e424b1

Function

Simon Beresford-Wylie

Chief Executive Officer

Christoph Schmidt-Wolf

Chief Financial Officer

Thomas Preute

Chief Legal Officer

Filed Pursuant to Rule 424(b)(1)
Registration No: 333-169347

ELSTER GROUP SE

16,200,000 American Depositary Shares

Representing 4,050,000 Ordinary Shares

This is an initial public offering of 16,200,000 American Depositary Shares, or ADSs, of Elster Group SE, a European public limited liability company (Societas Europaea, or SE) with its registered office in the Federal Republic of Germany. Each ADS represents one-fourth of an ordinary share, nominal value €1.00 per share. We are offering 13,461,540 ADSs. Rembrandt Holdings S.A., which we refer to as Rembrandt, is offering 2,412,048 ADSs and Nachtwache Metering Management Vermögensverwaltungs GmbH & Co. KG, which we refer to as the Management KG, is offering 326,412 ADSs. We will not receive any proceeds from the sale of the ADSs by Rembrandt or the Management KG, which we collectively refer to as the selling shareholders.

Prior to this offering, there has been no public market for our ADSs or our ordinary shares. The ADSs have been approved for listing on the New York Stock Exchange, or NYSE, under the symbol “ELT.” The initial public offering price per ADS is $13.

See “Risk Factors” beginning on page 14 to read about factors you should consider before buying ADSs.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.


	Per ADS		Total

Initial public offering price	$	13.00	$	210,600,000
Underwriting discount (1)	$	0.585	$	9,477,000
Proceeds, before expenses, to Elster Group SE	$	12.415	$	167,125,019
Proceeds, before expenses, to Rembrandt	$	12.415	$	29,945,576
Proceeds, before expenses, to the Management KG	$	12.415	$	4,052,405


(1)	See “Underwriting” for a description of additional compensation payable to the underwriters.

To the extent that the underwriters sell more than 16,200,000 ADSs, the underwriters have the option to purchase up to an additional 2,430,000 ADSs from Rembrandt at the initial public offering price, less the underwriting discount.

Deutsche Bank Securities

Goldman, Sachs & Co.

J.P. Morgan

Baird

Canaccord Genuity

Piper Jaffray

RBC Capital Markets

Stephens Inc.

The date of this prospectus is September 30, 2010.

PROSPECTUS SUMMARY

This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our ADSs. You should carefully read the entire prospectus, including “Risk Factors” and the financial statements, before making an investment decision.

We are one of the world’s largest providers of gas, electricity and water meters and related communications, networking and software solutions. Our products and solutions are used to accurately and reliably measure gas, electricity and water consumption as well as enable energy efficiency and conservation. We believe that we have one of the most extensive installed meter bases in the world, with more than 200 million meters deployed over the course of the last ten years. We sell our products and solutions in more than 130 countries for use in a variety of settings.

L.E.K. Consulting GmbH, or L.E.K., estimates that in 2009 we had the largest global market share by revenues in the gas meter market, were one of the three largest water meter providers in the world by revenues and had the third largest share by revenues in the electricity meter market. We attribute these leading positions to the quality, breadth and flexibility of our portfolio of products and solutions. Demand for our products and solutions is driven by natural replacement cycles, urbanization, increased meter penetration and infrastructure developments. We believe that these trends, along with the movement towards energy conservation and the promotion of cleaner fuels and technologies, will continue to play an important role in our future growth.

While we expect manual-read meters to remain an important part of our industry, in recent years, issues including energy and natural resource scarcity, shortcomings in grid reliability and concerns about global climate change, among others, have moved to the forefront of the agendas of governments and utilities. We believe that these and other imperatives, taken together, are driving the adoption of the Smart Grid. The term Smart Grid is commonly used to refer to any gas, electricity or water network that allows utilities to measure and control production, transmission and distribution more efficiently through the use of communications technology. The Smart Grid can also enable consumers to monitor and manage their gas, electric and water consumption more efficiently and frequently and, in some cases, in near real time. We believe that the Smart Grid will continue to evolve and deliver substantial economic and societal benefits to utilities and consumers.

We refer to meters that are equipped with communications capabilities, communications networks and related software solutions as Smart Grid solutions. We believe that the meter is the gateway to the Smart Grid through which utilities and consumers are able to effectively measure, monitor and control the distribution of gas, electricity and water. In our view, it is difficult to quantify or otherwise measure with certainty the proliferation of Smart Grids around the world, due largely to the early stage of the development of the market and the different rates of adoption from one market to the next. However, we believe that there is a significant growth opportunity for our industry in the coming years. The Scott Report estimates that as of December 31, 2009, smart metering systems comprised over 13% of all electric meters installed in the United States and will increase to over 50% within the next few years. L.E.K. estimates that there will be between 400 and 500 million advanced metering infrastructure, or AMI, meters and the same number of automated meter reading, or AMR, meters sold between 2010 and 2019. AMI is a technology that allows two-way communication between the meter and the utility or other parties, while AMR typically enables one-way communication of periodic consumption data from the meter to the utility. In addition, many of our own customers have indicated to us that they intend to upgrade their infrastructure to incorporate Smart Grid solutions and many governments around the world are promoting regulatory initiatives that support Smart Grid adoption. We believe our industry experience, despite the risk of increased competition from traditional metering companies as well as new entrants from outside the metering business, positions us well to capitalize on this emerging opportunity.

In 2009, AMR, AMI and Smart Grid solutions and individual products, components and services for use in the Smart Grid, which we refer to as Smart Offerings, accounted for approximately 26% of

our revenues compared to 19% of our revenues in 2008. Our product portfolio includes EnergyAxis, our comprehensive portfolio of Smart Grid solutions, which can be customized by incorporating meters, meter and network communications technologies, meter data management software and advanced applications that help customers to cost-effectively generate, deliver and manage gas, electricity and water.

Our customers are utilities, distributors and industrial companies and buy our manual read meters, Smart Offerings and other products for use in the following settings:


	•	Residential settings, which include dwellings and elements of local gas, electricity and water distribution networks;

	•	Commercial settings, which include retail facilities, offices and light industrial facilities;

	•	Industrial settings, which comprise general industry and public infrastructure;

	•	Transmission and distribution settings, which include the facilities and networks that utilities rely on to transport gas, electricity and water from their points of generation or extraction to consumers and to manage their flows along the way.

Due to the similarities among many of the products and services we offer for use in commercial, industrial, transmission and distribution settings, we refer internally to these settings collectively as “C&I” and the products and services we offer for use in these settings as our C&I products and services.

We also sell process-heating equipment and heat control systems for boilers, which we refer to as our gas utilization products. Our customers for our utilization products are industrial concerns, furnace builders and boiler manufacturers.

We divide our operations into three business segments: gas, electricity and water.

Our Strengths

We believe that we are well positioned to maintain and expand our strong market positions in the gas, electricity and water markets and to benefit from the expected industry growth that will arise from the trend towards Smart Grid installations. In particular, we believe that the following key strengths will enable us to achieve these goals:


	•	We are a leading global provider of gas, electricity and water meters and metering solutions. We are one of the world’s largest providers of meters and metering solutions to utilities and had worldwide revenue market share in 2009 of approximately 16% across the gas, electricity and water metering markets, as estimated by L.E.K. We believe our large installed base and strong customer relationships provide us with significant opportunities to benefit from regular meter replacement and upgrade cycles.

	•	*We are a leading enabler of Smart Grid solutions, which are already proven at scale in complex environments and across diverse utility settings.* As of June 30, 2010, we have delivered over eleven million of our two-way communication endpoints for metering applications. This total includes over 4.5 million AMI smart meters deployed in over 80 EnergyAxis systems worldwide, including what we believe to be one of the world’s largest AMI networks, located in Ontario, Canada. This network, which consists of over 1.6 million endpoints, supports time of use pricing for more than 600,000 residential and C&I customers. We believe that these extensive deployments demonstrate our systems’ market readiness in terms of performance, reliability, flexibility, and scalability.

	•	*We maintain strong customer relationships worldwide that provide us with diverse opportunities for global growth and competitive advantage.* Our customers operate in more than 130 countries and include many of the world’s largest gas, electricity and water utilities. Given the importance of the meter to the Smart Grid, we believe that our industry


		experience of over 170 years, coupled with our ability to innovate, positions us well to benefit from the developing market, even as existing and new competitors seek to gain market share.


	•	*We have a capable and experienced global management team.* Our managers have been instrumental in establishing our business strategy and securing our leading positions in our industry. We believe that our management’s in-depth understanding of our industry and our customers’ needs is a result of many years of combined industry experience across the metering and many other markets.

Our Strategy

Our mission is to support energy and natural resource conservation with a comprehensive portfolio of innovative and trusted metering and technology solutions that help gas, electricity and water utilities around the world to improve efficiency through accurate measurement of consumption and deployment of Smart Grid solutions that create value for utilities, consumers and shareholders.

Key elements of our strategy to deliver on that mission include:


	•	*Continue to build upon our global leadership.* As a global leader in metering, we intend to take advantage of the significant opportunities in the gas, electricity and water utility markets that we believe will arise to provide Smart Grid solutions and of the substantial organic growth that we anticipate will occur over the coming years.

	•	*Capitalize on the expected ongoing growth in metering and related infrastructure in gas, electricity and water.* We believe that we are well positioned to take advantage of the expansion of natural gas infrastructure and the increase in gas meter penetration worldwide as well as opportunities we perceive in onshore gas investment, including industrial gas flow control equipment. We intend to take advantage of potential future opportunities for expansion where water meter penetration rates remain low, and of similar opportunities for growth in the electricity market given electrification trends in developing countries.

	•	*Build on our history of innovation and engineering expertise.* We intend to continue the focus of our research and development organization on providing innovative metering and Smart Grid solutions across our business.

	•	*Use our understanding of evolving customer business models and deploy our key account management teams to capture Smart Grid solutions opportunities.* We intend to further strengthen our account management teams further to leverage and broaden our customer relationships to deliver metering and Smart Grid solutions and to further increase the percentage of our revenues from Smart Offerings.

	•	*Focus on operational efficiency to drive consistent competitive advantage.* We believe that our strong focus on operational efficiency has provided us with a scalable business platform. We plan to further develop our mixed production model to efficiently manage the significant volatility in volumes and delivery requirements often associated with large Smart Grid installations.

Our Recent Results and Financial Position

In the year ended December 31, 2009, we had revenues of $1,695.1 million and net income of $52.3 million, while in the six months ended June 30, 2010, we had revenues of $831.3 million and net income of $19.1 million. Our gas segment is our largest segment, accounting for 53.0% of our revenues in 2009 and 52.9% of our revenues in the six months ended June 30, 2010. We rely on our Senior Facilities Agreement as our main source of financing. As of June 30, 2010, $900.4 million in aggregate principal amount was outstanding under the Senior Facilities Agreement, with $11.3 million that is due in one year or less, comprising 1.2% of our outstanding debt as of that date.

Our Risks and Challenges

Our business is subject to many material risks and challenges that we describe in “Risk Factors” and elsewhere in this prospectus. If any of these risks materialize or we are unable to overcome these challenges, we may fail to achieve our strategic goals, and our business, financial condition or results of operations could suffer. Our key risks and challenges include the following:


	•	*Negative worldwide economic conditions and ongoing instability in the worldwide financial markets.* Our results may be affected by the difficult economic environment, as the pace of new construction and infrastructure investment has slowed. Ongoing instability in the worldwide financial markets may reduce our or our customers’ access to financing or reduce their ability to purchase from us.

	•	*Changes or delays in governmental regulations and initiatives.* Our industry depends substantially on regulation. It is possible that governments may delay initiatives that encourage the development of Smart Grid infrastructure. Some of our utility customers, while awaiting clarity on the laws and regulations and the timing of the receipt of stimulus funds, have been deferring their upgrades of installed meter bases that will be part of their response to Smart Grid-related regulation.

	•	*Our reliance on third parties to supply raw materials and components used in our business and to manufacture a substantial portion of the components we use in our products.* We rely on third-party suppliers to provide us with components and raw materials and thus are subject to delivery delays and volatility in the prices of components and raw materials. Our third-party manufacturers likewise may fail to deliver quality products (particularly electronics) in a timely manner, especially as demand for them increases in connection with the ongoing economic recovery.

	•	*The transition to more advanced technology in the industry, including increasing competition from industries we previously viewed as distinct from ours.* Our results and future revenues may be affected by the changing demands for advanced meters and Smart Grid solutions. We may fail to design solutions and products that meet the demands of our customers, and our competitive position may suffer as a result. New players from high technology industries may enter the market and work individually or together with our existing competitors to develop superior products.

	•	*We have global operations, which expose us to various risks.* We are exposed to economic, political and other risks and uncertainties due to our global operations. We do business and borrow funds in a number of currencies, which exposes us to fluctuations in exchange rates and may affect our results of operations. In addition, we sell some products in countries that are subject to sanctions in the European Union and the United States, which may have a negative effect on our reputation and the price of our ADSs.

	•	*Our shareholder structure following the offering could increase the likelihood that we must repay our credit facility.* Following the offering, our shareholders Rembrandt and Management KG will continue to hold a majority of our shares and will be able to exercise a direct or controlling influence on us. If our shareholders, Rembrandt and the Management KG, together cease to beneficially own at least 30.1% of our equity share capital following our listing, or if any holder or group of holders beneficially owns more than Rembrandt and the Management KG in the aggregate, we may be required to repay all amounts outstanding under our Senior Facilities Agreement, which may have an adverse effect on our financial position.

You should refer to the section entitled “Risk Factors” beginning on page 14 for a more complete discussion of these and a number of other risks and challenges.

The Offering


ADSs Offered by Elster:		13,461,540 ADSs representing 3,365,385 ordinary shares.

ADSs Offered by Rembrandt:		2,412,048 ADSs representing 603,012 ordinary shares.

ADSs Offered by the Management KG:		326,412 ADSs representing 81,603 ordinary shares.

Public Offering Price:		The initial public offering price per ADS is $13.

American Depositary Shares:		The underwriters will deliver our shares in the form of ADSs. Each ADS, which may be evidenced by an American Depositary Receipt, or ADR, represents an ownership interest in one-fourth of one of our ordinary shares. As an ADS holder, we will not treat you as one of our shareholders. The depositary, Deutsche Bank Trust Company Americas, will be the holder of the ordinary shares underlying your ADSs. You will have ADS holder rights as provided in the deposit agreement. Under the deposit agreement, you may only vote the ordinary shares underlying your ADSs if we ask the depositary to request voting instructions from you. The depositary will pay you the cash dividends or other distributions, if any, it receives on shares after deducting its fees and expenses and applicable withholding taxes. You may need to pay a fee for certain services, as provided in the deposit agreement. You are entitled to the delivery of shares underlying your ADSs upon the surrender of such ADSs at the depositary’s office, the payment of applicable fees and expenses and the satisfaction of applicable conditions set forth in the deposit agreement.

		To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, the form of which is attached as an exhibit to the registration statement of which this prospectus forms a part. We are offering ADSs so that our company can be quoted on the NYSE and investors will be


		able to trade our securities and receive dividends on them in U.S. dollars.

Depositary:		Deutsche Bank Trust Company Americas.

Custodian:		Deutsche Bank AG, Frankfurt Branch.

Over-Allotment Option:		Rembrandt has granted the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 2,430,000 additional ADSs from Rembrandt at the public offering price, less underwriting discount, solely to cover over-allotments. See “Underwriting.” Unless otherwise indicated, all information in this prospectus assumes the over-allotment option has not been exercised.

Shares Outstanding After the Offering:		28,220,041 ordinary shares. Upon completion of this offering, Rembrandt will hold an 80.2% equity interest in our company and the Management KG, which is affiliated with Rembrandt, will hold a 5.5% equity interest in our company. Rembrandt has advised us that it does not anticipate owning a majority of our shares over the long term. Although we expect that at some point Rembrandt will cease to be a major shareholder in our company, for so long as Rembrandt continues to own a significant percentage of our shares, its equity shareholding give it the power to control actions that require shareholder approval, including the election of members on our Administrative Board. See “Risk Factors—Risks Related to the Offering and Our Shareholder Structure.”

Use of Proceeds:		We expect our net proceeds from this offering, after expenses, to be approximately $152.1 million. We currently intend to use the net proceeds we expect to receive from this offering to pay a portion of our outstanding debt under our credit facility agreement and to repay a loan made to us by one of our shareholders. We expect to return any remaining net proceeds in liquid assets over the medium term to support our liquidity position. We will not receive any proceeds from the sale of ADSs by Rembrandt or the Management KG. See “Use of Proceeds.”

Lock-Up:		We, and our shareholders, Rembrandt and the Management KG, have agreed that, subject to customary exceptions, for a period of

Summary Financial and Other Data

The following table presents summary consolidated financial and other data for the periods indicated. We derived the financial data as of and for the years ended December 31, 2009, 2008 and 2007 from our consolidated financial statements for these years. Our consolidated financial statements, which we have prepared in accordance with U.S. GAAP, have been audited and are included elsewhere in this prospectus. For a further discussion of our financial data for those years, see “Presentation of Financial and Other Information.”

We derived the financial data as of and for the six months ended June 30, 2010 and 2009 from our unaudited interim consolidated financial statements for those periods, which are included elsewhere in this prospectus.


							As of and for the Six Months Ended June 30,
	As of and for the Year Ended December 31,						(unaudited)
	2009		2008		2007		2010		2009
	(in $ millions except for per share and share data)

Summary Consolidated Statement of Operations Data:
Revenues		1,695.1		1,904.5		1,735.6		831.3		837.2
Cost of revenues		1,191.3		1,306.3		1,207.6		574.6		585.4

Gross profit		503.8		598.2		528.0		256.7		251.8
Selling expenses		159.4		183.4		166.5		80.8		76.9
General and administrative expenses		137.0		246.5		183.9		69.9		68.4
Research and development expenses		78.4		70.7		60.3		41.4		36.7
Other operating income (expense), net		14.8		-39.5		-2.9		-0.4		21.2

Operating income		143.8		58.2		114.4		64.3		90.9
Interest expense, net		55.4		117.3		126.9		38.4		25.3
Other income, net		3.3		2.9		2.9		1.7		1.4

Total non-operating expenses		52.1		114.4		124.0		36.6		23.9
Income (loss) from continuing operations before income tax		91.7		-56.2		-9.6		27.7		66.9
Income tax expense		39.3		30.9		28.0		11.1		25.1
Net income (loss) from continuing operations		52.3		-87.1		-37.6		16.5		41.8
Net income from discontinued operations (1)		—		—		114.5		2.6		—

Net income (loss)		52.3		-87.1		76.9		19.1		41.8
Net income (loss) attributable to Elster Group SE		48.9		-91.7		72.3		17.9		40.7

Basic and diluted earnings (loss) per share from continuing operations (2)		1.42		-5.68		-2.58		0.20		1.72
Basic and diluted earnings (loss) per share (2)		1.42		-5.68		4.44		0.36		1.72
Weighted average number of shares outstanding (3)		16,320,750		16,320,750		16,320,750		16,320,750		16,320,750
Unaudited pro forma earnings (loss) from continuing operations per share (4)		1.97		—		—		0.62		—


								As of and for the Six Months Ended June 30,
	As of and for the Year Ended December 31,							(unaudited)
	2009		2008		2007			2010		2009
	(in $ millions except for per share and share data)

Unaudited pro forma weighted average shares outstanding (4)		24,854,656		—		—			24,854,656		—
Basic and diluted earnings (loss) per ADS from continuing operations (5)		0.36		-1.42		-0.65			0.05		0.43
Basic and diluted earnings (loss) per ADS (5)		0.36		-1.42		1.11			0.09		0.43
Weighted average number of ADSs outstanding (5)		65,283,000		65,283,000		65,283,000			65,283,000		65,283,000
Unaudited pro forma earnings (loss) from continuing operations per ADS (4)(5)		0.49		—		—			0.16		—
Unaudited pro forma weighted average ADSs outstanding (4)(5)		99,418,624		—		—			99,418,624		—

Selected Cash Flow Data:
Net cash provided by operating activities		119.6		114.1		110.9			37.0		76.0
Net cash from (used in) investing activities		-43.0		-79.0		46.0			-16.6		-18.9
Net cash from (used in) financing activities		-77.4		-8.7		-274.7			7.1		-56.4

Selected Consolidated Balance Sheet Data:
Cash and cash equivalents		75.4		74.3		53.0			99.0		74.7
Total assets		2,141.4		2,181.5		2,223.3			2,018.0		2,168.9
Short term debt and current portion of long-term debt		39.0		27.1		68.9			25.9		61.3
Long-term debt, less current portion		971.4		1,024.1		1,053.6			893.8		950.1

Total debt		1,010.4		1,051.2		1,122.5			919.7		1,011.4
Shareholder loan		6.8		6.2		408.3	(6)		6.0		6.4
Total equity attributable to Elster Group SE		416.6		412.9		-36.1			418.9		426.5
Total equity		422.7		418.8		-29.1			426.7		431.8

Selected Operating and Other Data:
Backlog (7)		445.3		542.1		383.5			508.7		424.0
Capital expenditures		30.5		81.8		53.5	(8)		18.1		22.0

Reconciliation of Net Income Before Amortization of PPA to Net Income:
Net income (loss)		52.3		-87.1		76.9			19.1		41.8
Amortization of intangible assets on PPA, net of tax effect		22.7		23.6		23.8			11.2		10.9

Net income before amortization of PPA (9)		75.0		-63.5		100.7			30.3		52.7


							As of and for the Six Months Ended June 30,
	As of and for the Year Ended December 31,						(unaudited)
	2009		2008		2007		2010		2009
	(in $ millions except for per share and share data)

Reconciliation of Adjusted EBITDA to Net Income:
Net income (loss)		52.3		-87.1		76.9		19.1		41.8
Net income from discontinued operations		—		—		114.5		2.6		0.0

Net income (loss) from continuing operations		52.3		-87.1		-37.6		16.5		41.8
Income tax expense		39.3		30.9		28.0		11.1		25.1
Interest expense, net		55.4		117.3		126.9		38.4		25.3
Depreciation and amortization		85.4		85.3		85.8		42.6		42.0
Foreign currency exchange effects		-14.4		45.2		5.7		0.6		-17.7
Management equity program		-33.3		90.7		31.1		1.4		-10.6
Expenses for preparation to become a public company		23.0		7.0		0.0		6.6		7.5
Strategy development costs		3.6		7.8		4.6		0.3		0.4
Employee termination and exit costs		25.4		10.5		15.2		2.1		5.0
Business process reengineering and reorganization costs		16.8		3.2		13.3		2.1		5.4
IT project costs		8.6		3.6		4.2		0.9		1.0
Gain from sales of real estate		-2.5		-0.8		-3.4		0.0		-0.8
Effects of termination of a distributor		—		—		—		9.0		—
Pension curtailments		0.0		0.0		-3.6		0.0		0.0
Insurance recovery		0.0		0.0		-2.6		0.0		0.0
Business combination costs		1.7		0.0		0.0		0.0		0.0
Impairment of intangible assets		2.3		1.3		0.0		0.0		0.0
Other		0.3		-0.2		0.2		-0.7		0.0

Adjusted EBITDA (10)		264.1		314.6		267.7		130.9		124.6


Reconciliation of Free Cash Flow to Cash Flows From Operating Activities:
Cash flows from operating activities		119.6		114.1		110.9		37.0		76.0
Purchases of property, plant and equipment and intangible assets		30.5		81.8		53.5		18.1		22.0

Free cash flow (11)		89.1		32.3		57.4		18.9		54.0


(1)		We disposed of the Ipsen Group, a manufacturer of industrial furnaces, as well as NGT Neue Gebäudetechnik GmbH, or NGT, in 2007 as part of our plan to focus on our core competencies. We included these businesses in discontinued operations. In the second quarter of 2010, we recorded a gain from the release of a provision in connection with a disposal as described in Note 3 to the unaudited condensed consolidated interim financial statements contained elsewhere in this prospectus.


