loans.

         (d) Payment Provisions.  Borrower shall make all payments due hereunder
free and clear of, and without  deduction or  withholding  for or on account of,
any  setoff,  counterclaim,  defense,  duties,  taxes,  levies,  imposts,  fees,
deductions,  withholding,  restrictions  or  conditions  of any  kind.  If after
receipt of any payment of, or proceeds of Collateral  applied to the payment of,
any of the Obligations Lender is required to surrender or return such payment or
proceeds to any person or entity for any reason,  then the Obligations  intended
to be satisfied by such payment or proceeds shall be reinstated and continue and
this  Agreement  shall  continue in full force and effect as if such  payment or
proceeds had not been received by Lender.  Borrower hereby indemnifies and holds
Lender  harmless  for the amount of any  payments  or  proceeds  surrendered  or
returned.  This  Section  2.3(d)  shall  remain  effective  notwithstanding  any
contrary  action  which may be taken by Lender in reliance  upon such payment or
proceeds  and  shall  survive  the  payment  in full and  performance  of all of
Borrower's other Obligations.

ARTICLE III.          SECURITY

         3.1          GRANT OF SECURITY INTEREST

         Borrower  hereby  grants to Lender a  security  interest  in all of the
Collateral as security for the full and prompt  payment in cash and  performance
of the Obligations.

         3.2          PERFECTION; DUTY OF CARE

         (a) Until all the  Obligations  have been fully  satisfied  and paid in
cash,  Borrower  shall  perform  all  steps  reasonably  requested  by Lender to
perfect,  maintain and protect  Lender's  security  interest in the  Collateral,
including,   without   limitation,   (i)  executing  and  filing  financing  and
continuation  statements in form and substance  satisfactory to Lender, and (ii)
delivering all Collateral in which Lender's  security  interest may be perfected
by possession  together with such  indorsements as Lender may request.  Borrower
hereby  authorizes  Lender  to  execute  and  file  one or  more  UCC  financing
statements  signed  only by Lender  evidencing  the  security  interest  granted
hereby.

         (b) Borrower shall pay all taxes,  assessments and governmental charges
levied or assessed or imposed upon or with respect to the Collateral;  provided,
however,  Borrower  shall not be required to pay any tax if the validity  and/or
amount thereof is being  contested in good faith and by  appropriate  and lawful
proceedings  promptly  initiated and diligently  conducted of which Borrower has
given  prior  notice to  Lender  and for which  appropriate  reserves  have been
established  and so long as levy and  execution  have  been and  continue  to be
stayed.  If  Borrower  fails to pay or so contest  and  reserve  for such taxes,
assessments and governmental charges,  Lender may (but shall not be required to)
pay the same and add the amount of such payment to the principal of the Loans.

         (c) In order to protect or perfect the security  interest granted under
the Loan  Documents,  Lender may discharge any Lien that is not a Permitted Lien
or bond the same,  pay for any insurance that Borrower has failed to maintain as
required by this Agreement and, upon an Event of Default,  maintain guards,  pay
any service  bureau,  or obtain any record and add the same to the  principal of
the Loans.

         (d) Lender shall have no duty of care with  respect to the  Collateral,
except  to  exercise  reasonable  care with  respect  to the  Collateral  in its
custody,  but shall be deemed to have exercised reasonable care if such property
is accorded  treatment either (i)  substantially  equal to that which it accords
its own  property or (ii) as Borrower  requests  in  writing,  provided  that no
failure to comply  with any such  request  nor any  omission  to do any such act
requested  by Borrower  shall be deemed a failure to exercise  reasonable  care.
Lender's  failure  to take  steps to  preserve  rights  against  any  parties or
property  shall not be deemed to be a failure to exercise  reasonable  care with
respect to the Collateral in its custody.

ARTICLE IV.           REPRESENTATIONS AND WARRANTIES

         Borrower makes the following  representations and warranties to Lender,
subject  to  the  exceptions  set  forth  on  the  Disclosure  Schedule,   which
representations and warranties shall survive the execution of this Agreement and
shall  continue in full force and effect  until the  performance  and payment in
full, in cash, of all Obligations:

         4.1          LEGAL STATUS; SUBSIDIARIES

         Borrower is a corporation,  duly  organized and validly  existing under
the laws of  Washington,  and is qualified or licensed to do business (and is in
good standing as a foreign  corporation,  if applicable) in all jurisdictions in
which such  qualification or licensing is required or in which the failure to so
qualify or to be so licensed could have a Material  Adverse Effect.  Borrower is
not known by, and has not,  during the  preceding  five years,  been known as or
used,  any other  corporate or  fictitious  name and has not acquired any of its
assets in a bulk transfer (other than in the asset purchase  involving  Lender).
Borrower has no subsidiaries  and does not own or hold,  directly or indirectly,
any capital stock or equity security of, or any equity interest in, any Person.

         4.2          AUTHORIZATION AND VALIDITY

         The Loan  Documents have been duly  authorized  and the  performance by
Borrower  of its  obligations  under  the  Loan  Documents  constitute  a proper
corporate  purpose  under all  applicable  law. The Loan  Documents,  upon their
execution and delivery in accordance with the provisions hereof, will constitute
legal,  valid and binding  agreements and  obligations of Borrower,  enforceable
against it in accordance with their respective terms.

         4.3          NO VIOLATION

         The execution, delivery and performance by Borrower of each of the Loan
Documents  do not  violate  or  contravene  any  provision  of its  articles  or
certificate of incorporation or by-laws and do not violate any Governmental Rule
or result in a breach of or constitute a default under any contract, obligation,
indenture  or  other  instrument  to  which  it is a party or by which it may be
bound, which violation, breach or default would have a Material Adverse Effect.

         4.4          LITIGATION

         There are no pending or, to Borrower's knowledge,  threatened, actions,
claims,  investigations,  suits or  proceedings,  by or before any  governmental
authority, arbitrator, court or administrative agency that could have a Material
Adverse Effect.

         4.5          CORRECTNESS OF FINANCIAL STATEMENT

         The financial  statements of Borrower dated as of _________  heretofore
delivered by Borrower to Lender, (a) present fairly its financial  condition and
results of  operations;  (b)  disclose  all  liabilities  of  Borrower  that are
required to be reflected or reserved against under GAAP,  whether  liquidated or
unliquidated, fixed or contingent; and (c) have been prepared in accordance with
GAAP.  Except as disclosed to Lender  pursuant to Section 6.3, since the date of
such  financial  statements,  there  has been no change or  changes  which  have
resulted in a Material Adverse Effect.

         4.6          TAXES

         Borrower has filed, or caused to be filed,  all federal,  state,  local
and foreign tax returns  required to be filed by it, and has paid,  or caused to
be paid, all taxes as are shown on such returns,  or on any assessment  received
by it, to the extent  that such  taxes  have  become  due,  except as  otherwise
contested in good faith and except for those taxes the nonpayment of which would
not , in the aggregate,  have a Material Adverse Effect.  Borrower has set aside
proper amounts on its books, determined in accordance with GAAP, for the payment
of all taxes for the years  that have not been  audited  by the  respective  tax
authorities and for taxes being contested by it.

         4.7          ERISA

         Borrower is in compliance in all material  respects with the applicable
provisions  of  ERISA.  Borrower  has not  violated  any  provision  of any Plan
maintained or contributed to by it in a manner that could reasonably be expected
to result in a Material  Adverse  Effect.  No "reportable  event" (as defined in
Title IV of ERISA)  has  occurred  and is  continuing  with  respect to any Plan
initiated by it.

