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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2002

OR

For the transition period from            to            

Commission file number 0-22418

ITRON, INC.

(Exact name of registrant as specified in its charter)

2818 North Sullivan Road

Spokane, Washington 99216-1897

(509) 924-9900

(Address and telephone number of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class

Common stock, no par value

Preferred share purchase rights

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  x    No  ¨

As of June 28, 2002 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the shares of common stock held by non-affiliates of the registrant (based on the closing price for the common stock on the Nasdaq National Market on such date) was approximately $549,151,490.

As of February 28, 2003, there were outstanding 20,240,943 shares of the registrant’s common stock, no par value, which is the only class of common stock of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part II and Part III is incorporated by reference to the definitive Proxy Statement for the Annual Meeting of Shareholders of the Company to be held May 23, 2003.

PART I

ITEM 1:    BUSINESS

OVERVIEW

General

Itron, Inc. is a leading technology provider and source of knowledge for collecting, analyzing, and applying critical data about electric, gas, and water usage to the global energy and water industries. Itron delivers value to its customers by providing industry-leading solutions for meter data collection, energy information management, demand side management and response, load forecasting and analysis consulting services and software, transmission and distribution system design and optimization, web-based workforce automation, commercial and industrial (C&I) customer care and residential energy management. Since our founding in 1977, we have brought advancements in hardware and software technology to our customers to enable a transition from manpower intensive activities, such as manual meter reading, to more automated and efficient systems that help optimize the delivery and use of energy and water.

Itron’s solutions are installed at over 2,800 utilities worldwide, many of which utilize multiple Itron products and systems. Most of those utilities utilize our meter data collection and management systems to collect and process data from over 270 million electric, gas, and water meters. Of those, over 1,100 utilities use our radio and telephone based technologies to automatically collect, analyze, and apply meter data from 24 million electric, gas and water meters. Our enterprise software solutions for managing complex commercial and industrial meter data are used by approximately 600 utilities worldwide, including over 90% of the largest electric and gas utilities in the United States (U.S.) and Canada. Our software systems are also in use at four wholesale energy markets in the U.S. and Canada to provide critical data management, billing, and settlement systems for the power flowing into and out of those deregulating markets. Over 150 utilities have utilized our transmission and distribution software design tools, and our joint pole use and engineering services. Approximately 100 utilities have utilized our forecasting software and consulting services. Approximately 35 end-users and 25 utilities use our enterprise energy data management software. All of the 300 largest utilities in the U.S. and Canada are Itron customers and use at least one of our solutions—a strong position from which to expand our growing portfolio of products and services.

During 2002 and 2003, we expanded our solutions portfolio for optimizing the delivery and use of energy and water beyond meter data collection hardware and software solutions with several strategic acquisitions. These acquisitions broadened our capabilities and solutions offerings to include software tools and services for more efficient design of transmission and distribution infrastructure, field workforce automation, enterprise-wide energy management and forecasting to help our customers predict and plan for future needs more effectively. We believe our technology, industry knowledge and relationships give us a strong foothold for extending our leadership into additional systems that give utilities and their customers the knowledge to distribute and use electricity, gas and water more efficiently.

With penetration for meter reading automation in the U.S. and Canada at approximately 17%, a growing international market for our products and new products to serve our customers changing needs, Itron is well positioned for its future.

Energy and Water Industries Overview

For a number of years, the energy markets have undergone fundamental changes as governments in the U.S. and Canada have modified the regulation and structure of the electricity and gas markets to stimulate competition, increase reliable delivery and standardize certain aspects of the market. Transactions previously controlled by a single vertically integrated provider may now be handled by a variety of unrelated market

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participants. The move from regulated industries towards a deregulated or partially deregulated market model has resulted in numerous challenges for utilities to run their businesses and serve their customers.

During the 1990’s, electricity demand increased by 17% while supply infrastructure only increased by 2.3%. At the end of the decade, the Energy Information Association predicted that by 2020 electricity demand would increase by another 32%, requiring an estimated 1,310 new power plants to meet the demand. The Association also predicted that during the same period, demand for natural gas would increase by 50%, with a significant portion of that growth driven by new gas fueled electric generation facilities. Investments in electric and gas delivery infrastructure have been minimal over the past decade. New investments in transmission infrastructure decreased by $110 million per year over the past 20 years while transmission congestion increased by more than 200% from August of 1999 to 2000. It is estimated that transmission infrastructure additions must quadruple over the next decade just to maintain the current level of transmission adequacy.

Faced with these projections, over the past several years, new generation infrastructure was built to meet expected increases in demand. Due in large part to the economy and unusually mild weather, demand over the past few years did not rise as predicted and certain areas are now faced with generation supply that exceeds near term demand. As a result, a number of companies that built new generation infrastructure find themselves with under performing assets. As well, planned new generating facilities are being cancelled or delayed due to permitting, environmental issues, inability to raise capital and cost concerns.

In addition, natural gas prices rose substantially in the latter part of 2002, impacting natural gas distribution companies and the competitive position of new gas fired electric generation. Increased reliance on natural gas is subjecting the electricity market to volatility in both wholesale electricity and natural gas prices.

The uncertainty of supply and demand imbalances, credit and liquidity issues, aging and under performing infrastructure combined with increased rates and wholesale price volatility, have resulted in a renewed interest by utility commissions, political bodies and consumers in the management and conservation of energy and upgrading and adding of technology to the infrastructure.

As the need for more accurate energy usage data grows, organizations must reduce the amount of human intervention required to collect, validate, edit and manage that data. According to a META Group, Inc. research report, the energy market volatility experienced in the past several years has uncovered the lack of an integrated market structure, creating significant risk exposure for energy companies and requiring new systems and better processes for managing commodities along the energy value chain. Advanced systems for energy commodity management will need significantly extended functionality over traditional systems.

