The following discussion and analysis should be read in conjunction with "Item 8: Financial Statements and Supplementary Data."

Results of Operations

We derive the majority of our revenues from sales of products and services to utilities. Revenues include hardware, software, managed services and consulting. Cost of revenues includes materials, labor, overhead, warranty expense and distribution and documentation costs for software.

Highlights

Our financial results for the year ended December 31, 2008 include the operations of our two operating segments: Itron North America and Actaris. Actaris was acquired on April 18, 2007; therefore our 2007 operating results reflect Actaris' operations from the date of acquisition through December 31, 2007. A small portion of Itron North America's operations outside North America was transferred to our Actaris operating segment on January 1, 2008, resulting in a restatement of 2007 segment information for comparative purposes.

Highlights for the year ended December 31, 2008 include:

· revenues of $1.9 billion

· diluted earnings per common share (EPS) of 80 cents

· annual bookings of $2.5 billion

· cash flow from operations of $193 million

We made debt repayments of $388 million during the year ended December 31, 2008. These repayments were made with cash flows from operations and a portion of the $311 million in net proceeds from the sale of 3.4 million shares of our common stock, which was completed in the second quarter of 2008. Cash and cash equivalents were $144 million at December 31, 2008.

Total Company Revenues, Gross Profit and Margin and Unit Shipments

                                       Year Ended December 31,
                  2008         % Change         2007          % Change         2006
              (in millions)                 (in millions)                  (in millions)
Revenues     $       1,909.6       30%     $       1,464.0       127%     $         644.0
Gross Profit           646.9       33%               487.3        82%               267.4
Gross Margin             34%                           33%                            42%



                               Year Ended December 31,
                             2008        2007       2006
                                    (in millions)
Revenues by region
Europe                     $   916.3   $   623.6   $   4.0
United States and Canada       648.0       596.6     602.9
Other                          345.3       243.8      37.1
Total revenues             $ 1,909.6   $ 1,464.0   $ 644.0

Revenues
Year-over-year revenue growth was primarily due to the Actaris acquisition in the second quarter of 2007. In addition, both Actaris and Itron North America realized higher revenues in 2008 due to increased shipments of AMR-enabled meters. The decline in revenue in the United States and Canada from 2006 to 2007 was due primarily to the completion of a large contract with Progress Energy.

No single customer represented more than 10% of total revenues for 2008 or 2007. One customer, Progress Energy, represented 16% of total revenues for the year ended December 31, 2006. The 10 largest customers accounted for approximately 15%, 14% and 40% of total revenues in 2008, 2007 and 2006, respectively.

Gross Margins
Gross margin was 34% in 2008, compared with 33% in 2007 and 42% in 2006. The mix of system sales to meter sales is higher in Itron North America than Actaris resulting in different margins between the segments. During 2007, business combination accounting rules required the valuation of Actaris inventory on hand at the acquisition date to equal the sales price, less costs to complete and a reasonable profit allowance for selling effort. Accordingly, the historical cost of inventory acquired as part of the Actaris acquisition was increased by $16.0 million, which lowered the 2007 total Company gross margin by one percentage point.

Unit Shipments
Meters can be sold with and without AMR functionality. In addition, AMR modules
can be sold separately from the meter. Depending on customers' preferences, we
also incorporate other vendors' AMR technology in our meters. Meter and AMR
shipments are as follows:

                                                Year Ended December 31,
                                                2008      2007      2006
                                                    (in thousands)
Total meters (with and without AMR)
          Electricity - Itron North America      4,800     5,075    6,625
          Electricity - Actaris                  7,840     5,400        -
          Gas                                    4,080     2,600        -
          Water                                  8,440     5,575        -
                      Total meters              25,160    18,650    6,625



AMR units (Itron North America & Actaris)
            Meters with AMR                      4,700    3,600    4,000
            AMR modules                          4,890    4,675    4,625
                        Total AMR units          9,590    8,275    8,625