         4.8          OTHER OBLIGATIONS

         Borrower is not in default with respect to any  Indebtedness  or any of
its material contractual obligations.

         4.9          ENVIRONMENTAL MATTERS

         Borrower  is  in   compliance   in  all  material   respects  with  all
Environmental  Laws  applicable to it, other than such  noncompliance  as in the
aggregate  will not have a Material  Adverse  Effect.  Borrower has not received
notice that it is the subject of any federal or state  investigation  evaluating
whether any Remedial  Action is needed.  There have been no Releases by Borrower
that could reasonably be expected to result in a Material Adverse Effect.

         4.10         LIENS

         Borrower  has  good,  indefeasible,   and  merchantable  title  to  and
ownership  of the  Collateral,  free and clear of all  Liens,  except  Permitted
Liens.  There  are  no  Liens  of any  nature  whatsoever  on any of  Borrower's
properties other than Permitted Liens.

         4.11         NO BURDENSOME RESTRICTIONS; NO DEFAULTS

         Borrower is not a party to any  contractual  obligation  the compliance
with which would have a Material Adverse Effect. No facts or circumstances exist
which would constitute a breach of any obligation, representation or warranty of
Borrower  hereunder  if this  Agreement  were in  effect  immediately  prior  to
Borrower's execution hereof.

         4.12         INSURANCE

         All current  policies of  insurance  of any kind or nature  owned by or
issued to Borrower,  including,  without  limitation,  policies of fire,  theft,
product liability,  public liability,  property damage, other casualty, employee
fidelity,  workers' compensation and employee health and welfare insurance,  are
in full force and effect and are of a nature and  provide  such  coverage  as is
sufficient and as is customarily carried by companies of its size and character.
Borrower  has no reason to believe that it will be unable to comply with Section
6.5.

         4.13         LABOR MATTERS

         Other  than  any of  the  following  which  in the  aggregate  have  no
reasonable  likelihood  of having a Material  Adverse  Effect:  (i) there are no
strikes,  work  stoppages,  slowdowns  or  lockouts  pending  or  to  Borrower's
knowledge  threatened against or involving it; (ii) there are no arbitrations or
grievances pending or to its knowledge threatened against or involving it; (iii)
there  is no  organizing  activity  involving  it  pending  or to its  knowledge
threatened  by any  labor  union  or  group  of  employees;  (iv)  there  are no
representation  proceedings  pending  against it or to its knowledge  threatened
with the National Labor Relations Board;  (v) no labor  organization or group of
its employees has made a pending demand on it for recognition; (vi) there are no
unfair labor practice charges, grievances or complaints pending or in process or
to its  knowledge  threatened  by or on behalf of any  employee  or group of its
employees; (vii) there are no complaints or charges against it pending or to its
knowledge  threatened  to be filed  with  any  federal,  state  or local  court,
governmental  agency or arbitrator based on, arising out of, in connection with,
or otherwise  relating to its employment of any individual;  and (viii) it is in
material  compliance  with  all  Governmental  Rules,  and  all  orders  of  any
Governmental  Authority  or  arbitrator,  relating  to the  employment  of labor
including  all such  laws  relating  to  wages,  hours,  collective  bargaining,
discrimination,  civil  rights,  and the payment of  withholding  and/or  social
security and similar  taxes.  As of the date hereof  Borrower is not a party to,
and has no obligations under, any collective bargaining agreement.

         4.14         FORCE MAJEURE

         Neither Borrower's  business nor its properties are currently suffering
from the  effects of any fire,  explosion,  accident,  strike,  lockout or other
labor dispute,  drought, storm, hail, earthquake,  embargo, act of God or of the
public enemy or other casualty (whether or not covered by insurance), other than
those  the  consequences  of which in the  aggregate  could  not  reasonably  be
expected to have a Material Adverse Effect.

         4.15         INTELLECTUAL PROPERTY

         Borrower  owns  or  licenses  or  otherwise  has the  right  to use all
material licenses, Permits, patents, patent applications,  trademarks, trademark
applications,  service marks, trade names,  copyrights,  copyright applications,
franchises,  authorizations  and other  intellectual  property  rights  that are
necessary  for the operation of its  businesses,  without  infringement  upon or
conflict  with the rights of any other Person with respect  thereto,  including,
without  limitation,  all trade names.  No slogan or other  advertising  device,
product, process, method, substance, part or other material now employed, or now
contemplated  to be employed,  by Borrower  infringes upon or conflicts with any
rights owned by any other Person,  which  infringement or conflict is reasonably
likely to have a Material Adverse Effect,  and no claim or litigation  regarding
any of the foregoing is pending or, to its knowledge,  threatened, the existence
of which is  reasonably  likely to have a Material  Adverse  Effect.  No patent,
invention, device, application, principle or any statute, law, rule, regulation,
standard or code is pending or, to its knowledge, proposed, other than those the
consequences of which in the aggregate have no reasonable likelihood of having a
Material Adverse Effect.

         4.16         SOLVENCY

         Borrower has received  consideration that is the reasonably  equivalent
value  of the  obligations  and  liabilities  that it has  incurred  to  Lender.
Borrower is not insolvent as defined in any applicable state or federal statute,
nor  will  it be  rendered  insolvent  by the  execution  and  delivery  of this
Agreement or the other Loan Documents.  Borrower does not intend to, nor does it
believe that it will, incur debts beyond its ability to pay them as they mature.
Borrower has capital  sufficient to carry on its business and  transactions  and
all business and transactions in which it is about to engage.

         4.17         TRUTH, ACCURACY OF INFORMATION

         All financial and other  information  furnished to Lender in connection
with this  Agreement is accurate in all  material  respects and does not contain
any  untrue  statement  of a  material  fact or omit to  state a  material  fact
necessary  in  order  to  make  the  information  furnished,  in  light  of  the
circumstances  under which furnished,  not misleading.  The  representations and
warranties in Sections  4.10 and 4.15 are based solely upon the  representations
and  warranties  made by Lender to Borrower in  connection  with the sale of the
Collateral by Lender to Borrower.

         4.18         CHIEF EXECUTIVE OFFICE AND OTHER LOCATIONS

         Borrower's  chief  executive  office and principal place of business is
East 15520 Fairview Avenue,  Spokane, WA 99216. Borrower's books and records are
located  at its  chief  executive  office,  and the only  other  offices  and/or
locations  where it keeps  the  Collateral  (except  for  Inventory  which is in
transit) or conducts  any of its  business  are set forth in Section 4.18 of the
Disclosure Schedule.

         4.19         COMPLIANCE WITH LAW

         Borrower is in compliance with all  Governmental  Rules and law, except
where the failure to do so would not have a Material Adverse Effect.

ARTICLE V.            CONDITIONS

         5.1          CONDITIONS OF INITIAL EXTENSION OF CREDIT

         The  obligation  of Lender to extend  any credit  contemplated  by this
Agreement is subject to the  fulfillment to Lender's  satisfaction of all of the
following conditions:

         (a)  Documentation.  Lender shall have received,  in form and substance
satisfactory to it, each of the following duly executed:

                  (i)      this Agreement, and the Note;

                  (ii)     a corporate borrowing resolution from Borrower;

                  (iii)    a good standing certificate and certified copy of 
Borrower's articles of incorporation;

                  (iv)     a copy of Borrower's by-laws certified by its 
secretary as correct and complete;

                  (v)      a certificate of incumbency from Borrower;

                  (vi) an opinion of Graham & Dunn,  P.C.,  counsel to Borrower,
         as to such matters as Lender shall reasonably require; and

                  (vii) such other documents as Lender may require.