The water delivery infrastructure has undergone different but equally substantial changes with large water companies buying up or running small water companies and water shortages becoming critical around the world. Delivering adequate amounts of clean, drinkable water is a problem many cities are now addressing. Since 1970, the worldwide demand for water has tripled while the amount of potable water remains at 1% of the earth’s total supply. In 2002, the U.S. experienced severe drought conditions over 45% of the country, with 57 rivers reaching record low levels in March of 2002. Measurement and recording of actual usage is now mission critical for many water utilities.

Industry trends give energy and water utilities, and delivery and generation companies, powerful incentives to return to their core business and focus on ways to reduce costs, streamline operations, enhance system reliability, improve safety for meter readers and customers, and provide superior customer service.

Itron’s Vision and Strategy

Itron’s vision is to optimize the delivery and use of energy and water. We intend to leverage our core competencies of providing products and services for advanced meter data collection and management, and our

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history of strong customer relationships with electric, gas and water utilities, to provide additional knowledge based systems about how and when energy and water are used, and how to better manage the distribution of both.

With this strategic growth path in mind, our next-generation product development has been and is focused on data collection, communications equipment and software applications—all of which will give utilities the knowledge to distribute and use their valuable resources more efficiently. In addition to internal development, we also look outside of Itron for potential licensing, partnering and acquisition opportunities that will enable us to expand our solutions portfolio.

In March 2002, we acquired LineSoft Corporation (LineSoft), which moved us into the optimization of delivery systems, with software tools and services that enable energy delivery providers to design more cost and operationally efficient transmission and distribution infrastructure, and as well, to rebuild existing transmission and distribution infrastructure.

In October 2002, we acquired Regional Economic Research, Inc. (RER), an energy forecasting, consulting and analysis company. With this acquisition, Itron moved into the world of helping utilities and other market participants forecast their future needs including load growth, new facilities requirements, customer reaction to proposed programs and rates, software for day ahead, and other predictive needs.

Also in October 2002, we acquired eMobile Data Corporation (eMobile), whose technology enables us to automate field workforce operations, providing cost savings and efficiency for utilities. A fully integrated field workforce management solution will enable workers to manage a variety of route-based work orders while in the field as well as receive dispatchable work orders that can be managed while in a particular geographic area.

In March 2003, we acquired Silicon Energy Corporation (Silicon Energy), a provider of enterprise energy software solutions (see discussion in the Subsequent Event section).

Our vision is to leverage the strengths of the acquisitions with our data collection technologies, and industry and customer relationships to continue to enhance our portfolio of technology solutions for optimizing the delivery and use of energy and water.

Market Opportunities

Meter Data Collection Systems and Services

We estimate there are approximately 130 million electric meters, 70 million gas meters, and 70 million water meters in the U.S. and Canada. Automated Meter Reading (AMR) technology is in use on approximately 46 million, or 17%, of these meters. We estimate that there are another 900 million to 1.2 billion meters outside of the U.S. and Canada with minimal AMR deployments. We have established ourselves as a leading supplier of AMR systems having shipped just over 23.6 million AMR meter modules to utilities in the U.S. and Canada, and approximately 600,000 to utilities elsewhere around the world as of December 31, 2002. In total, over 1,100 utilities have installed our AMR technology. With many utilities returning to a back to basics strategy, business fundamentals including cost reductions, improved reliability, enhanced workforce efficiency and enhanced customer connections are of increasing importance. Automation technology helps enable utilities to meet these goals.

Our MV-90 commercial and industrial (C&I) meter data collection and analysis software is used by approximately 600 utilities throughout the world including more than 90% of the major electric and gas utilities in the U.S. and Canada. At the end of 2002, Microsoft discontinued support of certain technology components that are used by some versions of MV-90. This could result in future upgrade requirements for our MV-90 customers. As the cost of energy increases and interest in energy management and control increases, we expect timely and open access to energy usage information collected by MV-90 to become increasingly important. This

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will enable energy providers and their customers to have the information and knowledge they need to make decisions on how to most efficiently and cost effectively use energy.

Workforce Automation

Electric, gas and water utilities have a number of workforces that perform operations in the field. In 2002, we acquired eMobile, a provider of wireless, web-based mobile workforce automation and dispatch management software solutions. Many of the economic and other pressures that drive automation of meter reading also result in the requirement for more immediate access to information between the office and the field. eMobile software tools allow utility field workers to access via the web the information they need to make decisions, eliminate costly paperwork, and work more effectively on operations such as service turn-ons/turn-offs, gas leak detection, credit and collections, meter services and trouble calls. Additionally, solutions are planned for tools related to planning, constructing and maintaining other infrastructure assets. While a number of utilities have solutions in place for one or more of their workforce crews, we believe the need to increase operational efficiency will drive further consolidation and automation of these crews.

Transmission and Distribution Products and Services

Significant amounts are spent annually on building, maintaining and upgrading transmission and distribution (T&D) systems. Electrical Power Research Institute and Cambridge Energy Research Associates reports indicate that approximately $10 billion is spent each year on the construction and maintenance of T&D facilities. In March 2002, we acquired LineSoft, a provider of software solutions and engineering consulting services that enable energy delivery providers to design more cost and operationally efficient transmission and distribution infrastructure, and as well, to rebuild existing transmission and distribution infrastructure. These solutions are now referred to as Itron’s Transmission and Distribution Solutions (TDS) product group.

There are a number of geographic areas that lack adequate transmission system capacity to move electricity from the generation facilities to the distribution systems. This has been one of the causes of increased congestion and voltage reductions in the Northeast region of the U.S. To support the increase in energy demand, new transmission system infrastructure must be built and existing infrastructure needs to be upgraded. Efficiently designing, upgrading and optimizing the transmission and distribution system can improve reliability and safety, while at the same time minimizing capital investments. Given the current state of transmission systems, with supply and demand imbalances and transmission congestion in many parts of the country, we believe there are significant opportunities over the next five years for the TDS suite of products.

