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Amendment to Form 8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

September 2, 2004

(Date of Report)

ITRON, INC.

(Exact Name of Registrant as Specified in Charter)

Washington

000-22418

91-1011792

(State or Other Jurisdiction

of Incorporation)

(Commission File No.)

(IRS Employer

Identification No.)

2818 N. Sullivan Road, Spokane, WA 99216

(Address of Principal Executive Offices, including Zip Code)

(509) 924-9900

(Registrant’s Telephone Number, Including Area Code)

None

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨	Written communications pursuant to Rule 425 under Securities Act (17 CFR 230.425)

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

The registrant hereby amends its Current Report on Form 8-K dated July 15, 2004 as follows:

Item 9.01 Financial Statements and Exhibits

(a)

Financial statements of businesses acquired.

The combined financial statements of Schlumberger Ltd.’s Electricity Products Business (SEM) required to be filed pursuant to Item 9.01(a) of Form 8-K are included as Exhibit 99.1 and Exhibit 99.2 of this Current Report on Form 8-K/A.

(b)

Pro forma financial information.

The pro forma financial information required to be filed pursuant to Item 9.01(b) of Form 8-K is included as Exhibit 99.3 of this Current Report on Form 8-K/A.

(c)

Exhibits.

The following exhibits are filed as part of this report:


Exhibit Number		Description
23.1		Consent of Independent Registered Public Accounting Firm.

99.1		Combined financial statements of the Electricity Products Business of Schlumberger Limited, including balance sheets as of December 31, 2003 and 2002, related combined statements of income, changes in owner’s net investment and accumulated other comprehensive income and cash flows for each of the three years ended December 31, 2003 and Report of Independent Registered Public Accounting Firm.

99.2		Unaudited condensed combined interim financial statements of the Electricity Products Business of Schlumberger Ltd. as of June 30, 2004 and December 31, 2003 and for the six months ended June 30, 2004 and 2003.

99.3		Unaudited pro forma condensed combined balance sheet of Itron, Inc. and the Electricity Products Business of Schlumberger Ltd. (SEM) as of June 30, 2004 and the unaudited pro forma condensed combined statements of operations of Itron, Inc. and SEM for the year ended December 31, 2003 and the six months ended June 30, 2004.

SIGNATURE

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


	ITRON, INC.

Dated: September 2, 2004	By:	/s/ DAVID G. REMINGTON
		David G. Remington
		Vice President and Chief Financial Officer

EXHIBIT INDEX


Exhibit Number		Description
23.1		Consent of Independent Registered Public Accounting Firm.

99.1		Combined financial statements of the Electricity Products Business of Schlumberger Limited, including balance sheets as of December 31, 2003 and 2002, related combined statements of income, changes in owner’s net investment and accumulated other comprehensive income and cash flows for each of the three years ended December 31, 2003 and Report of Independent Registered Public Accounting Firm.

99.2		Unaudited condensed combined interim financial statements of the Electricity Products Business of Schlumberger Ltd. as of June 30, 2004 and December 31, 2003 and for the six months ended June 30, 2004 and 2003.

99.3		Unaudited pro forma condensed combined balance sheet of Itron, Inc. and the Electricity Products Business of Schlumberger Ltd. (SEM) as of June 30, 2004 and the unaudited pro forma condensed combined statements of operations of Itron, Inc. and SEM for the year ended December 31, 2003 and the six months ended June 30, 2004.

Consent of Independent Registered Public Accounting Firm

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-04685, 333-28933, 333-63147, 333-81925, 333-86581, 333-40356, 333-89966, 333-97571, 333-110703 and 333-115987) of Itron, Inc. of our report dated February 27, 2004 relating to the financial statements of the Electricity Products Business of Schlumberger Limited, which contains an explanatory paragraph relating to certain assumptions and allocations to form the basis of presentation of the combined financial statements, which appears in the Current Report on Form 8-K/A of Itron, Inc. dated September 2, 2004.

/s/ PricewaterhouseCoopers LLP

New York, New York

September 2, 2004

Combined Financial Statements

Exhibit 99.1

Electricity Products Business

of Schlumberger Limited

Combined Financial Statements

December 31, 2003 and 2002 and for the

three years ended December 31, 2003

Report of Independent Registered Public Accounting Firm

To the Management of Schlumberger Limited

In our opinion, the accompanying combined balance sheets and the related combined statements of income, of changes in owner’s net investment and accumulated other comprehensive income and of cash flows present fairly, in all material respects, the financial position of the Electricity Products Business of Schlumberger Limited (the “Electricity Products Business” or the “Company”) at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the management of Electricity Products Business; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The Company is a fully integrated business of Schlumberger Limited. Consequently, as indicated in Note 1, these combined financial statements have been derived from the consolidated financial statements and accounting records of Schlumberger Limited and reflect significant assumptions and allocations. Moreover, as indicated in Note 1, the Company relies on Schlumberger Limited and its other businesses for certain administrative, management and other services. Accordingly, these combined financial statements do not necessarily reflect the combined financial position, results of operations, changes in owner’s net investment and cash flows of the Company had it been a separate, stand-alone entity during the periods presented.

/s/ PricewaterhouseCoopers LLP

New York, NY

February 27, 2004

COMBINED BALANCE SHEETS

(Electricity Products Business of Schlumberger Limited)


	December 31,
	2003		2002
	(in thousands)
Assets
Current assets:
Cash and cash equivalents	$	658	$	80
Accounts receivable, net of allowance for doubtful accounts of $3,806 and $510, respectively		18,073		19,926
Receivables from affiliates		4,550		4,268
Inventories		28,245		35,761
Deferred tax assets		4,239		5,441
Other current assets		2,509		531

Total current assets		58,274		66,007
Property and equipment, net		16,525		16,817
Deferred tax assets		23,960		19,060
Prepaid pension asset		10,029		9,671
Other assets		54		524

Total assets	$	108,842	$	112,079

Liabilities and Equity
Current liabilities
Book overdraft	$	7,885	$	6,049
Accounts payable – trade		7,817		11,711
Payables to affiliates		2,840		12,109
Accrued liabilities		17,378		15,775
Current accrued environmental liability		350		—
Income taxes payable		3,270		3,541

Total current liabilities		39,540		49,185
Accrued environmental liabilities		3,950		2,500
Post retirement health care benefits		61,212		57,426

Total liabilities		104,702		109,111

Minority interest		179		136

Commitments and contingencies (Note 11)
Accumulated other comprehensive income/(loss)		844		136
Owner’s net investment		3,117		2,696

Total equity		3,961		2,832

Total liabilities and equity	$	108,842	$	112,079

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

COMBINED STATEMENTS OF INCOME

(Electricity Products Business of Schlumberger Limited)


	Year Ended December 31,
	2003			2002			2001
	(in thousands)
Revenues
Third parties	$	227,464		$	159,076		$	140,209
Affiliated Companies		66,701			69,774			54,348

Total revenue		294,165			228,850			194,557
Cost of revenues
Third parties		145,858			112,048			104,944
Affiliated companies		55,145			60,818			40,264

Total cost of revenues		201,003			172,866			145,208

Gross profit		93,162			55,984			49,349

Operating expenses
Sales and marketing		14,093			12,806			14,006
Research and engineering		9,420			8,567			7,819
General and administrative		18,695			13,207			12,121
Litigation settlement		23,000			—			—

Total operating expenses		65,208			34,580			33,946

Income from operations		27,954			21,404			15,403
Minority interest		(43	)		96			447
Other expense		(17	)		(113	)		(986	)

Income before income taxes		27,894			21,387			14,864
Provision for income taxes		(11,571	)		(9,335	)		(6,210	)

Net income	$	16,323		$	12,052		$	8,654

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

COMBINED STATEMENTS OF CHANGES IN OWNER’S NET INVESTMENT AND ACCUMULATED OTHER

COMPREHENSIVE INCOME (LOSS)

(Electricity Products Business of Schlumberger Limited)


	Owner’s Net Investment			Accumulated Other Comprehensive Income (Loss)			Owner’s Net Investment and Accumulated Other Comprehensive Income (Loss)
	(in thousands)
Balance, December 31, 2000	$	19,504		$	(595	)	$	18,909

Net income		8,654			—			8,654
Currency translation adjustment		—			2			2

Total comprehensive income		—			—			8,656
Transfers to Schlumberger Limited		(17,275	)		—			(17,275	)

Balance, December 31, 2001		10,883			(593	)		10,290

Net income		12,052			—			12,052
Currency translation adjustment		—			729			729

Total comprehensive income		—			—			12,781
Transfers to Schlumberger Limited		(20,239	)		—			(20,239	)

Balance, December 31, 2002		2,696			136			2,832

Net income		16,323			—			16,323
Currency translation adjustment		—			708			708

Total comprehensive income		—			—			17,031
Transfers to Schlumberger Limited		(15,902	)		—			(15,902	)

Balance, December 31, 2003	$	3,117		$	844		$	3,961

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

COMBINED STATEMENTS OF CASH FLOWS

(Electricity Products Business of Schlumberger Limited)


	Year Ended December 31,
	2003			2002			2001
	(in thousands)
Cash flows from operating activities
Net income	$	16,323		$	12,052		$	8,654
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		4,255			6,115			5,560
Provision for allowance for doubtful accounts		3,481			190			401
Reserve for inventory obsolescence		1,273			1,466			860
Deferred income taxes		(3,698	)		(190	)		(3,069	)
Gain (loss) on disposal of property, plant and equipment		(189	)		6			63
Non-cash change in pension and post retirement obligations		3,428			(347	)		(4,176	)
Net changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(1,628	)		2,917			7,213
Decrease (increase) in inventories		6,243			(19,766	)		2,769
(Increase) decrease in other current assets		(1,978	)		388			1,471
Decrease (increase) in other long-term assets		470			100			(170	)
(Decrease) increase in receivables/payables to affiliates, net		(9,551	)		10,065			(1,452	)
(Decrease) increase in accounts and income taxes payable		(4,165	)		3,560			3,420
Increase in accrued environmental liabilities		1,800			—			—
Increase in accrued liabilities		1,603			3,735			847