         (b)      Financial Condition.  No event or circumstance exists that 
can reasonably be expected to have a Material Adverse Effect.

         (c) Insurance.  Borrower shall have delivered to Lender evidence of the
insurance coverage,  including loss payable  endorsements,  required pursuant to
Section 6.5.

         5.2          CONDITIONS OF EACH EXTENSION OF CREDIT

         The  obligation  of Lender to make any Loan  (including  any Loan being
made by Lender on the Closing  Date) shall be subject to the further  conditions
precedent that:

         (a) the  following  statements  shall be true on the date of such Loan,
both  before and after  giving  effect  thereto  and to the  application  of the
proceeds therefrom,  and the acceptance by Borrower of the proceeds of such Loan
shall constitute a  representation  and warranty by Borrower that on the date of
such Loan or such issuance such statements are true:

                  (i) the  representations  and warranties of Borrower contained
         in the Loan Documents are correct in all material respects on and as of
         such  date as  though  made  on and as of such  date  or,  as to  those
         representations  and  warranties  limited by their terms to a specified
         date, were correct in all material respects on and as of such date; and

                  (ii)     no Default is continuing or would result from the 
Loan being made;

         (b)      Lender shall have received such additional documents, 
information and materials as Lender may reasonably request; and

         (c) no event or circumstance  exists that can reasonably be expected to
have a Material Adverse Effect.

ARTICLE VI.           AFFIRMATIVE COVENANTS

         Borrower  covenants that so long as Lender remains  committed to extend
credit to  Borrower  pursuant  to the terms  hereof  and until  performance  and
payment in full, in cash, of all Obligations, Borrower shall:

         6.1          PUNCTUAL PAYMENTS

         Punctually pay all principal,  interest, fees and other liabilities due
under  any of the Loan  Documents  at the  times  and  place  and in the  manner
specified therein.

         6.2          ACCOUNTING RECORDS

         Keep accurate books and records of its financial affairs  sufficient to
permit the  preparation  of financial  statements  therefrom in accordance  with
GAAP.

         6.3          FINANCIAL STATEMENTS AND REPORTS

         Provide to Lender all of the following,  in form and detail  reasonably
satisfactory to Lender and with sufficient copies for distribution to Lender:

                  (i) as soon as available  but not later than 90 days after and
         as of the end of each fiscal year,  reviewed  financial  statements  of
         Borrower,   prepared  in  accordance  with  GAAP  and  prepared  by  an
         independent certified public accountant acceptable to Lender,  together
         with such accountant's report with respect thereto;

                  (ii) as soon as available but not later than 30 days after and
         as of the end of each month,  financial statements of Borrower prepared
         in accordance with GAAP (subject to normal year-end adjustments and, if
         Borrower so elects,  without  footnotes)  together with a comparison of
         Borrower's financial condition for such month and year-to-date with the
         corresponding  month  and  year-to-date  in the  immediately  preceding
         fiscal year;

                  (iii)  contemporaneously  with the delivery of each  financial
         statement  required hereby, a certificate of Borrower's chief executive
         officer  substantially  in the form of  Exhibit B  attached  hereto (A)
         certifying  that  such  financial  statements  fairly  present  in  all
         material  respects  Borrower's  balance  sheet  as of the  end of  such
         month/year   and  income  and  cash  flow  for  such   month/year   and
         year-to-date (subject to normal year-end adjustments),  and (B) stating
         that no Default  existed at any time during the period  covered by such
         statement,  except for those events or conditions, if any, described in
         such certificate in reasonable  detail together with a statement of any
         action taken or proposed to be taken with respect thereto;

                  (iv) not  later  than  March 30 of each  year,  or  sooner  if
         available,  Borrower shall furnish to Lender  detailed  projections for
         Borrower's  current fiscal year setting forth  projected  income,  cash
         flow and borrowing  availability  under this Agreement for each quarter
         and the projected balance sheet as of the end of each quarter, together
         with a certificate of Borrower's chief executive  officer setting forth
         the  assumptions  on which such  projections  are based and  certifying
         that, in the judgment of such officer,  such assumptions are reasonable
         based on careful consideration and on the information known to Borrower
         at the time such projections were prepared;

                  (v) not  later  than 20 days  after  and as of the end of each
         month:  (i) a report  of the aging  (based  on due date) of  Borrower's
         accounts  payable as of the end of the preceding month in the following
         categories:  current;  1-30 days past due;  31-60 days past due,  61-90
         days past due and over 90 days past due; and (ii) a report of the aging
         (based  on due  date)  of  Borrower's  accounts  as of  the  end of the
         preceding month in the following  categories:  current;  1-30 days past
         due;  31-60  days past due,  61-90  days past due and over 90 days past
         due; and

                  (vi) from time to time such  other  information  as Lender may
reasonably request.

         6.4          COMPLIANCE

         Preserve and maintain all licenses,  Permits,  governmental  approvals,
rights,  privileges,  franchises,  intellectual property and general intangibles
necessary  for the conduct of its business and comply in all material  respects,
with all Governmental Rules, contractual obligations,  commitments, instruments,
licenses,  Permits  and  franchises,  other  than such  failure to  preserve  or
maintain or  noncompliance  the  consequences  of which in the aggregate are not
reasonably likely to have a Material Adverse Effect.

         6.5          INSURANCE

         (a) Maintain with responsible insurance companies reasonably acceptable
to Lender  insurance  with respect to its  properties  and  business  (including
business  interruption and extra expense  endorsements)  against such casualties
and  contingencies  and of such types, with such deductibles and in such amounts
as is customary in the case of similar businesses.  Such insurance shall contain
a lender's loss payable  endorsement  acceptable to Lender and shall name Lender
as an additional named insured.  The policies or a certificate thereof signed by
the insurer  shall be delivered to Lender  within five  Business  Days after the
issuance or renewal of the policies to Borrower.  Each such policy shall provide
that such policy may not be amended  (except to increase  coverage)  or canceled
without thirty days prior written notice to Lender. At least fifteen days before
the expiration of a policy,  Borrower shall deliver to Lender a binder (or other
evidence  reasonably  acceptable to Lender) indicating that such policy has been
renewed or that a substitute  for such policy will be issued  effective upon the
expiration of such policy. If Borrower fails to do so, Lender may (but shall not
be required to) procure such insurance and add the cost thereof to the Loans.

         (b)  Maintain  in full  force  and  effect  such  liability  and  other
insurance  with  respect to its  activities  as may be  reasonably  required  by
Lender. Such liability insurance shall name Lender as an additional insured with
respect to the  activities  of  Borrower  and shall be  provided  by  insurer(s)
acceptable to Lender.

         6.6          FACILITIES

         Keep all properties  useful or necessary to its business in good repair
and  condition,  and from  time to time make  necessary  repairs,  renewals  and
replacements  thereto  so that  such  property  shall be fully  and  efficiently
preserved and maintained.

         6.7          TAXES AND OTHER LIABILITIES

         Pay and  discharge  when  due any  and all  indebtedness,  obligations,
assessments  and taxes,  both real or  personal,  including  without  limitation
Federal  and  state  income  taxes  and  state  and  local  property  taxes  and
assessments,  except such as Borrower may in good faith contest or as to which a
bona fide  dispute may arise,  and for which  Borrower  has made  provision  for
adequate reserves in accordance with GAAP.

         6.8          LITIGATION

         Promptly give notice in writing to Lender of any litigation  pending or
threatened against it with a claim in excess of $50,000.