TDS also provides software and services to optimize the design, upgrade and maintenance of the distribution infrastructure. Third party attachment to existing distribution poles requires the utility to perform field and engineering analysis for their poles. We provide joint use services which help pole owners track third party attachments to their existing distribution poles, determine what can be added to them, whether or not the poles are in compliance with existing codes and safety regulations, and whether they are being used most effectively.

With capital resource and credit constraints in the marketplace, the extent to which transmission and distribution companies can better predict load requirements will enable them to more efficiently design and operate reliable systems at the least possible cost. In 2002, we also acquired RER, a leading provider of energy forecasting consulting and analysis. As volatility in wholesale energy prices continues and congestion and bottlenecks in transmission infrastructure increase, we believe there will be a growing desire for generation, transmission and distribution companies to increase the accuracy of their energy purchases and system operations. Forecasting tools and services enable these improvements. We believe our forecasting and analysis tools can be utilized by delivery companies to optimally design and operate their systems, increase system reliability and minimize risk.

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While the 2001 energy crisis in California, and all of its impacts, have slowed decisions related to opening the wholesale markets in certain areas of the U.S., the Federal Energy Reliability Council (FERC) is proposing a Standard Market Design (SMD) that would provide a set of operating standards for market participants to follow. As this work continues, we believe there will be opportunities in this market as additional regional grids are established and new requirements for load data collection, management, forecasting, settlements and billing arise. As well, we believe new transmission construction and rebuild of existing facilities will grow as decisions in this area come to pass.

Itron Products and Solutions

Overview

Itron has a broad portfolio of solutions for collecting and communicating data from and throughout complex utility networks and creating information that has high value to suppliers, distributors and end-users of electricity, natural gas and water.

Our meter reading solutions integrate a broad array of meter modules, private and public radio and telephone-based communications systems, and data management storage and delivery applications. Our solutions support electric, gas and water service. Itron’s integrated approach provides our customers with the flexibility needed to apply a cost-effective solution to each of their situations—rural, suburban, urban, residential, commercial, and industrial.

Our meter reading automation technologies are designed to accommodate the inevitability of change so that our customers can select solutions that meet their needs today while also laying the foundation for more advanced solutions to meet their future goals and objectives. Our radio-based solutions encompass handheld, mobile and network reading technology options. Because the same radio-based meter modules can be used with any of these solutions, our technologies facilitate the migration from one level of systems automation to another by eliminating the need to replace the meter endpoint. Our telephone-based solutions offer an economically attractive alternative for low density or selective deployment situations.

We have developed software solutions that integrate, store, manage and apply information from diverse data collection systems and technologies. This allows for the deployment of various collection technologies within a service territory, tailored to the economic and functional considerations of different portions of the territory. Itron also provides software solutions that take collected load data and enable customized billing and settlement, internet-based presentment and information exchange. Itron software solutions are integrated with the widest array of utility billing systems in the industry, with our communication protocols, in many respects, representing the de facto industry standard. In addition, Itron has one of the largest project management organizations in the industry.

Traditionally, many of our customers have deployed our technology primarily on the basis of reducing costs and improving the efficiency of their meter reading applications. While this remains a critical component of Itron’s value proposition, our products, systems and solutions can provide a wide range of benefits to our customers that go far beyond meter reading and billing. Our customers are finding that Itron’s technology and services can be an integral component of their operational and strategic objectives of reducing costs, improving customer service, delivering real process improvement, and successfully evolving their businesses.

Automatic Meter Reading (AMR) Systems and Products

Our AMR product line primarily involves the use of radio and telephone communications technology to collect and transmit meter data along with a host of software solutions for billing and settlement, data storage and retrieval, internet data presentment, load profiling and forecasting, and numerous other applications for meter data. The Company’s radio-based AMR solutions encompass Handheld AMR, Mobile AMR and Network AMR.

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Due to the geographic features and varying population density of a utility’s service territory, generally no single meter reading solution is technologically or economically suited to all parts of the utility’s service territory. Our AMR applications are intended to provide flexibility ranging from selective installation for high cost-to-read meters or geographically dispersed meters requiring advanced metering functionality, to full implementation of an AMR system covering a large portion of a utility’s service area. In a deregulated marketplace, target marketing of specific features are desirable. We provide technology that can be selectively deployed to targeted end-use consumers. This flexibility helps our customers achieve economic and operational benefits from their initial investments in our AMR systems, while enabling migration to more comprehensive AMR solutions in the future as the marketplace requires.

Meter Modules:    Our encoder, receiver, transmitter (ERT) meter modules serve as the data collection endpoint for Itron’s fully integrated portfolio of radio-based data collection solutions. ERTs are radio-based modules that fit in or on electric, gas or water meters. The ERTs encode consumption and tamper information from the meters and communicate the data via radio to Itron’s handheld, mobile and network radio-based data collection systems. ERTs can be retrofitted to existing meters or installed on new meters. Electric ERTs are typically installed under the glass of electric meters and are powered by the electricity running through the meter. Gas and water ERTs are usually attached to the meters and are powered by long-life batteries. During 2002, Itron partnered with two companies to develop meter module solutions for the solid-state meter market. In these situations our AMR technology is integrated into solid-state meters.

We also offer a separate line of meter modules for use outside of the U.S. and Canada. The primary differences between the meter modules used in the U.S. and Canada and in international markets are the radio frequency band in which they operate and the physical configuration of the module.

Handheld AMR:    Handheld AMR uses radio-equipped handheld computers to read module-equipped electric, gas or water meters via radio without the need to access the meter or customer premises. A radio is integrated into a handheld computer. A software module in the meter reading system allows the handheld computer to determine which meters are read by manual efforts, by radio, or by an optical probe. As a meter reader walks a route, the radio-equipped handheld computer sends a radio wake-up signal to nearby radio-based meter modules that have been attached to electric, gas or water meters. The unit then receives meter reading and tamper data back from the meter modules. The same handheld computer can read any combination of properly equipped electric, gas and water meter modules.