Net cash provided by operating activities		17,667			20,291			22,391

Cash flows from investing activities
Purchases of property, plant and equipment		(3,774	)		(2,966	)		(3,767	)

Net cash used in investing activities		(3,774	)		(2,966	)		(3,767	)

Cash flows from financing activities
Net transfers to Schlumberger Limited		(15,902	)		(20,239	)		(17,275	)
Net increase (decrease) in book overdrafts		1,836			2,329			(917	)
Contribution from (dividend to) minority interest		43			(100	)		(444	)

Net cash (used in) financing activities		(14,023	)		(18,010	)		(18,636	)

Foreign currency effect on cash and cash equivalents		708			729			2

Net increase (decrease) in cash and cash equivalents		578			44			(10	)
Cash and cash equivalents
Beginning of year		80			36			46

End of year	$	658		$	80		$	36

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

NOTES TO COMBINED FINANCIAL STATEMENTS

(Electricity Products Business of Schlumberger Limited)

(in thousands of dollars)

Note 1: Basis of Presentation

Electricity Products, headquartered in South Carolina, is a leading manufacturer of electric meters and a wholly-owned subsidiary of Schlumberger Limited. Electricity Products has manufacturing facilities in South Carolina and in Quebec, Canada, and has a sales and distribution center in Mexico. Sales in Taiwan are made through a combined partially-owned subsidiary.

Sangamo Electric Company, its predecessor, was founded in 1899 and was acquired by Schlumberger Limited (Schlumberger) in 1975.

The accompanying Combined Financial Statements present, in conformity with accounting principles generally accepted in the United States of America, the combined assets, liabilities, revenues and expenses related to the historical operations of the Electricity Products Business of Schlumberger (the “Electricity Products Business” or the “Company”).

The accompanying Combined Financial Statements are presented on a “carve-out basis” and include the historical operations of the defined Electricity Products Business. Accordingly, Schlumberger’s net investment in the Electricity Products Business (Owner’s net investment) is shown in lieu of stockholder’s equity in the Combined Financial Statements. The Combined Financial Statements included herein have been prepared from the Electricity Products Business’ historical accounting records.

The Combined Statements of Income include all revenues and costs attributable to the Electricity Products Business including costs for certain functions and services performed by centralized Schlumberger organizations and directly charged or allocated to the Electricity Products Business based on usage or other systematic methods.

All of the allocations and estimates in the Combined Financial Statements are based on assumptions that management believes are reasonable under the circumstances. However, these allocations and estimates are not necessarily indicative of the costs and expenses that would have resulted if the Electricity Products Business had been operated as a separate stand-alone entity.

Note 2: Accounting Policies

Principles of Combination

The accompanying Combined Financial Statements include the accounts of the Electric Meters Businesses in the U.S., Canada and Mexico, and the accounts of a majority-owned subsidiary in Taiwan, over which the Company exercises control. All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition

The Electricity Products Business derives its revenue from the sale of electric meters to customers through their direct sales force, independent sales representatives and from sales to distributors. Revenue from the sale of electric meters is recognized upon shipment to customers or distributors under arrangement where title passes to the customer FOB Shipping Point or upon receipt by the customer when the arrangement is FOB destination, when there is persuasive evidence of an arrangement, the sales price is fixed or determinable and collection is reasonably assured. Distributors of the Company do not have the right of return.

The Company gives rebates to certain customers as incentive to replace old meters with newly purchased meters. The Company records the rebate upon the shipment of new meters to the customer as a reduction to revenue.

Concentrations of Credit Risk

Financial instruments that potentially expose the Electricity Products Business to concentrations of credit risk consist of cash, cash equivalents and accounts receivable. To minimize risk, cash and cash equivalents are held with highly rated financial institutions. In addition, risk related to accounts receivable is minimized through ongoing credit evaluations of customers’ financial condition and in certain instances customers are required to pay deposits for a portion of the sales price. For sales to third parities for the years ended December 31, 2003 and 2001, one customer represented 14% and 13% of total revenue, respectively. There were no customers to which the Company made a significant amount of sales (in excess of 10%) for the year ended December 31, 2002. Customer deposits are considered liabilities until the Company satisfies revenue recognition criteria.

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

(Electricity Products Business of Schlumberger Limited)

(in thousands of dollars)

Cash and Cash Equivalents

All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. Cash represents deposits of the Company’s majority owned foreign subsidiary and amounts to be transferred to Schlumberger. Cash in the U.S. and Canada is managed centrally by Schlumberger. All cash receipts from customers are generally transferred to Schlumberger. In addition, as the Company requires funds for payments, amounts are generally transferred from Schlumberger. These net transfers are presented as a contribution/distribution in Owner’s net investment. Book overdrafts represent outstanding checks that will be credited to Owner’s net investment when funded from Schlumberger.

Inventories

Inventories are principally valued at the lower of cost or market and cost is determined using the last-in, first-out (LIFO) dollar value method. Inventories consist of components, sub-assemblies and finished goods held for sale.

Technological change and new product introductions and enhancements could result in excess or obsolete inventory. To minimize this risk, the Company evaluates inventory levels and expected usage on a periodic basis and records a charge as required.

Property and Equipment

Property and equipment are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives as follows:


Machinery and equipment		3 – 7 years
Furniture and fixtures		3 – 7 years
Buildings and improvements		35 – 40 years

Major improvements that extend the useful life of an asset are capitalized. Maintenance and repair costs are expensed as incurred. When properties and equipment are sold, retired or otherwise disposed of, the cost and related accumulated depreciation are eliminated and the resulting gain or loss is recognized in the income statement.

Long-Lived Assets

Product Warranty

Warranty provisions related to sales of meters are determined based upon an estimate of costs that are expected to be incurred under the Company’s warranty program. Activity related to warranty provisions was as follows:


Balance at December 31, 2001	$	1,694
Accruals for electric meter deliveries in 2002		1,142
Warranty services provided in 2002		(1,426	)

Balance at December 31, 2002		1,410
Accruals for electric meter deliveries in 2003		2,880
Warranty services provided in 2003		(1,117	)

Balance at December 31, 2003	$	3,173

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

(Electricity Products Business of Schlumberger Limited)

(in thousands of dollars)

Income Taxes

The Company’s operating results historically have been included in Schlumberger’s consolidated U.S. and state income tax returns and in tax returns of Schlumberger’s foreign subsidiaries. The provision for income taxes reflected in the Combined Financial Statements has been determined on a separate return basis.

Taxes on income are computed in accordance with the tax rules and regulations of the taxing authorities where the income is earned. The income tax rates imposed by these taxing authorities vary substantially. Taxable income may differ from pre-tax income for financial accounting purposes. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax asset will not be realized.

Stock-Based Compensation

Schlumberger and the Company account for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and have adopted the disclosure only provisions of SFAS 123, “Accounting for Stock-Based Compensation.” Stock-based awards issued to non-employee are accounted for under SFAS 123.

Had compensation cost for the stock-based Schlumberger plans been determined based on the fair value at the grant dates for awards to Electricity Product’s employees under those plans, consistent with the method of SFAS 123, the Electricity Products Business’s net income would have been adjusted as follows:


	2003*		2002			2001
Net income as reported	$	16,323	$	12,052		$	8,654
Pro forma compensation expense		—		(680	)		(841	)

Pro forma net income	$	16,323	$	11,372		$	7,813

*	There were no stock based awards to company employees in 2003.

As required by SFAS 123, the fair value of each grant is estimated for proforma disclosure purposes on the date of grant using the multiple option Black-Scholes option-pricing model with the following weighted-average assumptions used for 2002 and 2001: dividend of $0.75 for 2002 and 2001; expected volatility of 35—36% for 2002 grants and 32%—33% for 2001 grants; weighted risk-free interest rate of 4.73% for the 2002 grants; and weighted risk-free interest rates of 5.69% for the 2001 grants; and expected option lives of 5.07 years for 2002 grants and 5.02 years for 2001 grants.

Foreign Currency

The financial statements of the subsidiaries in Canada, Mexico and Taiwan are measured using their local currencies as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date. Income and expense items are translated at average monthly rates of exchange. The resulting gains and losses from the translation of accounts are included in accumulated other comprehensive income. All transaction gains and losses are included in income in the period in which they occur.

Comprehensive Income (Loss)

Components of comprehensive income (loss) are net income and all changes in equity during a period except those resulting from transactions with owners. Accumulated other comprehensive income (loss), consists of foreign currency translation adjustments. The Company has made no provision for income taxes on comprehensive income because there is no intention to remit the undistributed income/(losses) in foreign subsidiaries.

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

(Electricity Products Business of Schlumberger Limited)

(in thousands of dollars)

Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts receivable and accounts payable. The carrying amounts of these items approximate fair value because of their short-term maturities.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of certain assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the related reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the allowance for doubtful accounts, LIFO, environmental reserves, and inventory obsolescence reserves. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

In July 2002, the Financial Accounting Standards Board issued SFAS 146 (Accounting for Costs Associated with Exit or Disposal Activities). The standard required companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by EITF Issue No. 94-3, (Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity [including Certain Costs Incurred in a Restructuring]). SFAS 146 replaced Issue 94-3. The Company adopted SFAS 146 prospectively to exit or disposal activities initiated after December 31, 2002.