         6.9          NOTICE TO LENDER

         (a)  Promptly  (but in no event more than two  Business  Days after the
occurrence  of each  such  event or  matter)  give  written  notice to Lender in
reasonable detail of: (i) the occurrence of any Default; (ii) any termination or
cancellation  of any  insurance  policy which  Borrower is required to maintain,
unless such policy is replaced  without any break in coverage with an equivalent
or better  policy;  (iii) any  uninsured or partially  uninsured  loss or losses
through  liability or property damage, or through fire, theft or any other cause
affecting  the property of Borrower in excess of an aggregate of $50,000  during
any twelve  month  period;  (iv) any change in the  organizational  structure of
Borrower;  or (v) the occurrence of any event that could  reasonably be expected
to have a Material Adverse Effect.

         (b) As soon as possible and in any event within ten days after Borrower
knows or has reason to know that any "reportable  event" (as defined in Title IV
of  ERISA)  that  triggers  an  obligation  to file a notice  with the PBGC with
respect to any Plan has occurred, deliver to Lender a statement of the President
or  chief  financial  officer  of  Borrower  setting  forth  details  as to such
reportable  event and the action  which  Borrower  proposes to take with respect
thereto,  together  with a copy of the  notice of such  reportable  event to the
PBGC.

         (c) Promptly, upon receipt (but in no event more than two Business Days
after  receipt)  of a notice by  Borrower,  any  affiliate  of  Borrower  or any
administrator of any Plan that the PBGC has instituted  proceedings to terminate
a Plan or to appoint a trustee to administer a Plan, provide to Lender a copy of
such notice.

         6.10         CONDUCT OF BUSINESS

         Except as  otherwise  permitted  by this  Agreement,  (a)  conduct  its
business  in the  ordinary  course  and (b) use its  reasonable  efforts  in the
ordinary  course and consistent  with past practice to (i) preserve its business
and the goodwill  and  business of the  customers,  advertisers,  suppliers  and
others with whom it has business relations, (ii) keep available the services and
goodwill of its  present  employees,  and (iii)  preserve  all rights,  Permits,
licenses,  approvals,  privileges,  registered patents, trademarks, trade names,
copyrights and service marks and other intellectual property with respect to its
business.

         6.11         PRESERVATION OF CORPORATE EXISTENCE, ETC.

         Preserve and  maintain its  corporate  existence,  rights  (charter and
statutory) and material franchises, licenses, permits, intellectual property and
general  intangibles,  unless the  failure to so  preserve  and  maintain is not
reasonably likely to have a Material Adverse Effect.

         6.12         ACCESS

         At any reasonable time and from time to time upon at least two Business
Days prior  notice  from Lender  (unless a Default  shall have  occurred  and be
continuing,  in which case no prior notice is  necessary),  permit Lender and/or
any agents or  representatives  thereof,  to (i)  examine and make copies of and
abstracts from Borrower's  records and books of account,  (ii) visit  Borrower's
properties,  (iii) discuss Borrower's affairs, finances and accounts with any of
its officers or directors who may then be reasonably available, (iv) communicate
directly with Borrower's  independent certified public accountants,  (v) arrange
for  verification of Borrower's  accounts under reasonable  procedures  directly
with the obligors thereon or by other methods,  and (vi) examine and inspect its
assets. Borrower shall authorize its independent certified public accountants to
disclose to Lender any and all financial statements and other information of any
kind,  including,  without  limitation,  copies of any management  letter,  work
papers or the substance of any oral  information  that such accountants may have
with respect to Borrower's business,  financial condition, results of operations
or other  affairs.  Borrower  shall execute and deliver at the request of Lender
such  instruments  as may be  necessary  for Lender to obtain  such  information
concerning  the  business of Borrower  as Lender may require  from  accountants,
service bureaus or others having custody of or maintaining  records or assets of
Borrower, provided that the foregoing shall not (and is not intended to) require
Borrower  to take any  action  that  would  constitute  a waiver  of  Borrower's
attorney/client privilege with any of Borrower's attorneys..

         6.13     PERFORMANCE AND COMPLIANCE WITH OTHER COVENANTS

         Perform and observe all the terms, covenants and conditions required to
be performed and observed by it under its  contractual  obligations  (including,
without  limitation,  to pay all rent and other charges  payable under any lease
and all debts and other  obligations  as the same become due), and do all things
necessary to preserve and to keep  unimpaired its rights under such  contractual
obligations, other than such failures the consequences of which in the aggregate
are not reasonably likely to have a Material Adverse Effect.

         6.14         FISCAL YEAR; ACCOUNTING PRACTICES

         Notify  Lender  at  least 45 days in  advance  of any  action  Borrower
intends to take to change (i) its fiscal year or (ii) its method of  accounting,
or any  accounting  practice used by it, or the  application of GAAP in a manner
inconsistent with the financial statements previously delivered by it to Lender.

         6.15         ENVIRONMENTAL

         (a) Promptly give notice to Lender upon obtaining  knowledge of (i) any
claim, injury,  proceeding,  investigation or other action,  including a request
for information or a notice of potential environmental liability, by or from any
Governmental Authority or any third-party claimant that could result in Borrower
incurring  Environmental  Liabilities  and  Costs or (ii) the  discovery  of any
Release at, on, under or from any real property,  facility or equipment owned or
leased by Borrower in excess of  reportable  or  allowable  standards  or levels
under any  applicable  Environmental  Law, or in any manner or amount that could
reasonably be expected to result in Borrower incurring Environmental Liabilities
and Costs.

         (b) Upon  discovery of the presence on any property  owned or leased by
Borrower  of any  Contaminant  that  reasonably  could be  expected to result in
Environmental  Liabilities  and Costs,  take all  Remedial  Action  required  by
applicable Environmental Law.

         6.16         LIENS

         Keep the  Collateral  free and  clear of all  Liens,  except  Permitted
Liens.

         6.17         FURTHER ASSURANCES

         At Lender's request at any time and from time to time, duly execute and
deliver,  or cause to be duly executed and delivered,  such further  agreements,
documents and  instruments,  and do or cause to be done such further acts as may
be necessary or proper to evidence,  perfect,  maintain and enforce the security
interests and the priority thereof in the Collateral and to otherwise effectuate
the provisions or purposes of this Agreement or any of the other Loan Documents,
at Borrower's expense.

ARTICLE VII.          NEGATIVE COVENANTS

         Borrower  covenants that so long as Lender remains  committed to extend
credit to  Borrower  pursuant  to the terms  hereof  and until  performance  and
payment in full, in cash, of all Obligations, Borrower will not:

         7.1          LIENS

         Create or suffer to exist any Lien upon or with  respect  to any of its
properties,  whether  now owned or  hereafter  acquired,  or assign any right to
receive income, except Permitted Liens.