Handheld AMR is normally used to read the 5-10 percent of accounts within the utility service territory that have high-cost or hazardous-to-read meters. The meters are typically located in a geographically dispersed environment, scattered throughout the service territory. These meters may be situated in a basement, in a back yard with a dangerous dog or locked gate, or with a customer who doesn’t want the meter reader on the property.

Mobile AMR:    Mobile AMR uses vehicles equipped with radio units to read ERT module-equipped electric, gas or water meters via radio without the need to access the meter. A radio transceiver in Itron’s Mobile Collection System is installed in a utility vehicle. Route information is downloaded from the utility billing system and loaded into the radio transceiver. While driving along a meter reading route, the transceiver broadcasts a radio wake-up signal to all ERT meter modules within range and receives the ERT messages when they respond. As a result of this level of saturation, meter reading efficiency is dramatically improved.

Fixed Network 2.0:    Launched in the fall of 2001, Itron’s Fixed Network 2.0 is designed for a utility of any size or service environment to meet its advanced meter data collection objectives. Fixed Network 2.0 combines Itron’s wireless RF technology for “last mile” communications between locally installed concentrator devices and meter endpoint devices with flexible public network communications capabilities for communication and data transfer between the concentrators and the host processor. Fixed Network 2.0 also features significantly improved data processing speeds and data management capability, as well as an open architecture design that allows for the interface and sharing of data with other utility applications such as outage management, distribution operations, and load research.

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Commercial and Industrial (C&I) Network:    Our C&I Network uses advanced, peer-to-peer radio communications to transport metering data from solid-state electric meters equipped with Itron External Meter Modems (EMMs). The data travels from the EMMs, through a system of radio relays, to a hub, which then routes the data using a single dedicated phone line to an Itron MV-90 host processor. There the data can be integrated with a variety of Itron and other software applications to provide a variety of billing, internet-based data presentment, load forecasting, settlements, marketing, load curtailment, energy management, load research and system engineering applications.

By using a system of radio frequency relays to communicate with these meters, the C&I Network eliminates the need for dedicated phone lines and the associated on-going phone charges to each meter. This makes the C&I Network a very economical network communication solution and enables energy providers to meet advanced data collection needs for a significantly broader segment of commercial and industrial energy customers.

In addition to our own C&I network, during 2002 Itron agreed to be the exclusive distributor of SmartSynch’s SmartMeter System^SM, a wireless communications system that uses public networks and the internet for communicating with and collecting data from solid-state commercial and industrial electric meters.

The SmartMeter system is installed within a regular electric meter, resulting in efficient, low-cost installations and operations. The SmartMeter collects power quality and usage data, then compresses and encrypts the data for superior transmission economics and data/device security. As data is collected, it travels through wireless public communication networks to the company’s TMS software, a unique application that seamlessly interfaces SmartMeters over advanced communication networks and the internet.

The SmartMeter System and the Itron C&I Network are complementary products—each has their own strengths and value depending on a utility’s needs and objectives. With its drop-in capability and use of public wireless communications networks, the SmartMeter System is ideally suited and cost effective for selective deployments in areas with public wireless network coverage. Conversely, the system architecture and communications capabilities of the Itron C&I Network make it a cost effective solution for areas with groups of C&I meters, such as commercial and industrial parks, strip malls, downtown areas, or large commercial and industrial facilities with multiple metering points.

Commercial and Industrial Data Collection and Management Software

Commercial and industrial (C&I) meters have more sophisticated measurement capabilities than residential meters and collect much more data from the meter that must be conveyed back to energy providers and others. There are a wide variety of these meters by multiple meter vendors with no uniform communications standards.

Itron is a leading provider of software systems for collection, validation and editing of interval, register and event data from C&I meters. Our C&I software systems have extensive functionality to support data validation and data editing, data totalization, time-of-use pricing, load research, interactive graphics, billing and financial settlement, load forecasting and demand management, distribution operations and planning, marketing and customer care, and deregulated marketplace transactions. Our C&I software is very scalable and can be operated on a single PC as well as in wide-area network operating environments and distributed systems.

Handheld Systems and Products

We provide several models of handheld computers to meet the varying requirements of our customers. Each model is designed for use in harsh environments with standard text and graphics, back-lit displays, several memory sizes, multiple communications options, interface devices for electronic meters and easy to use keyboards that can be customized to the needs of our customers.

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Workforce Automation Software

Field service operations represent an opportunity in which technologies such as wireless communications, the internet, and real-time data exchange can be applied to achieve operational efficiency, productivity and customer service. In 2002, we acquired eMobile. eMobile’s flagship product is Service-Link, a web-based application for utility field service dispatching and mobile workforce management. By combining wireless communications with the internet and real-time information exchange, Service-Link enables utilities to streamline and automate many of the processes associated with field service, including turn-ons/turn-offs, gas leak detection, credit and collections, meter services and trouble calls. An important feature of Service-Link is its ability to be configured to meet many of the dispatch and data collection needs of utilities.

Service-Link enables information to be downloaded to mobile computers via regular dial-up docking station connections or via wireless communications. Service-Link supports numerous handheld devices ranging from a pocket PC/PDA to a full laptop computer. Service-Link uses the internet and a utility’s local-area network or wide-area network to provide connections between a server, dispatcher workstations, customer service representatives, and the wireless network.

Residential Energy Management

In 2002, Itron introduced new products and conducted two market development trials for residential energy management solutions. Itron partnered with Lanthorn Technologies to facilitate the trials. The trials utilized an internet connection within the home to control a thermostat and monitor energy consumption. Lanthorn Technologies provided the utility and consumer interfaces and messaging application for monitoring consumption from Itron ERTs, and delivered thermostat control in near real-time. This technology may allow utilities to more accurately predict when to shift or reduce peak load while providing flexible tools to execute the load reduction event. The trial results also demonstrated that these tools could improve customer service and provide utilities with value added services they can offer to their customers.