Meters with other vendors' AMR                     840      925      925

Operating Segment Results

The Actaris operating segment consists primarily of the operations from the Actaris acquisition, as well as other Itron operations not located in North America that are now included in the Actaris operating segment. The operations of the Actaris operating segment are primarily located in Europe, with approximately 5% of revenues located in the United States and approximately 20% located throughout the rest of the world. Our remaining operations, primarily located in the United States and Canada, have been combined into a single operating segment called Itron North America. As we continue to integrate the Actaris acquisition, certain refinements of our operating segments may occur. The operating segment information as set forth below is based on our current segment reporting structure. In accordance with Statement of Financial Accounting Standards (SFAS) 131, Disclosures about Segments of an Enterprise and Related Information, historical segment information has been restated from the segment information previously provided to conform to our current segment reporting structure after the April 18, 2007 Actaris acquisition and our January 1, 2008 refinement. For the January 1, 2008 refinement, we have not restated the historical segment reporting for 2006 as the amounts were not material.

We have three measures of segment performance: revenue, gross profit (margin) and operating income (margin). Intersegment revenues were minimal. Corporate operating expenses, interest income, interest expense, other income (expense) and income tax expense (benefit) are not allocated to the segments, nor included in the measure of segment profit or loss. Depreciation and amortization expenses are allocated to our segments. For each of the years ended December 31, 2008, 2007 and 2006, Itron North America depreciation and amortization expense was $41.4 million, $43.8 million and $46.2 million. Depreciation and amortization expense for Actaris for the years ended December 31, 2008 and 2007 was $132.2 million and $82.6 million.

Segment Products

Itron North  Electronic electricity meters with and without AMR
America      functionality; gas and water AMR modules; handheld,
             mobile and network AMR data collection technologies;
             advanced metering infrastructure (AMI) technologies;
             software, installation, implementation, consulting,
             maintenance support and other services.

Actaris      Electromechanical and electronic electricity meters;
             mechanical and ultrasonic water and heat meters;
             diaphragm, turbine and rotary gas meters; one-way and
             two-way electricity prepayment systems, including
             smart key, keypad and smart card; two-way gas
             prepayment systems using smart card; AMR and AMI data
             collection technologies; installation, implementation,
             maintenance support and other managed services.

The following tables and discussion highlight significant changes in trends or components of each segment.

                                                  Year Ended December 31,
                              2008         % Change        2007         % Change        2006
                          (in millions)                (in millions)                (in millions)
Segment Revenues
Itron North America      $         628.2      6%      $         593.5     (8%)     $         644.0
Actaris                          1,281.4     47%                870.5      -                     -
Total revenues           $       1,909.6     30%      $       1,464.0     127%     $         644.0



                                                            Year Ended December 31,
                                     2008                            2007                            2006
                          Gross Profit    Gross Margin    Gross Profit    Gross Margin    Gross Profit    Gross Margin
Segment Gross Profit
and Margin               (in millions)                   (in millions)                   (in millions)
Itron North America      $        247.8       39%        $        247.3       42%        $        267.4       42%
Actaris                           399.1       31%                 240.0       28%                     -        -
Total gross profit and
margin                   $        646.9       34%        $        487.3       33%        $        267.4       42%



                                                      Year Ended December 31,
                                   2008                        2007                        2006

Segment Operating          Operating     Operating     Operating     Operating     Operating     Operating
Income (Loss)            Income (Loss)    Margin     Income (Loss)    Margin     Income (Loss)    Margin
and Operating Margin     (in millions)               (in millions)               (in millions)
Itron North America      $        77.1      12%      $        74.4      13%      $        89.0      14%
Actaris                           70.4      5%                 4.1      0%                   -       -
Corporate unallocated            (37.7 )                     (32.0 )                     (27.3 )
Total Company            $       109.8      6%       $        46.5      3%       $        61.7      10%

Itron North America: Revenues increased $34.7 million, or 6%, in 2008, compared with 2007, due to increased sales for many of our products and services, with the largest increase in standalone AMR water and gas modules. The decline in revenue from 2006 to 2007 was due to the completion of a large contract with Progress Energy.