(2)		For more information on the calculation of our earnings (loss) per share, see Note 8 to the audited consolidated financial statements and Note 5 to the unaudited condensed consolidated interim financial statements contained elsewhere in this prospectus.

(3)		Equal to the number of ordinary shares outstanding immediately prior to this offering. See “Our History and Recent Corporate Transactions—Our Current Capital Structure.”

(4)		Unaudited pro forma earnings (loss) per share and unaudited pro forma weighted shares outstanding are based upon 24,854,656 shares issued and outstanding under the assumption that the preferred shares held by Rembrandt, our principal shareholder, are replaced immediately before the closing of this offering with ordinary shares. See “Our History and Recent Corporate Transactions—Capital Measures in Connection with the Offering.”

(5)		Each ADS represents one-fourth of an ordinary share.

(6)		In 2007, our shareholder loan reflects the value before our preferred equity certificates were contributed into our equity. See “Our History and Recent Corporate Transactions—Transactions Relating to Our Share Capital.”

(7)		We define backlog as our total open purchase orders.

(8)		Our capital expenditures for 2007 include $5.5 million that were attributable to discontinued operations.

(9)		We define net income before amortization of PPA as net income (loss) excluding the expenses associated with the amortization of that portion of our intangible assets that comprises the allocation of the purchase price we paid in our business acquisitions in excess of the previous carrying amount of the intangible assets before the acquisition occurred. We refer to the adjusted expense as amortization before PPA. We also present this amortization measure net of the income tax effects. We believe that this non-GAAP financial measure is useful to management, investors and financial analysts in assessing our company’s operating performance because it excludes the effect of the non-cash expenses that are related solely to the allocation of purchase prices paid in business acquisitions to those intangible assets acquired in connection with these business acquisitions. Fair values for these balance sheet items are determined as of the time of an acquisition and then amortized over their respective useful lives, which generally cannot be changed or influenced by management after the acquisition. By excluding these amortization expenses and the related income tax effects, we believe that it is easier for our management, investors and financial analysts to compare our financial results over multiple periods and analyze trends in our operations. For example, expenses related to amortization of intangible assets are now decreasing, but the positive effect of this decrease on our net income is not necessarily reflective of the operations of our businesses.

		We provide a reconciliation of net income before amortization of PPA to net income, which is the closest financial measure calculated in accordance with U.S. GAAP, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Non-GAAP Financial Measures.”

(10)		Adjusted earnings before interest, tax expense, depreciation and amortization, or Adjusted EBITDA, reflects adjustments for certain gains and charges for which we believe adjustment is permitted under our Senior Facilities Agreement as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Non-GAAP Financial Measures.”

		The definition of Adjusted EBITDA used in our Senior Facilities Agreement permits us to make adjustments to our net income for certain cash and non-cash charges and gains. This measure is used in our Senior Facilities Agreement to determine compliance with financial covenants. Because this credit agreement and the financing provided under it are material to our operations, we have and continue to manage our business and assess our performance and liquidity by reference to the requirements of the Senior Facilities Agreement. We also use Adjusted EBITDA for a number of additional purposes. We use Adjusted EBITDA on a consolidated basis to assess our operating performance. We believe this financial measure on a consolidated basis is helpful in highlighting trends in our overall business because the items excluded in calculating Adjusted EBITDA have little or no bearing on our day-to-day operating performance. Adjusted EBITDA is also an important metric in the formula we use to determine the value of our company in connection with our management equity program, or MEP, we describe below.

		We also use segment profit, a measure equal to Adjusted EBITDA, as the primary measure used by our management to evaluate the ongoing performance of our business segments. On a segment basis, we define segment profit as earnings of a segment before taxes, interest and depreciation and amortization, as well as certain gains and losses, and other income and expense determined by our senior management to have little or no bearing on the day-to-day operating performance of our business segments. The adjustments made to earnings of a segment before taxes, interest and depreciation and amortization correlate with the adjustments to net income in calculating Adjusted EBITDA on a consolidated basis pursuant to the Senior Facilities Agreement.

		“Consolidated EBITDA,” as defined in the Senior Facilities Agreement, differs from the measure of Adjusted EBITDA we have disclosed in a way we believe is immaterial. This difference is that the Senior Facilities Agreement excludes the modest amount of dividends we receive from companies in which we hold minority interests, including those we account for using the equity method. We do not exclude these dividends when we calculate the measure of Adjusted EBITDA we disclose in this prospectus. These dividends totaled $3.3 million in 2009 and $2.9 million in each of 2008 and 2007, and were $1.7 million in the first six months of 2010 and $1.4 million in the first six months of 2009.


		We provide a reconciliation of Adjusted EBITDA to net income, which is the closest financial measure calculated in accordance with U.S. GAAP, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Non-GAAP Financial Measures.”

(11)		We define free cash flow as cash flows from operating activities less purchases of property, plant and equipment and intangible assets. Free cash flow is not defined under U.S. GAAP and may not be comparable with measures of the same or similar title that are reported by other companies. Under SEC rules, “free cash flow” is considered a non-GAAP financial measure. It should not be considered as a substitute for, or confused with, any U.S. GAAP financial measure. There are important limitations related to the use of free cash flow instead of cash flows from operating activities calculated in accordance with U.S. GAAP. We believe the most comparable U.S. GAAP measure to free cash flow is cash flows from operating activities. We report free cash flow to provide investors with a measure that can be used to evaluate changes in liquidity after taking capital expenditures into account. It is not intended to represent residual cash flow available for discretionary expenditures, since debt service requirements or other non-discretionary expenditures are not deducted. We urge you not to rely on any single financial measure to evaluate our business but instead to form your view on our business with reference to our audited annual consolidated financial statements included elsewhere in this prospectus and the other information we present in this prospectus. In 2007, free cash flow includes our discontinued operations. We describe free cash flow below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Free Cash Flow.”

RISK FACTORS

Investing in our ADSs involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus, including our financial statements and the related notes, before making an investment decision regarding our securities. The risks and uncertainties described below are those significant risk factors, currently known and specific to us, that we believe are relevant to an investment in our securities. If any of these risks materialize, our business, financial condition or results of operations could suffer, the price of our ADSs could decline and you could lose part or all of your investment. Additional risks and uncertainties not currently known to us or that we now deem immaterial may also harm us and adversely affect your investment in our ADSs.

Risks Related to Our Operations

Negative worldwide economic conditions, including related reduction in corporate and consumer spending, may have a material adverse effect on our results of operations, cash flows and financial condition.

The recent worldwide financial crisis and difficult economic environment have contributed to a reduction in corporate and consumer spending, which has adversely affected the level of demand for our products and services. We believe that macroeconomic developments may continue to have adverse effects on demand for our products and services. If the economies in North America and Europe, our most significant markets, resume the deterioration experienced in 2008 and 2009, or if growth remains at low levels, the demand for our products may not increase at the rates we expect and may even weaken.

In particular, we sell and distribute a significant portion of our manual-read meters and our Smart Offerings for use in new construction markets. Our level of sales activity in these markets depends to a significant extent on economic conditions, corporate profitability and interest rates. The continued weakness faced by the new construction markets worldwide poses a substantial risk to our business. The new construction market in the United States has in particular been in an extended period of contraction, and we are unable to predict whether this market will return to levels approaching those seen before the crisis began. Similar contractions have occurred in the new construction markets in other countries, including in the United Kingdom and Spain. If countries where we have significant operations continue to experience an overall contraction in new construction markets, or if these markets fail to grow, existing orders for our metering products and services may be delayed or cancelled, and new orders may not materialize. This could have a material adverse effect on our results of operations, cash flows and financial condition.

The length and severity of the economic downturn may continue to place pressure on our customers, which may have a material adverse effect on our results of operations, cash flows and financial condition.

We sell and distribute a significant portion of our manual-read meters and our Smart Grid components to utilities and utility contractors. Many utilities have announced plans or intentions to replace older meters with smart meters enabled for automated meter reading, or AMR, or with meters enabled for advanced metering infrastructure, or AMI, on a standalone basis or as components of Smart Grid solutions. However, some have delayed their investments due to economic uncertainty, a reduction in the consumption of energy resources as a result of the economic downturn or for other reasons, difficulty in obtaining financing or strains on their own or public financial resources. Such uncertainties and funding constraints may continue, leading some utilities to alter their budgeting and procurement priorities to focus on capital expenditures in areas other than metering, such as in energy or natural resource generation, which may result in delays in the installation of meters and Smart Grid solutions.

Furthermore, the economic downturn may slow the rate of “gasification,” which we define as the expansion of natural gas infrastructure and distribution to include regions and customers,

particularly in the Middle East, North Africa and Asia, not previously connected to the gas grid. Similarly, the economic downturn has led to a decrease in demand for our meters and other products that we sell for transmission and distribution applications, as well as for gas utilization, which consists of safety devices for the control and use of natural gas and the related components and systems for the regulation of combustion processes. As a result of these developments, existing orders for our products and services may be delayed or cancelled and new orders may not materialize, which could have a material adverse effect on our results of operations, cash flows and financial condition.

Our products may not achieve or may lose market acceptance, and, as a result, we may fail to realize both the expected level of demand for our new products and services and the expected level or timing of revenues generated by those products and services.

We are exposed to the risk that new technologies, features and functionalities that we and other industry participants develop and market in connection with our manual-read meters, Smart Grid solutions and other products may not be accepted by the industry, regulators or end-users. This may occur as a result of technological developments or competing features or functionalities proving superior to our existing products, changes occurring in the regulatory landscape, including with respect to interoperability standards, perceptions that the new technologies are error-prone or because of present cyber-security risks or otherwise. There is a risk that competing technologies, features or functionalities will be favored by the industry, regulators or end-users if there is not sufficient awareness of, or interest in, our innovations. For example, the advantages that Smart Grid-enabled products can provide may fail to be effective if utility customers choose not to implement corresponding technology throughout their distribution and transmission networks, or if regulators mandate or encourage the deployment of another technology. Generally, if utilities in the United States or some European countries plan to invest additional amounts for capital improvements, including meters and AMI/AMR upgrades, the utility must present the proposed capital improvement to the relevant utility regulatory commission for approval. Many of our utility customers are required to obtain regulatory approval to pass through the costs of products and services to their customers because of the effect it may have on utility rates for consumers. Utility regulatory commissions have decided in the past, and may decide in the future, not to permit the pass-through of such costs onto consumers and this in turn could affect the products and services that our utility customers ultimately purchase. Any delay or failure to receive this approval, due to regulatory preference for another technology or otherwise, could reduce demand for the products we sell to our utility customers. Market and regulatory acceptance of Smart Grid technologies varies by country and industry based on factors, such as the regulatory and business environment, environmental concerns, labor costs and other economic conditions.

We also are exposed to the risk that consumers or other end-users will not welcome these new technologies, or view technologically advanced systems as responsible for higher utility bills, uncertainty in their relationships with their utilities, incursions on privacy or other real or perceived shortcomings. We believe that some utilities and their regulators are expressing concerns about the potential for near-term costs to customers of the installation of these new technologies. If our products or those of a competitor fall subject to perceptions of this nature, the resulting negative publicity for us or for the industry generally could adversely affect our business. Our industry is also exposed to the risk of, and to public concern about, an increased threat of “cyber attacks” on the power grid as Smart Grid infrastructure becomes more prevalent. Smart Grid privacy and security risks have attracted attention recently, as media reports have highlighted the dangers of potential instability, blackouts and economic disruption that could result from a Smart Grid cyber attack by hackers. Any cyber attack or other security breach on any component we or a competitor have provided, or on other similar technologies, could lead to a reduction in public acceptance of Smart Grid technologies and have a material adverse effect on our results of operations, cash flows and financial condition.

We face increasing competition, which is broadly based and global in scope. Some of our competitors are well positioned in our areas of strategic focus, including Smart Grid technologies. If our competitors are more successful than we are at winning market share and developing their reputations in new technological or product areas, we could experience a material adverse effect on our results of operations, cash flows and financial condition.

We face competitive pressures from a variety of companies in each of the markets we serve. Some of our current or future competitors have or may have substantially greater financial, marketing, technical or manufacturing resources, and, in some cases, greater name recognition, market penetration and experience than we do. This may also be the case with respect to Smart Grid solutions. These competitors may also be able to devote greater resources to the development, promotion and sale of their products and services.

The competitive environment in which we operate has been strongly impacted by the movement towards Smart Grid solutions. While we are increasingly focusing our business plan on the development of Smart Grid product offerings and solutions in an attempt to maintain and expand our activities and increase our market share in this area, current or future competitors may be able to respond more quickly to new or emerging technologies and changes in customer or regulatory requirements. They may also be able to drive technological innovation and develop products that are equal in quality and performance or superior to our products, which could reduce our overall sales, require us to invest additional funds in new technology development and put pressure on our market position. Our competitors also have made or may make strategic acquisitions or establish alliances or cooperative relationships among themselves or with third parties that may enhance their ability to address the needs of customers, potentially giving them a significant increase in market share at our expense. Should we fail to compete successfully with current or future competitors, we could experience a material adverse effect on our results of operations, cash flows and financial condition.

In our industry, competition based on price can be intense, particularly during periods of economic decline or stagnation. We face varying levels of price erosion in the markets that we serve due to a variety of factors, including existing competitors lowering their prices, competition from manufacturers in low-cost countries and new entrants using off-the-shelf products or other low-priced strategies to gain market share. New entrants could also include competitors from industries we previously viewed as distinct from ours, such as the networking, telecommunications and systems integration industries. In addition, there is a risk that low-cost providers will enter, or form alliances or cooperative relationships with our competitors, thereby contributing to further price erosion in the market for manual-read meter and Smart Grid solutions. Some of our products and services may become commoditized and we may have to adjust the prices of some of our products to stay competitive.

Any inability to win or maintain contracts with existing customers may have a material adverse effect on our results of operations, cash flows and financial condition.

A significant number of our customers purchase products under master agreements with terms ranging from one year in many cases to two to five years for larger projects. As the market moves towards large contracts in connection with Smart Grid solutions, the proportion of such contracts in our business is likely to increase further. Individual orders of products under these master agreements are subject to cancellation or rescheduling due to many factors that may lead our customers to redeploy resources. They may also cease placing orders or cancel these agreements in their entirety, in which case our remedies may be limited. While we are currently participating in pilot projects with various utilities, large-scale projects may not result from these pilots. In addition to potential changes in their views regarding our products, they may also take such steps in response to changes in economic conditions generally or in the public procurement or regulatory environments. Cancellation or postponement of one or more of these significant contracts, or parts thereof, could have a material adverse effect on our results of operations, cash flows and financial condition.

If our customers reduce the number of suppliers from which they purchase, we may lose business or face more restrictive terms in our agreements and our business may suffer as a result.

In an attempt to increase efficiency, some of our customers have informed us they are seeking to reduce the number of vendors from whom they purchase products and services, particularly as vendors, including us, increase the breadth of the products and solutions they offer. If we are not selected as a preferred provider in a significant number of cases, we may lose access to certain sections of the markets in which we compete or wish to compete. Failure to maintain access to important sections of the market could have a material adverse effect on our results of operations, cash flows and financial condition. Even if we are selected as a preferred provider, the possibility exists that increased competition will have an impact on the agreements customers are willing to enter into. As a result, the terms and conditions of agreements regarding testing, contractual penalties, bonding, warranties, performance and indemnities may be substantially more restrictive for us, or carry a greater risk of liability, than the terms and conditions associated with our standard products and services.

We may no longer be able to rely on our traditional contacts in the metering departments at our utility customers for more technologically advanced procurement, which may have a negative effect on our results of operations.

Many of our long-standing customer relationships have grown from our lengthy experience in the metering and meter automation businesses. As a result, many of our primary contacts tend to be employees in the metering or customer service departments of large utilities. As our industry becomes more dependent on technology, procurement decisions may be moved elsewhere within these organizations, which may reduce our contact with the decision makers at potential or existing customers and limit our ability to effectively promote our entire range of products along the value chain, thereby potentially decreasing our ability to win new contracts.

A change in current and proposed regulatory initiatives that are of key significance to our company could have a material adverse effect on our results of operations, cash flows and financial condition.

Our industry depends substantially on governmental regulation. Historically, a key driver in our industry has been the replacement cycle of existing meters, especially the length of that cycle. Local or national regulations often determine when meters are to be replaced, and manual-read meter replacement cycles have been between five and 30 years, depending on the specific geographic market and the type and usage of the meter. Likewise, much of the impetus for the growth we expect in our industry arises from regulatory initiatives. Today, governments around the world are considering and, in some cases, have already begun to implement new laws and regulations to promote increased energy efficiency, slow or reverse growth in the consumption of scarce resources, reduce carbon dioxide emissions and protect the environment more generally. In particular, intensified regulatory pressure relating to energy and natural resource consumption is being driven by these and a range of additional imperatives in the United States and the European Union and in other countries, including Australia, Brazil, Canada, China and Russia. Many of the legislative and regulatory initiatives encourage utilities to develop Smart Grid infrastructure, and some of these initiatives provide for government subsidies, grants or other incentives to utilities and other participants in their industry to promote transition to Smart Grid technologies.

If government regulations regarding the introduction of Smart Grid technologies and the related shortening of the replacement cycles for meters we expect are delayed, revised to permit lower or different investments in metering infrastructure or terminated altogether, this could have a material adverse effect on our results of operations, cash flows and financial condition.

Lengthy or uncertain implementation of Smart Grid-related regulatory initiatives may result in our customers lowering or delaying their investments in the existing meter base and Smart Grid technologies, which could have a material adverse effect on our results of operations, cash flows and financial condition.

In many regions, Smart Grid-related legislation or regulation is being considered, drafted or negotiated, or general legislation is in place, but awaiting implementing rules or guidance. Legislatures and governmental agencies may prolong the law- and rule-making process, subject new technology to extensive reviews or fail to implement Smart Grid-related legislation or regulation on a timely basis, if at all. For example, some of the current legislative and regulatory initiatives in the European Union have clauses that may lead to deferral or dilution to the extent the Smart Grid initiatives are deemed economically non-viable. Some of our utility customers have been awaiting greater clarity on the scope and implementation of these laws and regulations and the timing of, and conditions related to, the receipt of related government grants, subsidies and other incentives. This effect has caused the revenues of our electricity segment to decline as utilities in the United States have been deferring their upgrades of installed meter bases and infrastructure expansions while the timing of their receipt of U.S. economic stimulus funding has remained uncertain. They have accordingly been deferring their commitments for the substantial upgrades of installed meter bases and infrastructure expansions that will be part of their response to Smart Grid related regulation. These deferrals continued through the end of 2009 and into 2010. Some utilities may eventually decline public subsidies or grants if they perceive conditions placed on their receipt to be too onerous or otherwise disadvantageous. If a significant number of utilities continue to delay their investments or opt not to participate altogether, this could lead to shortfalls in our sales and results of operations in the short to medium term.