In November 2002, FASB Interpretation No. 45 (Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others) was issued. It requires certain accounting and disclosures of guarantees to third parties including indebtedness. The interpretation is effective on a prospective basis for guarantees issued or modified after December 31, 2002. The implementation of this interpretation did not have a material effect on the Company’s financial position or results of operations.

In January 2003, the Emerging Issues Task Force (EITF) issued No. 00-21 (Accounting for Revenue Arrangements with Multiple Deliverables). This EITF establishes the criteria for recognizing revenue in arrangements when several items are bundled into one agreement. EITF 00-21 does not allow revenue recognition unless the fair value of the undelivered element(s) is available and the element has stand-alone value to the customer. EITF 00-21 also provides guidance on allocating the total contract revenue to the individual elements based upon the available fair value of each deliverable. The implementation of this pronouncement did not have a material impact on the Company’s financial position or results of operations.

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, (Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51). The primary objective of the interpretation is to provide guidance on the identification of, and financial reporting for entities over which control is achieved through means other than voting rights; such entities are known as variable-interest entities (VIE’s). FIN 46 provides guidance that determines (1) whether consolidation is required under the “controlling financial interest” model of Accounting Research Bulletin No. 51 (ARB 51), Consolidated Financial Statements, or other existing authoritative guidance, or, alternative, (2) whether the variable-interest model under FIN 46 should be used to account for existing and new entities. The Company does not believe that the adoption of this statement will have a material effect on the financial position or results of operations.

In April 2003, the Financial Accounting Standards Board issued SFAS No. 149 (Amendment of Statement 133 on Derivative Instruments and Hedging Activities) which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133 (Accounting for Derivative Instruments and Hedging Activities). SFAS 149, which is to be applied prospectively, is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of this new standard did not have a material impact on the Company’s results of operations or financial position.

In May 2003, the Financial Accounting Standards Board, issued SFAS No. 150, (Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity). The Standard specifies that instruments within its scope embody obligations of the issuer and therefore, the issuer must classify them as liabilities. The Standard was effective July 1, 2003, and had no material effect on the Company’s financial position.

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

(Electricity Products Business of Schlumberger Limited)

(in thousands of dollars)

In January 2004, the Financial Accounting Standards Board issued FSP No. FAS 106-1 (Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003). The statement permits the deferral of accounting related to the effects of the legislation until the earlier of issuance of final accounting guidance by the FASB or a significant plan amendment/curtailment event requiring remeasurement, occurring after January 31, 2004. The Company expects the new legislation will significantly reduce future postretirement medical costs.

Note 3: Valuation and Qualifying Accounts

Valuation and qualifying accounts are as follows for the years ended December 31, 2003 and 2002:


	Beginning Balance		Charged to Costs and Expenses		Charged to Other Accounts	Deductions*			Ending Balance
Allowance for doubtful accounts
For the year ended December 31, 2003	$	510	$	3,481	—	$	(185	)	$	3,806
For the year ended December 31, 2002		505		190	—		(185	)		510
For the year ended December 31, 2001		571		401	—		(467	)		505

*	Write-off of uncollectible accounts

During the year ended December 31, 2003, the Company reserved $3,337 related to one customer, whose outstanding balance was deemed uncollectible.

Note 4: Inventories

Inventories at December 31, 2003 and 2002 consist of the following:


	2003			2002
Components	$	18,948		$	17,862
Work-in-process		2,430			1,386
Finished goods		8,502			18,278

		29,880			37,526
LIFO reserve		(1,635	)		(1,765	)

	$	28,245		$	35,761

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

(Electricity Products Business of Schlumberger Limited)

(in thousands of dollars)

Note 5: Property and Equipment

Property and equipment at and December 31, 2003 and 2002 consist of the following:


	2003			2002
Machinery and equipment	$	59,471		$	59,218
Furniture and fixtures		9,474			12,096
Building and improvements		15,200			14,215
Land		94			92
Construction-in-progress		3,427			4,382

		87,666			90,003
Accumulated depreciation		(71,141	)		(73,186	)

Net property and equipment	$	16,525		$	16,817

Note 6: Accrued Liabilities

Accrued liabilities at December 31, 2003 and 2002 consist of the following:


	2003		2002
Accrued payroll	$	1,535	$	3,370
Accrued vacation		1,926		1,509
Accrued employee benefits		4,658		3,940
Accrued royalties		1,752		1,353
Accrued warranty		3,173		1,410
Accrued customer rebates		434		1,461
Accrued legal expenses		175		586
Other		3,725		2,146

	$	17,378	$	15,775

Note 7: Income Taxes

The components of income before income taxes for the years ended December 31, 2003, 2002 and 2001 were as follows:


	2003		2002		2001
Domestic	$	25,281	$	20,872	$	14,323
Foreign		2,613		515		541

	$	27,894	$	21,387	$	14,864

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

(Electricity Products Business of Schlumberger Limited)

(in thousands of dollars)

The provision for income taxes for the years ended December 31, 2003, 2002 and 2001 consisted of the following:


	2003			2002			2001
Current tax expense
Federal	$	11,985		$	7,007		$	5,908
State		2,578			1,590			1,300
Foreign		706			928			383

Total current		15,269			9,525			7,591

Deferred tax expense
Federal		(2,978	)		(190	)		(1,179	)
State		(655	)		(42	)		(254	)
Foreign		(65	)		42			52

Total deferred		(3,698	)		(190	)		(1,381	)

Total provision	$	11,571		$	9,335		$	6,210

The income tax expense (benefit) for the twelve months ended December 31, 2003, 2002 and 2001 resulted in effective tax rates of 41.5%, 43.6% and 41.8%, respectively. The reasons for the differences between these effective tax rates and the U.S. statutory rate of 35% for the twelve months ended December 31, 2003 and 2002 are as follows:


	2003		2002		2001
Federal income tax at statutory rates	35.0	%	35.0	%	35.0	%
State income taxes, net of federal income tax benefit	4.9		4.3		4.5
Impact of foreign operations	(0.7	)	3.5		1.3
Other	2.3		0.8		1.0

	41.5	%	43.6	%	41.8	%

Deferred tax assets and liabilities at December 31, 2003 and 2002 are comprised of the following:


	2003		2002
Deferred tax assets
Post retirement benefits	$	20,242	$	18,688
Inventory allowances		716		332
Employee benefits		762		3,685
Warranty		1,255		665
Reserves and other accruals		3,207		759
Property and other equipment		2,017		372

Total deferred tax assets	$	28,199	$	24,501

The Electricity Products Business has not recorded a valuation allowance against deferred tax assets as they are expected to be fully realizable. The Electricity Products Business has not recorded a deferred income tax liability for additional income taxes that would result from the distribution of earnings of its foreign subsidiaries if they were actually repatriated. The Electricity Products Business intends to indefinitely reinvest the undistributed earnings of its foreign subsidiaries.

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

(Electricity Products Business of Schlumberger Limited)

(in thousands of dollars)

Payments to Schlumberger for income taxes totaled $17,022, $3,040 and $4,116 for the years ended December 31, 2003, 2002 and 2001, respectively.

Note 8: Pension and Other Benefit Plans

Schlumberger and its subsidiaries sponsor several defined benefit and defined contribution pension plans that cover substantially all of the employees of the Electricity Products Business. The benefits are based on years of service and compensation on a career-average pay basis. These plans are funded with a trustee in respect to past and current service. Charges to expense are based upon costs computed by independent actuaries. The funding policy is to annually contribute amounts that are allowable for federal income tax purposes. These contributions are intended to provide for benefits earned to date and those expected to be earned in the future.

The pension and other post retirement benefit information contained in these Combined Financial Statements are based on allocations of the plan performance, plan assets and benefit obligations of the parent company plan. These pro-rata allocations were determined based on current participation of employees of the Electricity Products Business, which Electricity Products management believes is a reasonable method.

U.S. Pension Plans

The assumptions used in determining the net pension cost for the years ended December 31, 2003, 2002 and 2001 were as follows:


	2003		2002		2001
Discount rate	6.75	%	7.25	%	7.50	%
Rate of compensation increases	3.00	%	3.00	%	4.50	%
Long-term rate of return on plan assets	8.50	%	8.50	%	9.00	%

Net pension cost in the U.S. for 2003, 2002 and 2001 included the following components:


	2003			2002			2001
Service cost	$	1,867		$	1,793		$	1,169
Interest cost		6,337			6,380			6,419
Expected return on plan assets		(8,936	)		(9,957	)		(10,708	)
Recognition of prior service cost		374			374			374
Amount of loss (gain) recognized		—			(806	)		(2,103	)

Net pension cost (benefit)	$	(358	)	$	(2,216	)	$	(4,849	)

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

(Electricity Products Business of Schlumberger Limited)

(in thousands of dollars)

The changes in the projected benefit obligation, plan assets and funded status of the plans on December 31, 2003 and 2002, were as follows:


	2003			2002
Projected benefit obligation at beginning of the year	$	98,334		$	91,276
Service cost		1,867			1,793
Interest cost		6,337			6,380
Actuarial loss (gain)		4,828			5,422
Benefits paid		(6,756	)		(6,537	)

Projected benefit obligation at end of the year	$	104,610		$	98,334

Fair value of plan assets at beginning of the year	$	98,134		$	116,793
Actual return on plan assets		18,311			(12,122	)
Benefits paid		(6,756	)		(6,537	)

Fair value of plan assets at end of the year	$	109,689		$	98,134

Funded status	$	5,079		$	(200	)
Unrecognized net loss (gain)		3,788			8,336
Unrecognized prior service cost		1,162			1,535

Net prepaid benefit cost recognized	$	10,029		$	9,671

Postretirement Benefits other than Pension

Schlumberger provides certain health care benefits to former employees who have retired under the U.S. pension plans. The plan is not funded.