Transmission and Distribution Software and Engineering Services

TDS provides software solutions and engineering consulting services for optimizing utility transmission and distribution systems. Specific TDS products include: (1) licensed software tools, typically sold on a seat license basis with follow-on software maintenance contracts for transmission line design, distribution line design and substation design, (2) software services that help utilities apply TDS tools, including data entry of utility codes and standards, and electrical and mechanical design standards, (3) engineering consulting services for transmission and distribution line design, and (4) joint use services, which include services and software tools, for surveying utility poles in preparation for attachment of cables and equipment of other carriers (cable companies, competitive local exchange carriers, etc.) and software tools for calculating a utility pole’s capability for carrying wires and other devices, creating work orders to repair or make poles ready for additional attachments, and determining compliance with local codes and safety rules.

Consulting, Analysis and Forecasting Services and Software

Itron’s software and consulting services are used by energy utilities, energy marketers, research organizations, industrial and corporate customers, and government agencies for load and price forecasting, analysis and planning, energy and resource economics assessment, utility program analysis, and market share research. Additionally, Itron’s customers use our consulting services to evaluate and develop energy efficiency programs and assess renewable energy technology.

RER’s solutions offer utilities and other market participants solutions that forecast needs including load growth, new facilities requirements, customer reaction to proposed programs and rates, software for day ahead and other predictive needs. Itron provides forecasting services and software products to improve system operation, scheduling, risk management and financial performance.

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Customers, Sales and Distribution

We use a combination of direct and indirect sales channels. We primarily utilize direct sales, technical and administrative support teams to serve the needs of the large electric, gas and water utilities. At December 31, 2002, we had approximately 70 employees in direct sales and technical support. For other utilities, we conduct sales and technical support activities primarily through distributors, representative agencies and end-manufacturer representatives. At December 31, 2002, we had approximately 30 indirect channel representatives. We also sell electric and water meter modules through original equipment manufacturer arrangements with several major meter manufacturers, in which the manufacturers incorporate our meter modules at their own facilities into new meters and then offer them for sale. In addition to selling our own AMR modules, we license AMR technology to certain electric meter manufacturers who either manufacture their own AMR modules or who imbed our AMR technology into their meters. Cumulatively, as of December 31, 2002, over 1.5 million electric meters have Itron’s AMR technology through these licensing arrangements. In addition to utilities, we also call on other energy market participants including regional transmission organizations, independent transmission companies, energy service providers and large energy users.

We address the market and serve our customers through four business units:

Electric:    This business unit focuses on roughly 120 investor-owned utilities. The utilities are primarily located in the U.S. and Canada and represent large electric, and combination electric and gas utilities. In total, these customers represent approximately 102 million electric meters, 27 million gas meters and 4 million water meters.

Natural Gas:    This business unit focuses on approximately 80 U.S. and Canadian investor-owned utilities, including subsidiaries, encompassing approximately 40 million gas meters and 3 million electric meters.

Water and Public Power:    This business unit focuses on approximately 50,000 water utilities, over 2,000 municipalities providing electric, gas and/or water service and over 900 electric cooperative utilities in the U.S. and Canada. The largest utilities in this segment include over 130 water utilities and municipalities, representing approximately 29 million water meters, 4 million electric meters and 1 million gas meters.

International:    This business unit focuses on sales of products, systems and services outside of the U.S. and Canada. We estimate that outside of the U.S. and Canada, there are approximately 900 million to 1.2 billion meters. We have a significant handheld meter reading market share with utilities in Japan, Korea, Australia, and parts of Europe. Interest in AMR systems and technology varies widely from country to country and overall is at a very early penetration level.

Marketing

Marketing activities include market intelligence, marketing communications, customer relationship management, and regulatory and legislative affairs. Our marketing efforts focus on Company and product brand awareness and recognition principally through an integrated marketing communications approach including trade shows, symposiums, brochures and collateral, published papers, the Itron website, advertising, direct mail, electronic communications, newsletters, conferences, annual users forums, industry standards committee representation and regulatory support. We maintain communications with our customers through integrated marketing communication campaigns. Additionally, we are continuing to build and expand our customer relationship management system based upon Siebel software.

We attend and participate in several major industry conferences each year, which include the DistribuTECH Conference and the Automatic Meter Reading Association Conference. Our Annual Users Conferences offer an important opportunity for Itron and our customers to come together and share ideas about Itron products, industry happenings and customer needs.

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Product Development

We have maintained our leadership position in part because of our commitment to developing new products and continued enhancement of existing products. Our next generation technology development is primarily focused on data collection, communications technologies and software applications. We also invest in expanding and upgrading new hardware and software platforms for handheld and automatic meter reading systems. We spent $36.8 million and $30.0 million on product development in 2002 and 2001, respectively. Over 50% of our 2002 product development dollars were spent developing future products.

Manufacturing

We manufacture meter modules and other communications technology products, as well as certain peripheral equipment. Our primary manufacturing objective is to participate in the design through concurrent engineering and produce cost effective, high quality meter modules and network components utilizing high volume production equipment and processes. We outsource the manufacturing of certain handheld systems and peripheral equipment, as well as other low volume AMR products, to a contract manufacturer in which we have a 30% ownership interest. The contract manufacturer leases approximately 30,000 square feet, or 21%, of our Spokane facility. In addition, most of our handheld systems products, telephone modules and international meter module products are manufactured for us by third parties.

Our primary manufacturing facility is located in Waseca, Minnesota. We currently have the capacity to produce approximately 6.4 million (combination of electric, gas and water) meter modules annually on a three-shift basis. We are currently running at approximately 70% capacity in total, however, capacity for individual products varies throughout the year depending on current demand. Itron is committed to pursuing annual outside quotes for the production of its meter modules to ensure that its manufacturing is cost competitive and to maintain a base of contract manufacturers that are familiar with the products and capable of producing them.