Changes and developments in the regulations and policies of the countries we serve may affect demand for our products or cause us to incur significant costs.

We are subject to a range of laws, regulations and ordinances in all of the jurisdictions in which we conduct business, and we and our customers are regulated by various bodies at the supranational, national, state and local level. For example, in many U.S. states, public utility commissions regulate utilities in their states separately from other state regulators and federal agencies. The laws, regulations and ordinances to which we are subject, and the actions and attitudes of regulators, can change from time to time. Compliance with current or future laws and regulations may increase our expenses if their complexity or inconsistency increases, while failure to comply could result in the imposition of significant fines, suspension of our production, alteration of our production processes, cessation of our operations or other actions in the jurisdictions concerned, all of which could have a material adverse effect on our results of operations, cash flows and financial condition.

We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing or future laws will be administered or interpreted. In particular, governmental agencies and state public utility commissions may promulgate regulations that mandate or encourage the use of a particular type of technology that is not readily compatible with the technology employed in our products or may otherwise establish standards that are more favorable to our competitors. For example, in the United States, the National Institute of Standards and Technology is statutorily required to define uniform interoperability standards for the implementation of Smart Grid solutions, and the U.S. Federal Energy Regulatory Commission is required to engage in a rulemaking process to consider making these interoperability standards mandatory for interstate electricity transmission and wholesale power markets. This process may favor one company’s technology over another’s. If this were to happen, particularly in the larger markets in which we sell our products, we could be forced to withdraw some of our products from the market, make substantial investments in a new technology or lose market share to our competitors, all of which could have a material adverse effect on our results of operations, cash flows and financial condition.

Changes to data protection laws and regulations and their interpretation in Europe may lead to a delay in related Smart Grid solution initiatives, which could adversely affect the demand for our smart meters and Smart Grid solutions.

In Europe we are subject to data protection regulation that imposes a general regulatory framework for the collection, processing and use of personal data. Many of our Smart Grid and other technologies rely on the transfer of data relating to individuals and are accordingly affected by these regulations. Although the European Data Protection Directive (94/46/EC) has been implemented across the European Union, data protection laws across member states vary to a large degree, and authorities do not always apply existing laws in a consistent manner. While privacy issues in connection with AMR, AMI and Smart Grid solutions have been discussed within the European Union, it is unclear how regulation in connection with privacy requirements will further develop and to what extent it may affect technology in our industry relating to Smart Grid solutions. It may also lead to delay in other regulatory initiatives supporting the implementation of Smart Grid solutions. Our business could suffer a material adverse effect as a result.

Changes and developments in product certification and calibration requirements may adversely affect demand for our products, cause us to incur significant costs and have a material adverse effect on our business.

We are subject to various governmental certification requirements and similar regulations. Many of our new products and much of our equipment require certifications, calibrations or regulatory approvals before they may be sold or used. In some areas, each item we produce must be separately calibrated or certified by a governmental agency prior to deployment. We cannot be certain that any of our new products and equipment requiring approval will be approved in a timely manner, if at all. If certification, calibration or approval requirements become more stringent or cumbersome in the future, or differ materially on a regional or national level, our ability to market our products may be impaired.

In some cases, existing calibration requirements currently work to our benefit by driving service opportunities and meter replacement. Our water meter products in particular are subject to ongoing calibration requirements in a number of European countries and our gas meters are generally subject to exacting safety tests. In Germany, for example, federal regulations require cold water meters to be recalibrated and repaired every six years, while hot water meters must be recalibrated and repaired every five years. German and certain U.S. state regulations also require that gas meters be tested periodically and serviced when needed. Because of the relative expense involved in repairing water and gas meters, many customers install new meters at the time national regulations call for recalibration and repair. If these national regulations were changed to extend the time for recalibration and repair, our sales of water and gas meters could decrease, which could have a material adverse effect on our results of operations, cash flows and financial condition.

Limitations on the capacity of unlicensed frequencies or the inability of our company or our customers to obtain licenses where required may result in lower demand for our products, which could have a material adverse effect on our business.

Our communications technologies use particular radio frequencies and thus are subject to the regulation of various governmental bodies, such as the U.S. Federal Communications Commission and corresponding regulatory institutions of various U.S. states and European countries. With respect to the United States in particular, currently only our TRACE AMR products operate using licensed radio frequencies, but additional AMI and AMR products may operate in the United States using licensed radio frequencies in the future. To the extent that our products and solutions use licensed frequencies, there is a risk that there may be insufficient available licensed frequencies in some markets, that neither we nor our customers will be able to obtain licenses where required, even if sufficient frequencies are available, and that licenses that are granted to us or our customers may not be renewed on acceptable terms, if at all. Also, while unlicensed frequencies may currently be available for a wide variety of uses, including our RF mesh communications technology, we and our

customers may not be entitled to protection from interference by others who operate on frequencies close to or the same as those on which our products operate. If currently unlicensed frequencies become unacceptably crowded, or subject to restrictive rules governing their use, our business could suffer a material adverse effect.

We may face volatility in the prices for, and availability of, components, raw materials and energy used in our business, which could adversely impact the competitive position of our products, decrease profit margins and negatively impact timely delivery to customers.

The manufacturing processes for all of our products, especially in our gas and water segments, require a wide variety of components, raw materials and energy, including gas and electricity. We use components such as brass castings, aluminum housings, sheet metal, plastics and printed circuit board assemblies and other electronics. Important raw materials include steel, resins, aluminum, brass and bronze. We rely on third-party suppliers to provide us with these manufactured components, raw materials and energy. Since we do not control the actual production of the components, raw materials and energy sources used in the manufacturing processes for our products, we are subject to delivery delays for reasons that are beyond our control. Supply curtailments or interruptions could arise from shortages of components, raw materials and energy, especially as demand for them (particularly electronics) increases in connection with any economic recovery, as well as from labor disputes, transportation disruptions, impaired financial condition of suppliers, extreme weather or other natural disasters. In addition, prices of components, raw materials or energy may increase or become more volatile. In many cases, especially for brass, steel and aluminum, we seek to manage our exposure to changing prices by executing procurement contracts for periods of up to one year with our suppliers of these materials or of components that include them. We may pay higher prices with this approach than we otherwise would have should market prices decline during the life of the contracts.

Any inability to obtain adequate supplies of component parts, raw materials and energy at favorable prices could decrease our profit margins and negatively impact timely deliveries to our customers. In addition, the loss of, or a substantial decrease in the availability of, products from some of our suppliers, or the loss of key supplier relationships and the need to find alternative sources on potentially disadvantageous terms, could lead to a reduction in our production and sales volumes and in our profit margins. Any of these events could have a material adverse effect on our results of operations, cash flows and financial condition.

We have contracted with third-party manufacturers to provide a substantial portion of our production capabilities. Our results of operations, cash flows and financial condition may be adversely affected if we are unable to manage our outsourcing arrangements effectively or if we are unable to project our demand accurately.

Our future operating results will depend on our ability to develop and manufacture products in a cost-effective manner. We outsource the manufacturing of some of our products and their sub-assemblies and components, especially for solid state meters used by gas, electricity and water utilities to maintain focus on our core competencies and streamline our operations, as well as to minimize our manufacturing costs. Solid state meters measure gas, electricity or water using electronic devices instead of mechanical components.

The outsourcing of manufacturing capabilities reduces the day-to-day control that we are able to exercise over the production process and could result in quality problems and increased product warranty costs. In addition, as we outsource additional production capacity, we will retain limited internal production capacity and will rely more on third-party manufacturers to fill orders on a timely basis. While our strategy calls for having more than one supplier for each important product and component, we rely on a single source for some key product lines, products and components that we purchase from third-party manufacturers. In some cases, our purchases account for a material portion of some of our suppliers’ respective businesses.

The third-party manufacturers with whom we work often require us to provide accurate forecasts, sometimes months in advance. If we overestimate our requirements, we may be obligated to purchase quantities of products that exceed customer demand. If we underestimate our requirements, particularly in connection with large rollouts, we may have inadequate inventory from which to meet customer demand. From time to time, some of our suppliers may have difficulties keeping pace with our requirements if we increase our orders with little advance notice in response to demand for our products. While we are seeking to give our suppliers more advance notice of our peak requirements and holding more of the affected components in inventory where possible, we may fail to do so, or may, for reasons outside our control, not have access to sufficient supplies, which may cause even longer lead times. In any case where we must forecast our supply needs, our inability to forecast demand accurately may have a material adverse effect on our results of operations, cash flows and financial condition.

We have recently experienced significantly extended lead times at some of our suppliers of electronic components. These have negatively impacted our revenues, particularly in our electricity segment. If we are unable to ensure sufficient supplies to prevent these lead times from lengthening, our results of operations, cash flows and financial condition may be adversely affected.

Lead times for the electronic components we purchase from third-party manufacturers depend on a variety of factors, including the demand for each component and supplier capacity. If our third-party manufacturers or any of their sub-suppliers fail to deliver quality products and services in a timely manner, or if our ability to source from alternative suppliers cannot be maintained or if a supplier that is dependent on us is unable to cope with variations in our ordering patterns, the ensuing disruptions in our chain of supply could negatively affect our product portfolio, reputation, sales and ability to meet large orders, especially in the context of large rollouts.

During 2010, we have experienced significantly extended lead times at those of our suppliers that provide electronic components used in some of our products. We believe that the resumption of economic growth in some of the world’s economies, and the resulting demand for electronic components generally across a range of industrial sectors, has resulted in an increase in demand (after capacities had been reduced during the downturn) for commoditized electronic components that these suppliers use in producing circuit boards for us as well as for other customers, including customers in unrelated industries. This has been the case despite the overall lower levels of demand for our own products. We believe that some of our most important markets, including in particular the residential and commercial construction markets in many of the regions in which we operate, have remained weaker than some other markets that require similar components, such as the worldwide electronics and computer markets. In some cases, we have been required to place orders for electronics and electronic components six months or more in advance to ensure timely availability of these components. Some of our other suppliers have imposed limitations not only on purchases of their electronic components, but in other areas as well. We believe, based on discussions with our suppliers, that these circumstances have been relatively widespread, affecting participants in our industry as well as others. At our company, these circumstances have affected our electricity segment more than our other segments, although we have experienced scattered instances of shortages of electronic components in our other segments as well.

Shortages or interruptions in the supply of electronic components or communications modules could delay shipments of our products or increase our production costs. This in turn could have a material adverse effect on our results of operations, cash flows and financial condition. Any contractual penalties we negotiate for the event that a supplier does not meet its obligations with respect to timeliness and quality may fail to mitigate the harm to our business caused by any such contractual breaches.

We rely on our information technology systems, including systems provided by third parties to conduct our business.

We rely on our own information technology, or IT, systems to manage our business data, communications, computing needs, production and supply chain effectively and efficiently. Our IT systems are used to conduct order entry, order fulfillment, inventory replenishment, e-commerce and other business processes. We also rely on the IT systems provided by third parties, including, in particular, for much of our networking and other IT infrastructure. For example, we agreed to outsource certain of our technical and communication infrastructure to a third party, but we terminated the contract in February 2010. They are under the obligation to continue to manage our IT infrastructure until the end of March 2011 and thereafter, over the course of an orderly transition period, properly to transfer the management of services to us or another third party. We are currently planning to reassume management of our IT infrastructure and/or outsource all or parts of it after the termination of the contract. If we are not able to find a suitable outsourcing partner or are not able to effectively manage our IT infrastructure internally, or if we experience disruptions in our IT systems during the transition period, it may have an adverse impact on our business.

Should these systems not operate as intended, our ability to transact business across our international company would be significantly impaired. In addition, our IT systems and those we outsource are vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, power loss, hacker attacks, computer systems failure and viruses. The failure of our IT systems and our updated IT platform to perform as we anticipate, could disrupt our business and could result in decreased sales, increased overhead costs, excess inventory and product shortages, causing our business and results of operations to suffer. In addition, flaws in our security systems could result in potential data misuse, with a resulting damage to our reputation and an adverse effect on our business.

Through our global activities, we are exposed to economic, political and other risks and uncertainties, any of which could adversely affect our business and have a material adverse effect on our results of operations, cash flows and financial condition.

We are a global company with operations in more than 30 countries on five continents and sales in more than 130 countries. While most of our operations are located in developed countries, we have substantial operations in a number of developing countries and derive revenues from a broad range of countries. In 2009, our sales in Europe, North America and the rest of the world accounted for 45.2%, 33.0% and 21.8% of our revenues, respectively. This geographical diversity of both operations and sales exposes us to a range of risks relating to events that can occur in individual countries or regionally. Risks inherent to the global nature of our operations and which could negatively affect us include:


	•	local or regional economic downturns, some of which can be severe;

	•	withholding taxes imposed on dividends and other payments by subsidiaries;

	•	difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;

	•	restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in various jurisdictions;

	•	inability to develop successful relationships with local distributors;

	•	difficulty in staffing and managing our local operations around the world;

	•	changes in law, regulations or governmental policies in the individual jurisdictions in which we operate, including potentially negative consequences from changes in tax laws;

	•	the expense of complying with a wide variety of national and local laws, regulations, trade standards, treaties and technical standards and changes in them, and the risk of liability or the risk of being prohibited from doing business in a jurisdiction arising from any failures to comply with them;


	•	challenges to our internal policies, compliance processes and information systems posed by our widely dispersed operations;

	•	different legal regimes controlling the protection of our intellectual property;

	•	exchange controls imposed by various countries and changed from time to time in ways that can be disadvantageous for us;

	•	nationalization of foreign assets;

	•	political instability, especially in some of the emerging markets in which we do business;

	•	local and regional conflicts and unrest;

	•	import and export duties, tariffs, quotas and other trade barriers, or other forms of government protectionism; and

	•	continued and/or repeated interruption of gas supply by one or more countries or companies producing natural gas.

The manifestation of any one or more of these risks could impair our current or future operations in the affected country or countries. While an event of this nature, if contained to one developing country, may not affect us significantly, such an event may trigger more widespread regional or global consequences, which could have a material adverse effect on our results of operations, cash flows and financial condition.

We derive most of our revenues from sales to or for the utility industry, which has been subject to long and unpredictable capital investment and related sales cycles, which could negatively affect our results of operations, cash flows and financial condition.

We derive most of our revenues from customers in the utility industry, either directly or through distributors. In our experience, the utility industry worldwide is often subject to long budgeting, purchasing and regulatory review processes that can take several years to complete and can result in unpredictable capital investment cycles. Generally, larger contracts with utilities are granted through competitive tender processes that involve large volumes, require lengthy and complex competitive procurement processes and lead to long and unpredictable sales cycles. Utilities are under increasing economic, political and regulatory pressure to seek bids for their higher-volume purchases in as competitive a process as possible, which can further delay the time necessary to complete the tender process. In some markets, utilities’ ability to recover the costs of purchasing our products and services is also subject to lengthy and uncertain regulatory proceedings. In addition, utilities’ purchasing decisions are sometimes delayed if they are considering or negotiating major transactions or changes in their businesses or operations that are unrelated to our products. Our revenue development may be materially and adversely affected if these sales cycles lead to delays that we did not anticipate, for which we were unable to plan adequately or that are otherwise disadvantageous to us. This could have a material adverse effect on our results of operations, cash flows and financial condition.

Ongoing instability and volatility in the worldwide financial markets have created uncertainty, which may reduce our customers’ access to financing or reduce their ability or slow their plans to purchase products and services from us.

The recent worldwide financial crisis and current weakness in the global economy have resulted in severe and prolonged volatility and disruption in the capital and credit markets in 2008 and 2009, leading to lower levels of liquidity and corresponding increases in the rates of default and bankruptcy. These market developments continue to pose a risk to the financial stability and reliability of companies and vendors in our industry. If financial conditions worsen and global credit markets fail to ease or tighten further, many of our customers, some of whom are substantially dependent on credit to finance their own operations, may delay or reduce purchases of our products or services. They also may limit their levels of capital expenditures in a manner that directly or indirectly leads to a reduction, deferral or cancellation of orders placed with us. This could have a material adverse effect on our results of operations, cash flows and financial condition.

We may have difficulty raising capital to refinance our indebtedness or to obtain credit in support of our customer-related securities and bonding requirements.

All of our long-term debt is scheduled to mature between September 30, 2012, and September 30, 2014. We have incurred virtually all of our long-term debt under a credit facility agreement that we put in place in 2005 with a syndicate of banks and that we have modified since that time, most recently in January 2010. We refer to this agreement in its current form as our Senior Facilities Agreement. Any outstanding balances of our Senior Facilities Agreement’s multicurrency revolving facility are due on September 30, 2012 and any outstanding credit support under our bonding facility will expire on the same date, with any remaining amount outstanding under the Senior Facilities Agreement’s tranches maturing in 2013 and 2014. We therefore will be required to refinance our existing indebtedness in the next several years. However, if the recent uncertainty and weakness in worldwide financial markets continues, financing may not be available on terms we find attractive or at all. For example, banks may be unwilling to renew our credit facility or extend it on current or similar terms.

In addition, some of our customers and potential customers ask us for guarantees, including payment and advance payment guarantees and performance guarantees, or bonds, in each case to cover portions of their potential contract volumes. They may also or alternatively ask us to maintain a certain level of inventory. A continuation of the recent uncertainty in worldwide financial markets may lead customers to demand guarantees or bonds covering a larger portion of these contracts or for us to maintain larger amounts of inventory, while at the same time making it more difficult for us to obtain favorable terms on the credit necessary to fulfill these demands. If we are unable to obtain the necessary guarantees or bonds, or maintain or finance the necessary level of inventory, we may fail to win these contracts, which could have a material adverse effect on our results of operations, cash flows and financial condition.

Our exposure to counterparty default risk may increase as a result of the ongoing instability and volatility in the worldwide financial markets.

One characteristic of the recent financial crisis has been financial institution distress. Depending on the development of the markets, some or all of our current lenders (or any financial institutions from whom we borrow in the future) may be unable to honor their commitments under our Senior Facilities Agreement for draw-downs or bonds, particularly if they fail or if they are required to set lending limits imposed by their regulators. If this happens with respect to our current lenders, we could be required to seek financing in a credit market that has become less accessible. These developments may have an adverse effect on our ability to raise capital to refinance our indebtedness, which may in turn have a material adverse effect on our results of operations, cash flows and financial condition. The counterparties on our interest rate and foreign currency derivative contracts could also default on their obligations, which, to the extent that we are not in a liability position under these contracts, could have a material adverse effect on our results of operations, cash flows and financial condition.

We have undertaken, and may continue to undertake, business in countries subject to EU or U.S. sanctions and embargoes, and we may be unable to prevent possible sales or transfers of our products to countries, governments, entities or persons targeted by EU or U.S. sanctions.

The Council of the European Union has adopted restrictions on trade with entities associated with certain jurisdictions, including a council decision of July 26, 2010 concerning restrictive measures against Iran. These sanctions regulations, which vary depending on the jurisdiction in question, apply to EU nationals worldwide, including all EU companies. While these sanctions regulations do not apply to subsidiaries of EU companies that are organized under the laws of countries outside the European Union, EU parent companies are nonetheless expected to encourage their subsidiaries to follow these regulations. We have conducted, and continue to conduct, business with entities located in jurisdictions subject to EU sanctions regulations. If we are found to have violated any of these restrictions, we could be subject to fines, which could have a material adverse effect on our business and reputation.

The U.S. Department of the Treasury’s Office of Foreign Assets Control, or OFAC, and the Office of Export Enforcement of the U.S. Department of Commerce, or OEE, administer certain laws and regulations, or U.S. Economic Sanctions Laws, that impose restrictions upon U.S. companies and persons, or U.S. persons, and, in some contexts, foreign entities and persons, with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of U.S. Economic Sanctions Laws, or Sanctions Targets. U.S. persons are also generally prohibited from facilitating such activities or transactions.

We have engaged and continue to engage in business with counterparties, including government-owned or controlled counterparties, in certain countries that are Sanctions Targets, including Iran, Syria and Cuba. In the three years ended December 31, 2009, we had sales of approximately $85.1 million to Sanctions Targets. Specifically, in the years ended December 31, 2009, 2008 and 2007, we generated revenues from products sold to customers in Iran of $21.8 million, $29.8 million and $24.1 million, respectively, which represent approximately 1.3%, 1.6% and 1.4%, respectively, of our total revenues for those years. Our business with Sanctions Targets consisted mostly of the sale of electricity meters for residential and C&I use until the second quarter of 2010, after which we have ceased selling electricity meters in Iran. We also sell gas metering and utilization products and, to a lesser extent, water meters in Sanctions Targets. In the first six months of 2010, we had sales of approximately $5.0 million, or 0.6% of our revenues, to Sanctions Targets, of which $3.8 million related to products sold to customers in Iran.

We recently concluded an investigation, assisted by external counsel, and submitted, on a voluntary basis, a disclosure report to OFAC and OEE in March 2010 regarding conduct in 2005 through 2007. The report concludes that a U.S. person employed by our U.S. affiliate participated in the settlement of a warranty claim made by one of our Iranian customers against two of our European operating units, which may implicate certain of the U.S. Economic Sanctions Laws. We also described in our voluntary disclosure to OFAC and OEE our sales of certain meters to counterparties in Iran and Syria with de minimis U.S.-origin content. On July 29, 2010, the OEE notified us that the file relating to our voluntary disclosure report was being closed and no further action would be taken. The OFAC review is still ongoing. While the report states our conclusion that these product sales either did not violate the relevant U.S. Economic Sanctions Laws or should not be penalized under such laws, OFAC may not concur with our assessments.