The principle actuarial assumptions used to measure costs were a discount rate of 6.75% in 2003, 7.25% in 2002 and 7.50% in 2001. The health care trend rate for the 2002 valuation decreased gradually from 9.5% for 2002 to 5.0% by the year 2007.

Net periodic post-retirement benefit cost allocated to the Electricity Products Business in the U.S. for 2003, 2002 and 2001, included the following components:


	2003			2002			2001
Service cost	$	1,144		$	885		$	357
Interest cost		5,273			3,917			3,835
Recognition of prior service cost		(46	)		(46	)		(46	)
Amount of loss recognized		934			—			—

	$	7,305		$	4,756		$	4,146

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

(Electricity Products Business of Schlumberger Limited)

(in thousands of dollars)

The change in accumulated postretirement benefit obligation, plan assets and funded status for the years ended December 31, 2003 and 2002 was as follows:


	2003			2002
Accumulated postretirement benefit obligation at beginning of the year	$	61,381		$	55,469
Service cost		1,144			885
Interest cost		5,273			3,917
Actuarial loss (gain)		24,439			3,998
Benefits paid		(3,519	)		(2,888	)

Accumulated postretirement benefit obligation	$	88,718		$	61,381

Funded status	$	(88,718	)	$	(61,381	)
Unrecognized net loss (gain)		27,903			4,397
Unrecognized prior service cost		(397	)		(442	)

Postretirement benefit liability	$	(61,212	)	$	(57,426	)

If the assumed medical cost trend rate was increased by one percentage point, service cost in 2003 would have been $1,508, interest cost in 2003 would have been $6,055 and the accumulated postretirement benefit obligation would have been $102,954 on December 31, 2003.

If the assumed medical cost trend rate was decreased by one percentage point, service cost in 2003 would have been $876, interest cost in 2003 would have been $4,639 and the accumulated postretirement benefit obligation would have been $77,272 on December 31, 2002.

Note 9: Stock Compensation Plans

As of December 31, 2003, Schlumberger had two types of stock-based compensation plans, which are described below. Employees of the Electricity Products Business participated in both types of plans. The Company applies APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost is recognized in the accompanying statement of income for awards granted to employees under its stock option plans and its stock purchase plan with exercise prices at least equal to the fair market value of the Company’s common stock on the date of grant.

Stock Option Plans

During 2003, 2002 and 2001 and in prior years, officers and key employees of the Electricity Products Business were granted stock options under Schlumberger stock option plans. For all of the stock options granted, the exercise price of each option equals the market price of Schlumberger stock on the date of grant; an option’s maximum term is ten years, and options generally vest in 20% increments over five years.

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

(Electricity Products Business of Schlumberger Limited)

(in thousands of dollars)

A summary of the status of the Schlumberger stock option plans as they relate to options granted to employees of the Electricity Products Business for the years ended December 31, 2003, 2002 and 2001 is presented below (actual amounts):


	2003					2002					2001
	Shares			Weighted- Average Exercise Price		Shares			Weighted- Average Exercise Price		Shares			Weighted- Average Exercise Price
Fixed Options
Outstanding at beginning of year		158,270		$	65.43		133,198		$	66.16		135,027		$	66.31
Granted		—			—		31,000			55.75		—			—
Exercised		(5,245	)		28.74		(5,428	)		28.91		(329	)		55.62
Forfeited		(4,648	)		68.55		(500	)		55.75		(1,500	)		82.28
Transfers in (out)		(600	)		73.83		—			—		—			—

Outstanding at year-end		147,777			66.60		158,270			65.43		133,198			66.16

Options exercisable at year-end		96,767					81,090					63,999
Weighted-average fair value of options granted during the year	$	N/A				$	20.12				$	N/A

The following table summarizes information concerning currently outstanding and exercisable options by five ranges of exercise prices on December 31, 2003 (actual amounts):


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding as of 12/31/03	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable as of 12/31/03	Weighted- Average Exercise Price
$24.14 – $30.71	6,773	1.44	$	27.86	6,773	$	27.86
$30.80 – $44.84	7,290	3.72		42.36	6,522		42.07
$46.08 – $65.33	61,710	6.62		55.39	32,468		55.10
$71.32 – $82.35	72,004	5.99		82.30	51,004		82.31

	147,777	5.93	$	66.60	96,767	$	66.66

Employee Stock Purchase Plan

Under the Schlumberger Discounted Stock Purchase Plan, Schlumberger is authorized to issue up to 22,012,245 shares of common stock to its employees. Under the terms of the Plan, employees can choose each year to have up to 10% of their annual earnings withheld to purchase Schlumberger common stock. Effective July 1, 2003 the purchase price of the stock was 92.5% of the lower of its beginning or end of the Plan year market price at six month intervals. Prior to July 1, 2003, the purchase price was 85% at one year intervals. Under the Plan, Schlumberger sold 12,069, 15,597 and 12,428 shares to employees in 2003, 2002 and 2001, respectively. Pro forma compensation cost has been computed for the fair value of the employees’ purchase rights, which was estimated using the Black-Scholes model with the following assumptions for 2003, 2002 and 2001: Dividend of $0.75; expected volatility of 28% for 2003, 34% for 2002 and 36% for 2001; and risk-free interest rates of 0.75% for 2003, 1.74% for 2002, 3.03% for 2001. The weighted-average fair value of those purchase rights granted in 2003, 2002 and 2001, was $7.91, $13.32 and $15.54, respectively.

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

(Electricity Products Business of Schlumberger Limited)

(in thousands of dollars)

Note 10: Owner’s Net Investment

Distributions in the form of dividends and other transfers have been made to/from Schlumberger for each of the periods presented in the Combined Financial Statements.

Note 11: Related Party Transactions

The Combined Financial Statements include allocations (See Note 1) of certain corporate expenses, including legal, accounting, employee benefits, payroll, real estate, insurance services, information technology services, treasury and other corporate and infrastructure costs. These allocations, which may be settled in either cash as a distribution to/from the parent or in the case of non-cash charges as an equity transaction, are from various corporate entities existing within Schlumberger. These allocations have been determined on bases that Schlumberger and the Electricity Products Business consider to be a reasonable reflection of the utilization of services provided or the benefit received by the Electricity Products Business. The allocation methods include relative sales, headcount, square footage, transaction processing costs, adjusted operating expenses and others.

These allocations resulted in the following charges for the years ending December 31, 2003, 2002 and 2001, respectively:


	2003		2002		2001
Research and development	$	—	$	159	$	—
Sales and marketing		—		—		2,578
General and administrative		3,566		8,127		6,385

	$	3,566	$	8,286	$	8,963

Schlumberger did not allocate any expenses for management fees to the company for the year ended December 31, 2003.

The Electricity Products Business participates in Schlumberger’s centralized treasury and cash processes. Cash is managed either through zero balance accounts or an interest-bearing offsetting mechanism.

The remaining balance of the payables and receivables to affiliates included in the combined balance sheet represent amounts arising from transactions entered into by the Electricity Products Business to settle outstanding receivables and payables with other Schlumberger entities.

Sales to Schlumberger affiliates were $66,701, $69,774 and $54,348 for the years ended December 31, 2003, 2002 and 2001, respectively. Terms of sales are based on the historical transaction terms between the parties, which may not be indicative of future arrangements.

In certain countries, there are formal tax sharing arrangements between the Electricity Products Business and the respective entity of Schlumberger. In certain countries, the Electricity Products Business is a division of the Schlumberger legal entity that is the ultimate tax payer in that jurisdiction.

Note 12: Commitments and Contingencies

The Company has various lease agreements for its office space, distribution facilities and certain office equipment under noncancelable operating leases that expire at various dates between 2003 and 2006.

Rent expense for the years ended December 31, 2003, 2002 and 2001 was approximately $289, $371 and $1,105, respectively.

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

(Electricity Products Business of Schlumberger Limited)

(in thousands of dollars)

Future minimum lease payments under noncancelable operating leases for the years ended December 31 are as follows:


2004		153
2005		70
2006		50

	$	273

The Company settled a patent infringement case in 2003, under which the Company was required to pay approximately $23,000. The Company has recorded this settlement amount in its income statement as it directly related to its operations. The payment of the liability was funded through Schlumberger and recognized as an additional capital contribution.

In the ordinary course of business, the Electricity Products Business is involved in various pending or threatened legal actions. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on its combined financial position, operating results or cash flows.

It is often difficult to estimate the future impact of environmental matters, including potential liabilities. The Company records an environmental reserve when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. This practice is followed whether the claims are asserted or unassorted. Management expects that the amounts reserved will be paid out over the periods of remediation for the applicable sites. Reserves for estimated losses from environmental remediation are, depending on the site, based primarily on internal or third-party environmental studies and estimates as to the number, the extent of the contamination and the nature of required remedial actions. Accruals are adjusted as further information develops or circumstances change. The amounts provided for in the Company’s combined financial statements for environmental reserves are discounted at a rate of 7% and 11% and amounted to $4,300 and $2,500 at December 31, 2003 and 2002, respectively. Although the Company believes that its reserves are adequate, there can be no assurance that the amount of expenses which will be required relating to remedial actions and compliance with applicable environmental laws will not exceed the amounts reflected in the Company’s reserves or will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. Any possible loss or range of possible loss that may be incurred in excess of the amounts provided for at December 31, 2003 cannot be estimated.