         7.2          INDEBTEDNESS

         Create or suffer to exist any Indebtedness except:

         (a)      the Obligations;

         (b)  current   liabilities  in  respect  of  taxes,   assessments   and
governmental  charges or levies incurred,  or liabilities for labor,  materials,
inventory,  services,  supplies and rentals  incurred,  or for goods or services
purchased,  in the ordinary course of business consistent with industry practice
in respect of arm's length transactions and the past practice of Borrower;

         (c)  Indebtedness  of  Borrower   referenced  on  Section  7.2  of  the
Disclosure  Schedule and all renewals,  extensions,  refinancing or refunding of
such  Indebtedness  in a principal  amount  which does not exceed the  principal
amount  outstanding  immediately  before  such  refinancing,  together  with all
prepayment  fees,  penalties and expenses in respect of the  Indebtedness  being
renewed,  extended,   refinanced  or  refunded,   provided  each  such  renewal,
extension, refinancing or refunding is on terms and conditions no less favorable
to the creditors than the Indebtedness  being renewed,  extended,  refinanced or
refunded;

         (d) purchase money  Indebtedness  (including capital leases) to finance
the purchase of fixed assets (including equipment);  provided that (i) the total
of all such  Indebtedness  shall not  exceed an  aggregate  principal  amount of
$___________ at any one time  outstanding (in addition to any such  Indebtedness
referred to in Section 7.2(c));  (ii) such  Indebtedness when incurred shall not
exceed the purchase price of the assets financed; and (iii) no such Indebtedness
shall be refinanced  for a principal  amount in excess of the principal  balance
outstanding thereon at the time of such refinancing;

         (e)  Indebtedness  subordinated  in writing to the Obligations on terms
acceptable  to  Lender  in favor  of the  prior  payment  in full in cash of the
Obligations;

         (f)  Indebtedness  to the Senior  Lender  provided  that the  principal
amount  thereof  does  not  exceed  $1,500,000  outstanding  at  any  time;  (g)
Indebtedness  secured  by  Permitted  Liens;  and (h) In  addition  to all other
Indebtedness  permitted by this Agreement,  aggregate Indebtedness not to exceed
at any one time outstanding $______.

         7.3          RESTRICTED PAYMENTS, REDEMPTIONS

         (a)  Declare  or make any  dividend  payment or other  distribution  of
assets,  properties,  cash,  rights,  obligations or securities on account or in
respect  of any of its  Stock  or Stock  Equivalents  except  dividends  paid by
Borrower solely in Stock or Stock Equivalents of Borrower;

         (b)      purchase, redeem or otherwise acquire for value any of 
Borrower's Stock or Stock Equivalents; or

         (c)  prepay or redeem  any  Indebtedness  that is  subordinated  to the
Obligations or make any payment in respect of such Indebtedness at any time that
a Default is continuing or would be caused by such payment.

         7.4          MERGERS, STOCK ISSUANCES, SALE OF ASSETS, ETC.

         (a)  Merge  or   consolidate   with  any  Person  or  acquire   all  or
substantially  all of the Stock or Stock  Equivalents of any Person,  except for
(i) any such merger,  consolidation,  or acquisition in which the Stock or Stock
Equivalents  are  acquired in exchange  for, or out of the cash  proceeds of the
substantially concurrent sale of, new common or preferred equity of Borrower;

         (b) Acquire all or substantially all of (i) the assets of any Person or
(ii) the assets  constituting  the business of a division,  branch or other unit
operation of any Person, except for any such acquisition in which the assets are
acquired in  exchange  for,  or out of the cash  proceeds  of the  substantially
concurrent sale of, new common or preferred equity of Borrower; or

         (c) Sell,  convey,  transfer,  lease or otherwise dispose of any of its
assets or any  interest  therein  to any  Person,  or permit or suffer any other
Person to acquire  any  interest  in any of the assets of  Borrower,  except (i)
Permitted  Liens,  (ii) the sale or  disposition  of  inventory  in the ordinary
course of business  and/or assets which have become  obsolete or are replaced in
the  ordinary  course of  business,  (iii)  equipment  to the  extent  that such
equipment  is  exchanged  for  credit  against  the  purchase  price of  similar
replacement  equipment,  or the  proceeds of such sale are  reasonably  promptly
applied to the purchase price of such replacement equipment,  and (iv) any other
assets or interest,  provided that (A) at the time of any such sale, conveyance,
transfer  or  disposition,  no Default  shall  exist or shall  result  from such
transaction,  (B) at least 80% of the  aggregate  sales  price  from such  sale,
conveyance, transfer or disposition shall be paid in cash, and (C) the aggregate
value of all assets so sold by  Borrower  shall not  exceed in any  fiscal  year
$_____.

         7.5          INVESTMENTS IN OTHER PERSONS

         Directly or  indirectly,  make or  maintain  any loan or advance to any
other Person or own, purchase or otherwise acquire any Stock, Stock Equivalents,
other equity  interest,  obligations or other securities of, or otherwise invest
in, any other Person (any such transaction being an "Investment"), except:

         (a) Investments in accounts,  contract rights and chattel paper,  notes
receivable and similar items arising in the ordinary course of business;

         (b)      incidental advances to employees of Borrower in the ordinary
course of business;

         (c)  Investments in direct  obligations to the United States of America
or any agency thereof,  banker's  acceptances and certificates of deposit issued
by any commercial bank in the United States of America;

         (d)  Investments  acquired in exchange for, or out of the cash proceeds
of the  substantially  concurrent  sale of,  new common or  preferred  equity of
Borrower; and

         (e) In addition to the Investments permitted under this Agreement,  any
other  Investments  to the  extent  that  they do not  exceed  at any  one  time
outstanding $________.

         7.6          CHANGE IN NATURE OF BUSINESS

         Directly  or  indirectly  engage in any  business  activity  other than
contract  manufacturing and new activities that are reasonably  incidental to or
can reasonably be expected to facilitate such manufacturing.

         7.7          GUARANTIES

         Guarantee or become liable in any way as surety,  endorser  (other than
as endorser of negotiable  instruments for deposit or collection in the ordinary
course of  business),  accommodation  endorser or  otherwise  for, nor pledge or
hypothecate  any  assets  of  Borrower  as  security  for,  any  liabilities  or
obligations  of any other Person  except any of the  foregoing  required by this
Agreement.

         7.8          PLANS

         (a) Adopt or become  obligated  to  contribute  to any Plan  subject to
Title IV or any  multiemployer  Plan or any other Plan subject to Section 412 of
the Internal  Revenue  Code  (except for any such Plan listed on the  Disclosure
Schedule on the Closing Date), (b) establish or become obligated with respect to
any new welfare benefit Plan, or modify any existing welfare benefit Plan, which
is  reasonably  likely to result in an increase  of the present  value of future
liabilities  for  post-retirement  life insurance and medical  benefits,  or (c)
establish or become obligated to contribute to any new unfunded pension Plan, or
modify any existing  unfunded pension Plan, which is reasonably likely to result
in an increase in the present  value of future  unfunded  liabilities  under all
such plans.

         7.9          CANCELLATION OF INDEBTEDNESS OWED TO IT

         Cancel  any  claim or  Indebtedness  owed to it except  for  legitimate
business  purposes in the  reasonable  judgment of Borrower  and in the ordinary
course of business.

         7.10         ENVIRONMENTAL

         Dispose,  or permit any other Person to dispose,  of any Contaminant by
placing  it in or on the  ground or waters  of any  property  owned or leased by
Borrower,  except in material  compliance with Environmental Law or the terms of
any  Permit,  unless  such  action(s),  in the  aggregate,  have  no  reasonable
likelihood of having a Material Adverse Effect.

         7.11         TRANSACTIONS WITH AFFILIATES

         Enter  into any  transaction  directly  or  indirectly  with or for any
affiliate except in the ordinary course of business on a basis no less favorable
to  such  affiliate  than  would  be  obtained  in  a  comparable  arm's  length
transaction  with a  Person  not an  affiliate  involving  assets  that  are not
material to the business and operations of Borrower.