We may be subject to fines or other administrative action relating to the matters discussed in the voluntary disclosure report. We do not expect any fines or other action to have a direct material adverse effect on our results of operations, cash flows or financial condition. However, our disclosure of this conduct and any fines or other action relating to this conduct could harm our reputation and indirectly have a material adverse effect on our business.

In October 2007, we implemented enhancements to our compliance and training programs and procedures designed to ensure that, across all our operations globally, no sales to Sanctions Targets would occur of products containing more than a de minimis level of U.S. content (or any level of U.S. content in circumstances where no U.S. content is permissible) and that U.S. persons among our employees would have no involvement in business with Sanctions Targets. Despite these enhancements and our other efforts designed to ensure compliance with applicable sanctions laws and embargoes, it remains possible that our products could be sold or transferred to countries, governments, entities or persons targeted by EU or U.S. sanctions in a manner that violates such sanctions. For example, despite our procedures, one of our businesses may miscalculate the level of U.S.-origin content in a product or transfer a U.S.-origin product to a customer that we should have known was subject to U.S. or EU sanctions. Should such sales or transfers occur, we would bear the costs of any necessary investigative and remedial measures that may be necessary, and could be subject to fines or criminal penalties in respect of such sales or transfers.

In addition to the sanctions administered by OFAC and OEE described above, the U.S. government may impose (and has in the past imposed from time to time) restrictions and sanctions against other

countries, including ones in which we do business. In addition, the U.S. government may impose new or expanded restrictions and sanctions against existing Sanctions Targets. Any such measures targeting countries in which we undertake business could have a material adverse effect on our business and reputation.

Certain U.S. state and municipal governments, universities and institutional investors have proposed or adopted divestment initiatives regarding investments in companies doing business with Iran and other Sanctions Targets. If our business activities regarding Iran or other Sanctions Targets were deemed to fall within the scope of such initiatives, then such investors holding interests in us may sell these interests. If significant, these sales could have adverse effects on our business or the price of our ADSs.

Our business depends on our ability to develop new products and technologies and a failure or delay in successful new product development could reduce our future revenues.

Our customers increasingly demand access to a broad range of products and technologies, and we must continue to develop our expertise to design, manufacture and market our products successfully. We believe that our customers rigorously evaluate their suppliers on the basis of a number of factors, including product quality, reliability and timeliness of delivery, accuracy, new product innovation, price competitiveness, technical expertise and development capability, product design capability, manufacturing expertise, operational flexibility, customer service and overall management. Our success therefore depends, to a significant extent, on our development of new products and technologies and our ability to continue to meet our customers’ changing requirements.

As a result, in addition to enhancing our current product and solutions portfolio, we continually strive to offer new products and design new technologies and software solutions. This requires continued investment in product and technology development to help us maintain or increase our current market position and to allow us to respond to changing customer needs. However, we may be unable to develop or commercialize technological advances and introduce new products in a manner and to an extent sufficient for us to remain competitive within our industry. For example, we may, among other things, lack capacity to invest the required level of human and financial resources necessary to develop these products, commit errors or misjudgments in our planning in these areas or experience difficulties in implementing rollouts. In addition, we may not be able to meet our product development and delivery schedules as a consequence of unforeseen problems during the design or development phases of new product and technology introductions. Some of our new products also require certification or regulatory approval and may not be approved in a timely manner or at all. Delays of this type, or failures to obtain regulatory approval, could negatively affect our reputation and relationship with our customers and lead to delayed or reduced revenues for our products.

If we fail to enhance existing products, develop new products or keep pace with developing technology, growth opportunities could be lost or we may lose existing customers. This is especially the case for our Smart Offerings, which we define to be AMR, AMI and Smart Grid solutions and individual products, components and services for use therein, which have experienced a rapid pace of development. In addition, we have made commitments within some existing contracts with customers, to develop and deliver new products. If we are unable to meet these commitments, we could be subject to contractual penalties or lose the orders altogether. Delays in product development may also lead to a need for greater investments in research, design and development. If we encounter increased costs associated with new product development and product enhancements for which we are unable to realize sufficient revenues, the costs of the related new product development may not be recoverable. Either increased costs of or decreased revenues from newly developed products, or both, could have a material adverse effect on our results of operations, cash flows and financial condition.

A number of skilled personnel are critical to the success of our business, and any inability to attract and retain employees with skills in our areas of focus, or industrial action by our employees generally, could have a material adverse effect on our results of operations, cash flows and financial condition.

Our success depends on our continued ability to identify, attract, develop and retain skilled personnel throughout our company. Competition for highly qualified management and technical personnel is intensifying as our industry becomes more technologically advanced. In addition, many of our key management personnel have become eligible to receive the full economic benefits of their interests in our Management Equity Program, or MEP. These members of management may leave us after they are able to receive the cash value of their interests in the MEP. While we believe that we have a good relationship with our management and other key employees, and while we are also developing a long-term incentive compensation plan to be implemented shortly after the offering, we may not be able to retain key executives or other skilled personnel, or attract and retain replacements for those who may decide to leave our company. In certain strategic focus areas, such as Smart Grid technologies, we intend to make significant investments and further develop our product portfolio. The successful development of our business in these strategic areas depends in part on our continued ability to hire and retain qualified and skilled personnel. We are also dependent on the remainder of our workforce to respond effectively to customer requests, and industrial actions could negatively impact our ability to respond effectively, especially for larger, more complex rollouts that encompass a broad range of our products and services. Any such industrial actions, along with any inability to attract and retain key personnel could have a material adverse effect on our results of operations, cash flows and financial condition.

Failure to successfully identify attractive acquisition candidates or integrate current or future acquisitions could result in charges, cause disruption to the management of our business or otherwise have a material adverse effect on our results of operations, cash flows and financial condition.

We have pursued selected acquisitions in a number of countries to expand our business. We expect to continue to evaluate potential acquisitions, and may engage in discussions with acquisition targets and pursue selective acquisition opportunities, some of which may be material, if we believe they will be beneficial to our company and our shareholders. However, we may be unable to identify and acquire suitable acquisition targets, or our acquisition strategies may not be well received by the market. If we decide to pursue a strategic acquisition, we may need to raise additional private or public funds and we may be unable to finance the acquisition on satisfactory terms or at all.

Additionally, any acquisition will bring with it attendant risks, including a possible inability to integrate its operations into our business, failure to realize expected benefits or synergies, increases in operating costs, the diversion of management’s attention away from operating activities or other unanticipated problems, including, for example, relating to compliance or liability matters in the target. In addition, our capitalization and results of operations may change significantly as a result of an acquisition or a series of acquisitions, and the related financings, and we may be unable to accomplish our strategic objectives as planned or at all as a result of any such acquisition. Future acquisitions may result in our incurrence of additional debt and contingent liabilities, an increase in our interest expense and additions to our amortization expense, especially in connection with intangible assets. We may also incur significant charges relating to the integration of acquired businesses. Any of these factors could have a material adverse effect on our results of operations, cash flows and financial condition.

Our quarterly operating results may fluctuate substantially, which may cause the price of our ADSs to decline.

We have experienced variability in our quarterly operating results in the past. We may fail to achieve sustained profitability in the future and may experience operating or net losses. Our future operating results are subject to numerous risks, including the following:


	•	the size and timing of deployments may vary, as might the time at which we recognize the associated revenue, especially in the case of large and complex contracts for our Smart


		Offerings. Equally, deployments under major rollouts may be concentrated in particular quarters, leading to the possibility of large quarterly revenue swings;


	•	exchange rates that impact our operating results could change suddenly and significantly;

	•	our mix of products and services in any one quarter may change significantly, especially if individual contract sizes are larger, even if the mix is less volatile over time;

	•	expenses relating to our stock-based compensation arrangements may be higher than expected in any given period;

	•	we may be subject to unexpected warranty liabilities that may, in turn, require us to accrue lump sum provisions;

	•	the timing and production levels of our new product developments may be delayed or overly optimistic;

	•	the timing and availability to our customers of government stimulus funding;

	•	components or raw materials that are material for us may quickly become less easily available in the quantities we need at attractive prices or may be subject to shortages. Moreover, prices for these components and raw materials can swing rapidly;

	•	we may experience other, potentially severe, interruptions in our supply chain; and

	•	general economic conditions affecting enterprise spending for the utility industry may change quickly and adversely.

Some of these factors are partially or wholly outside of our control. Any of the above factors, or others that are unforeseen or today seen as immaterial, may, individually or in the aggregate, have a material adverse effect on our results of operations, cash flows and financial condition, which may, in turn, cause the price of our ADSs to decline.

Our operating results have fluctuated significantly in the past due to the effect of exchange rates and are likely to continue to do so.

Our results of operations have been, and may continue to be, adversely affected by movements in exchange rates, especially among the euro, U.S. dollar and pound sterling, but also with other currencies. Adverse currency exchange rate movements may hinder our ability to procure important materials and services from vendors and suppliers, may affect the value of our level of indebtedness, and may have a significant adverse effect on our revenues and overall financial results. Currency movements affect our financial statements and results of operations in various ways, including:


	•	As part of our consolidation each period, we translate the balance sheet items in the financial statements of those entities in our group that have functional currencies other than the U.S. dollar into U.S. dollars at the period-end exchange rates. The translated values in respect of each entity fluctuate over time with the movement of the exchange rate for the entity’s functional currency against the dollar. We refer to this as the currency translation effect. It is not practicable to hedge against this risk.

	•	Most of our entities make their purchases and sales primarily in their respective functional currencies. However, sometimes entities within the group make purchases and sales denominated in currencies other than their functional currencies. To the extent that an entity makes purchases in a currency that appreciates against its functional currency, its cost basis expressed in its functional currency will increase, or decrease, if the other currency depreciates against its functional currency. Similarly, for sales in a currency other than the entity’s functional currency, its revenues will increase to the extent that the other currency appreciates against the entity’s functional currency and decrease to the extent that currency depreciates against the entity’s functional currency. These movements can have a material effect on the gross margin of the entity concerned and on our consolidated gross margin. We refer to this as the currency transaction effect.


	•	After a purchase or sale is completed, the currency transaction effect continues to affect foreign currency accounts payable and accounts receivable on the books of those entities that made purchases or sales in a foreign currency. These entities are required to remeasure these balances at market exchange rates at the end of a period. In 2008, we incurred a foreign currency loss of $7.4 million resulting from these remeasurements; in 2009, we recognized a gain of $2.9 million and in the first six months of 2010, we incurred a loss of $0.9 million, as compared to a gain of $0.7 million in the first six months of 2009. We intend, through our group treasury function, to enter into foreign currency derivative financial products to mitigate exchange rate risks when the appropriate financial products are available on attractive terms. However, it is often economically disadvantageous to pay the costs associated with hedging against every possible currency movement, particularly between currencies that have traditionally been rather stable, and we will continue to be subject to this risk.

In addition to these exposures, we are also exposed to the risk of fluctuations in currency exchange rates in connection with our financing arrangements, in particular drawings by an entity under the multi-currency borrowing facilities provided under the terms of our Senior Facilities Agreement which are denominated in a foreign currency. In addition, inter-company borrowings by one Elster entity to another Elster entity with a different functional currency can cause gains or losses from remeasuring the inter-company financing at changing exchange rates.

Under our Senior Facilities Agreement, our U.K. subsidiary drew debt, including balances denominated in euros and pounds sterling. With respect to the U.K. subsidiary’s euro-denominated drawing, because the functional currency of the U.K. subsidiary is the pound sterling, that subsidiary is required to remeasure its euro-denominated liability to the banks at the end of each period as the exchange rate of euro for pounds sterling changes. Elster Holdings GmbH made an inter-company loan, denominated in pounds sterling, to its U.K. subsidiary, in an amount that permitted the U.K. subsidiary to repay all but £28.4 million of the pound-sterling denominated tranche of the Senior Facilities Agreement it had drawn. Elster Holdings GmbH is required to recognize changes in the value of its pound sterling-denominated loan to its U.K. subsidiary at the end of each period. The effect of exchange rate changes on our debt led us to recognize a foreign exchange rate gain of $11.5 million in 2009 and foreign exchange rate losses of $37.8 million in 2008 and $5.1 million in 2007. In the first six months of 2010, we incurred a foreign exchange rate gain of $0.3 million compared to a foreign exchange rate gain of $17.0 million in the prior year period.

We intend to use a portion of the proceeds of this offering to permit the U.K. subsidiary to repay the euro drawing on its books. We also intend for the U.K. subsidiary to sell further assets to the group holding company or another of its subsidiaries to permit it to extinguish its remaining pound sterling-denominated debt under the Senior Facilities Agreement using an additional portion of the proceeds of this offering.

In the past, we have experienced gains and losses from exchange rate fluctuations, including foreign exchange gains and losses from transaction risks associated with assets and liabilities denominated in foreign currencies, including inter-company financings. In 2009, we had a foreign exchange gain of $14.4 million, compared to foreign exchange losses of $45.2 million in 2008 and $5.7 million in 2007. Although we have introduced measures to improve our ability to respond to currency exchange rate risks, these measures may prove ineffective, and recent exchange rate volatility, particularly between currency pairs that have traditionally been rather stable, may continue at high levels. As a result, we may continue to suffer exchange rate losses, which could cause our operating results to fluctuate significantly and could have a material adverse effect on our results of operations, cash flows and financial condition.

Our business requires us to maintain investments in inventory. A decline in our customers’ purchases could result in obsolete inventory and lead to losses.

Our business requires us to maintain inventories in an effort to maintain a reliable source of supply for our customers. The market for many of our products is characterized by rapid change as a result of the development of new technologies, evolving industry standards and frequent new product

introductions. Many of our product sales are made on a purchase order basis, which allows our customers to reduce or discontinue their purchases. Accordingly, we cannot predict the timing, frequency or size of our customer orders. In addition, as the range of products and solutions we offer becomes more complex, the risk increases that our inventory, including spare parts we need to carry, may increase or become obsolete more quickly. If we fail to anticipate the changing needs of our customers and accurately forecast demands, our customers may not continue to place orders with us, and we may accumulate significant inventories of products or components that we are unable to sell or return to vendors. This may result in a significant decline in the value of our inventory.

Restrictive covenants in our Senior Facilities Agreement limit our ability and the ability of most of our subsidiaries to take certain actions, which may restrict our ability to pursue our business strategies, incur additional indebtedness or make any future distributions to our shareholders.

Our Senior Facilities Agreement is our main source of financing. It contains a range of covenants that restrict our ability and the ability of our subsidiaries to take actions related to corporate matters, to incur indebtedness, to make investments and to undertake various other matters. In addition, the Senior Facilities Agreement contains covenants that require us to meet specified financial ratios including a leverage ratio, an interest coverage ratio and a cash flow to debt service ratio, as well as other customary covenants. Our ability to borrow under our credit facility and to maintain or increase these borrowings depends on our compliance with these covenants. Events beyond our control can affect our ability to meet these covenants.

Our failure to comply with covenants or other obligations under our borrowing arrangements may result in a declaration of an event of default. An event of default, if not cured or waived, may permit acceleration of such indebtedness. In addition, indebtedness under other instruments that contain cross-default or cross-acceleration provisions also may be accelerated and become due and payable. If an event of default were to be declared, we may not be able to remedy such default. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to borrow sufficient funds to replace the accelerated indebtedness on terms favorable to us or at all. In addition, in the case of an event of default under our secured indebtedness such as our Senior Facilities Agreement, the lenders may be permitted to foreclose on our assets securing that indebtedness.

We may be required to make a repayment offer under our Senior Facilities Agreement based on changes to the beneficial ownership of our Company. Our inability to finance a required repayment offer for any reason could result in the declaration of an event of default and the acceleration of all of our indebtedness under the Senior Facilities Agreement.

Our Senior Facilities Agreement requires us to make a mandatory repayment offer if specific changes to our beneficial ownership structure occur. For example, if, following this offering, Rembrandt and the Management KG together cease to beneficially own (directly or indirectly) at least 30.1% of our equity share capital or if any holder or group of holders beneficially owns more than Rembrandt and the Management KG collectively, we would be required to immediately prepay all outstanding advances and provide cash cover for all outstanding letters of credit, lender guarantees and advances under the revolving facility. Our inability to finance a required repayment offer for any reason, including an inability to raise the required amount of capital in a short period of time, could result in the declaration of an event of default and cross-default and the acceleration of all of our indebtedness under the Senior Facilities Agreement and other financing agreements. In the event an event of default or a cross-default were declared under our secured indebtedness, the lenders may be permitted to foreclose on our assets securing that indebtedness.

Although we do not expect Rembrandt and Management KG to sell below the 30.1% threshold before we have repaid or refinanced our indebtedness under the Senior Facilities Agreement, Rembrandt has advised us that it does not anticipate owning a majority of our shares over the long term.

Impairment of our intangible assets, long-lived assets, goodwill or deferred tax assets could result in significant charges that would adversely impact our future operating results.

We have significant intangible assets, long-lived assets, goodwill and deferred tax assets that are susceptible to valuation adjustments as a result of changes in various factors or conditions. We assess impairment of amortizable intangible and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, many asset classes are subject to impairment testing on a periodic basis under applicable accounting rules. Factors that could trigger an impairment of such assets include the following:


	•	a significant underperformance relative to historical or projected future operating results;

	•	significant changes in the nature of or use of the acquired assets or the strategy for our overall business;

	•	significant negative industry or general economic trends;

	•	changes in our organization or management reporting structure could result in additional reporting units, which may require alternative methods of estimating fair values or greater aggregation or disaggregation in our analysis by reporting unit; and

	•	a sustained decline in our market capitalization below net book value.

We assess the potential impairment of goodwill as of December 31 of each year. We also assess the potential impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Adverse changes in our operations or other unforeseeable factors could result in an impairment charge in future periods that would impact our results of operations in that period.

The realization of our deferred tax assets related to net operating loss carry-forwards is supported by projections of future profitability. We provide a valuation allowance based on estimates of future taxable income in the respective taxing jurisdiction and the amount of deferred taxes that are expected to be realizable. If future taxable income is different from what we expected, we may not be able to realize some or all of the tax benefit, which may, in turn, have a material and adverse effect on our results of operations, cash flows and financial condition.

As a manufacturer and seller, we are exposed to risks related to warranties and product liability, and a failure to manufacture high-quality products may have a material adverse effect on our reputation and business.

Product quality and performance are a priority for us since our products are used in various industries where precise control of gas, electricity and water is essential. We also focus on technological platforms and systems to facilitate the proper functioning of many of our Smart Offerings as well as more advanced manual-read meters and services we sell. Our products and solutions will not meet performance standards if we fail to produce high-quality products that perform as their specifications demand or if the technology on which we depend for accurate metering, data storage and secure data transmission is defective. Any delivery of substandard products, or any failure of our meters to record accurate data or transmit recorded data in an accurate and secure manner, even if this failure results from a failure to use our meters according to their specifications, may seriously harm our reputation and lead to claims, resulting both in a loss of current customers to competitors and damage to our ability to attract new customers.

As is customary in our industry, our sales agreements typically contain product warranties that generally allow post-shipment obligations and returns over a period of one year or longer, depending on the particular product and market, and may provide for liquidated damages. Some warranties provide that if certain failure rates are exceeded among a production lot of meters, all the meters in the production lot may be returned. In some cases, the length of our warranties and guarantees may even exceed ten years. We may be exposed to substantial warranty claims as a result of our warranty undertakings. We have experienced warranty claims in the recent past relating to some of our meters and other products. Our accruals for warranty provisions totaled $34.8 million as of

December 31, 2009 and $27.7 million as of June 30, 2010. Widespread product failures, or perceptions of such failures, may damage our market reputation, reduce our market share and cause our sales to decline. Our reputation and that of our industry may also suffer if a large or high-profile rollout, whether involving our products and solutions or those of a competitor, is impacted by serious technical or other failures.

Product defects may result in substantial replacement costs and in litigation, which could be costly and time consuming to defend and may have a material adverse effect on our results of operations, cash flows and financial condition.

If any of our products proves to be defective, we may be required to effect or participate in a recall involving those products. We may also be the subject of lawsuits seeking damages for products alleged to be defective, including in particular product liability claims in the event that the use of our products is alleged to have resulted in injury, a risk of injury or other adverse effects. Litigation, including litigation resulting from product liability claims, can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome of the litigation with respect to those claims. While we currently maintain product liability insurance coverage, such insurance may not provide adequate coverage against potential claims. A successful claim brought against us with respect to a defective product in excess of available insurance coverage, if our coverage is applicable, or a requirement to participate in a major product recall, could have a material adverse effect on our reputation, results of operations, cash flows and financial condition.

We may be unable to adequately protect our intellectual property, which may result in the appropriation by our competitors of, or the loss of our right to use, the intellectual property.

Our intellectual property rights include patents, copyrights, trade secrets, trademarks, utility models and designs covering a range of technologies we use in our business. We believe that our intellectual property is a valuable asset that protects our investment in technology and software, and supports our licensing efforts with third parties. We depend in part on our ability to obtain and maintain ownership of and rights of use in the intellectual property related to our product and solution portfolio.