Note 13: Operating Segments

The Company operates in one business segment. Through that segment, the Company sells electric meters in the United States, Canada, Mexico and Taiwan. Following are the Company’s revenues by geographic market for the years ended December 31, 2003, 2002 and 2001:


	2003		2002		2001
Revenues, including related parties, by geographic location:
Taiwan	$	6,894	$	5,391	$	2,513
Mexico		1,823		7,558		6,711
Canada		17,562		18,771		16,083
United States		267,886		197,130		169,250

	$	294,165	$	228,850	$	194,557

The Company’s revenue from affiliates, which amounted to $66,701, $69,774 and $54,348 for the years ended December 31, 2003, 2002 and 2001, respectively, were all within the United States.

NOTES TO COMBINED FINANCIAL STATEMENTS – (Continued)

(Electricity Products Business of Schlumberger Limited)

(in thousands of dollars)

Manufacturing operations of the Company are located in the United States and Canada. Property, plant and equipment by geographic location are as follows at December 31, 2003 and 2002:


	2003		2002
Property, plant and equipment, net, by geographic location:
Taiwan	$	234	$	360
Mexico		67		63
Canada		3,121		2,860
United States		13,103		13,534

	$	16,525	$	16,817

Unaudited Condensed Combined Interim Financial Statements

Exhibit 99.2

Electricity Products Business

of Schlumberger Ltd.

Unaudited Condensed Combined Interim Financial Statements

June 30, 2004 and December 31, 2003, and for the

six months ended June 30, 2004 and 2003

Electricity Products Business of Schlumberger Ltd.

Index


		Page(s)
Condensed Combined Interim Financial Statements

Balance Sheets		1

Statements of Operations		2

Statements of Changes in Owner’s Net Investment and Accumulated Other Comprehensive Income (Loss)		3

Statements of Cash Flows		4

Notes to Financial Statements		5–13

Electricity Products Business of Schlumberger Ltd.

Condensed Combined Interim Balance Sheets

(unaudited)


*(in thousands of dollars)*	June 30, 2004		December 31, 2003
Assets
Current assets
Cash and cash equivalents	$	2,631	$	658
Accounts receivable, net		33,079		18,073
Receivables from affiliates		161		4,550
Inventories		20,184		28,245
Deferred tax assets, net		4,556		4,239
Other current assets		419		2,509

Total current assets		61,030		58,274

Property, plant and equipment, net		14,838		16,525
Deferred tax assets, net		25,557		23,960
Prepaid pension asset		9,234		10,029
Other assets		218		54

Total assets	$	110,877	$	108,842

Liabilities and Equity
Current liabilities
Book overdraft	$	1,956	$	7,885
Accounts payable - trade		8,233		7,817
Payables to affiliates		1,770		2,840
Accrued liabilities		17,013		17,378
Current accrued environmental liability		350		350
Income taxes payable		10,467		3,270

Total current liabilities		39,789		39,540
Accrued environmental liabilities		3,950		3,950
Post retirement health care benefits		65,418		61,212

Total liabilities		109,157		104,702

Minority interest		153		179

Commitments and contingencies (Note 11)

Accumulated other comprehensive income		1,396		844
Owner’s net investment		171		3,117

Total equity		1,567		3,961

Total liabilities and equity	$	110,877	$	108,842

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

Electricity Products Business of Schlumberger Ltd.

Condensed Combined Interim Statements of Operations

(unaudited)


*(in thousands of dollars)*	June 30, 2004			June 30, 2003
Revenues
Third parties	$	150,692		$	109,351
Affiliated companies		3,827			35,088

Total revenues		154,519			144,439
Cost of revenues
Third parties		96,665			73,631
Affiliated companies		3,233			29,824

Total cost of revenues		99,898			103,455

Gross profit		54,621			40,984

Operating expenses
Sales and marketing		7,924			6,943
Research and engineering		4,921			4,581
General and administrative		3,749			7,276
Litigation settlement		—			23,000

Total operating expenses		16,594			41,800

Income (loss) from operations		38,027			(816	)

Minority interest		43			(44	)
Other income (expense)		(112	)		15

Income (loss) before income taxes		37,958			(845	)

Provision (benefit) for income taxes		14,968			(470	)

Net income (loss)	$	22,990		$	(375	)

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

Electricity Products Business of Schlumberger Ltd.

Condensed Combined Interim Statements of Changes in Owner’s Net

Investment and Accumulated Other Comprehensive Income (Loss)

(unaudited)


*(in thousands of dollars)*	Owner’s Net Investment			Accumulated Other Comprehensive Income (Loss)			Owner’s Net Investment and Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2003	$	3,117		$	844		$	3,961

Net income		22,990						22,990
Currency translation adjustment					552			552

Total comprehensive income								23,542
Transfers to Schlumberger Ltd.		(25,936	)					(25,936	)

Balance, June 30, 2004	$	171		$	1,396		$	1,567


Balance, December 31, 2002	$	2,696		$	136		$	2,832

Net loss		(375	)					(375	)
Currency translation adjustment					(5,531	)		(5,531	)

Total comprehensive loss								(5,906	)
Transfers from Schlumberger Ltd.		11,372						11,372

Balance, June 30, 2003	$	13,693		$	(5,395	)	$	8,298

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

Electricity Products Business of Schlumberger Ltd.

Condensed Combined Interim Statements of Cash Flows

(unaudited)


*(in thousands of dollars)*	June 30, 2004			June 30, 2003
Cash flows from operating activities
Net income (loss)	$	22,990		$	(375	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1,711			2,247
Provision for (recovery of) allowance for doubtful accounts, net		(2,120	)		74
Reserve for inventory obsolescense		300			2,083
Deferred income tax		(1,914	)		(2,835	)
Loss on disposal of property, plant and equipment		13			57
Non-cash change in pension and post retirement obligations		5,001			2,051
Net changes in operating assets and liabilities:
Accounts receivable		(12,886	)		(6,736	)
Inventories		7,761			10,491
Other current assets		2,090			(80	)
Other long-term assets		(164	)		472
Receivables/payables to affiliates, net		3,319			(16,437	)
Accounts and income taxes payable		7,613			12,315
Accrued liabilities		(365	)		1,427

Net cash provided by operating activities		33,349			4,754

Cash flows from investing activities
Purchases of property, plant and equipment		(37	)		(1,963	)

Net cash used in investing activities		(37	)		(1,963	)

Cash flows from financing activities
Net transfers from (to) Schlumberger Ltd.		(25,936	)		11,372
Net decrease in book overdrafts		(5,929	)		(5,020	)
Contribution from (dividend to) minority interest		(26	)		44

Net cash provided by (used in) financing activities		(31,891	)		6,396

Foreign currency effect on cash and cash equivalents		552			(5,937	)

Net increase in cash and cash equivalents		1,973			3,250

Cash and cash equivalents
Beginning of year		658			80

End of period	$	2,631		$	3,330

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

Electricity Products Business of Schlumberger Ltd.

Notes to Condensed Combined Interim Financial Statements

(unaudited)

(in thousands of dollars)

1.	Basis of Presentation

Electricity Products Business of Schlumberger Ltd. (Company), headquartered in South Carolina, is a leading manufacturer of electric meters and a wholly-owned subsidiary of Schlumberger Ltd. (Schlumberger). The Company has manufacturing facilities in South Carolina and Quebec, Canada, and has a sales and distribution center in Mexico. Sales in Taiwan are made through a combined partially-owned subsidiary.

Sangamo Electric Company, its predecessor, was founded in 1899 and was acquired by Schlumberger in 1975.

The accompanying Condensed Combined Interim Financial Statements are unaudited and reflect, in the opinion of management, entries necessary for the fair presentation in conformity with accounting principles generally accepted in the United States of America (U.S.), the combined assets, liabilities, revenues and expenses related to the historical operations of the Company.

The accompanying Condensed Combined Interim Financial Statements are presented on a “carve-out basis” and include the historical operations of the defined Company. Accordingly, Schlumberger’s net investment in the Company (Owner’s net investment) is shown in lieu of stockholder’s equity in the Condensed Combined Interim Financial Statements. The Condensed Combined Interim Financial Statements included herein have been prepared from the Company’s historical accounting records.

The Condensed Combined Interim Statements of Operations include all revenues and costs attributable to the Company including costs for certain functions and services performed by centralized Schlumberger organizations and directly charged or allocated to the Company based on usage or other systematic methods. Interim results are not necessarily indicative of full year results.

All of the allocations and estimates in the Condensed Combined Interim Financial Statements are based on assumptions that management believes are reasonable under the circumstances. However, these allocations and estimates are not necessarily indicative of the costs and expenses that would have resulted if the Company had been operated as a separate stand-alone entity or the results expected for the full fiscal year or for any other fiscal period. These condensed combined interim financial statements should be read in conjunction with the audited combined financial statements and the notes for the year ended December 31, 2003 for the Company.

2.	Accounting Policies

Principles of Combination

The accompanying Condensed Combined Interim Financial Statements include the accounts of the Company in the U.S., Canada and Mexico, and the accounts of a majority-owned subsidiary in Taiwan, over which the Company exercises control. All significant intercompany accounts and transactions have been eliminated.

Electricity Products Business of Schlumberger Ltd.

Notes to Condensed Combined Interim Financial Statements - Continued

(in thousands of dollars)

Revenue Recognition

The Company derives its revenues from the sale of electric meters to customers through their direct sales force, independent sales representatives and from sales to distributors. Revenues from the sale of electric meters are recognized upon shipment to customers or distributors under an arrangement where title passes to the customer FOB shipping point or upon receipt by the customer when the arrangement is FOB destination, when there is persuasive evidence of an arrangement, the sales price is fixed or determinable and collection is reasonably assured. Distributors of the Company do not have the right of return.