Gross margin decreased three percentage points in 2008, compared with 2007, primarily as a result of lower overhead absorption due to lower electricity meter volumes. Gross margin remained constant in 2007, compared with 2006, as a result of increased margins in 2007 from product mix, offset by lower overhead absorption from lower volumes. Approximately 60% of our meters sold in 2008 were equipped with our AMR technology, compared with 45% in 2007 and 60% in 2006.

One customer accounted for 10% of the Itron North America operating segment revenues in 2008 while no single customer represented more than 10% in 2007. Progress Energy accounted for 16% of the Itron North America operating segment revenues in 2006.

Itron North America operating expenses as a percentage of revenues were 27% in 2008, compared with 29% in 2007 and 28% in 2006. During 2008, amortization of intangible assets and corporate overhead costs declined by approximately $10.6 million. This decrease was partially offset by increased research and development (R&D) costs, which were 12% of revenues in 2008. During 2007, operating expenses increased compared with 2006. The increase was primarily due to R&D costs, which were 11% of revenues, compared with 9% in 2006. This increase was partially offset by a decline in intangible asset amortization and lower bonus and profit sharing expense.

Actaris: Actaris was acquired on April 18, 2007. Certain operations not located in North America that were previously reported within the Itron North America operating segment were moved to the Actaris operating segment on January 1, 2008, due to a realignment. Therefore, 2007 segment information has been restated to conform to the January 1, 2008 presentation.

Actaris revenues for 2008 increased by $410.9 million as a result of a full year of results, whereas revenues for 2007 primarily included results of operations from the date of acquisition on April 18, 2007. The electricity business line revenues as a percentage of total operating segment revenues decreased due to the completion of a significant prepayment project. Business line revenues for Actaris were as follows:

                                 April 18, 2007
               Year Ended            through
            December 31, 2008   December 31, 2007
Electricity        38%                 43%
Gas                33%                 30%
Water              29%                 27%

Gross margin for 2008 was three percentage points higher at 31%, compared with 28% in 2007. In 2007, gross margin was negatively impacted by a two percent point reduction due to the revaluation of inventory on hand at the acquisition date in accordance with business combination accounting rules, which increased cost of sales. Gross margin was also favorably impacted in 2008 by product mix and lower indirect cost of sales.

No single customer represented more than 10% of the Actaris operating segment revenues for the years ended December 31, 2008 and 2007.

Operating expenses for Actaris were $328.7 million, or 26% of revenues, for 2008, compared with $235.9 million, or 27% of revenues, in 2007. Operating expenses have increased in all areas due to higher revenues, increased emphasis on product development, higher intangible asset amortization, general and administrative expense for financial integration and foreign exchange fluctuations. Operating expenses for 2007 primarily included results from the date of acquisition as well as $35.8 million of IPR&D costs recorded in accordance with business combination accounting rules.

Corporate unallocated: Operating expenses not directly associated with an operating segment are classified as "Corporate unallocated." Corporate unallocated expenses increased $5.7 million for the year ended December 31, 2008, compared with 2007, due to increased compensation and financial integration expenses. These expenses, as a percentage of total Company revenues, were 2% in 2008 and 2007 and 4% in 2006.

Operating Expenses

The following table details our total operating expenses in dollars and as a
percentage of revenues:

                                                                 Year Ended December 31,
                                2008         % of Revenue         2007         % of Revenue         2006         % of Revenue
                            (in millions)                     (in millions)                     (in millions)
Sales and marketing        $         167.5          9%       $         125.8          9%       $          63.6          10%
Product development                  120.7          6%                  94.9          6%                  58.8          9%
General and
administrative                       128.5          7%                 100.1          7%                  52.2          8%
Amortization of
intangible assets                    120.3          6%                  84.0          6%                  31.1          5%
In-process research and
development                              -           -                  36.0          2%                     -           -
   Total operating
expenses                   $         537.0          28%      $         440.8          30%      $         205.7          32%

As a percentage of revenues, operating expenses have remained constant between 2008 and 2007, except for IPR&D, which was directly related to the Actaris acquisition. Operating expenses in 2006 reflect higher costs as a percentage of revenue due to lower revenues and more of an emphasis on research and development. Amortization of intangible assets increased $36.3 million in 2008 and $52.9 million in 2007 due to the Actaris acquisition and as a result of amortization based on estimated discounted cash flows. General and administrative expenses in 2008 were impacted by increased compensation and financial integration expenses. We have devoted significant resources and time to comply with internal control over financial reporting requirements of the Sarbanes-Oxley Act of 2002. In 2007, the acquisition of Actaris also resulted in $36 million of IPR&D expense, consisting primarily of next generation technology. These research and development projects were completed in 2008 and expensed as product development.