However, some of the countries in which we operate, such as China, offer less effective copyright and trade secret protection than is available in Europe or the United States. In jurisdictions where effective copyright and trade secret protection is unavailable or limited, our trade secrets may be vulnerable to disclosure or misappropriation by employees, strategic partners, suppliers, customers and other persons. Patents may not be granted on our currently pending or future applications or may not be of sufficient scope or strength to provide us with meaningful protection or commercial advantage. Policing unauthorized use of our intellectual property is difficult and expensive, and we may not be able, or may lack the resources, to prevent misappropriation of our intellectual property, particularly in countries where the laws may not protect such rights as fully as do the laws of the United States.

Competitors or others may infringe our intellectual property rights or successfully avoid them through design innovation. To combat infringement or unauthorized use, we may need to litigate, which can be expensive and time-consuming. In addition, a court may decide in an infringement proceeding that an intellectual property right of ours is not valid or is unenforceable, or may refuse to enjoin the other party from using the technology or other intellectual property right at issue on the grounds that it is non-infringing or the legal requirements for an injunction have not been met. We may also be the subject of assertions that we infringe on the intellectual property rights of others. The loss or unavailability, or threat of loss, of our intellectual property or the economic exploitation of it could have a material adverse effect on our results of operations, cash flows and financial condition. The cost of defending against or settling intellectual property claims can be material, even when we believe that we own the associated intellectual property right and the existence or threat of such claims can damage our reputation and business.

Environmental laws and regulations may expose us to liability and increased costs.

As with other companies engaged in similar activities, we face inherent risks of environmental liability in our manufacturing activities. For example, our former Ipsen Group furnace business has been subject to a number of claims relating to alleged asbestos exposure. Pursuant to the agreement under which we sold our Ipsen Group furnace business, we are required to indemnify the purchaser against present or future asbestos claims noticed to us by August 15, 2015, up to a maximum out-of-pocket amount for us of €15 million. The agreement under which we sold our Ipsen Group furnace business further provides that the amount of the indemnity be reduced by payments made to the purchaser under the Ipsen Group’s current or pre-existing insurance policies. We have covered the contingent liability arising out of this out-of-pocket maximum with an indemnity from our former owner, E.ON Ruhrgas AG, in an equal amount. In addition, according to our due diligence conducted at the time of the disposition, Ipsen’s current and pre-existing insurance coverage is in excess of the €15 million amount. At the time of the disposition, 14 cases were open, and 62 new claims have been subsequently notified. Of the 76 total claims notified, 37 have been dismissed. Additionally, there are currently three asbestos cases (filed in 1999, 2002 and 2003 by individual plaintiffs) in which Elster American Meter Company has been named as an additional defendant. All three cases have been included in the New York County Asbestos Litigation, or NYCAL, program and are currently classified as inactive. While on the inactive docket, all discovery in these matters has been stayed until further notice.

Furthermore, our operations and properties are subject to U.S., European and other foreign environmental laws and regulations governing, among other things, the generation, storage, emission, discharge, transportation, treatment and disposal of hazardous materials and the clean up of contaminated properties. Many of these environmental laws and regulations impose a form of strict liability on the owners and operators of land for the presence of any hazardous waste materials on the land and require generators of waste to take remedial actions at off-site disposal locations when necessary. In the ordinary course of our business, we have used and may continue to use metals such as mercury and cadmium, solvents and other materials on-site that create waste, which may expose us to liability under these regulations. Any failure to comply could result in the imposition of significant fines, suspension of production, alteration of product processes, cessation of operations or other actions detrimental to our business.

These environmental laws and regulations have complicated requirements, which are often changed or modified and could become stricter in the future. As such, we may incur increased costs associated with future environmental compliance, with remediation obligations or with litigation if claims are made with respect to damages resulting from our operations (including those arising under the indemnity agreement relating to our former Ipsen Group furnace business). These and any future costs associated with environmental issues currently unknown to us could have a material adverse effect on our results of operations, cash flows and financial condition.

We may be exposed to tax-related risks in connection with the acquisition of Ruhrgas Industries GmbH, the related financing, our subsequent reorganizations and the corporate transactions we have undertaken in preparation of this offering.

The acquisition of our company in 2005, in particular the financing of the acquisition of Ruhrgas Industries GmbH and the numerous transactions we have undertaken in connection with the restructurings of our group following our acquisition and in the preparation for this offering, may expose us to the risk of additional tax liability. These transactions included the change of our legal form and our relocation from Luxembourg to Germany. The tax issues that might arise could relate, among other things, to the realization of significant capital gains and to potential forfeitures of tax losses and interest expenses carried forward. We obtained tax rulings from the Luxembourg tax authorities regarding the tax treatment of the acquisition of Ruhrgas Industries GmbH, the changes to our capital structure in December 2008 (as described in more detail in “Our History and Recent Corporate Transactions—Transactions Relating to Our Share Capital—Our Recapitalization in 2008”) and the change of our legal form to a SE and relocation to Germany. We did not obtain any tax rulings

in other countries or with respect to other issues. As the issues involved are complex and, in the case of the change in our legal form in connection with our move to Germany, novel, the relevant tax authorities may raise issues relating to the positions we have taken in connection with these transactions. If they ultimately disagree with our positions on these tax matters, we could be required to pay additional taxes in connection with these transactions. This could have a material adverse effect on our results of operations, cash flows and financial condition.

Tax rules limiting the deductibility of interest expenses could reduce our net income, especially in periods in which our net income is small or in which we incur a net loss.

We incur a substantial amount of interest on our Senior Facilities Agreement. In addition, some of our subsidiaries obtained inter-company financing and record interest expense on such financing. While interest expense is generally deductible for tax purposes, the tax laws of Germany and several other countries in which we have operations disallow the deduction of interest expenses for tax purposes either in full or in part.

Of particular relevance for us, in Germany, for fiscal years up to and including 2007, interest expenses on loans granted, secured or guaranteed by affiliated companies may not be deductible from taxable income due to the application of the German thin capitalization rules. Furthermore, in 2008 Germany adopted a limitation on the deductibility of interest expenses in excess of interest income, referred to as the “interest barrier” (Zinsschranke). Subject to qualifications and exceptions contained in the interest barrier rules, German law limits the deductibility of interest expenses in excess of interest income to an amount equal to 30% of the taxpayer’s earnings before interest, taxes, depreciation and amortization (EBITDA), as this earnings measure is defined in the tax law. Non-deductible interest expenses under the interest barrier rules may, subject to conditions, be carried forward to future tax years (at which time their deductibility continues to be limited by the interest barrier). Our German subsidiary Elster Holdings GmbH carried forward interest expenses of approximately $32.3 million as of December 31, 2009. In the future, we plan to manage our corporate group’s tax structure by creating a “fiscal unity” (Organschaft) that will include Elster Group SE and Elster Holdings GmbH and that treats the participating companies as if they were combined for tax purposes. If we were to create this fiscal unity, however, it will prevent us, among other things, from using these interest carryforwards while the fiscal unity exists. These amounts, as well as some interest expense we may incur in the future, may not be deductible to the extent that the interest barrier in Germany, or similar tax rules elsewhere, apply. In Germany, this risk would be higher in periods in which our earnings, on the EBITDA basis described above, are low or negative. The Company recorded valuation allowances for deferred tax assets relating to future interest deduction as of December 31, 2009 in Germany.

In the United Kingdom, the tax authorities have taken the position that the interest expense on bank loans and inter-company debt of our U.K. subsidiary are subject to deduction limitations due to U.K. tax rules limiting deductibility based on financial ratios, especially to the extent the terms of the indebtedness were not on an arms’ length basis. We are negotiating this issue with the U.K. tax authorities.

To the extent our interest expenses are not deductible, we may incur a reduction of our existing loss carryforwards and we may pay higher taxes. This could have a material adverse effect on our results of operations, cash flows and financial condition.

We are from time to time involved in disputes, regulatory actions and legal proceedings, the ultimate outcome of which is generally uncertain and which may have a material adverse effect on our results of operations, cash flows and financial condition.

In the ordinary course of our business, we are subject to risks relating to legal proceedings. The outcomes of legal proceedings, including regulatory actions, intellectual property disputes and employee lawsuits, are inherently unpredictable. If claims are asserted against us in the future or if we become subject to regulatory action or employee litigation, and if our opponents in these proceedings obtain judgments or awards against us or if we determine to settle any of these proceedings, we could be required to pay substantial damages, fines and related costs. These

payments may have a material adverse effect on our results of operations, cash flows and financial condition.

The nature of our industry, which includes large contracts entered into with public or publicly-regulated utilities in many jurisdictions, presents greater risks of non-compliance with some forms of regulation than is the case in many other industries. These risks are accentuated by the global nature of our operations. We are, in particular, exposed to the risk that our employees or agents could engage in anti-competitive behavior or seek to influence the awarding of contracts in other impermissible ways. We maintain a compliance infrastructure including “whistleblower” hotlines and employee and agent education and training programs. Under this compliance infrastructure, we investigate cases of potentially non-compliant behavior and, if necessary, take specific steps to prevent such non-compliant conduct in the future. However, our compliance infrastructure may be insufficient to deter all misconduct. Moreover, if we become aware of allegations of non-compliant conduct, we may have difficulty investigating such conduct and gathering evidence. For example, shortly after our acquisition, we became aware through an employee tip of a potential case involving anti-competitive behavior. Our investigation of the matter did not provide actionable evidence. However, should evidence become available in this case in the future, or if other such cases were to arise, and misconduct were determined to have occurred, we could be subject to fines and to litigation, which could have a material adverse effect on our results of operations, cash flows and financial condition.

If we fail to fully establish and maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

Effective internal controls are necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. We have devoted significant resources and time to enhance our internal controls over financial reporting in connection with our preparation to become a public company. Section 404 under the Sarbanes-Oxley Act of 2002 requires that our auditors attest to the effectiveness of our controls over financial reporting starting with our annual report for the year ending December 31, 2011. Beginning with this year, our compliance with the annual internal control report requirement for each fiscal year will depend on the effectiveness of our financial reporting and data systems and controls across our operating subsidiaries. Furthermore, an important part of our growth strategy has been, and will likely continue to be, the acquisition of complementary businesses, and we expect these systems and controls to become increasingly complex as our business grows and to the extent we integrate any future acquisitions. Likewise, the complexity of our transactions, systems and controls may become more difficult to manage. Additional complexity arises for our control environment from the fact that we operate in numerous countries around the world, in many of which our local staff is small. We cannot be certain that the measures we have taken will ensure that we design, implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, difficulties encountered in their implementation or operation, or difficulties in the assimilation of acquired businesses into our control system could harm our operating results or cause us to fail to meet our financial reporting obligations. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our ADSs and our future access to capital.

Risks Related to the Offering and Our Shareholder Structure

After the offering, share ownership will remain concentrated in the hands of the selling shareholders, who will continue to be able to exercise a direct or indirect controlling influence on us.

Upon completion of this offering, Rembrandt will hold an 80.2% equity interest in our company, and the Management KG, which is affiliated with Rembrandt, will hold a 5.5% equity interest in our company, in each case assuming that the underwriters’ over-allotment option is not exercised. Rembrandt has advised us that it does not anticipate owning a majority of our shares over the long term. While we are not aware of any specific plans for, or the potential timing of, future sales by

Rembrandt, and expect that any decision by Rembrandt to sell more of our shares would depend on a range of potential factors, including the performance of our company, the price of our ADSs and general market conditions, we expect that at some point Rembrandt will cease to be a major shareholder in us. However, for so long as Rembrandt continues to own a significant percentage of our shares, its equity shareholding and its affiliation with the Management KG give it the power to control actions that require shareholder approval, including the election of members of our Administrative Board. Three of the Administrative Board members will, following the offering, be directly affiliated with Rembrandt and Rembrandt’s affiliated entities and two other members are limited partners in the Management KG.

Even if Rembrandt ceases to own or control more than 50% of our shares, for so long as it continues to have a substantial equity interest in our company it may, as a practical matter, be in a position to control many or all actions that require shareholder approval. Under German law, for so long as Rembrandt holds more than 25% of our shares, it will be in a position to block shareholder action on any capital increase or decrease, merger, consolidation, spin-off, sale or other transfer of all or substantially all of our assets, a change in the corporate form or business purpose (Unternehmensgegenstand) of our company or the dissolution of our company.

Significant corporate actions, including the issuance of a material amount of equity securities, may require the consent of our shareholders. Rembrandt might oppose any action that would dilute its equity interest in our company, and may be unable or unwilling to participate in a future financing of our company. Rembrandt, as our majority shareholder, could block any such action and thereby materially harm our business or prospects. In addition, this concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive shareholders of an opportunity to receive a premium for their ADSs as part of a sale of our company and might ultimately affect the market price of our ADSs.

We are controlled by Rembrandt, whose interests may not be aligned with yours.

Although our company is an independent entity, Rembrandt is our majority shareholder. Rembrandt or a person affiliated with Rembrandt, including funds advised by CVC Capital Partners, a private equity group, could in the future acquire and hold interests in businesses that compete directly or indirectly with us.

Rembrandt may from time to time also make strategic decisions that it believes are in the best interests of its business as a whole, including our company. These decisions may be different from the decisions that we would have made on our own. Rembrandt’s decisions with respect to us or our business may be resolved in ways that favor Rembrandt, which may not coincide with the interests of our other shareholders. We may not be able to resolve any potential conflicts and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated party.

As an example, Rembrandt may decide to sell all or a portion of the shares that it holds in us. Should it do so in capital markets transactions, the influx of additional shares into the public market could exert downward pressure on our share price. Should Rembrandt sell shares it holds to a third party, including to one of our competitors, that party could acquire substantial influence over our business and our affairs. Such a sale could be contrary to the interests of certain of our stakeholders, including our employees or our public shareholders.

Risks Related to the Securities Markets and Ownership of Shares and ADSs

Future sales of our ADSs by Rembrandt or the Management KG, the anticipation of future sales of our ADSs in the public market or speculation to this effect may adversely affect the trading price of our ADSs.

Upon completion of this offering, Rembrandt will hold an 80.2% equity interest in our company, and the Management KG will hold a 5.5% equity interest in our company, in each case assuming that the underwriters’ over-allotment option is not exercised. Rembrandt and the Management KG have agreed not to sell or transfer any of the remaining shares they hold without the consent of each of

the Joint Bookrunners until 180 days after the date of our initial public offerings. However, Rembrandt has advised us that it does not anticipate owning a majority of our shares over the long term. Sales of a substantial number of the shares of our company by Rembrandt or the Management KG, either in the public market or in private transactions, or the perception that such sales may occur, could adversely affect the market price of the shares and ADSs and our ability to raise capital through subsequent offerings of equity or equity-related securities.

There has been no prior market for our ADSs and an active and liquid market for our securities may fail to develop, which could adversely affect the market price of our ADSs.

Our ADSs are a new issue of securities. Prior to the offering described in this prospectus, there has not been a public market for our ADSs. Although our ADSs will trade on the New York Stock Exchange, we cannot assure you that an active public market for our securities will develop or be sustained after this offering. If an active market for our ADSs does not develop after the offering, the market price and liquidity of our ADSs may be adversely affected.

The price of our ADSs may fluctuate significantly and our securities may trade below the initial public offering price, which may make it difficult for you to sell our ADSs when you want or at prices you find attractive.

The initial public offering price of our ADSs was determined by negotiations between Rembrandt, the Management KG, us and representatives of the underwriters, based on numerous factors that we discuss under “Underwriting.” This price may not be indicative of the market price of our securities after this offering. We cannot assure you that you will be able to resell your ADSs at or above the initial public offering price or our net asset value. Among the factors that could affect the price of our ADSs are the risk factors described in this section and other factors, including:


	•	the volatility of the prices for our products and therefore of our revenues;

	•	changes in demand for, and supply of, our products;

	•	changes in market valuations of companies in our industry in general, and metering companies in particular;

	•	variations in our operating results (actual or anticipated);

	•	technological changes that hurt our competitive position;

	•	manifestations of uninsured risks;

	•	unfavorable developments in litigation, governmental investigations or administrative proceedings in which we may be involved;

	•	developments in the regulatory landscape in countries in which we operate;

	•	strategic moves by us or our competitors including, for example, acquisitions, alliances or restructurings;

	•	failure or anticipated failure of our quarterly or annual operating results to meet market expectations;

	•	changes in expectations as to our future financial performance, including financial estimates by securities analysts;

	•	reviews of the long-term values of our assets, which could lead to impairment charges that negatively impact our earnings;

	•	release/expiration of the lock-up agreement or other restrictions on transfer of the ADSs;

	•	sales or anticipated sales of additional ADSs; and

	•	general market conditions.

Stock markets have experienced extreme volatility in recent years that has often been unrelated to the operating performance of a particular company or sector. These broad market fluctuations may adversely affect the trading price of our securities.

Exchange rate fluctuations may reduce the amount of U.S. dollars you receive in respect of any dividends or other distributions we may pay in the future in connection with your ADSs.

Although our consolidated financial statements are denominated in U.S. dollars, under German law, the determination of whether we have been sufficiently profitable to pay dividends is made on the basis of the unconsolidated annual financial statements of Elster Group SE prepared under the German commercial code in accordance with accounting principles generally accepted in Germany, which we refer to as German GAAP. Exchange rate fluctuations may affect the amount of euro that Elster Group SE is able to distribute, and the amount in U.S. dollars that our shareholders receive upon the payment of cash dividends or other distributions Elster Group SE declares and pays in euro, if any. Such fluctuations could adversely affect the value of our ADSs, and, in turn, the U.S. dollar proceeds that holders receive from the sale of our ADSs.

We have no present intention to pay dividends on our ordinary shares in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of our ADSs appreciates.

We have no present intention to pay dividends on our ordinary shares in the foreseeable future. Any recommendation by our Administrative Board to pay dividends will depend on many factors, including our financial condition, results of operations, legal requirements and other factors. In addition, our Senior Facilities Agreement limits our ability to pay dividends or make other distributions on our shares and we may also become subject to debt instruments or other agreements that limit our ability to pay dividends. Accordingly, if the price of our ADSs falls in the foreseeable future, you will incur a loss on your investment, without the likelihood that this loss will be offset in part or at all by potential future cash dividends.

You may not be able to exercise your right to vote the ordinary shares underlying your ADSs.

Holders of ADSs may exercise voting rights with respect to the ordinary shares represented by our ADSs only in accordance with the provisions of the deposit agreement. The deposit agreement provides that, upon receipt of notice of any meeting of holders of our ordinary shares, the depositary will, as soon as practicable thereafter, fix a record date for the determination of ADS holders who shall be entitled to give instructions for the exercise of voting rights. Upon timely receipt of notice from us, the depositary shall distribute to the holders as of the record date (i) the notice of the meeting or solicitation of consent or proxy sent by us, (ii) a statement that such holder will be entitled to give the depositary instructions and a statement that such holder may be deemed, if the depositary has appointed a proxy bank as set forth in the deposit agreement, to have instructed the depositary to give a proxy to the proxy bank to vote the ordinary shares underlying the ADSs in accordance with the recommendations of the proxy bank and (iii) a statement as to the manner in which instructions may be given by the holders.

You may instruct the depositary of your ADSs to vote the ordinary shares underlying your ADSs, but only if we ask the depositary to ask for your instructions. Otherwise, you will not be able to exercise your right to vote, unless you withdraw our ordinary shares underlying the ADSs you hold. However, you may not know about the meeting far enough in advance to withdraw those ordinary shares. If we ask for your instructions, the depositary, upon timely notice from us, will notify you of the upcoming vote and arrange to deliver our voting materials to you. We cannot guarantee you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ordinary shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote, and there may be nothing you can do if the ordinary shares underlying your ADSs are not voted as you requested.

Under the deposit agreement for the ADSs, the depositary may choose to appoint a proxy bank. In this event, the depositary will receive a proxy which will be given to the proxy bank to vote our ordinary shares underlying your ADSs at shareholders’ meetings if you do not vote in a timely fashion and in the manner specified by the depositary.

The effect of this proxy is that you cannot prevent our ordinary shares representing your ADSs from being voted, and it may make it more difficult for shareholders to influence the management of our company, which could adversely affect your interests. Holders of our ordinary shares are not subject to this proxy.

You may not receive distributions on our ordinary shares represented by our ADSs or any value for them if it is illegal or impractical to make them available to holders of ADSs.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. We have no obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on our ordinary shares or any value from them if it is illegal or impractical for us to make them available to you. These restrictions may have a material adverse effect on the value of your ADSs.

You may be subject to limitations on the transfer of your ADSs.

Your ADSs, which may be evidenced by ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary think it is advisable to do so because of any requirement of law, government or governmental body, or under any provision of the deposit agreement, or for any other reason.

As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC than a U.S. company. This may limit the information available to holders of our ADSs.

We are a “foreign private issuer,” as defined in the SEC’s rules and regulations and, consequently, we are not subject to all of the disclosure requirements applicable to companies organized within the United States. For example, we are exempt from certain rules under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act. In addition, our officers and directors are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, while we expect to submit quarterly interim consolidated financial data to the SEC under cover of the SEC’s Form 6-K, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies. Accordingly, there may be less information concerning our company publicly available than there is for U.S. public companies.