Concentrations of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist of cash, cash equivalents and accounts receivable. To minimize risk, cash and cash equivalents are held with highly rated financial institutions. In addition, risk related to accounts receivable is minimized through ongoing credit evaluations of customers’ financial condition and in certain instances customers are required to pay deposits for a portion of the sales price. Two customers represented 15% and 14% of total revenues for the six months ended June 30, 2004, respectively. For the six months ended June 30, 2003, one customer represented 17% of total revenues. Customer deposits are considered liabilities until the Company satisfies revenue recognition criteria.

Cash and Cash Equivalents

Inventories

Electricity Products Business of Schlumberger Ltd.

Notes to Condensed Combined Interim Financial Statements - Continued

(in thousands of dollars)

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives as follows:


Machinery and equipment		3 – 7 years
Furniture and fixtures		3 – 7 years
Buildings and improvements		35 – 40 years

Major improvements that extend the useful life of an asset are capitalized. Maintenance and repair costs are expensed as incurred. When property, plant and equipment are sold, retired or otherwise disposed of, the cost and related accumulated depreciation are eliminated and the resulting gain or loss is recognized in the statement of operations.

Long-Lived Assets

Management reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. If an impairment loss exists, the resulting write-down would be the difference between fair market value of the long-lived asset and the related net book value. During June 2004, the Company began plans to move the manufacturing operations located in Quebec, Canada to its South Carolina facility. The Company intends to sell the Quebec facility once the relocation of the manufacturing operations is completed. The Quebec facility was not held-for-sale at June 30, 2004. There were no impairments recorded for the six months ended June 30, 2004 or 2003. (See Note 11)

Product Warranty


Balance at December 31, 2003	$	3,173
Accruals for electric meter deliveries in 2004		3,396
Warranty services provided in 2004		(927	)

Balance at June 30, 2004	$	5,642


Balance at December 31, 2002	$	1,410
Accruals for electric meter deliveries in 2003		1,744
Warranty services provided in 2003		(843	)

Balance at June 30, 2003	$	2,311

Electricity Products Business of Schlumberger Ltd.

Notes to Condensed Combined Interim Financial Statements - Continued

(in thousands of dollars)

Income Taxes

Stock-Based Compensation

Schlumberger and the Company account for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and have adopted the disclosure only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Stock-based awards issued to non-employees are accounted for under SFAS No. 123.

There were no stock based awards to Company employees during the six month periods ended June 30, 2004 and 2003. Therefore, had compensation costs for the stock-based Schlumberger plans been determined based on the fair value at the grant dates for awards to the Company’s employees under those plans, consistent with the method of SFAS No. 123, the Company’s net income would not have changed.

Foreign Currency

The financial statements of the subsidiaries in Canada, Mexico and Taiwan are measured using their local currencies as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date. Income and expense items are translated at average monthly rates of exchange. The resulting gains and losses from the translation of accounts are included in accumulated other comprehensive income (loss). All transaction gains and losses are included in income in the period in which they occur.

Comprehensive Income (Loss)

Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments. The Company has made no provision for income taxes on comprehensive income (loss) because there is no intention to remit the undistributed income (losses) in foreign subsidiaries.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amount of certain assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the related reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the allowance for doubtful accounts, LIFO, environmental reserves, inventory obsolescence reserves, accounting for income taxes and pension and post retirement obligations. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

In January 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. SFAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003. The statement permits the deferral of accounting related to the effects of the legislation until the earlier of issuance of the final accounting guidance by the FASB or a significant amendment/curtailment event requiring remeasurement, occurring after January 31, 2004. The Company expects the new legislation will reduce future post retirement medical costs, although this amount has not yet been determined.

Electricity Products Business of Schlumberger Ltd.

Notes to Condensed Combined Interim Financial Statements - Continued

(in thousands of dollars)

3.	Valuation and Qualifying Accounts

Valuation and qualifying accounts are as follows for the periods ended June 30, 2004 and 2003:


	Beginning Balance		Charges (Recoveries) to Provision			Deductions*			Ending Balance
Allowance for doubtful accounts
For the six months ended June 30, 2004	$	3,806	$	(2,120	)	$	(135	)	$	1,551
For the six months ended June 30, 2003		510		74			(83	)		501

*	Write-off of uncollectable accounts

4.	Inventories

Inventories at June 30, 2004 and December 31, 2003 consist of the following:


	June 30, 2004			December 31, 2003
Components	$	13,604		$	18,948
Work-in-process		4,222			2,430
Finished goods		3,993			8,502

		21,819			29,880
LIFO reserve		(1,635	)		(1,635	)

	$	20,184		$	28,245

Electricity Products Business of Schlumberger Ltd.

Notes to Condensed Combined Interim Financial Statements - Continued

(in thousands of dollars)

5.	Property, Plant and Equipment

Property, plant and equipment at June 30, 2004 and December 31, 2003 consist of the following:


	June 30, 2004			December 31, 2003
Machinery and equipment	$	45,497		$	59,471
Furniture and fixtures		6,305			9,474
Buildings and improvements		14,058			15,200
Land		94			94
Construction-in-progress		2,291			3,427

		68,245			87,666
Accumulated depreciation		(53,407	)		(71,141	)

Net property, plant and equipment	$	14,838		$	16,525

6.	Accrued Liabilities

Accrued liabilities at June 30, 2004 and December 31, 2003 consist of the following:


	June 30, 2004		December 31, 2003
Accrued payroll	$	769	$	1,535
Accrued vacation		2,120		1,926
Accrued employee benefits		5,144		4,658
Accrued royalties		994		1,752
Accrued warranty		5,642		3,173
Accrued customer rebates		433		434
Accrued legal expenses		105		175
Other		1,806		3,725

	$	17,013	$	17,378

7.	Income Taxes

The Company currently estimates its annual effective income tax rate to be approximately 39% for fiscal 2004. The expected income tax rate differs from the federal statutory rate of 35% due to state income taxes and extraterritorial income exclusion tax benefits. The Company’s effective income tax rate can vary from period to period due to fluctuations in operating results, new or revised tax legislation and changes in the level of business performed in domestic and international tax jurisdictions. The effective income tax rates for the six months ended June 30, 2004 and 2003 were 39% and (56%), respectively.

The Company has not recorded a valuation allowance against deferred tax assets as they are expected to be fully realizable. The Company has not recorded a deferred income tax liability for additional income taxes that would result from the distribution of earnings of its foreign subsidiaries if they were actually repatriated. The Company intends to indefinitely reinvest the undistributed earnings of its foreign subsidiaries.

Electricity Products Business of Schlumberger Ltd.

Notes to Condensed Combined Interim Financial Statements - Continued

(in thousands of dollars)

Payments to Schlumberger for income taxes totaled $10,112 and $1,000 for the six months ended June 30, 2004 and 2003, respectively.

8.	Pension and Other Benefit Plans

Schlumberger and its subsidiaries sponsor several defined benefit and defined contribution pension plans that cover substantially all of the employees of the Company. The benefits are based on years of service and compensation on a career-average pay basis. These plans are funded with a trustee in respect to past and current service. Charges to expense are based upon costs computed by independent actuaries. The funding policy is to annually contribute amounts that are allowable for federal income tax purposes. These contributions are intended to provide for benefits earned to date and those expected to be earned in the future.

The pension and other post retirement benefit information contained in these Condensed Combined Interim Financial Statements are based on allocations of the plan performance, plan assets and benefit obligations of the parent company plan. These pro-rata allocations were determined based on current participation of employees of the Company, which Company management believes is a reasonable method. Allocated pension and other post retirement benefit costs are $3,339 and $3,810 for the six months ended June 30, 2004 and 2003. The Company does not believe the relationship of the individual components of the pension and post retirement costs to the total costs for the six months ended June 30, 2004 are significantly different from the year ended December 31, 2003.

9.	Owner’s Net Investment

Distributions in the form of dividends and other transfers have been made to/from Schlumberger for each of the periods presented in the Condensed Combined Interim Financial Statements.

10.

Related Party Transactions

The Condensed Combined Interim Financial Statements include allocations (see Note 1) of certain corporate expenses, including legal, accounting, employee benefits, payroll, real estate, insurance services, information technology services, treasury and other corporate and infrastructure costs. These allocations, which may be settled in either cash as a distribution to/from the parent or in the case of non-cash charges as an equity transaction, are from various corporate entities existing within Schlumberger. These allocations have been determined on bases that Schlumberger and the Company consider to be a reasonable reflection of the utilization of services provided or the benefit received by the Company. The allocation methods include relative sales, headcount, square footage, transaction processing costs, adjusted operating expenses and others. These allocations resulted in charges to general and administrative expense of $1.8 million and $1.7 million for the six months ended June 30, 2004 and 2003, respectively.

Schlumberger did not allocate any expenses for management fees to the Company for the six months ended June 30, 2004 and 2003, respectively.

The Company participates in Schlumberger’s centralized treasury and cash processes. Cash is managed either through zero balance accounts or an interest-bearing offsetting mechanism.

Electricity Products Business of Schlumberger Ltd.

Notes to Condensed Combined Interim Financial Statements - Continued

(in thousands of dollars)

The remaining balance of the payables and receivables to affiliates included in the condensed combined interim balance sheet represent amounts arising from transactions entered into by the Company to settle outstanding receivables and payables with other Schlumberger entities.

Sales to Schlumberger affiliates were $3,827 and $35,088 for the six months ended June 30, 2004 and 2003, respectively. Terms of sales are based on the historical transaction terms between the parties, which may not be indicative of future arrangements.