Other Income (Expense)

The following table shows the components of other income (expense).

                                         Year Ended December 31,
                                      2008        2007        2006
                                             (in thousands)
Interest income                     $   5,970   $  10,477   $   9,497
Interest expense                      (71,817 )   (76,443 )   (13,205 )
Amortization of debt placement fees    (8,918 )   (13,522 )    (4,580 )
Other income (expense), net            (2,984 )       435      (1,220 )
Total other income (expense)        $ (77,749 ) $ (79,053 ) $  (9,508 )

Interest income: Our cash balances have fluctuated period over period due to the timing of proceeds from the sale of common stock and repayments on borrowings. The decrease in interest income in 2008 from 2007 and 2006 was primarily the result of lower average cash and cash equivalent balances and short-term investments. The decrease in interest income was also impacted by reduced market interest rates during 2008. Such average balances were $119.5 million, $174.0 million and $193.8 million during 2008, 2007 and 2006, respectively. The higher cash and short-term investment balances during the previous two years were attributable to the issuance of $345 million 2.50% convertible senior subordinated notes (convertible notes) in August 2006 and the sale of 4.1 million shares of common stock in March 2007, the proceeds of which were used to fund a portion of the Actaris acquisition on April 18, 2007. In May 2008, we sold 3.4 million shares of common stock, with net proceeds of $311 million, partially offset by our repayment of borrowings.

Interest expense: Interest expense decreased 6% in 2008, compared with 2007. This decrease was due to a reduction in the Company's applicable margin for the term loans from 2% to 1.75% effective August 2008 and lower market rates on the floating portion of our debt, partially offset by a full year of interest expense from the $1.2 billion credit facility used to finance the Actaris acquisition on April 18, 2007. The average loan balance outstanding during 2008 was $1.4 billion, compared with $1.3 billion during 2007 as the credit facility was outstanding for a full year in 2008. The increase in interest expense in 2007, compared with 2006, was primarily the result of the new $1.2 billion credit facility and the $345 million convertible notes issued in August 2006. Average loan balances outstanding during 2006 were $273.7 million.

Amortization of debt placement fees: Amortization of debt placement fees decreased in 2008, compared with 2007, due to the write-off of $6.6 million associated with our convertible notes in September 2007. The debt placement fees associated with our convertible notes were amortized through the date of the earliest put or conversion option; therefore, when our convertible notes exceeded the conversion threshold, the remaining debt placement fees were written-off. In addition, when debt is repaid early, the portion of unamortized prepaid debt fees related to the early principal repayment is written-off and included in interest expense. Amortization of prepaid debt fees was higher in 2007, compared with 2006, due to the August 2006 issuance of our convertible notes.

Other income (expense): Other income (expense) consists primarily of foreign currency gains and losses, which can vary from period to period, as well as other non-operating events or transactions. In 2008, other expenses, net resulted primarily from net foreign currency losses due to balances denominated in a currency other than the reporting entity's functional currency. In 2007, in addition to foreign currency fluctuations, other income, net included $3.0 million in unrealized gains on our euro denominated borrowings, which are now designated as a hedge of a net investment in foreign operations, with future foreign currency fluctuations recorded in other comprehensive income. Other income, net in 2007 also included $2.8 million in net realized gains from foreign currency hedge range forward contracts that were settled as part of the Actaris acquisition and a $1.0 million realized gain from an overnight euro rate change prior to the acquisition of Actaris. During 2006, other expense consisted primarily of foreign currency fluctuations.