We have installed extensive automated testing equipment in our manufacturing facility to provide quality control and process repeatability. Our testing includes both visual inspection and automated testing of the technical parameters established for each of our products. Our quality control equipment also includes a sophisticated information system that collects data from testing equipment and provides extensive reports and analysis of such data. This information system permits us to promptly identify potential problems or weaknesses in our manufacturing processes. During 2003, we intend to upgrade our quality system to ISO 9000-2000 and receive ISO 14000 certification for environmental compliance.

Employees

As of December 31, 2002, we employed 1,434 full-time regular and contract manufacturing persons, 30% in manufacturing, 37% in product development, 4% in marketing and IT, 10% in service and support, 10% in finance and corporate administration and 9% in our business units.

Of these employees, 94.2% were located in the U.S., 1.8% in Canada, 1.7% in Australia and 2.3% in Europe. None of our domestic employees are represented by a labor union. We have not experienced any work stoppages and consider our employee relations to be healthy.

Competition

Although we are the industry leader in supplying energy and water data collection products, systems and services to the utility industry in the U.S. and Canada, and in many other areas around the world, we face competition from a variety of companies in each of the markets we serve. The large market potential for meter reading automation has led communications, electronics and other companies to begin developing and marketing

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various systems. Some of these companies currently compete, and in the future others may compete with our products, systems, and services. These competitors can be expected to offer a variety of technologies and communications approaches, as well as meter reading, installation and other services to utilities and other industry participants. There are several market participants that may be both competitors and partners. We expect competition in the AMR market to increase as current competitors and new market entrants introduce competitive products.

As of December 31, 2002, we had a greater than 50% market share of AMR meter modules shipped to date in the U.S. and Canada. The next largest competitor is Schlumberger, which we estimate represents roughly 25% of the installed market. There are also a few system providers, radio-based and power-line-carrier-based, most of whom are narrowly focused, that have recently been awarded systems at utilities, including companies such as DCSI, Datamatic, Hexagram, Hunt, Invensys, Neptune, Nexus, Ramar, and Trace.

We face competition in energy information management from a number of companies such as ABB, ICF Kaiser, Lodestar, and Siemens. In competitive wholesale markets in California and Ontario, Canada, we have partnered with ABB and Cap Gemini to offer a total integrated system solution. We may continue to partner with some of these companies, as well as other consulting and system integration companies, to address future competitive energy markets with Itron systems.

We believe that as we expand our offerings towards optimizing energy delivery there are several very large suppliers of equipment, services or technology to the utility industry that have developed or could develop competitive products for this market, such as ABB, Invensys and Siemens. Similarly, we believe that as we move towards offering systems and solutions for end-use customers, we will face competition from billing and in-building controls companies. We hope to develop cooperative relationships with several of these companies to jointly develop and offer solutions to the market.

In the market for utility field workforce automation, we expect to compete with companies such as DB Microware, MDSI and Utility Partners.

For our transmission systems products we compete with Power Line Systems and others. In the distribution software business, we compete with Cook-Hurlbert and GE/Smallworld. Additionally, Roussey and Enghouse offer underground distribution products. In the engineering consulting business the primary competitors are Black and Veatch, Power Engineers and Sargent and Lundy along with other regional players.

Intellectual Property

We own or license numerous U.S., Canadian and foreign patents and have filed various patent applications. These patents cover a range of technologies for meter reading, portable handheld computer and AMR related technologies. We also rely on copyrights to protect our proprietary software and documentation. We have registered trademarks for most of our major product lines in the U.S. and many foreign countries. The Company is currently involved in a legal action related to a patent dispute. As a result, the Company has redesigned its current products that were found by a jury to infringe on a third party patent. We believe that our continued success will be based on continued innovation, market knowledge, technical and marketing capabilities, existing relationships with utilities and a fundamental commitment to customer service excellence.

FCC Regulation and Allocation of Radio Frequencies

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

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Although radio licenses generally are required for radio stations, Part 15 of the FCC’s rules permit certain low-power radio devices (Part 15 devices) to operate on an unlicensed basis. Part 15 devices are designed for use on frequencies used by others. These other users may include licensed users, which have priority over Part 15 users. Part 15 devices are not permitted to cause harmful interference to licensed users and must be designed to accept interference from licensed radio devices. Our radio meter modules are Part 15 devices that transmit information back to either the handheld, mobile or network AMR reading devices in the 910-920 MHz band pursuant to these rules.

On May 24, 2002, the FCC adopted the service rules governing the use of the 1427-1432 MHz band. The Company was originally granted a nationwide license to operate in the band during 1994. Among other things, the new rules reserve the upper 2.5 MHz of the band for general telemetry, including utility telemetry, and provide that non-exclusive licenses will be issued in accordance with Part 90 rules and the recommendations of frequency coordinators. Telemetry licensees must comply with power limits and out-of-band emission requirements that are designed to avoid interference with the use of the lower part of the band by hospitals. Although the FCC will issue licenses on a non-exclusive basis, and it is possible that the demand for spectrum will exceed supply, we believe that the Company will continue to have access to spectrum in the 1429.5-1432 MHz band under favorable conditions.

Backlog of Orders

We enter into short-term and long-term contracts to supply hardware, software and services to our customers. Long-term (multi-year or annual) contracts are subject to rescheduling or cancellation by our customers. Bookings and backlog can be highly variable from period to period primarily due to the nature and timing of large orders.

Backlog is not a complete measure of our business and pertains only to manufactured products and associated software and services, such as installation services. Software only sales tend to be book and ship business, so that at the end of an accounting period little or no software backlog exists for software only orders. Bookings for a reported period represent the revenue value of contracts signed during a specified period except for those related to annual maintenance, joint use (utility pole surveys) and engineering services. Instead, revenues from these contracts are included in bookings during the quarter in which the revenues are earned. At December 31, 2002, the estimated value of these contracts approximates $45 million on an annual basis.