         7.12         NEW LOCATION; NAME CHANGE

         Open any new  location  or change its name  unless (i)  Borrower  gives
Lender (a) 30 days prior written notice of the intended name change, (b) 30 days
prior  written  notice of the intended  opening of such new  location,  and (ii)
Borrower  executes  and  delivers  to  Lender  such  agreements,  documents  and
instruments  as Lender  deems  reasonably  necessary or desirable to protect its
interests in the  Collateral,  including,  without  limitation,  UCC-1 financing
statements.

ARTICLE VIII.         EVENTS OF DEFAULT

         8.1          EVENTS OF DEFAULT

         The  occurrence of any of the following  shall  constitute an "Event of
Default" under this Agreement:

         (a)      Borrower shall fail to pay when due any amount payable under 
any of the Loan Documents;

         (b) any  financial  statement  or  certificate  furnished  to Lender in
connection with, or any  representation  or warranty made by Borrower under, any
of the Loan  Documents  shall prove to be false or  misleading  in any  material
respect when furnished or made;

         (c) any default by Borrower in the  performance  of or compliance  with
any obligation,  agreement or other  provision  contained in Sections 6.5, 6.11,
7.2, 7.3, 7.4, 7.5, 7.7, and 7.12;

         (e) any default by Borrower in the  performance  of or compliance  with
any  obligation,  agreement or other  provision  contained in any Loan  Document
(other  than those  referred  to in  subsections  (a) through (c) above) for ten
Business Days after written notice thereof has been given to Borrower by Lender;

         (f) any  breach  by  Borrower  in the  payment  or  performance  of any
obligation under the terms of any contract or instrument  (other than any of the
Loan Documents) evidencing Indebtedness in excess of $100,000 if such breach has
not been cured to the  satisfaction  of the affected  creditor or waived by such
creditor  within any  applicable  cure  period  provided  under the  contract or
instrument;

         (g) any  judgment(s),  order(s) or writ(s) in excess of an aggregate of
$100,000 is/are rendered or entered  against  Borrower,  except any judgment for
which Borrower is fully insured  (subject to standard  deductibles) or except if
the enforcement of such judgment, order or writ has been stayed or the liability
thereon bonded in a manner and on terms  reasonably  satisfactory to Lender;  or
the service of notice(s) of levy and/or of writ(s) of  attachment  or execution,
or other like  process,  against any of the assets of Borrower  with  respect to
obligations in excess of an aggregate of $100,000;

         (h) Borrower shall become  insolvent,  or shall suffer or consent to or
apply for the  appointment  of a receiver,  trustee,  custodian or liquidator of
itself or any of its  property,  or shall  generally be unable to or fail to pay
its debts as they become due, or shall make a general assignment for the benefit
of creditors; Borrower shall file a voluntary petition in bankruptcy, or seek to
effect a plan or other  arrangement with creditors or any other relief under the
Bankruptcy  Code,  or under any state or other  Federal law  granting  relief to
debtors,  whether now or hereafter  in effect;  or any  involuntary  petition or
proceeding  pursuant to the  Bankruptcy  Code or any other  applicable  state or
other  Federal law relating to  bankruptcy,  reorganization  or other relief for
debtors is filed or commenced  against Borrower and is not dismissed,  stayed or
vacated within sixty days  thereafter;  Borrower shall file an answer  admitting
the  jurisdiction  of the court and the material  allegations of any involuntary
petition;  or Borrower shall be  adjudicated a bankrupt,  or an order for relief
shall be entered by any court of  competent  jurisdiction  under the  Bankruptcy
Code or any other  applicable  state or  Federal  law  relating  to  bankruptcy,
reorganization or other relief for debtors;

         (i) tax lien(s)  (other than a Permitted  Lien) greater than $50,000 in
the aggregate  shall have been filed against  Borrower or any of its property by
any federal, state, or municipal authority;

         (j) if any of the  following  events  occur:  (a) any Plan  incurs  any
"accumulated  funding  deficiency"  (as defined in ERISA) whether waived or not,
(b)  Borrower  or any  affiliate  engages in any  "prohibited  transaction"  (as
defined in ERISA), (c) any Plan is terminated,  (d) a trustee is appointed by an
appropriate United States district court to administer any Plan, or (e) the PBGC
institutes  proceedings  to  terminate  any  Plan or to  appoint  a  trustee  to
administer any Plan;

         (k) the  dissolution  or  liquidation  of Borrower,  or Borrower or its
directors or stockholders shall take action seeking to effect the dissolution or
liquidation of Borrower; or

         (l) there  shall exist or occur any event or  condition  that Lender in
good faith believes impairs, or is substantially  likely to impair, the prospect
of payment or performance by Borrower of any of the Obligations.

         8.2          REMEDIES

         (a) During the continuance of any Event of Default (other than an Event
of Default  referred to in Section 8.1(h) hereof),  Lender may by written notice
to  Borrower,  (i)  terminate  the  obligations  of Lender to extend any further
credit under any of the Loan  Documents,  and (ii) declare all  indebtedness  of
Borrower  under the Loan  Documents to be  immediately  due and payable  without
presentment,  demand,  protest or any other notice of any kind, all of which are
hereby expressly waived by Borrower,  and/or take such enforcement  action as is
permitted  under this Section 8.2. Upon the occurrence or existence of any Event
of Default  described in Section 8.1(h) hereof,  immediately and without notice,
(A) the obligations, if any, of Lender to extend any further credit under any of
the  Loan  Documents  shall  automatically  cease  and  terminate,  and  (B) all
indebtedness  of Borrower under the Loan Documents  shall  automatically  become
immediately due and payable,  without presentment,  demand, protest or any other
notice  of any kind,  all of which  are  hereby  expressly  waived by  Borrower.
Borrower  acknowledges  that  portions of the  Collateral  may be  difficult  to
preserve  and  dispose  of  and  may  be  subject  to  complex  maintenance  and
management;  accordingly,  Lender shall have the widest possible latitude in the
exercise of its rights and remedies hereunder as to such portions of Collateral.

         (b) During the continuance of an Event of Default,  Lender, in addition
to any other rights and remedies contained in the Loan Documents, shall have all
of the  rights  and  remedies  of a secured  party  under the Code and all other
applicable  law,  all of which  rights  and  remedies  shall be  cumulative  and
nonexclusive to the extent  permitted by law. Lender may cause the Collateral to
remain on  Borrower's  premises,  at Borrower's  expense,  pending sale or other
disposition  thereof.  Lender  shall  have the right to  conduct  such  sales on
Borrower's premises or elsewhere,  at Borrower's expense, on such occasion(s) as
Lender may see fit, and  Borrower,  at Lender's  request,  will,  at  Borrower's
expense,  assemble  the  Collateral  and make it  available  to  Lender  at such
place(s) as Lender may reasonably  designate from time to time. Any sale,  lease
or other  disposition by Lender of the Collateral,  or any part thereof,  may be
for cash or other value.  Borrower  shall  execute and  deliver,  or cause to be
executed  and  delivered,  such  instruments,   documents,  assignments,  deeds,
waivers,  certificates  and  affidavits  and take such further  action as Lender
shall  reasonably  require in  connection  with such sale,  and Borrower  hereby
constitutes  Lender as its  attorney-in-fact  to  execute  any such  instrument,
document,  assignment,  deed,  waiver,  certificate  or  affidavit  on behalf of
Borrower and in its name. At any sale of the  Collateral,  the  Collateral to be
sold may be sold in one lot as an  entirety  or in  separate  lots as Lender may
determine.  Lender shall not be obligated to make any sale of any  Collateral if
it  determines  not to do so,  regardless  of the fact  that  notice of sale was
given. Lender may, without notice or publication,  adjourn any public or private
sale or cause the sale to be adjourned from time to time by  announcement at the
time and place fixed for sale, and such sale may,  without  further  notice,  be
made at the time and  place  to which it was so  adjourned.  In case any sale of
Collateral is made on credit or for future delivery,  the Collateral so sold may
be retained by Lender  until the sale price is paid,  but Lender shall not incur
any liability if any purchaser  fails to pay for any  Collateral so sold and, in
case of any such failure, such Collateral may be sold again. At any public sale,
Lender (i) may bid for or purchase,  free (to the extent  permitted by law) from
any rights of redemption, stay or appraisal on the part of Borrower with respect
to the Collateral, the Collateral offered for sale, (ii) make payment on account
thereof by using any claim then due and  payable to Lender  from  Borrower  as a
credit against the purchase  price,  and (iii) upon compliance with the terms of
sale, hold,  retain and dispose of such property without further  accountability
to Borrower therefor.