In certain countries, there are formal tax sharing arrangements between the Company and the respective entity of Schlumberger. In certain countries, the Company is a division of the Schlumberger legal entity that is the ultimate taxpayer in that jurisdiction.

11.

Commitments and Contingencies

In the ordinary course of business, the Company is involved in various pending or threatened legal actions. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on its condensed combined interim financial position, operating results or cash flows, therefore no accruals have been recorded.

The Company settled a patent infringement case in 2003, under which the Company was required to pay approximately $23,000.

It is often difficult to estimate the future impact of environmental matters, including potential liabilities. The Company records an environmental reserve when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. This practice is followed whether the claims are asserted or unasserted. Management expects that the amounts reserved will be paid out over the periods of remediation for the applicable sites. Reserves for estimated losses from environmental remediation are, depending on the site, based primarily on internal or third-party environmental studies and estimates as to the number, the extent of the contamination and the nature of required remedial actions. Accruals are adjusted as further information develops or circumstances change. The amounts provided for in the Company’s condensed combined financial statements for environmental reserves are discounted at a rate of 7% and amounted to $4,300 at June 30, 2004 and December 31, 2003. Although the Company believes that its reserves are adequate, there can be no assurance that the amount of expenses which will be required relating to remedial actions and compliance with applicable environmental laws will not exceed the amounts reflected in the Company’s reserves or will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. Any possible loss or range of possible loss that may be incurred in excess of the amounts provided for at June 30, 2004 cannot be estimated.

During the first quarter of 2004, the Company’s South Carolina manufacturing facility received Canadian certification for the manufacturing and shipment of meters into Canada. As a result of this certification, the Company began plans to move the manufacturing operations located in Quebec, Canada to its South Carolina facility to increase manufacturing efficiencies. The Company expects to incur approximately $600 in termination benefits and relocation costs subsequent to June 30, 2004, with completion of the move expected in the fourth quarter of 2004.

Electricity Products Business of Schlumberger Ltd.

Notes to Condensed Combined Interim Financial Statements - Continued

(in thousands of dollars)

12.

Operating Segments


	June 30, 2004		June 30, 2003
Revenues, including related parties, by geographic location
Taiwan	$	2,211	$	3,447
Mexico		2,549		1,108
Canada		10,414		9,470
United States		139,345		130,414

	$	154,519	$	144,439

The Company’s revenues from affiliates, which amounted to $3,827 and $35,088 for the six months ended June 30, 2004 and 2003, respectively, were all within the United States.

Manufacturing operations of the Company are located in the United States and Canada. Property, plant and equipment by geographic location are as follows at June 30, 2004 and December 31, 2003:


	June 30, 2004		December 31, 2003
Property, plant and equipment, net, by geographic location
Taiwan	$	216	$	234
Mexico		79		67
Canada		2,863		3,121
United States		11,680		13,103

	$	14,838	$	16,525

13.

Subsequent Event

On July 1, 2004, Schlumberger completed the sale of its Electricity Products Business to Itron, Inc. for an all-cash amount of $248 million, which includes primarily all of the assets and certain of the liabilities of the Company.

Unaudited Pro Forma Condensed Combined Financial Information

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined balance sheet and statements of operations give effect to the acquisition of Schlumberger’s Electricity Products Business (SEM), which was completed on July 1, 2004. The acquisition has been accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. Under the purchase method of accounting, the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values. The estimated fair values contained herein are preliminary in nature and are likely to change as management completes its assessment and independent appraisers complete their valuation of intangible assets. Such preliminary estimates of fair values of the assets and liabilities of SEM have been combined with the recorded values of the assets and liabilities of Itron, Inc. and subsidiaries (Itron) in the unaudited pro forma condensed combined financial information.

The unaudited pro forma condensed combined balance sheet has been prepared to reflect the acquisition of SEM as if it had occurred on June 30, 2004. The two unaudited pro forma condensed statements of operations reflect the condensed combined results of operations of Itron and SEM for the year ended December 31, 2003 and the six months ended June 30, 2004, in both cases as if the acquisition had occurred on January 1, 2003.

The unaudited pro forma condensed combined balance sheet and unaudited pro forma condensed combined statements of operations are presented for illustrative purposes only and are not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized had Itron and SEM been a combined company during the specified periods. Certain of SEM’s historical financial information has been reclassified to conform with Itron’s financial statement presentation. The unaudited pro forma condensed combined balance sheet and unaudited pro forma condensed combined statements of operations should be read in conjunction with the historical financial statements and notes thereto of Itron and SEM.

On March 4, 2003, we purchased Silicon Energy Corp. (Silicon), for approximately $71.1 million in cash. We financed a portion of the purchase price of Silicon with our existing $50.0 million, three-year senior secured loan. The unaudited pro forma condensed combined financial data also gives effect to the acquisition of Silicon as if it occurred on January 1, 2003 with respect to the statement of operations for the year ended December 31, 2003.

Itron, Inc.

Unaudited Pro Forma Condensed Combined Statement of Operations

For the year ended December 31, 2003


	Historical Itron			Historical Silicon			Historical SEM			Pro Forma Adjustments			Pro Forma Itron
	(in thousands)
Revenues	$	316,965		$	1,722		$	294,165		$	(6,335	)(1)	$	606,517
Cost of revenues		173,411			2,082			201,003			(12,100	)(2)		364,396

Gross profit (loss)		143,554			(360	)		93,162			5,765			242,121

Operating expenses
Sales and marketing		36,673			1,573			14,093			(777	)(3)		51,562
Product development		43,017			2,213			9,420			(1,190	)(4)		53,460
General and administrative		28,944			2,030			18,695			(563	)(5)		49,106
Amortization of intangibles		9,618			85			—			19,548	(6)		29,251
Restructurings		2,208			—			—			—			2,208
In-process research and development		900			—			—			—			900
Litigation accrual		500			—			23,000			—			23,500

Total operating expenses		121,860			5,901			65,208			17,018			209,987

Operating income (loss)		21,694			(6,261	)		27,954			(11,253	)		32,134
Interest expense		2,638			266			20			16,893	(7)		19,817
Other income (expense), net		(1,157	)		24			(40	)		(8	)(8)		(1,181	)

Income (loss) before income taxes		17,899			(6,503	)		27,894			(28,154	)		11,136
Income tax provision		(7,421	)		—			(11,571	)		14,315	(9)		(4,677	)

Net income (loss)	$	10,478		$	(6,503	)	$	16,323		$	(13,839	)	$	6,459


Earnings per share
Basic net income per common share	$	0.51											$	0.32

Diluted net income per common share	$	0.48											$	0.30


Weighted average number of shares outstanding
Basic		20,413												20,413
Diluted		21,740												21,740

See accompanying notes to unaudited pro forma condensed combined financial information.

Itron, Inc.

Unaudited Pro Forma Condensed Combined Statement of Operations

For the six months ended June 30, 2004


	Historical Itron			Historical SEM			Pro Forma Adjustments			Pro Forma Itron
	(in thousands)
Revenues	$	145,244		$	154,519		$	(2,588	)(10)	$	297,175
Cost of revenues		79,114			99,898			(5,549	)(11)		173,463

Gross profit		66,130			54,621			2,961			123,712

Operating expenses
Sales and marketing		19,926			7,924			(277	)(12)		27,573
Product development		20,776			4,921			(393	)(13)		25,304
General and administrative		15,278			3,749			(229	)(14)		18,798
Amortization of intangibles		4,054			—			8,216	(15)		12,270
Restructurings		2,434			—			—			2,434

Total operating expenses		62,468			16,594			7,317			86,379

Operating income		3,662			38,027			(4,356	)		37,333
Interest expense		3,015			8			8,208	(16)		11,231
Other income (expense), net		(607	)		(61	)		—			(668	)

Income before income taxes		40			37,958			(12,564	)		25,434
Income tax (provision) benefit		40			(14,968	)		5,009	(17)		(9,919	)

Net income	$	80		$	22,990		$	(7,555	)	$	15,515


Earnings per share
Basic net income per common share	$	0.00								$	0.75

Diluted net income per common share	$	0.00								$	0.71


Weighted average number of shares outstanding
Basic		20,750									20,750
Diluted		21,987									21,987

See accompanying notes to unaudited pro forma condensed combined financial information.

Itron, Inc.

Unaudited Pro Forma Condensed Combined Balance Sheet

At June 30, 2004


	Historical Itron		Historical SEM		Pro Forma Adjustments			Pro Forma Itron
	(in thousands)
ASSETS
Current assets
Cash and cash equivalents	$	2,227	$	2,631	$	196	(18)	$	5,054
Accounts receivable, net		61,716		33,240		13,006	(19)		107,962
Inventories		20,357		20,184		1,635	(20)		42,176
Other current assets		9,120		4,975		(8,410	)(21)		5,685

Total current assets		93,420		61,030		6,427			160,877

Property, plant and equipment, net		44,427		14,838		2,410	(22)		61,675
Intangible assets, net		18,925		52		97,000	(23)		115,977
Goodwill		90,440		—		105,209	(24)		195,649
Restricted cash		128,310		—		(128,310	)(25)		—
Other		49,333		34,957		(22,431	)(26)		61,859

Total assets	$	424,855	$	110,877	$	60,305		$	596,037

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses	$	22,824	$	20,939	$	(1,956	)(27)	$	41,807
Wages and benefits payable		10,920		8,033		(1,287	)(28)		17,666
Short-term borrowings		21,000		—		(21,000	)(29)		—
Current portion of debt		17,435		—		(14,817	)(29)		2,618
Current portion of warranty		7,995		—		—			7,995
Other current liabilities		11,240		10,817		(350	)(30)		21,707

Total current liabilities		91,414		39,789		(39,410	)		91,793

Long-term debt		140,225		—		170,650	(29)		310,875
Warranty		3,768		—		—			3,768
Other long-term liabilities		7,259		69,368		(69,368	)(31)		7,259

Total liabilities		242,666		109,157		61,872			413,695
Minority interest		—		153		—			153
Shareholders’ equity		182,189		1,567		(1,567	)(32)		182,189

Total liabilities and shareholders’ equity	$	424,855	$	110,877	$	60,305		$	596,037

See accompanying notes to unaudited pro forma condensed combined financial information.