As a foreign private issuer, we are not subject to certain NYSE corporate governance rules applicable to U.S. listed companies.

We are relying on a provision in the NYSE Listed Company Manual that allows us to follow German corporate law and the German Corporate Governance Code with regard to certain aspects of corporate governance. This allows us to follow certain corporate governance practices that differ in significant respects from the corporate governance requirements applicable to U.S. companies listed on the NYSE.

For example, we are exempt from NYSE regulations that require a listed U.S. company, among other things, to:


	•	establish a nominating, compensation and audit committee composed entirely of independent directors;

	•	adopt and disclose a code of business conduct and ethics for directors, officers and employees; and

	•	promptly disclose any waivers of the code for directors or executive officers that should address certain specified items.

In accordance with our NYSE listing, our Audit Committee is required to comply with the provisions of Section 301 of the Sarbanes-Oxley Act of 2002 and Rule 10A-3 of the Exchange Act, both of which are also applicable to NYSE-listed U.S. companies. Because we are a foreign private issuer, however, our Audit Committee is not subject to additional NYSE requirements applicable to listed U.S. companies, including:


	•	an affirmative determination that all members of the Audit Committee are “independent,” using more stringent criteria than those applicable to us as a foreign private issuer;

	•	the adoption of a written charter specifying, among other things, the audit committee’s purpose and including an annual performance evaluation; and

	•	the review of an auditor’s report describing internal quality-control issues and procedures and all relationships between the auditor and us.

Furthermore, the NYSE’s Listed Company Manual requires listed U.S. companies to, among other things, seek shareholder approval for the implementation of certain equity compensation plans and issuances of common stock. Under applicable German laws, shareholder approval is required for all amendments to our Articles of Association, for capital increases and decreases (including the creation of authorizations for management to issue shares in the future), for the exclusion of preemptive rights in connection with capital increases, for the issue of convertible bonds or bonds with warrants attached, for certain corporate measures (including the execution of inter-company agreements (Unternehmensverträge) and the merger with another company or other corporate transformations), for authorization to purchase our own shares (subject to certain statutory exceptions), and for other essential actions, such as the transfer of all or virtually all of our assets. However, we might not be required to seek shareholder approval for issuances of shares in some circumstances in which a listed U.S. company would be required to do so under the NYSE rules, such as an acquisition of another company in exchange for shares representing more than 20% of our shareholders’ voting power, if we use previously authorized capital for the acquisition.

U.S. investors may have difficulty enforcing civil liabilities against us, the members of our Administrative Board and senior management and the experts named in this prospectus.

We are a European public limited liability company (Societas Europaea, or SE), and our registered offices and most of our assets are located outside of the United States. In addition, most of the members of our Administrative Board, our senior management and the experts named in this prospectus are residents of Germany and other jurisdictions outside of the United States. As a result, it may not be possible for you to effect service of process within the United States upon these individuals or upon us or to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. securities laws against these individuals or us in the United States. In particular, judgments awarding punitive damages are generally not enforceable in Germany. In addition, actions brought in a German court against us or the members of our Administrative Board or our senior management to enforce liabilities based on the U.S. federal securities laws may be subject to certain restrictions; in particular, German courts generally do not award punitive damages. Litigation in Germany is also subject to rules of procedure that differ from the U.S. rules, including with respect to the taking and admissibility of evidence, the conduct of the proceedings and the allocation of costs. Proceedings in Germany would have to be conducted in the German language, and all documents

submitted to the court would, in principle, have to be translated into German. For these reasons, it may be difficult for a U.S. investor to bring an original action in a German court predicated upon the civil liability provisions of the U.S. federal securities laws against us, the members of our Administrative Board and senior management and the experts named in this prospectus. In addition, even if a judgment against our company, the non-U.S. members of our Administrative Board, senior management or the experts named in this prospectus based on the civil liability provisions of the U.S. federal securities laws is obtained, a U.S. investor may not be able to enforce it in U.S. or German courts.

The rights of shareholders in companies subject to German corporate law differ in material respects from the rights of shareholders of corporations incorporated in the United States.

Our company is a European public limited liability company incorporated in Germany and organized under the laws of Germany and the European Union. We are treated to a large extent like a German stock corporation (Aktiengesellschaft) and the rights of our shareholders are governed by German law, which differs in many respects from the laws governing corporations incorporated in the United States. For example, individual shareholders in German companies do not have standing to initiate a shareholder derivative action, either in Germany or elsewhere, including the United States, unless they meet certain thresholds set forth under German corporate law. Therefore, our public shareholders may have more difficulty protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Our consolidated financial statements are prepared in accordance with U.S. GAAP and expressed in U.S. dollars. In this prospectus, references to “dollars,” “$” or “USD” are to U.S. dollars. References to “euro,” “€” or “EUR” are to euro, the single currency of the participating member states in the Third Stage of the European Economic and Monetary Union, or EMU, of the Treaty Establishing the European Community, as amended from time to time. References to “pounds sterling,” “£” or “GBP” are to the British pound sterling. The noon buying rate of the Federal Reserve Bank of New York for the euro on September 24, 2010 was €1.00 = $1.3476. Unless otherwise specified, we have used this rate for translations related to this offering that are calculated in this prospectus.

We have prepared our consolidated financial statements in accordance with U.S. GAAP and in U.S. dollars beginning with the year ended December 31, 2007. We have not prepared financial information in accordance with U.S. GAAP for periods prior to January 1, 2007 for the following reasons:


	•	For the year ended December 31, 2006 and for the period from its formation on May 20, 2005 to December 31, 2005, our parent company, Rembrandt Holdings S.A., prepared its consolidated financial statements in accordance with International Financial Reporting Standards, as adopted by the European Union, which we refer to as IFRS, and reported in euro. We were not required to prepare a complete set of consolidated financial statements for these periods and did not voluntarily prepare consolidated financial statements in accordance with IFRS or any other home-country GAAP for either of the years ended December 31, 2006 or December 31, 2005. However, we reported limited financial information in accordance with IFRS to Rembrandt for its consolidation purposes. We do not have the necessary data to convert the available financial information into consolidated financial information prepared in accordance with U.S. GAAP and reported in U.S. dollars for these periods without incurring unreasonable cost and effort, and we would be required to make assumptions and estimates to do so that would affect the meaningfulness of those financial statements; and

	•	Our company was originally formed in October 2004 but did not start operations until the acquisition of Ruhrgas Industries Group in September 2005. For that reason, the consolidated financial information we provided to Rembrandt for 2005 only includes information about operations for the period from the date of our acquisition in September 2005 through the end of the year. Prior to its acquisition by Rembrandt, our businesses consisted of individual components of a different corporate group; the various entities that were acquired prepared financial statements only according to their respective statutory requirements and some did not prepare financial statements at all.

We therefore have not prepared and do not present selected consolidated financial data in accordance with U.S. GAAP for 2006 or any period within 2005 because of the unreasonable cost and effort involved with properly preparing, collecting, compiling and verifying all the financial information needed to prepare consolidated financial statements on a basis comparable to the financial statements we include in this prospectus.

For the reasons described above, we also have not prepared and do not present selected consolidated financial data in accordance with IFRS or other home-country GAAP for the years 2009, 2008, 2007, 2006 or any period within 2005 because such information is not readily available for the years 2009, 2006 and 2005 and we would incur additional cost and effort involved with properly preparing, collecting, compiling and verifying all the financial information needed to prepare consolidated financial information on a comparable basis that did not exist in such form at that time.

Likewise, we do not present selected financial data for 2006 and 2005 in accordance with U.S. GAAP or any selected financial data in accordance with IFRS for any period. Even if we were able to prepare these financial statements, we do not believe they would provide useful information for investors because of the many extensive changes in our Group that have taken place since these years.

Our financial year ends on December 31 of each year. References to any financial year refer to the year ended December 31 of the calendar year specified.

Figures presented in tabular format may not add up to the total or percentages presented due to rounding.

We also present financial information that we calculate by translating the results from our entities that have functional currencies other than the U.S. dollar into dollars using the exchange rates of the prior year. We refer to this presentation as “constant currency.” The most important of these other functional currencies is the euro and to a lesser extent the pound sterling. For the purposes of these constant currency presentations, we have used the average exchange rates of euros for dollars, which were €1 = $1.3216 in the first six months of 2010, €1 = $1.3330 in the first six months of 2009, €1 = $1.3902 in 2009, €1 = $1.4633 in 2008 and €1 = $1.3689 in 2007, and the average exchange rates of pounds sterling for dollars, which were £1 = $1.5326 in the first six months of 2010, £1 = $1.4928 in the first six months of 2009, £1 = $1.5603 in 2009, £1 = $1.8315 in 2008 and £1 = $2.0016 in 2007.

In addition, this document contains inactive textual addresses of Internet websites operated by us and third parties. Reference to such websites is made for informational purposes only, and information found at such websites is not incorporated by reference into this document.

SPECIAL NOTE REGARDING MARKET DATA

There are a number of studies that address either specific market segments, or regional markets, within our worldwide industry, most notably the 2009 Multi-Utility Meter Report prepared by ABS Energy Research, which focuses on the worldwide metering industry (and which we refer to as the ABS Report), and The Scott Report: AMR Deployments in North America (second quarter 2010), which mainly focuses on North America and contains some information about Smart Grid offerings in the North American market (and which we refer to as the Scott Report). The ABS Report and the Scott Report each provide data relating to parts of our industry and participants in it. However, given the rapid changes in our industry in its development towards the Smart Grid, no industry research that is generally available has covered some of the trends we view as key to understanding our worldwide industry and our place in it, such as expectations of the breakdown of manual read, AMR and AMI meters in different regions and for gas, electricity and water. For example, while the ABS Report covers meters, it contains no breakdowns among manual read, AMR and AMI meters, and the Scott Report does not make forecasts regarding market developments in AMR and AMI meters.

To assist us in formulating our business plan, which is multi-utility and global in nature, and in anticipation of this offering, we believe that it is important that we maintain as broad a view on industry developments as possible. We have over time retained several consultants to prepare general industry and market studies for us, including individual analyses of the gas, electricity and water metering and Smart Grid markets. L.E.K. Consulting GmbH, or L.E.K., prepared this type of report for us in 2009, and L.E.K. has updated parts of this report relating to worldwide market share data and the North American and some European markets at our request in 2010. We make use of the data contained in the updated report (which we refer to as the L.E.K. Report) to assist us in giving you information on the nature of our industry and our position in it.

We retained L.E.K. to assist us in developing a view on how to prioritize and address the Smart Grid opportunities that have presented themselves globally, and asked L.E.K. to conduct a comprehensive study, across 19 countries we and L.E.K. view as representative of the overall market. These countries are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Italy, Mexico, The Netherlands, New Zealand, Russia, Saudi Arabia, South Africa, Spain, the United Arab Emirates, the United Kingdom and the United States. In connection with L.E.K.’s preparation of their report, we furnished certain information about our company and the competitive environment to L.E.K. Then, L.E.K. conducted extensive research on its own in preparation of the report, including study of the market reports prepared by other parties, the conducting of more than 400 interviews with market participants in North America, Europe, Asia Pacific and other regions, and study of a broad range of secondary sources including other market reports, association and trade press, other databases and other sources.

Although we retained L.E.K. and provided L.E.K. some information to assist it in preparing its reports, we believe that L.E.K. sought to present a report similar to one that might have been prepared by an organization knowledgeable in the industry but not retained by a market participant. We base this belief on the work L.E.K. performed as described above, the nature of our working relationship with L.E.K. and on their statements concerning the report they produced. L.E.K. offers its services as a consulting company focused on market research and market and corporate strategy. Our work with L.E.K. was characterized by what we believe to have been a thorough review and verification by L.E.K. of information we provided to it. In its materials publicly offering its report to third parties, L.E.K. states that while it was commissioned by a client to conduct the study, it acted with the brief of providing an objective view of the industry and its likely development.

Due to the evolving nature of our industry and the relative paucity of multi-utility, global competitors, we believe that it is difficult for any market participant, including us, to provide precise data on the market or our industry. However, we believe that the market and industry data we present in this prospectus provide accurate estimates of the market and our place in it.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including particularly the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Industry” and “Our Company,” contains forward-looking statements. These forward-looking statements include statements regarding our financial position, our expectations concerning future operations, margins, profitability, liquidity and capital resources, our business strategy and other plans and objectives for future operations, and all other statements that are not historical facts. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “thinks,” “estimates,” “seeks,” “predicts,” “views,” “potential” and similar expressions.

Examples of forward-looking statements include statements concerning:


	•	our prospective market shares for products and services and by region;

	•	the expected penetration rates of Smart Grid technologies in existing and new markets;

	•	plans, objectives and expectations relating to future operations and related revenue generation and expenditures;

	•	the impact of our cost-saving measures and exchange rate fluctuations; and

	•	impacts of existing and potential legislative and regulatory initiatives.

Although we believe that these statements are based on reasonable assumptions, they are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected, including, but not limited to:


	•	negative worldwide economic conditions and ongoing instability and volatility in the worldwide financial markets, including our ability to raise capital to refinance our indebtedness;

	•	the extent of the revenues we derive from sales to the utility industry;

	•	possible changes in current and proposed legislation, regulations and governmental policies, including with respect to radio frequency licensing and certification requirements;

	•	the timing and availability to our customers of government stimulus funding;

	•	volatility in the prices for, and availability of, components, raw materials and energy used in our business;

	•	our ability to manage our outsourcing arrangements;

	•	the economic, political and other risks and uncertainties associated with our global activities, and the business our subsidiaries have undertaken, and may continue to undertake, in countries subject to EU or U.S. sanctions and embargoes;

	•	the dependency of our business on our ability to develop new products and technologies and the possible failure or delay in successful new product development;

	•	the possibility that our products would fail to achieve or lose market acceptance or fail to perform to specification, the increasing competition we face, particularly from competitors that are well positioned in our areas of strategic focus, and our ability to win regional, national and international contracts from existing or new customers;

	•	our ability to attract and retain employees with skills in our areas of focus, including in particular our skilled personnel who are critical to the success of our business;

	•	fluctuations of our operating results due to the effect of exchange rates or other factors;

	•	risks relating to the offering and our shareholder structure, including the concentration of share ownership in the hands of existing shareholders, who will continue to be able to exercise


		controlling influence on us and whose interests may not be aligned with those of other shareholders; and


	•	the other factors listed under “Risk Factors” and elsewhere in this prospectus.

Those factors, among others, could cause our actual results and performance to differ materially from the results and performance projected in, or implied by, the forward-looking statements. As you read and consider this prospectus, you should understand that the forward-looking statements are not guarantees of performance or results.

These factors expressly qualify all subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. New risks and uncertainties arise from time to time, and we cannot predict those events or how they may affect us. Except as required by law, we do not have any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.

In addition, this prospectus contains information concerning our industry generally, and the Smart Grid market in particular, that is forward-looking in nature and is based on a variety of assumptions regarding the ways in which the metering and Smart Grid markets will develop. These assumptions have to some extent been derived from market research and industry reports referred to in this prospectus. Some data are also based on our good faith estimates, derived from our review of internal surveys and the external sources we describe above.

USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $152.1 million, after deducting the underwriting discount and the estimated offering expenses payable by us.

We will not receive any of the proceeds from sales of ADSs by Rembrandt or the Management KG or from any exercise of the underwriters’ over-allotment option to purchase additional ADSs from Rembrandt.

We intend to use the net proceeds we receive from this offering for the following purposes:


	•	We intend to use $143.9 million to pay outstanding debt under our Senior Facilities Agreement;

	•	We intend to use approximately $6.7 million to repay a loan made to us by the Management KG of €3.9 million ($5.3 million) in principal amount plus accrued interest in an amount expected to be approximately €1.0 million ($1.4 million). This loan matures on December 31, 2025 and accrues interest at an annual rate of 6.8%; and

	•	We expect to retain the remaining $1.5 million of the net proceeds in liquid assets over the medium term to support our liquidity position.

The following table shows the tranches we have drawn under our Senior Facilities Agreement that we intend to repay using proceeds from this offering.


	Amount in							Original		Current
	Contract		Amount in			Amount in		Maturity		Interest
Tranche	Currency		Euro			Dollars (1)		Date		Rate (2)
	(in millions)		(in millions)			(in millions)

Tranche A GBP		£6.0		€7.0	(3)		$9.5		Sept. 30, 2012		2.08	%
Tranche B EUR	€	16.2		€16.2			$22.1		Sept. 30, 2013		2.52	%
Tranche B USD	$	22.1		€16.2	(1)		$22.1		Sept. 30, 2013		2.26	%
Tranche B1 EUR	€	16.9		€16.9			$23.0		Sept. 30, 2013		2.52	%
Tranche C EUR	€	16.2		€16.2			$22.1		Sept. 30, 2014		3.02	%
Tranche C USD	$	22.1		€16.2	(1)		$22.1		Sept. 30, 2014		2.76	%
Tranche C1 EUR	€	16.9		€16.9			$23.0		Sept. 30, 2014		3.02	%

Total				€105.7			$143.9


(1)		Translated between euro to dollars at a rate of €1.00=$1.3611, the European Central Bank foreign exchange reference rate of euros for dollars on September 29, 2010.

(2)		As of September 30, 2010.

(3)		Translated from pounds sterling to euro at a rate of €1.00 = £0.8618, the European Central Bank foreign exchange reference rate of euros for pounds sterling on September 29, 2010.

For further information on the Senior Facilities Agreement and its requirements relating to prepayments and our leverage ratio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Senior Facilities Agreement.”

Despite our international operations, we will not direct any of the proceeds from the sale of any ADSs to fund any operations in, finance any investments or activities in, or make payments to any country, entity or person with whom a U.S. person is prohibited from dealing under U.S. economic sanctions laws.

DIVIDEND POLICY

We have not declared any cash dividends on our ordinary shares and have no present intention to pay dividends in the foreseeable future. Any recommendation by our Administrative Board to pay dividends will depend on many factors, including our financial condition, results of operations, legal requirements and other factors. In addition, our Senior Facilities Agreement currently limits the ability of our subsidiaries that are borrowers under the Senior Facilities Agreement to extend loans, pay dividends or make distributions to us. These subsidiaries are only permitted to pay dividends out of 50% of accumulated and unspent excess cash flow (as defined in the agreement) after certain mandatory loan prepayments, and only to the extent that total leverage ratio (calculated pursuant to the agreement) following such payment would not be greater than 2.5 to 1. These subsidiaries accounted for almost all our equity as of June 30, 2010. As a result, our company is in practice currently unable to pay dividends due to these restrictions.

In preparation for this offering, we and our lenders have amended the Senior Facilities Agreement. Under this amendment, the conditions relating to the payment of dividends have been modified, and the restrictions relating to the payment of dividends or extension of loans or advances to us have been removed. Consequently, starting in 2011, the Senior Facilities Agreement will permit us to pay dividends for the preceding year in an amount of up to 50% of our unconsolidated net income for that preceding year, determined in accordance with German GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Senior Facilities Agreement.” We may also become subject to debt instruments or other agreements that limit our ability to pay dividends.

All of the shares represented by the ADSs offered by this prospectus will have the same dividend rights as all of our other outstanding shares. Any distribution of dividends proposed by our Administrative Board requires the approval of our shareholders in a shareholders’ general meeting. See “Articles of Association,” which explains in more detail the procedures we must follow and the German law provisions that determine whether we are entitled to declare a dividend.

For information regarding the German withholding tax applicable to dividends and related United States refund procedures, see “Taxation—German Taxation of ADSs.”

CAPITALIZATION

The following table sets forth, as of June 30, 2010:


	•	our actual consolidated capitalization; and

	•	our consolidated capitalization, as adjusted to reflect the sale of the ADSs in this offering and the application of a portion of the net proceeds to reduce debt as described under “Use of Proceeds.” We make a further adjustment to show the effect of the replacement of the preferred shares Rembrandt, our principal shareholder, has previously held with ordinary shares. For further information on this replacement, see “Our History and Recent Corporate Transactions—Capital Measures in Connection with the Offering.”


	As of June 30, 2010
	Actual		As Adjusted
	(in $ millions)

Short term debt (1)(2)		25.9		16.4

Long-term debt (1)(2)		893.8		759.4
Shareholder loan		6.0		0.0
Shareholders’ equity:
Preferred share capital (3)		448.6		0.0
Ordinary share capital (3)		20.0		36.2
Additional paid-in capital		71.5		663.0
Accumulated deficit		-131.1		-131.1
Accumulated other comprehensive income		9.9		9.9

Total equity attributable to Elster Group SE		418.9		578.0
Noncontrolling interests		7.9		7.9

Total equity		426.7		585.9

Total capitalization		1,352.4		1,361.7


(1)		No third party has guaranteed any of our debt.

(2)		None of our short term debt and $57.2 million of our long-term debt are related to our revolving credit facility under our Senior Facilities Agreement, which is secured.

(3)		We had 16,320,750 ordinary shares authorized, issued and outstanding as of June 30, 2010 and 308,931,920 preferred shares authorized, issued and outstanding as of June 30, 2010. As adjusted for the offering and the replacement of the preferred shares, we will have 28,220,041 ordinary shares authorized and outstanding, and no preferred shares authorized and outstanding. See “Our History and Recent Corporate Transactions” for more information.

DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and the net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ADS is substantially in excess of the net tangible book value per ADS attributable to our existing shareholders for our ordinary shares that will be outstanding immediately prior to the closing of this offering. We calculate net tangible book value per ordinary share by dividing the net tangible book value (total assets less intangible assets, total liabilities and noncontrolling interests) by the number of outstanding ordinary shares. Each ADS represents one-fourth of an ordinary share. For purposes of illustration, the following discussion assumes that all of our outstanding shares both before and after the offering are in the form of ADSs, each representing one-fourth of an ordinary share. Dilution is determined by subtracting net tangible book value per ADS from the initial public offering price per ADS.

Our net tangible book value as of June 30, 2010 was a negative $697.1 million, or negative $28.05 per ordinary share (equivalent to negative $7.01 per ADS). After giving effect to the sale of 16,200,000 ADS, which represent 4,050,000 of our ordinary shares, in this offering, less the underwriting discount and the estimated offering expenses payable by us and without taking into account any other changes in our net tangible book value after June 30, 2010, our pro forma as adjusted net tangible book value at June 30, 2010 would have been negative $538.0 million, or negative $19.06 per ordinary share (negative $4.77 per ADS). This represents an immediate increase in net tangible book value of $8.99 per ordinary share ($2.25 per ADS) to the existing shareholders and an immediate dilution in net tangible book value of negative $71.06 per ordinary share (negative $17.77 per ADS) to investors purchasing our ADSs in this offering. The following table illustrates this dilution per ordinary share and per ADS:


	Per Share			Per ADS
	(in $)

Initial public offering price		52.00			13.00
Net tangible book value before the change attributable to new investors		(28.05	)		(7.01	)
Increase in net tangible book value attributable to new investors		8.99			2.25
Pro forma net tangible book value after this offering		(19.06	)		(4.77	)
Dilution to new investors		(71.06	)		(17.77	)

The following table summarizes, on a pro forma basis to give effect to the replacement of preferred shares and the offering as of June 30, 2010, the number of our ADSs purchased during the past five years, the total consideration paid for those ADSs and the average price per ADS paid (before deducting the underwriting discount and our estimated offering expenses):


	ADSs Purchased During Past Five Years
					Total Consideration		Average Price per
	Number		Percent		in $ Millions		ADS in $

Existing Shareholders (1)		34,135,624		30.2		443.8		13.00
New Shareholders		16,200,000		14.4		210.6		13.00

Total		50,335,624		44.6		654.4		13.00


(1)		Our existing shareholders acquired the equivalent of 62,544,540 ADSs more than five years ago, representing 55.4% of our total number of ADSs on a pro forma basis as indicated above. They acquired these ADSs at an average price per ADS of $0.03.

The tables and discussions above assume that the underwriters’ over-allotment option has not been exercised.

SELECTED FINANCIAL AND OTHER DATA

The following table presents selected consolidated financial and other data for the periods indicated. We derived the financial data as of and for the years ended December 31, 2009, 2008 and 2007 from our consolidated financial statements for these years. Our consolidated financial statements, which we have prepared in accordance with U.S. GAAP, have been audited and are included elsewhere in this prospectus. We derived the financial data as of and for the six months ended June 30, 2010 and 2009 from our unaudited interim consolidated financial statements for those periods, which are included elsewhere in this prospectus.

We have not provided selected financial data for 2006 and 2005 because to do so would have entailed unreasonable cost and effort. We do not believe that selected financial data for those years would have provided you with useful information. For a further discussion of our financial data for those years, see “Presentation of Financial and Other Information.”


							As of and for the Six Months Ended June 30,
	As of and for the Year Ended December 31,						(unaudited)
	2009		2008		2007		2010		2009
	(in $ millions except for per share and share data)

Selected Consolidated Statement of Operations Data:
Revenues		1,695.1		1,904.5		1,735.6		831.3		837.2
Cost of revenues		1,191.3		1,306.3		1,207.6		574.6		585.4

Gross profit		503.8		598.2		528.0		256.7		251.8
Selling expenses		159.4		183.4		166.5		80.8		76.9
General and administrative expenses		137.0		246.5		183.9		69.9		68.4
Research and development expenses		78.4		70.7		60.3		41.4		36.7
Other operating income (expense), net		14.8		-39.5		-2.9		-0.4		21.2

Operating income		143.8		58.2		114.4		64.3		90.9
Interest expense, net		55.4		117.3		126.9		38.4		25.3
Other income, net		3.3		2.9		2.9		1.7		1.4

Total non-operating expenses		52.1		114.4		124.0		36.6		23.9
Income (loss) from continuing operations before income tax		91.7		-56.2		-9.6		27.7		66.9
Income tax expense		39.3		30.9		28.0		11.1		25.1
Net income (loss) from continuing operations		52.3		-87.1		-37.6		16.5		41.8
Net income from discontinued operations (1)		—		—		114.5		2.6		—

Net income (loss)		52.3		-87.1		76.9		19.1		41.8
Net income (loss) attributable to Elster Group SE		48.9		-91.7		72.3		17.9		40.7
Basic and diluted earnings (loss) per share from continuing operations (2)		1.42		-5.68		-2.58		0.20		1.72
Basic and diluted earnings (loss) per share (2)		1.42		-5.68		4.44		0.36		1.72
Weighted average number of shares Outstanding (3)		16,320,750		16,320,750		16,320,750		16,320,750		16,320,750
Unaudited pro forma earnings (loss) from continuing operations per share (4)		1.97		—		—		0.62		—
Unaudited pro forma weighted average shares outstanding (4)		24,854,656		—		—		24,854,656		—


								As of and for the Six Months Ended June 30,
	As of and for the Year Ended December 31,							(unaudited)
	2009		2008		2007			2010		2009
	(in $ millions except for per share and share data)

Basic and diluted earnings (loss) per ADS from continuing operations (5)		0.36		-1.42		-0.65			0.05		0.43
Basic and diluted earnings (loss) per ADS (5)		0.36		-1.42		1.11			0.09		0.43
Weighted average number of ADSs outstanding (5)		65,283,000		65,283,000		65,283,000			65,283,000		65,283,000
Unaudited pro forma earnings (loss) from continuing operations per ADS (4)(5)		0.49		—		—			0.16		—
Unaudited pro forma weighted average ADSs outstanding(4)(5)		99,418,624		—		—			99,418,624		—

Selected Cash Flow Data:
Net cash provided by operating activities		119.6		114.1		110.9			37.0		76.0
Net cash from (used in) investing activities		-43.0		-79.0		46.0			-16.6		-18.9
Net cash from (used in) financing activities		-77.4		-8.7		-274.7			7.1		-56.4
Selected Consolidated Balance Sheet Data:
Cash and cash equivalents		75.4		74.3		53.0			99.0		74.7
Total assets		2,141.4		2,181.5		2,223.3			2,018.0		2,168.9
Short term debt and current portion of long-term debt		39.0		27.1		68.9			25.9		61.3
Long-term debt, less current portion		971.4		1,024.1		1,053.6			893.8		950.1

Total debt		1,010.4		1,051.2		1,122.5			919.7		1,011.4
Shareholder loan		6.8		6.2		408.3	(6)		6.0		6.4
Total equity attributable to Elster Group SE		416.6		412.9		-36.1			418.9		426.5
Total equity		422.7		418.8		-29.1			426.7		431.8

Selected Operating and Other Data:
Backlog (7)		445.3		542.1		383.5			508.7		424.0
Capital expenditures		30.5		81.8		53.5	(8)		18.1		22.0

Reconciliation of Net Income Before Amortization of PPA to Net Income:
Net income (loss)		52.3		-87.1		76.9			19.1		41.8
Amortization of intangible assets on PPA, net of tax effect		22.7		23.6		23.8			11.2		10.9

Net income before amortization of PPA (9)		75.0		-63.5		100.7			30.3		52.7


Reconciliation of Adjusted EBITDA to Net Income:
Net income (loss)		52.3		-87.1		76.9			19.1		41.8
Net income from discontinued operations		—		—		-114.5			2.6		0.0

Net income (loss) from continuing operations		52.3		-87.1		-37.6			16.5		41.8


							As of and for the Six Months Ended June 30,
	As of and for the Year Ended December 31,						(unaudited)
	2009		2008		2007		2010		2009
	(in $ millions except for per share and share data)

Income tax expense		39.3		30.9		28.0		11.1		25.1
Interest expense, net		55.4		117.3		126.9		38.4		25.3
Depreciation and amortization		85.4		85.3		85.8		42.6		42.0
Foreign currency exchange effects		-14.4		45.2		5.7		0.6		-17.7
Management equity program		-33.3		90.7		31.1		1.4		-10.6
Expenses for preparation to become a public company		23.0		7.0		0.0		6.6		7.5
Strategy development costs		3.6		7.8		4.6		0.3		0.4
Employee termination and exit costs		25.4		10.5		15.2		2.1		5.0
Business process reengineering and reorganization costs		16.8		3.2		13.3		2.1		5.4
IT project costs		8.6		3.6		4.2		0.9		1.0
Gain from sales of real estate		-2.5		-0.8		-3.4		0.0		-0.8
Effects of termination of a distributor		—		—		—		9.0		—
Pension curtailments		0.0		0.0		-3.6		0.0		0.0
Insurance recovery		0.0		0.0		-2.6		0.0		0.0
Business combination costs		1.7		0.0		0.0		0.0		0.0
Impairment of intangible assets		2.3		1.3		0.0		0.0		0.0
Other		0.3		-0.2		0.2		-0.7		0.0

Adjusted EBITDA (10)		264.1		314.6		267.7		130.9		124.6


Reconciliation of Free Cash Flow to Cash Flows From Operating Activities:
Cash flows from operating activities		119.6		114.1		110.9		37.0		76.0
Purchases of property, plant and equipment and intangible assets		30.5		81.8		53.5		18.1		22.0

Free cash flow (11)		89.1		32.3		57.4		18.9		54.0


(1)		We disposed of the Ipsen Group, a manufacturer of industrial furnaces, as well as NGT Neue Gebäudetechnik GmbH, or NGT, in 2007 as part of our plan to focus on our core competencies. We included these businesses in discontinued operations. In the second quarter of 2010, we recorded a gain from the release of a provision in connection with a disposal as described in Note 3 to the unaudited condensed consolidated interim financial statements contained elsewhere in this prospectus.

(2)		For more information on the calculation of our earnings (loss) per share, see Note 8 to the audited consolidated financial statements and Note 5 to the unaudited condensed consolidated interim financial statements contained elsewhere in this prospectus.

(3)		Equal to the number of ordinary shares outstanding immediately prior to this offering. See “Our History and Recent Corporate Transactions—Our Current Capital Structure.”

(4)		Unaudited pro forma earnings (loss) per share and unaudited pro forma weighted shares outstanding are based upon 24,854,656 shares issued and outstanding under the assumption that the preferred shares held by Rembrandt, our principal shareholder, are replaced immediately before the closing of this offering with ordinary shares. See “Our History and Recent Corporate Transactions—Capital Measures in Connection with the Offering.”

(5)		Each ADS represents one-fourth of an ordinary share.

(6)		In 2007, our shareholder loan reflects the value before our preferred equity certificates were contributed into our equity. See “Our History and Recent Corporate Transactions—Transactions Relating to Our Share Capital.”

(7)		We define backlog as our total open purchase orders.


(8)		Our capital expenditures for 2007 include $5.5 million that were attributable to discontinued operations.

(9)		We define net income before amortization of PPA as net income (loss) excluding the expenses associated with the amortization of that portion of our intangible assets that comprises the allocation of the purchase price we paid in our business acquisitions in excess of the previous carrying amount of the intangible assets before the acquisition occurred. We refer to the adjusted expense as amortization before PPA. We also present this amortization measure net of the income tax effects. We believe that this non-GAAP financial measure is useful to management, investors and financial analysts in assessing our company’s operating performance because it excludes the effect of the non-cash expenses that are related solely to the allocation of purchase prices paid in business acquisitions to those intangible assets acquired in connection with these business acquisitions. Fair values for these balance sheet items are determined as of the time of an acquisition and then amortized over their respective useful lives, which generally cannot be changed or influenced by management after the acquisition. By excluding these amortization expenses and the related income tax effects, we believe that it is easier for our management, investors and financial analysts to compare our financial results over multiple periods and analyze trends in our operations. For example, expenses related to amortization of intangible assets are now decreasing, but the positive effect of this decrease on our net income is not necessarily reflective of the operations of our businesses.

		We provide a reconciliation of net income before amortization of PPA to net income, which is the closest financial measure calculated in accordance with U.S. GAAP, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Non-GAAP Financial Measures.”

(10)		Adjusted earnings before interest, tax expense, depreciation and amortization, or Adjusted EBITDA, reflects adjustments for certain gains and charges for which we believe adjustment is permitted under our Senior Facilities Agreement as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Non-GAAP Financial Measures.”

		The definition of Adjusted EBITDA used in our Senior Facilities Agreement permits us to make adjustments to our net income for certain cash and non-cash charges and gains. This measure is used in our Senior Facilities Agreement to determine compliance with financial covenants. Because this credit agreement and the financing provided under it are material to our operations, we have and continue to manage our business and assess our performance and liquidity by reference to the requirements of the Senior Facilities Agreement. We also use Adjusted EBITDA for a number of additional purposes. We use Adjusted EBITDA on a consolidated basis to assess our operating performance. We believe this financial measure on a consolidated basis is helpful in highlighting trends in our overall business because the items excluded in calculating Adjusted EBITDA have little or no bearing on our day-to-day operating performance. Adjusted EBITDA is also an important metric in the formula we use to determine the value of our company in connection with our management equity program, or MEP, we describe below.
		We also use segment profit, a measure equal to Adjusted EBITDA, as the primary measure used by our management to evaluate the ongoing performance of our business segments. On a segment basis, we define segment profits as earnings of a segment before taxes, interest and depreciation and amortization, as well as certain gains and losses, and other income and expense determined by our senior management to have little or no bearing on the day-to-day operating performance of our business segments. The adjustments made to earnings of a segment before taxes, interest and depreciation and amortization correlate with the adjustments to net income in calculating Adjusted EBITDA on a consolidated basis pursuant to the Senior Facilities Agreement.
		“Consolidated EBITDA,” as defined in the Senior Facilities Agreement, differs from the measure of Adjusted EBITDA we have disclosed in a way we believe is immaterial. This difference is that the Senior Facilities Agreement excludes the modest amount of dividends we receive from companies in which we hold minority interests, including those we account for using the equity method. We do not exclude these dividends when we calculate the measure of Adjusted EBITDA we disclose in this prospectus. These dividends totaled $3.3 million in 2009 and $2.9 million in each of 2008 and 2007, and were $1.7 million in the first six months of 2010 and $1.4 million in the first six months of 2009.
		We provide a reconciliation of Adjusted EBITDA to net income, which is the closest financial measure calculated in accordance with U.S. GAAP, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Non-GAAP Financial Measures.”
(11)		We define free cash flow as cash flows from operating activities less purchases of property, plant and equipment and intangible assets. Free cash flow is not defined under U.S. GAAP and may not be comparable with measures of the same or similar title that are reported by other companies. Under SEC rules, “free cash flow” is considered a non-GAAP financial measure. It should not be considered as a substitute for, or confused with, any U.S. GAAP financial measure. There are important limitations related to the use of free cash flow instead of cash flows from operating activities calculated in accordance with U.S. GAAP. We believe the most comparable U.S. GAAP measure to free cash flow is cash flows from operating activities. We report free cash flow to provide investors with a measure that can be used to evaluate changes in liquidity after taking capital expenditures into account. It is not intended to represent residual cash flow available for discretionary expenditures, since debt service requirements or other non-discretionary expenditures are not deducted. We urge you not to rely on any single financial measure to evaluate our business but instead to form your view on our business with reference to our audited annual consolidated financial statements included elsewhere in this prospectus and the other information we present in this prospectus. In 2007, free cash flow includes our discontinued operations. We describe free cash flow below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Free Cash Flow.”

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis of our financial condition and results of operations is based on, and should be read in conjunction with, our audited annual and unaudited interim consolidated financial statements and the accompanying notes and other financial information included elsewhere in this prospectus. We have prepared our consolidated financial statements in accordance with U.S. GAAP.

This discussion contains forward-looking statements. Statements that are not statements of historical fact, including expressions of our beliefs and expectations, are forward-looking in nature and are based on current plans, estimates and projections. Forward-looking statements are applicable only as of the date they are made. Except for any ongoing obligation to disclose material information as required by the U.S. federal securities laws, we do not have any intention or obligation to update forward-looking statements after we distribute this prospectus. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause our actual results or outcomes to differ materially from those expressed in any forward-looking statement. These factors include those identified under the headings “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

Executive Summary

In the first six months of 2010 and the 2009 financial year, worldwide economic conditions were the main factor that impacted our revenue development. Weak residential and commercial construction markets and a decline in utility investments in many of the regions in which we operate decreased demand for our gas, electricity and water products. Our utilization products faced an ongoing decline in demand due to a reduction in capital expenditures by our furnace builder customers and our customers in the metal and ceramics industries. By the end of the second quarter of 2010, our revenues, particularly in our water segment, began to reflect the early stages of an economic recovery in many regions in which we operate, and our new order intake expanded significantly across all three of our segments. These developments contributed to an aggregate decline of 0.7% in our revenues in the first six months of 2010 compared to the first six months of 2009 and a revenue decline of 11.0% in 2009 from 2008.

Exchange rates also played an important role in our results in 2009, although much less so in the first six months of 2010. In 2009, changes in foreign exchange rates, primarily through the strengthening of the U.S. dollar against many foreign currencies over the course of the year, had an adverse impact on our results. Had we translated our 2009 revenues from our entities that have functional currencies other than the U.S. dollar into dollars using the exchange rates of 2008 (which we refer to as a constant currency basis), we would have recorded revenues of $1,786.8 million in 2009, 6.2% lower than in 2008 compared to a reported decline of 11.0%. On a constant currency basis, our revenues in the first six months of 2010 would have been 2.7% lower than in the first six months of 2009.

Despite the overall decline in revenues from 2008 to 2009, revenues from Smart Offerings increased to approximately 26% of revenues in 2009 compared to approximately 19% in 2008. We define Smart Offerings to include AMR, AMI and Smart Grid solutions and individual products, components and services for use in the Smart Grid. We believe the ongoing investment in metering infrastructure combined with the changes now driving the implementation of new technologies, including Smart Grid solutions, present a growth opportunity for our company despite increasing competition from traditional metering companies and new entrants from outside the metering business. Accordingly, we expect the share of revenues derived from Smart Offerings to continue to increase over the full year 2010, even though it may vary on a quarter to quarter basis due largely to timing effects in our fulfillments of orders.

The increase in the portion of our revenues attributable to Smart Offerings in 2009 was largely a result of EnergyAxis deployments in the electricity segment, primarily in North America. We attribute

this, in part, to a stronger and more effective sales focus on Smart Offerings. In the United States, we deployed EnergyAxis solutions for a range of large and mid-sized electricity and multi-utilities, including the Arizona Public Service Company, Salt River Project in Arizona and Black Hills. In 2009 and the first six months of 2010, we continued to deploy our Smart Offerings in several regions in Canada, Central America and Oceania. In 2009, we increased sales of smart water meters in Western Europe compared to 2008. In the first quarter of 2010, we booked a significant order for smart water meters with a customer in Kuwait.

In our gas segment, we recorded growth in 2009 in the Middle East and North Africa across a range of gasification related areas, including distribution stations and advanced C&I products associated with gas transmission and distribution projects. We define gasification as the expansion of natural gas infrastructure not previously connected to the gas grid. Distribution stations enable gas to be moved from transmission to distribution networks.

In the first six months of 2010, new orders entered into backlog, which we refer to as new order intake, increased when compared to the first six months of 2009. Our new order intake was $889.0 million in the six months ended June 30, 2010, up 24.1% from $716.5 million in the six months ended June 30, 2009. New order intake increased in all three segments.

As at December 31, 2009, total contracted future revenues, which we define as our total order backlog plus additional contract revenues under awarded contracts with an initial value of $500,000 or more, was more than $730 million. Additional contract revenues represent contracted deliverables for which orders have not yet been placed (and therefore do not include any items that we categorize as backlog). Total contracted future revenues were more than $800 million as at June 30, 2010. We describe our backlog and total contracted future revenues in more detail in “Our Company—Projects and Backlog.”

Our net income was $19.1 million in the six months ended June 30, 2010, compared to a net income of $41.8 million for the first six months of 2009. Our net income for 2009 was $52.3 million. This compares with a net loss of $87.1 million in 2008. The net loss in 2008 was largely attributable to the recognition of $90.7 million in non-cash expenses related to our management equity program, or MEP, the costs of which will terminate as a result of this offering, and $37.8 million in foreign exchange losses from the remeasurement of financial indebtedness at year-end exchange rates. While we incurred a charge related to the MEP in 2008, we recognized an MEP-related gain of $33.3 million in 2009 (of which $10.6 million related to the first six months of 2009). The MEP accounted for a non-cash charge of $1.4 million in the six months ended June 30, 2010. In 2009, we also recognized foreign exchange gains of $11.5 million from the remeasurement of financial indebtedness at year-end exchange rates. In the first six months of 2010, we incurred a gain of $0.3 million from the remeasurement of financial indebtedness compared to a gain of $17.0 million in the first six months of 2009.