         (c) Lender is hereby granted a license and right to use, without charge
upon the occurrence and during the  continuance of an Event of Default and until
the Obligations are fully and finally paid in cash, Borrower's labels,  patents,
copyrights,  rights of use of any name, trade secrets, trade names,  trademarks,
service  marks,  advertising  material or any  property  of a similar  nature in
completing the production, advertising for sale and sale of any Collateral.

         (d) Any notice  required to be given by Lender  with  respect to any of
the Collateral which notice is given pursuant to Section 9.1 and deemed received
pursuant  to  Section  9.1 at least five  Business  Days  before a sale,  lease,
disposition  or other  intended  action by  Lender  with  respect  to any of the
Collateral shall  constitute fair and reasonable  notice to Borrower of any such
action. A public sale in the following fashion shall be conclusively presumed to
be reasonable: (i) the sale is held in a county where any part of the Collateral
is  located  or in  which  Borrower  has a place of  business;  (ii) the sale is
conducted by auction, but it need not be by a professional auctioneer; (iii) any
Collateral is sold as is and without any preparation for sale; and (iv) Borrower
is given notice of such public sale pursuant to the preceding sentence.

         (e) Upon the  occurrence  and  during  the  continuance  of an Event of
Default,  Lender shall have, with respect to Borrower's accounts, all rights and
powers  to:  (i) direct any and all  account  debtors  to make all  payments  in
respect of such accounts  directly to Lender or otherwise  demand payment of any
or all of such accounts;  (ii) enforce payment of any or all of such accounts by
legal  proceedings or otherwise;  (iii) exercise  Borrower's rights and remedies
with respect to any actions or  proceedings  brought to collect  such  accounts;
(iv) sell or assign any such  account  upon such  terms,  for such amount and at
such time or times as Lender deems advisable;  (v) settle,  adjust,  compromise,
extend or renew any such account;  (vi)  discharge or release any such accounts;
and  (vii)  prepare,  file and  sign  Borrower's  name on any  proof of claim in
bankruptcy or any similar document  against an account debtor,  and to otherwise
exercise the rights granted herein.

         (f) Lender shall have no  obligation  (i) to preserve any rights to the
Collateral against any Person, (ii) to make any demand upon or pursue or exhaust
any rights or remedies against Borrower or others with respect to payment of the
Obligations,  (iii) to pursue or exhaust any rights or remedies  with respect to
any of the  Collateral  or any other  security for the  Obligations,  or (iv) to
marshal  any  assets in favor of  Borrower  or any other  Person  against  or in
payment of any or all of the Obligations.

         (g)  Borrower  shall  pay  to  Lender  on  demand  and as  part  of the
Obligations,  all costs and expenses,  including  court costs and costs of sale,
incurred by Lender in exercising  any of its rights or remedies  hereunder,  and
all costs and expenses incurred in connection with any review of any part of the
Collateral.

         8.3          LENDER AS BORROWER'S ATTORNEY

         Borrower  hereby  appoints  Lender or any other  Person whom Lender may
designate,  as Borrower's  attorney,  with power during the  continuation  of an
Event of Default: to indorse Borrower's name on any checks, notes,  acceptances,
money  orders,  drafts or other forms of payment or security  that may come into
Lender's  possession;  to sign  Borrower's name on any invoice or bill of lading
relating  to  any  account,  on  drafts  against  customers,  on  schedules  and
assignments  of accounts,  on notices of  assignment,  financing  statements and
other public  records,  and on notices to  customers;  to notify the post office
authorities to change the address for delivery of Borrower's  mail to an address
designated  by Lender;  to  receive,  open and  process  all mail  addressed  to
Borrower;  to ask for,  demand,  sue for,  collect,  receive,  receipt  and give
aquittance  for any and all  moneys  due or to become  due with  respect  to any
Collateral;  to settle,  compromise,  prosecute  or defend any action,  claim or
proceeding with respect to Collateral;  to sell,  assign,  pledge,  transfer and
make any agreement with respect to or otherwise deal with the Collateral; and to
do all things necessary to perfect Lender's security interest in the Collateral,
to  preserve  and  protect  the  Collateral  and to  otherwise  carry  out  this
Agreement; provided, however, that nothing contained in this Section 8.3 will be
construed as requiring or obligating Lender to take any action.  Provided Lender
acts in a  reasonable  manner,  Borrower  ratifies and approves all acts of such
attorney,  and neither  Lender nor the  attorney  will be liable for any acts or
omissions  nor for any error of judgment  or mistake of fact or law.  This power
being coupled with an interest is irrevocable  until the  Obligations  have been
fully  satisfied and  indefeasibly  paid in cash or the  financing  arrangements
between Lender and Borrower are terminated, whichever shall later occur.

ARTICLE IX.           MISCELLANEOUS

         9.1          NOTICES

                  Any notice required or permitted to be given hereunder will be
in  writing,  will be  addressed  to the party to be notified at the address set
forth below,  or at such other  address as each party may  designate  for itself
from time to time by notice  hereunder,  and will be deemed to have been validly
given (i) five days  following  deposit in the United  States mail,  with proper
first-class  postage  prepaid,  (ii) the next  Business  Day  after  notice  was
delivered to a regularly  scheduled  overnight  delivery carrier,  or (iii) upon
receipt of notice given by fax, mailgram, telegram, telex or personal delivery:

                  To Borrower:         Servatron, Inc.
                                       East 15520 Fairview Avenue
                                       Spokane, Washington 99216
                                       Attn:  Larry Panattoni
                                       Fax No.:

                  To Lender:           Itron, Inc.
                                       2818 N. Sullivan Road
                                       Spokane, Washington 99216
                                       Attn:  David G. Remington
                                       Fax No.:  _____________

         9.2          COSTS, EXPENSES, ATTORNEYS' FEES

         Borrower  shall pay  immediately  upon  demand  the full  amount of all
payments, advances, charges, costs and expenses, including reasonable attorneys'
fees  (whether  incurred  at the trial or  appellate  level,  in an  arbitration
proceeding,  in  bankruptcy,   (including,  without  limitation,  any  adversary
proceeding,  contested  matter or motion) or  otherwise),  incurred by Lender in
connection with (a) the  negotiation and preparation of the Loan Documents,  (b)
the   enforcement,   preservation  or  protection  (or  attempted   enforcement,
preservation or protection) of Lender's rights,  including,  without limitation,
periodic  collateral  examinations,  and/or the  collection of any amounts which
become due under any of the Loan  Documents,  and (c) the prosecution or defense
of any action in any way related to any of the Loan Documents, including without
limitation,  any  action  for  declaratory  relief,  and  including  any  of the
foregoing  incurred in connection  with any  bankruptcy  proceeding  relating to
Borrower.