Total backlog represents the revenue value of undelivered contractual orders, excluding annual maintenance, joint use and engineering services contracts. Twelve-month backlog represents the estimated portion of total backlog that will be earned over the next twelve months.

Information for bookings and backlog by quarter for 2002 and 2001 is as follows ($ in millions):

Note that beginning total backlog, plus current quarter bookings, less current quarter sales and service revenues will not always equal ending total backlog due to miscellaneous contract adjustments and other factors.

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Environmental Regulations

In the ordinary course of our business, we use metals, solvents, and similar materials that are stored on site. The waste created by use of these materials is transported off-site on a regular basis by a state-registered waste hauler. Itron has made a concerted effort to eliminate the use of mercury and other hazardous materials in its products. Itron complies with state and federal regulations regarding storage, emissions, and the disposal of waste.

SEC Filings

The Company’s SEC filings are available under the Investor Relations section of Itron’s website at www.itron.com. The SEC filings are available free of charge on the website as soon as practicable after they are filed with or furnished to the SEC.

Trademarks

Itron, Linesoft, and ERT, are registered trademarks of Itron, Inc. MV-90, Service-Link, and “Knowledge to Shape Your Future” are trademarks of Itron, Inc.

Certain Risk Factors

Itron is dependent on the utility industry, which has experienced volatility:

We derive substantially all of our revenues from sales of products and services to the utility industry. Purchases of our products are, to a substantial extent, deferrable in the event that utilities reduce capital expenditures as a result of mergers and acquisitions, pending or unfavorable regulatory decisions, poor revenues due to weather conditions, rising interest rates or general economic downturns, among other factors. We have experienced variability of operating results, on both an annual and a quarterly basis as a result of these factors.

The utility industry, both domestic and foreign, is generally characterized by long budgeting, purchasing and regulatory process cycles that can take up to several years to complete. Our utility customers typically issue requests for quotes and proposals, establish evaluation committees, review different technical options with vendors, analyze performance and cost/benefit justifications and perform a regulatory review, in addition to applying the normal budget approval process within a utility.

In the past, we have experienced considerable delays in purchase decisions by utilities that have become parties to merger or acquisition transactions. Often such purchase decisions are put on hold indefinitely when merger negotiations begin. If we were to experience a high amount of industry merger and acquisition activity, our revenues could be materially adversely affected. In the past, the unbundling of metering and certain other services from the basic transport aspects of electricity distribution resulted in significant delays in purchasing decisions as those regulations were being analyzed, which had a material adverse impact on our business. If we were to experience future state or other regulatory decisions that cause a delay in purchasing decisions, changes in our customer base, or requirements to modify our products and services (or develop new products or services) to meet the needs of market participants, our results could be materially and adversely affected.

Itron’s acquisitions of and investments in third parties carry risks:

Acquisitions and investments may involve numerous risks such as the diversion of senior management’s attention from the core business, unsuccessful integration of the acquired entity’s operations, technologies and products, lack of market acceptance of new services and technologies, or a shift in industry dynamics that negatively impacts the forecasted demand of the new products. Impairment of an investment, or goodwill and intangible assets may result if these risks materialize. In addition, acquisitions may involve the assumption of

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obligations or significant one-time write-offs. In order to finance any future acquisitions, we may need to raise additional funds through public or private financings.

Itron utilizes financing from third parties:

Itron may utilize financing for outsourcing contracts, business expansion efforts or other capital requirements. The risks associated with indebtedness include the commitment of a portion of our cash flow from operations to payments on the indebtedness, limited flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, and interest rate fluctuations (additionally refer to the Subsequent Event section).

Itron’s quarterly results may fluctuate substantially:

While we were profitable in fiscal years 2002, 2001 and 2000, we experienced operating losses in some quarters during those periods and in periods prior to 2000. There can be no assurance that we will maintain consistent profitability on a quarterly or annual basis. We have experienced variability of quarterly results and believe our quarterly results will continue to fluctuate as a result of factors such as costs related to acquisitions, legal activity, changes in internal structure, size and timing of significant customer orders, FCC or other governmental actions, the gain or loss of significant customers, timing and levels of new product developments, shifts in product or sales channel mix, increased competition and pricing pressure, and the general economic conditions affecting enterprise spending for the energy industry. In addition, financial results may fluctuate due to new accounting standards or changes to existing accounting standards affecting the timing of revenue and expense recognition.

Itron depends on its ability to develop new products:

We have made, and expect to continue to make, substantial investments in technology development. Our future success will depend, in part, on our ability to continue to design and manufacture new competitive products and to enhance our existing products. This product development will require continued investment in order to maintain our market position. There can be no assurance that unforeseen problems will not occur with respect to the development, performance or market acceptance of our technologies or products. Although we have rigorous product lifecycle processes, there can be no assurance that we will meet our product development schedules. There can be no assurance that we will have market acceptance of our new products and solutions. International market acceptance for AMR systems varies by country based on such factors as the regulatory and business environment, labor costs and other economic conditions.

Itron has a limited number of large customer contracts:

In some years, our revenues are concentrated with a limited number of customers, the identity of which changes over time. From time to time, we are dependent on large, multi-year contracts that are subject to cancellation or rescheduling by our customers. Cancellation or postponement of one or more of these contracts could have a material adverse effect on the Company.

Itron is facing increasing competition:

We face competitive pressures from a variety of companies in each of the markets we serve. Some of our present and potential future competitors have or may have substantially greater financial, marketing, technical or manufacturing resources, and in some cases, greater name recognition and experience. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the development, promotion and sale of their products and services than we can. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties that increase their ability to address the needs of

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our prospective customers. It is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. If we cannot compete successfully against current or future competitors, it could have a material adverse effect on our business, financial condition, results of operations and cash flow.