Income Taxes

Our tax provision (benefit) as a percentage of income (loss) before tax typically differs from the federal statutory rate of 35%. Changes in our effective tax rate are subject to several factors, including fluctuations in operating results, new or revised tax legislation and accounting pronouncements, changes in the level of business conducted in domestic and international jurisdictions, research credits, state income taxes and changes in valuation allowance.

Our tax provision as a percentage of income before tax was 12.5% for 2008. Our actual effective tax rate for 2008 was lower than the federal statutory rate due to a variety of factors, including lower effective tax rates on certain international earnings due to an election made under Internal Revenue Code
Section 338 with respect to the Actaris acquisition in 2007 that resulted in a reduced global effective tax rate. Additionally, our reduced foreign tax liability reflects the benefit of foreign interest expense deductions.

Our tax benefit as a percentage of loss before tax was 50.5% for 2007. Our actual effective tax benefit for 2007 was higher than the federal statutory rate as a result of benefits from legislative tax rate reductions in Germany and the United Kingdom. The German Business Tax Reform 2008 was finalized on August 17, 2007, which reduced the German tax rate from approximately 39% to 30%. On July 19, 2007, the United Kingdom enacted the Finance Act of 2007, which lowered the main corporate tax rate from 30% to 28%. These benefits were offset by IPR&D, which was not tax deductible and increased our effective tax rate. The 2007 effective tax rate was also favorably impacted by lower effective tax rates on international earnings due to the Internal Revenue Code Section 338 election.

Our 2006 effective tax rate equaled the statutory tax rate of 35%. Although our actual income tax rate was the same as the statutory rate, this was due to several factors. Such factors include state income taxes that increased the actual income tax rate, the adoption of SFAS 123(R), Share-Based Payment, and current year federal, state and Canadian R&D credits that decreased the actual income tax rate. The tax provision was further reduced by approximately $1.5 million due to prior year state and Canadian R&D credits and the signing of the Relief and Health Care Act, extending the research tax credit for qualified research expenses incurred throughout 2006 and 2007. We recorded approximately $2.2 million in federal and state R&D credits after the effective date of this legislation.

We adopted the provisions Financial Accounting Standards Board (FASB) Interpretation 48 (FIN 48), Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No.109, on January 1, 2007. FIN 48 clarifies the accounting for uncertain tax positions and requires companies to recognize the impact of a tax position in their financial statements, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. As a result of the implementation of FIN 48, we recognized a $5.4 million increase in the liability for unrecognized tax benefits, with a corresponding increase in deferred tax assets. Our implementation did not require an adjustment to retained earnings.

We classify interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of income tax expense. For each of the years ended December 31, 2008 and 2007, we recognized interest and penalties of approximately $1.2 million. At December 31, 2008 and 2007, the amount of accrued interest totaled $3.2 million and $2.7 million, respectively, and the amount of accrued penalties totaled $2.9 million and $2.2 million, respectively. The amount of unrecognized tax benefits that would affect our actual tax rate at December 31, 2008, December 31, 2007 and January 1, 2007 were $37.0 million, $8.4 million and $5.4 million, respectively. Over the next 12 months, we do not expect our unrecognized tax benefits to change significantly except for the payment of approximately $4.5 million income tax obligations related to FIN 48. We are not able to reasonably estimate the timing of future cash flows relating to the remaining balance.

We are subject to income tax in the U.S. federal jurisdiction and numerous foreign and state jurisdictions. The Internal Revenues Service has completed its examinations of our federal income tax returns for the tax years 1993 through 1995. Due to the existence of net operating loss and tax credit carryforwards, tax years subsequent to 1995 remain open to examination by the major tax jurisdictions to which we are subject. Actaris' subsidiaries in France are currently finalizing an examination for the years 2004 through 2006.

Financial Condition

Cash Flow Information:
                                                  Year Ended December 31,
                                             2008           2007          2006
                                                       (in millions)
Operating activities                       $   193.2     $    133.3     $    94.8
Investing activities                           (67.1 )     (1,714.4 )       (85.5 )
Financing activities                           (63.4 )      1,310.4         318.5
Effect of exchange rates on cash and
. . .