         9.3          INDEMNIFICATION

         To the fullest  extent  permitted  by law,  Borrower  hereby  agrees to
protect,  indemnify,  defend and hold  harmless each of Lender and its officers,
directors,   shareholders,   employees,   agents,   attorneys   and   affiliates
(collectively,  "Indemnitees") from and against any liabilities, losses, damages
or  expenses  of any kind or  nature  and  from any  suits,  claims  or  demands
(including in respect of or for reasonable  attorneys' fees (whether incurred at
the trial or  appellate  level,  in an  arbitration  proceeding,  in  bankruptcy
(including,  without limitation,  any adversary proceeding,  contested matter or
motion) or otherwise)  and other  expenses,  including  the allocated  costs and
expenses of internal  counsel)  arising on account of or in connection  with any
matter or thing or  action or  failure  to act by  Indemnitees,  or any of them,
arising out of or relating to this Agreement, any other Loan Document, including
without  limitation  any use by  Borrower  of any Loan  proceeds,  except to the
extent such liability arises from the willful  misconduct or gross negligence of
the Indemnitees.  Upon receiving knowledge of any suit, claim or demand asserted
by a third  party  that  Lender  believes  is covered  by this  indemnity,  such
Indemnitee shall give Borrower notice of the matter and an opportunity to defend
it, at  Borrower's  sole cost and expense,  with legal counsel  satisfactory  to
Lender.  Lender may also require  Borrower to defend the matter.  Any failure or
delay of Lender to notify  Borrower of any such suit,  claim or demand shall not
relieve  Borrower of its  obligations  under this  Section 9.3, but shall reduce
such  obligations  to the extent of any  increase  in those  obligations  caused
solely by an  unreasonable  failure  or delay in  providing  such  notice.  This
Section  9.3  shall  survive  the  payment  in full  and  performance  of all of
Borrower's other Obligations.

         9.4          SUCCESSORS AND ASSIGNS

         (a) The Loan  Documents  shall be binding upon and inure to the benefit
of the successors and assigns of the parties;  provided,  however, that Borrower
may not assign or transfer its interest hereunder.  Lender reserves the right to
sell, assign, transfer, negotiate or grant participations in all or any part of,
or any  interest  in,  Lender's  rights  and  benefits  under  each of the  Loan
Documents.

         (b) Without limitation, Lender may disclose the Loan Documents, and any
financial or other information relating to Borrower, to its affiliates, auditors
and  legal  counsel,  to  any  potential  participant  or  assignee  and  to any
Governmental Authority to the extent that such disclosure is required by law and
as required  in order to comply  with a subpoena  or order  issued by a court of
competent jurisdiction or by a legislative or regulatory body.

         9.5          SETOFF

         In addition to any of Lender's others rights and remedies, Lender shall
have the right without prior notice to Borrower, any such notice being expressly
waived by  Borrower  to the  extent  permitted  by  applicable  law,  during the
continuance of an Event of Default to setoff and apply against any indebtedness,
whether matured or unmatured, of Borrower to Lender any amount owing from Lender
or any affiliate  thereof to Borrower at any time during the  continuation of an
Event of  Default.  This  right of setoff  may be  exercised  by Lender  against
Borrower or against any trustee in bankruptcy,  debtor in  possession,  assignee
for the benefit of  creditors,  receiver or  execution,  judgment or  attachment
creditor of Borrower or against anyone else claiming through or against Borrower
or such trustee in bankruptcy, debtor in possession, assignee for the benefit of
creditors,   receiver,   or   execution,   judgment  or   attachment   creditor,
notwithstanding the fact that such right of setoff shall not have been exercised
by Lender prior to the occurrence of an Event of Default. Lender agrees promptly
to notify  Borrower  after  any such  setoff  and  application  made by  Lender,
provided  that the failure to give such notice  shall not affect the validity of
such setoff and application.

         9.6          NO WAIVER; CUMULATIVE REMEDIES

         No  failure  on the  part  of  Lender  to  exercise,  and no  delay  in
exercising,  any right, power, privilege or remedy under any Loan Document shall
operate as a waiver  thereof;  nor shall any single or partial  exercise  of any
such right,  power,  privilege or remedy preclude any other or further  exercise
thereof or the exercise of any other  right,  power,  privilege  or remedy.  The
rights and remedies under the Loan Documents are cumulative and not exclusive of
any rights,  powers,  privileges and remedies that may otherwise be available to
Lender.

         9.7          ENTIRE AGREEMENT; AMENDMENT

         The Loan Documents constitute the entire agreement between Borrower and
Lender  with  respect  to  the  Loans  and  supersede  all  prior  negotiations,
communications,   discussions,  correspondence  and  agreements  concerning  the
subject matter  hereof.  The Loan Documents may be amended or modified only by a
written document executed by the parties hereto.

         9.8          NO THIRD PARTY BENEFICIARIES

         This  Agreement  is made and entered into for the sole  protection  and
benefit of the parties  hereto and their  respective  permitted  successors  and
assigns, and no other person or entity shall be a third party beneficiary of, or
have any direct or indirect  cause of action or claim in connection  with,  this
Agreement or any other of the Loan Documents to which it is not a party.

         9.9          TIME

         Time is of the essence of each and every  provision  of this  Agreement
and each other of the Loan Documents.

         9.10         SEVERABILITY OF PROVISIONS

         If any  provision of this  Agreement  shall be prohibited by or invalid
under  applicable law, such provision shall be ineffective only to the extent of
such  prohibition  or  invalidity  without  invalidating  the  remainder of such
provision or any remaining provisions of this Agreement.

         9.11         GOVERNING LAW

         This  Agreement  shall be governed by and construed in accordance  with
the laws of the State of Washington.

         9.12         WAIVER OF JURY TRIAL

         EACH OF  BORROWER  AND  LENDER,  TO THE  FULLEST  EXTENT  PERMITTED  BY
APPLICABLE  LAW, HEREBY  IRREVOCABLY  WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY
ACTION,  PROCEEDING,  COUNTERCLAIM OR OTHER LITIGATION IN ANY WAY ARISING OUT OF
OR RELATING TO THIS  AGREEMENT,  ANY OTHER OF THE LOAN  DOCUMENTS  OR ANY OF THE
TRANSACTIONS OR EVENTS  REFERENCED  HEREIN OR THEREIN OR CONTEMPLATED  HEREBY OR
THEREBY, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS OR OTHERWISE. THIS
WAIVER  SHALL  APPLY TO ANY  SUBSEQUENT  AMENDMENTS,  RENEWALS,  SUPPLEMENTS  OR
MODIFICATIONS TO THIS AGREEMENT  AND/OR ANY OTHER OF THE LOAN DOCUMENTS.  A COPY
OF THIS SECTION MAY BE FILED WITH ANY COURT AS WRITTEN EVIDENCE OF THE WAIVER OF
THE RIGHT TO TRIAL BY JURY AND THE CONSENT TO TRIAL BY COURT.

         9.13         COUNTERPARTS

         This Agreement may be executed in any number of identical counterparts,
any set of which signed by all the parties  hereto shall be deemed to constitute
a complete, executed original for all purposes.

         9.14         WASHINGTON STATUTORY NOTICE

         ORAL  AGREEMENTS OR ORAL  COMMITMENTS  TO LOAN MONEY,  EXTEND CREDIT OR
FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.


SERVATRON, INC.                             ITRON, INC.   

By:   /s/ Larry Panattoni                   By: /s/  David G. Remington
Title:   President                          Title: CFO



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