Itron is affected by availability and regulation of radio spectrum:

A significant portion of our products use radio spectrum and in the U.S. are subject to regulation by the FCC. Licenses for radio frequencies must be obtained and periodically renewed. There can be no assurance that any license granted to us or our customers will be renewed on acceptable terms, if at all, or that the FCC will keep in place rules for our frequency bands that are compatible with our business. In the past, the FCC has adopted changes to the requirements for equipment using radio spectrum, and it is possible that the FCC or Congress will adopt additional changes in the future.

We have committed, and will continue to commit, significant resources to the development of products that use particular radio frequencies. Action by the FCC could require modifications to our products. If we are unable to modify our products to meet such requirements, we could experience delays in completing such modifications, or the cost of such modifications could have a material adverse effect on our future financial condition and results of operations.

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

We are also subject to regulatory requirements in international markets that vary by country. To the extent we wish to introduce products designed for use in the U.S. or another country into a new market, such products may require significant modification or redesign in order to meet frequency requirements and power specifications. Further, in some countries, limitations on frequency availability or the cost of making necessary modifications may preclude us from selling our products.

A number of key personnel are critical to the success of Itron’s business:

Our success depends in large part upon our ability to retain highly qualified technical and management personnel, the loss of one or more of whom could have a material adverse effect on our business. Our success depends upon our ability to continue to attract and retain highly qualified personnel in all disciplines.

Itron may face liability associated with the use of products on which patent ownership or other intellectual property rights are claimed:

Itron is or may be subject to claims or inquiries regarding our alleged unauthorized use of a third party’s intellectual property. An adverse outcome in any intellectual property litigation could subject us to significant liabilities to third parties, require us to license technology from others, require us to cease marketing or using certain products, or require us to redesign certain products, any of which could negatively affect our business, financial condition and operating results. If we are required to seek licenses under patents or proprietary rights of others, we may not be able to acquire these licenses on acceptable terms, if at all. In addition, the cost of responding to an intellectual property infringement claim, in terms of legal fees and expenses and the diversion of management resources, whether or not the claim is valid, could harm our business, financial condition and operating results.

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Itron may be unable to adequately protect its intellectual property:

While we believe that our patents, trademarks and other intellectual property have significant value, it is uncertain that these patents and trademarks, or any patents or trademarks issued in the future, will provide meaningful competitive advantages. There can be no assurance that our patents or pending applications will not be challenged, invalidated or circumvented by competitors or that rights granted there under will provide meaningful proprietary protection. Detecting infringement and misappropriation of intellectual property can be difficult, time consuming, and costly. If we detect infringement or misappropriation, litigation could be ultimately unsuccessful.

Itron depends on certain key vendors:

Certain of our products, subassemblies and system components are procured from a single source, and others are procured only from limited sources. Our reliance on such components or on these limited or sole source vendors or subcontractors involves certain risks, including the possibility of shortages, obsolescence and reduced control over delivery schedules, manufacturing capability, quality and costs.

Itron may face warranty exposure:

Itron generally provides product warranties for varying lengths of time. In anticipation of such expenses, we establish allowances for the estimated liability associated with product warranties. However, these warranty allowances may be inadequate, and we may incur additional warranty expenses in the future with respect to new or established products.

Itron is subject to international business uncertainties:

International sales and operations may be subject to risks such as the imposition of government controls, political instability, restrictions on the export of critical technology, currency exchange rate fluctuations, availability of qualified third party financing, generally longer collection periods, trade restrictions, changes in tariffs, difficulties in staffing and managing international operations, and potential insolvency of international dealers. In addition, the laws of certain countries do not protect our products to the same extent as do the laws of the U.S. There can be no assurance that these factors will not have a material adverse effect on our future international sales and, consequently, on our business, financial condition, and results of operations.

Itron has anti-takeover provisions in place that make it more difficult for a third party to acquire the Company:

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

Itron is subject to regulatory compliance:

We are subject to various governmental regulations related to occupational safety and health, labor, and wage practices. We are subject to various government regulations regarding the performance of certain engineering services. We believe that we are currently in material compliance with such regulations. Failure to comply with current or future regulations could result in the imposition of substantial fines, suspension of production, alteration of our production processes, cessation of operations, or other actions which could materially and adversely affect our business, financial condition, and results of operations.

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Itron may incur liability arising from the use of hazardous materials:

In the ordinary course of our business, we use metals, solvents, and similar materials, which are stored on site. The waste created by use of these materials is transported off-site on a regular basis by a state-registered waste hauler. We are subject to federal, state, and local regulations relating to the storage, discharge, handling, emission, generation, manufacture, and disposal of toxic or other hazardous substances used to produce our products. Failure to comply with current or future environmental regulations could result in the imposition of substantial fines, suspension of production, alteration of our production processes, cessation of operations, or other actions which could materially and adversely affect our business, financial condition, and results of operations. Although we are not aware of any material claim or investigation with respect to these activities, there can be no assurance that such a claim will not arise, or that the cost of complying with governmental regulations in the future, will not have a material adverse effect on us.

Itron’s stock price may be subject to volatility:

The market price of our common stock has experienced fluctuations since it commenced trading in 1993 and is likely to fluctuate significantly in the future. Our stock price can fluctuate due to a number of factors such as general market conditions, the economy, stock sales by executive officers, variations in quarterly operating results, announcements about us or our competitors, announcements of significant contracts, acquisitions, strategic partnerships or capital commitments, the introduction of new technology or products by us or our competitors, conditions and trends in the energy industry, comments regarding us or the industry by analysts, and changes in earnings estimates.

Executive Officers of the Registrant

Set forth below are the names, ages, titles with the Company, and principal occupations and employment for the last five years of the persons serving as executive officers of Itron as of March 14, 2