Itron, Inc.

Notes to Unaudited Pro Forma Condensed Combined Financial Information

(in thousands)

Note 1: Purchase Price

On July 1, 2004, Itron, Inc. (Itron) completed the acquisition of Schlumberger’s Electricity Products Business (SEM). The purchase price was $248 million, not including direct transaction costs, and is subject to post closing working capital adjustments. Itron used proceeds from a new $240 million senior secured credit facility and $125 million in Senior Subordinated Notes to finance the acquisition, pay related fees and expenses, and repay approximately $50.2 million of outstanding Itron debt under an existing credit facility.

The unaudited pro forma condensed combined financial information reflects a preliminary allocation of the purchase price and represents Itron’s expectations of the significant tangible and intangible assets and liabilities that will be recognized in connection with the acquisition. The estimated fair values of the assets and liabilities are preliminary and are subject to future adjustments. The significant items which could change are intangible assets and goodwill. The valuations of certain tangible and intangible assets are dependent on the finalization of appraisals.

The preliminary purchase price, which includes estimated direct transaction costs and other consideration, is summarized as follows:


Cash paid	$	248,077
Estimated direct transaction costs		5,404

Total acquisition costs	$	253,481

For pro forma purposes only, assuming the transaction was consummated on June 30, 2004 and not on the actual closing date of July 1, 2004, the preliminary allocation of the purchase price would be as follows:


Net current assets and liabilities	$	34,125
Property, plant and equipment		17,248
Intangible assets		97,052
Goodwill		105,209
Minority interest		(153	)

Total net assets acquired	$	253,481

The excess of the purchase price over the fair value of net assets acquired has been classified as goodwill.

Preliminary intangible assets are comprised of the following:


			Weighted Average Useful Life (in months)
Core development technology	$	70,000	60
Contract backlog		3,000	12
Customer relationships		23,000	120
Trademarks and tradenames		1,000	96
Other		52	120

Total intangible assets	$	97,052

The preliminary values assigned to the identifiable intangible assets were determined using the income approach by an independent appraiser. Under the income approach, the fair value reflects the present value of the projected cash flows that are expected to be generated by the products. The intangible assets will be amortized over the estimated useful lives of the estimated discounted cash flows assumed in the valuation models.

The pro forma condensed combined financial information is intended for information purposes only, and does not purport to represent what the combined companies’ results of operations or financial position would actually have been had the transaction in fact occurred at an earlier date, or project the results for any future date or period.

Itron, Inc.

Notes to Unaudited Pro Forma Condensed Combined Financial Information - (continued)

(in thousands)

Note 2: Pro Forma Adjustments

The following adjustments are reflected in the unaudited pro forma condensed combined balance sheet and unaudited pro forma condensed combined statements of operations to reflect the estimated impact of the merger on the historical combined results of Itron and SEM.

(1)	Adjustment to eliminate intercompany sales activity, which consists primarily of royalty sales.

(2)

Net adjustment to remove $(4,585) in pension and post retirement costs related to SEM retirement plans that Itron will not be assuming, to remove intercompany royalty cost of sales of $(6,024), to reflect a decrease in depreciation expense of $(1,621) based on estimated fair values of Silicon and SEM’s property, plant and equipment depreciated in accordance with Itron’s policy over the estimated useful lives and to remove the SEM LIFO inventory reserve impact of $130 to conform with Itron’s FIFO inventory accounting policy.

(3)	Net adjustment consists of a decrease of $(12) in depreciation expense calculated in accordance with Itron’s policy over the estimated useful lives and $(765) to remove pension and post retirement costs related to SEM retirement plans that Itron will not be assuming.

(4)	Net adjustment consists of a decrease of $(9) in depreciation expense calculated in accordance with Itron’s policy over the estimated useful lives and $(1,181) to remove pension and post retirement costs related to SEM retirement plans that Itron will not be assuming.

(5)	Net adjustment consists of a decrease of $(147) in depreciation expense calculated in accordance with Itron’s policy over the estimated useful lives and $(416) to remove pension and post retirement costs related to SEM retirement plans that Itron will not be assuming.

(6)	Net adjustment to eliminate historical amortization expense of $(85) for Silicon and to increase amortization expense by $19,633 for intangible assets associated with Silicon and SEM.

(7)

Net adjustment consists of an increase in interest expense for new debt issued in connection with the acquisition along with amortization of deferred financing costs of $19,349 and a decrease in interest expense of $(2,456) for debt repaid upon the acquisition closing. A change in the interest rate of ¹/8% would result in a change in interest expense of $234.

(8)	Adjustment to remove Silicon interest income related to note receivables from Silicon officers that were not assumed by Itron.

(9)	Adjustment to revise income tax provision utilizing Itron’s statutory rate of 42.0%.

(10)	Adjustment to eliminate intercompany sales activity, which consists primarily of royalty sales.

(11)

Net adjustment to remove $(2,504) in pension and post retirement costs related to SEM retirement plans that Itron will not be assuming, to remove intercompany royalty cost of sales of $(2,614), to reflect a decrease in depreciation expense of $(431) based on estimated fair values of SEM’s property, plant and equipment depreciated in accordance with Itron’s policy over the estimated useful lives. There was no SEM LIFO inventory reserve impact for the six months ended June 30, 2004.

(12)	Net adjustment consists of a decrease of $(10) in depreciation expense calculated in accordance with Itron’s policy over the estimated useful lives and $(267) to remove pension and post retirement costs related to SEM retirement plans that Itron will not be assuming.

(13)	Net adjustment consists of a decrease of $(25) in depreciation expense calculated in accordance with Itron’s policy over the estimated useful lives and $(368) to remove pension and post retirement costs related to SEM retirement plans that Itron will not be assuming.

(14)	Net adjustment consists of a decrease of $(29) in depreciation expense calculated in accordance with Itron’s policy over the estimated useful lives and $(200) to remove pension and post retirement costs related to SEM retirement plans that Itron will not be assuming.

(15)	Adjustment to increase amortization expense for intangible assets associated with the acquisition.

(16)

Net adjustment consists of an increase in interest expense for new debt issued in connection with the acquisition along with amortization of deferred financing costs of $9,660 and a decrease in interest expense of $(1,452) for debt repaid upon the acquisition closing. A change in the interest rate of ¹/8% would result in a change in interest expense of $119.

(17)	Adjustment to revise income tax provision utilizing Itron’s statutory rate of 39.0%.

(18)	Adjustments represent $(960) in payments for professional services related to the acquisition and $1,156 in cash remaining from debt financing.

(19)	Net adjustment to eliminate $(981) in intercompany accounts receivable and to add $13,987 for tax liabilities that are reflected on the opening balance sheet that will be reimbursed by Schlumberger, Ltd.

(20)	Adjustment to remove SEM’s LIFO inventory reserve in order to conform with Itron’s FIFO inventory accounting policy.

(21)

Net adjustment to remove the current portion of deferred income taxes of $(4,556) as the acquisition will involve a 338(h)10 tax election (deemed asset purchase for which certain deferred tax assets will not be acquired), $1,550 to capitalize the current portion of debt issuance costs that will be amortized over the related financing and $(5,404) to eliminate prepaid professional services related to the acquisition.

(22)	Adjustment to reflect a net increase in property, plant and equipment based on estimated fair values. These fair value estimates are preliminary and are subject to future adjustment based on finalization of a valuation conducted by a third party.

(23)	Adjustment to reflect intangible assets identified and the fair values assigned, which are preliminary and subject to future adjustment based upon an evaluation by a third party.

Itron, Inc.

Notes to Unaudited Pro Forma Condensed Combined Financial Information - (continued)

(in thousands)

(24)	Adjustment reflects goodwill from the acquisition after allocating the purchase price to the fair value of net assets acquired.

(25)	Adjustment to reflect the use of restricted cash for the purchase of the acquisition.

(26)

Net adjustment to remove $(25,557) in long-term deferred income taxes as the acquisition will involve a 338(h)10 tax election (deemed asset purchase for which certain deferred tax assets will not be acquired), to eliminate a $(9,234) prepaid pension asset Itron is not assuming, plus $12,360 to capitalize the long-term portion of debt issuance costs that will be amortized over the related financing.

(27)	Net adjustment to remove SEM’s accrued royalties payable to Itron of $(996) and $(960) of accrued professional services related to the acquisition.

(28)	Net adjustment to remove the liabilities that Itron will not be assuming which include $(85) for vacation in excess of defined hours, $(652) related to a pension plan and $(550) for 401(k) contributions.

(29)	Net adjustment to short-term borrowings and current and long-term debt is as follows:


	Short-term borrowings			Current debt			Long-term debt
	(in thousands)
New term debt	$	—		$	1,850		$	183,150
Existing revolving line of credit		(21,000	)		—			—
Existing term loan		—			(16,667	)		(12,500	)

	$	(21,000	)	$	(14,817	)	$	170,650

(30)	Adjustment to remove the current portion of an environmental accrual that Itron will not be assuming.

(31)	Net adjustment to remove a post retirement liability of $(65,418) and the long-term portion of an environmental accrual of $(3,950) that Itron will not be assuming.

(32)	Net adjustment to eliminate SEM’s equity.