Our management monitors our operating performance by analyzing Adjusted EBITDA, which is a non-GAAP financial measure. For a description and reconciliation of Adjusted EBITDA to net income, the closest U.S. GAAP financial measure, see “—Special Note Regarding Non-GAAP Financial Measures.” Our Adjusted EBITDA increased by $6.3 million, or 5.0%, from $124.6 million in the six months ended June 30, 2009 to $130.9 million in the six months ended June 30, 2010. On a constant currency basis, our Adjusted EBITDA increased by 5.7% to $131.7 million in the first six months of 2010. This increase was primarily driven by the higher gross profit, which resulted from the more favorable product mix in our gas segment and by an increase in the revenues in our water segment, offset by a decline in profitability in our electricity segment driven by the lower level of revenues in North America. Our Adjusted EBITDA decreased by 16.1% to $264.1 million in 2009 due to lower revenues. On a constant currency basis, Adjusted EBITDA decreased by 12.3% to $275.9 million in 2009.

Key Factors Affecting Our Revenues and Expenses

A number of factors have contributed to our results of operations during recent periods. We summarize three of these key factors in the following text. We summarize additional factors, many of which are less related to our day-to-day operating activities than are the following key factors, below under “—Historical Factors Affecting Our Recent Results.”

The Increasing Share of Smart Offerings in Our Revenues

We earn most of our revenues in each of our segments from the sale of meters, and expect this to continue to be the case in the coming periods. However, we expect an increasing portion of our revenues to be attributable to Smart Offerings, which we expect will include an increased, if comparatively modest, component of revenues from services and products other than meters. In addition, we expect average unit prices of meters to increase as technological complexity and functionality increases to support and complement other Smart Grid technologies. Furthermore, we believe that the pace of such technological improvements will shorten average meter life leading to more opportunities for revenue growth from regular replacement and upgrade cycles.

The Effects of Prices for Raw Materials and Components on Our Operations

The majority of the $1,191.3 million cost of revenues we incurred in 2009 and of the $574.6 million cost of revenues we incurred in the six months ended June 30, 2010 related to direct production materials, including commodities such as brass, steel and aluminum and other supplies for our products, such as brass castings, aluminum housings, sheet metal, plastics and printed circuit board assemblies and other electronics. Commodity prices can vary significantly from period to period and are affected by changes in global economic conditions, supply and demand trends, technological changes and related industrial cycles. For example, we have experienced substantial swings in the price of brass, copper, steel, aluminum and resins, and in components that include them, which are important materials for the manufacture of accurate and durable meters. We have been seeking to counter this price volatility that we have experienced by entering into supply contracts for some of our raw materials and components, with terms from about one month to about one year, in an effort to lock in prices when we perceive that price increases may occur and to manage the risk of supply shortages. For example, we entered into contracts covering our forecasted requirements for brass at prices we believe will, on average, prove to be competitive through the end of 2010. We intend to monitor market trends closely and adapt our supply contracts accordingly.

During 2010, we have experienced significantly extended lead times at those of our suppliers that provide electronic components used in some of our products. We believe that the resumption of economic growth in some of the world’s economies, and the resulting demand for electronic components generally across a range of industrial sectors, has resulted in an increase in demand (after capacities had been reduced during the downturn) for commoditized electronic components that those suppliers use in producing circuit boards for us as well as for other customers, including customers in unrelated industries. This has been the case despite the overall lower levels of demand for our own products. We believe that some of our most important markets, including in particular the residential and commercial construction markets in many of the regions in which we operate, have remained weaker than some other markets that require similar components, such as the worldwide electronics and computer markets. In some cases, we have been required to place orders for electronics and electronic components six months or more in advance to ensure timely availability of these components. Some of our other suppliers have imposed limitations not only on purchases of their electronic components, but in other areas as well.

Focus on Efficiency in Our Global Manufacturing and Supply Functions

Following our acquisition in September 2005, our management team initiated a Profit Improvement Program, or PIP. This program was designed to transform the operations that had been acquired

into a single group focused on metering solutions by identifying manufacturing, supply chain and procurement processes within our company that could be made more efficient. Despite the beneficial effects of these programs, the impact of the financial crisis and economic downturn that began in 2008 led us to adopt a further program of efficiency improvements. These initiatives were intended to further rationalize our business and operations in the light of the macroeconomic conditions. In seeking to optimize our cost structure, we have also, through our PIP and other initiatives, focused on our sourcing, manufacturing footprint, overhead, indirect personnel and non-personnel related expense, capital expenditures and cash-related inventory control.

As part of our PIP, we are continuing to consolidate our production facilities, improve our production process, concentrate our production capacities in a reduced number of designated competence centers and transfer selected manufacturing activities to lower cost countries in order to gain efficiencies and manage costs. Our largest production centers are now concentrated in the United States, Germany and Slovakia. We were able to decrease our headcount by more than 10% from December 31, 2008 to December 31, 2009, despite having increased our R&D personnel and our sales force for Smart Offerings. In addition, as part of our current initiatives in the area of procurement, we have reduced the number of suppliers of direct production-related materials from approximately 4,000 in 2007 to approximately 3,500 by the end of 2009 with a strategic focus on a core group of companies that provide high quality supplies for our products. Furthermore, we intend to renegotiate terms and conditions with a number of suppliers and will continue to actively manage supplier risks.

Results of Operations

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

Revenues. The following table presents data on our revenues for the periods indicated:


	Six Months Ended June 30,
	2010		2009
	(in $ millions)

Revenues		831.3		837.2

In the six months ended June 30, 2010, our revenues decreased by $5.9 million, or 0.7%, to $831.3 million compared to revenues of $837.2 million in the six months ended June 30, 2009. On a constant currency basis, our revenues decreased by 2.7%.

Our business has typically been impacted by the level of regional economic growth in the markets in which we operate. The economic downturn has resulted in decreased demand generally for goods and services worldwide. In particular, the decline of the new construction markets in the United States, the United Kingdom and Spain and a decline in utility investments in infrastructure have negatively affected demand for our products and services across all segments. The downturn in some of our important markets for C&I sales, especially in certain Eastern European countries, also had negative effects, including decreased demand for our electricity and gas products. By the end of the second quarter of 2010, our revenues, particularly in our water segment, began to reflect the early stages of an economic recovery in many regions in which we operate, and our new order intake expanded significantly across all three of our segments. Our order backlog increased by 14.2% in the first six months of 2010 as compared to December 31, 2009, as we booked new orders totaling $889.0 million during the first six months of 2010. This new order intake represented an increase of 24.1% over new order intake of $716.5 million we received during the first six months of 2009. The new order intake increased in all three segments. Late in the first quarter of 2010, our sales forces reported a resumption in the activity and requests for proposals in our electricity segment in the United States as the stimulus fund disbursement situation was clarified. By the end of the second quarter of 2010, we began to recognize an increase in demand in the electricity segment, which is reflected in an increase in order backlog in that segment.

In the second quarter of 2010, we decided to adopt early an accounting policy related to revenue recognition in sales involving the delivery of multiple elements that include software. As a result, our revenues for the six months ended June 30, 2010 were approximately $3.9 million higher than revenues would have been using the previous accounting policies for revenue recognition. For more information, see “—Critical Accounting Policies—Revenue Recognition—Early Adoption of Accounting Pronouncement.”

In our gas segment, our revenues declined by $17.8 million, or 3.9%, in the six months ended June 30, 2010 as compared to the first six months of 2009. Demand for our gas utilization and for our C&I products, particularly in Europe, has declined as customers delayed their capital expenditures and scheduled grid maintenance and upgrades in anticipation of an economic recovery. In the second quarter of 2010, we began to record revenues from new gas infrastructure projects we started in Asia. However, these revenues did not compensate for the absence of revenues from our gas infrastructure projects in the Middle East and North Africa that we had started at the beginning of 2009 and completed later that year. In addition, the weak construction markets in the United States negatively impacted our gas segment, resulting in lower sales volumes for both residential and C&I gas meters. However, we experienced increased demand for our gas distribution products and gas regulators in the United States, and the demand for residential gas meters recovered in some major markets outside North America in the first six months of 2010.

In the six months ended June 30, 2010, the revenues in our electricity segment declined by $1.1 million, or 0.5%, as compared to the first six months of 2009. In the first six months of 2010, the delay in orders and contracts associated with uncertainty about the availability of stimulus funds in the United States negatively affected our revenues. An additional effect contributing to the decline was that in the first quarter of 2009, the revenues in our electricity segment were very high compared to previous quarters due to significant shipments of smart metering products as we ramped up our production capabilities for components of our EnergyAxis solutions at the end of 2008. However, by the end of the second quarter of 2010, our electricity segment’s order backlog had increased compared to the end of the second quarter of 2009. In addition, as described in “Risk Factors—Risks Related to Our Operations—We have recently experienced significantly extended lead times at some of our suppliers of electronic components. These have negatively impacted our revenues, particularly in our electricity segment. If we are unable to ensure sufficient supplies to prevent these lead times from lengthening, our results of operations, cash flows and financial condition may be adversely affected,” a further negative impact on our revenues from our electricity segment in the six months ended June 30, 2010 was attributable to significantly extended lead times at our suppliers that provide electronic components used in some of our electricity segment’s products.

The overall decline in revenues in our electricity segment was offset in part by an increase in revenues in our electricity segment in Western Europe as sales increased, due substantially to our larger portfolio of Smart Offerings. In addition, as a result of the change in accounting policy described above, the revenues of our electricity segment for the three and six months ended June 30, 2010 were approximately $3.9 million higher than revenues would have been in such periods using the previous accounting policies for revenue recognition.

Revenues in our water segment increased by $17.0 million, or 9.6%, as the demand recovered in North America supported by new product launches for our Smart Offerings. Furthermore, we experienced sales increases in Asia, where we won a large contract with a customer in Hong Kong, and in the Middle East. In Western Europe, demand for our water metering products was negatively affected by the continued weak construction market in certain countries such as the United Kingdom and Spain.

For more information on our revenue development and trends, see “—Results of Operations by Segment in the Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009.”

Revenues by region. The following table sets forth our revenues by region for the periods indicated. We categorize our revenues geographically based on the location to which we ship products or in which we provide services to our customers.


	Six Months Ended June 30,
	2010		2009
	(in $ millions)
North America
United States		227.8		225.1
Other North America		52.5		62.0

Total		280.3		287.1
Rest of the world
Germany		119.2		132.1
Europe outside Germany		265.7		259.2
Other		166.1		158.8

Total		551.0		550.1

Total		831.3		837.2

Cost of revenues. Our cost of revenues consists principally of expenses relating to:


	•	direct and indirect costs of raw materials and components;

	•	salaries, wages and indirect costs of labor, including the employer portion of social security and other payroll taxes;

	•	temporary employees;

	•	warranty expenses;

	•	other overhead and infrastructure expenses to the extent these relate to our manufacturing;

	•	related depreciation and amortization; and

	•	restructuring charges to the extent they relate to our manufacturing.

The following table sets forth our cost of revenues, gross profit and related data for the periods indicated.


	Six Months Ended June 30,
	2010				2009
			% of				% of
	in $ millions		revenues		in $ millions		revenues

Cost of revenues		574.6		69.1		585.4		69.9
Gross profit		256.7		30.9		251.8		30.1

Our cost of revenues decreased by $10.8 million in the first six months of 2010, or 1.8%, compared to the six months of 2009. This decrease was primarily due to lower revenues. Our gross profit as a percentage of revenues decreased to 30.9% in the first six months of 2010 from 30.1% in the prior year period. Several factors combined to drive this development in gross margin:


	•	Our gas segment experienced a shift toward higher margin products in the first six months of 2010 compared to the prior year period. As part of several gas infrastructure projects, we delivered components during the first six months of 2009 that we purchased from third parties, which reduced our own profit margin.

	•	We wrote down inventory of $8.4 million in connection with our decision to terminate our relationship with one of our distributors of our electricity segment. We decided to cease doing


		business with the distributor when we became aware that the distributor may have engaged in conduct on behalf of other parties that, if engaged in on our behalf, could have violated our compliance policies. When we terminated the relationship, we were unable to recover the value of inventory already in the possession of the distributor.

Selling expenses. Selling expenses consist primarily of:


	•	salaries for personnel engaged in sales and marketing activities and the employer portion of social security and other payroll taxes;

	•	shipping and handling costs;

	•	commissions;

	•	marketing and advertising expenses;

	•	external services;

	•	overhead and infrastructure expenses; and

	•	related depreciation and amortization.

The following table sets forth information on our selling expenses for the periods indicated.

Six Months Ended June 30,

2010

2009

% of

in $ millions

revenues

in $ millions

revenues

Selling expenses

80.8

9.7

76.9

9.2

Selling expenses increased by $3.9 million in the first six months of 2010, or 5.0%, compared to the prior year period. The main reason for the increase was the expansion of our sales force that supports our key account and opportunity management teams in marketing our Smart Offerings, particularly in the United States and the European Union.

General and administrative expenses. General and administrative expenses consist primarily of:


	•	salaries, including the employer portion of social security and other payroll taxes, not allocated to other functional costs;

	•	expenses for our Management Equity Program, or MEP, an incentive program sponsored by our principal shareholder for some of our key management personnel;

	•	expenses relating to our preparation to become a public company;

	•	other overhead costs not allocated to manufacturing, R&D and selling;

	•	IT costs not allocated to other functional costs;

	•	external services, professional services and consultancy fees;

	•	banking fees; and

	•	related depreciation and amortization.

The following table sets forth information on our general and administrative expenses for the periods indicated.


	Six Months Ended June 30,
	2010				2009
			% of				% of
	in $ millions		revenues		in $ millions		revenues

Management Equity Program		1.4		0.2		-10.6		-1.3
Other general and administrative expenses		68.5		8.2		79.0		9.4

Total general and administrative expenses		69.9		8.4		68.4		8.2

Our general and administrative expenses increased by $1.5 million, or 2.2%, in the first six months of 2010. The increase in general and administrative expenses was primarily due to the shift to a non-cash expense of $1.4 million in the six months ended June 30, 2010 compared to the non-cash $10.6 million gain related to the MEP in the first six months of 2009. In compensation expense, we recognize amounts determined by reference to a formula-based valuation of the shares in our company under the MEP. After this offering, we will no longer be required to recognize any charges or income related to the MEP. For more information relating to the MEP, see “Related Party Transactions.”

Our general and administrative expenses other than those relating to the MEP decreased by $10.5 million, or 13.3%, in the first six months of 2010 as compared to the first six months of 2009. In the first six months of 2009, we recorded higher reorganization expenses than in the first six months of 2010, largely in respect of severance payments. The decline was partly offset by additional costs that we began to incur in anticipation of becoming a public company especially in respect of legal advice and other external services. We built up additional functions and hired personnel for departments such as investor relations and internal control necessary for a public company. For more information relating to these expenses, see “—Historical Factors Affecting Our Recent Results—Expenses for Preparation to Become a Public Company.”

Research and development expenses. Research and development, or R&D, expenses consist primarily of:


	•	salaries for R&D personnel, including the employer portion of social security and other payroll taxes;

	•	external services;

	•	consulting expenses associated with R&D activities;

	•	depreciation and amortization of our R&D assets; and

	•	other overhead and infrastructure cost associated with our R&D activities.

The following table sets forth information on our R&D expenses for the periods indicated.

Six Months Ended June 30,

2010

2009

% of

in $ millions

revenues

in $ millions

revenues

Research and development expenses

41.4

5.0

36.7

4.4

Our research and development expenses increased by $4.7 million, or 12.8%, in the first six months of 2010 as compared to the prior year period. We have increased our R&D headcount, as well as our use of external services, including engineering consultants and research institutes, particularly in connection with our development of Smart Offerings.

Other operating income (expense), net. Other operating income (expense), net mainly includes currency gains and losses. The following table sets forth information on other operating income (expense), net for the periods indicated.

Six Months Ended June 30,

2010

2009

% of

in $ millions

revenues

in $ millions

revenues

Other operating income (expense), net

- 0.4

0.0

21.2

2.5

The decrease in other operating income is mainly due to lower currency gains of $−0.6 million in the six months ended June 30, 2010 compared to $17.7 million in the prior year period.

Interest expense, net. The following table sets forth information on interest expense, net for the periods indicated.

Six Months Ended June 30,

2010

2009

% of

in $ millions

revenues

in $ millions

revenues

Interest expense, net

38.4

4.6

25.3

3.0

Interest expense, net increased by $13.1 million, or 51.8%, from $25.3 million in the first six months of 2009 to $38.4 million in the first six months of 2010. This increase resulted mainly from higher negative fair value of our interest rate swaps.

Other income, net. The following table sets forth information on other income, net for the periods indicated.

Six Months Ended June 30

2010

2009

% of

in $ millions

revenues

in $ millions

revenues

Other income, net

1.7

0.2

1.4

0.2

Other income, net includes miscellaneous income, such as income from equity accounted investees and dividends from investments, and expenses not associated with other functional areas.

Income tax expense. The following tables set forth information on our income tax expense for the periods indicated.

Six Months Ended June 30,

2010

2009

% of

in $ millions

revenues

in $ millions

revenues

Income tax expense

11.1

1.3

25.1

3.0

Our income tax expense decreased by $14.0 million, or 55.7%, to $11.1 million in the six months ended June 30, 2010 based on estimated tax rates for the year, primarily a result of lower income from continuing operations.

Net income from discontinued operations. The following table sets forth information on net income from discontinued operations for the periods indicated.

Six Months Ended June 30,

2010

2009

% of

in $ millions

revenues

in $ millions

revenues

Net income from discontinued operations

2.6

0.3

—

In the second quarter of 2010, we recorded a gain from the release of a provision in connection with a disposal as described in Note 3 to the unaudited condensed consolidated interim financial statements.

Net income. The following table sets forth information on net income for the periods indicated.

Six Months Ended June 30,

2010

2009

% of

in $ millions

revenues

in $ millions

revenues

Net income

19.1

2.3

41.8

5.0

We recognized net income of $19.1 million in the six months ended June 30, 2010 compared to net income of $41.8 million in the prior year period.

Adjusted EBITDA. The following table sets forth information on our Adjusted EBITDA for the periods indicated. Adjusted EBITDA is a non-GAAP financial measure. It is based on the profitability measure defined in our Senior Facilities Agreement, and we use this measure for many purposes in managing and directing our company. It is not, however, a substitute for net income or any other measure calculated in accordance with U.S. GAAP. We present a reconciliation of Adjusted EBITDA to net income, together with other important disclosure, below under “—Special Note Regarding Non-GAAP Financial Measures.”

Six Months Ended June 30,

2010

2009

% of

in $ millions

revenues

in $ millions

revenues

Adjusted EBITDA

130.9

15.7

124.6

14.9

Our Adjusted EBITDA increased by $6.3 million, or 5.0%, from $124.6 million in the six months ended June 30, 2009 to $130.9 million in the six months ended June 30, 2010. On a constant currency basis, our Adjusted EBITDA increased by 5.7% to $131.7 million in the first six months of 2010. This increase was primarily driven by the higher gross profit, which resulted from the more favorable product mix in our gas segment and an increase in revenues in our water segment. Adjusted EBITDA was negatively impacted as we built up additional functions, including investor relations and internal control, in anticipation of our becoming a public company.

Our Adjusted EBITDA is equal to our consolidated segment profit as shown in our segment results appearing below.

Results of Operations by Segment in the Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009.

The following table sets forth operating data and segment profit for each of our three segments, gas, electricity and water.


	Gas				Electricity				Water
	Six Months Ended June 30,
	2010		2009		2010		2009		2010		2009
	in $ millions

Total revenues		442.1		459.9		206.5		207.6		193.9		176.9

thereof to external customers		439.8		459.0		199.0		203.4		192.5		174.8
thereof to other segments		2.4		0.9		7.5		4.2		1.4		2.1
Segment profit		105.6		99.7		19.5		20.3		19.3		15.5

We prepare our segment reporting in accordance with U.S. GAAP and report our segment profitability based on our internal reporting methodology for managing our segments, assessing their results internally and allocating our internal resources. This methodology may be different than those of other companies, and you should consider this in making any comparisons with other companies. For further information regarding our segment results, see Note 22 to our consolidated financial statements and Note 14 to our condensed consolidated interim financial statements included elsewhere in this prospectus.

We assess the performance of our segments using the measure “segment profit.” In determining segment profit, our management either adjusts for a number of items that it believes have little or no bearing on the day-to-day operating performance of our business segments or does not allocate those items to the segments. These include the categories of items that we describe in more detail below under “—Historical Factors Affecting Our Recent Results.”

The adjustments made to determine segment profit correlate to the adjustments we make to net income when we calculate Adjusted EBITDA on a consolidated basis based on the definition in the Senior Facilities Agreement. We have used this measure of segment profitability due to the importance to our company of the financial covenants in the Senior Facilities Agreement. Our group management has therefore required the segments to manage their operating businesses with the financial covenants in mind. In addition, group management assumes the responsibility from an initial accountability point of view for those non-operating and other matters that it believes are more appropriately attributable to the group function. We believe this has assisted us in achieving consistency across our Group on these matters while simplifying the monitoring of their effects on our financial covenants.

Gas

Revenues. In the six months ended June 30, 2010, the revenues of our gas segment decreased by $17.8 million, or 3.9%, from $459.9 million in the first six months of 2009 to $442.1 million in 2010. On a constant currency basis, our revenues in the gas segment decreased by 4.0% as compared to the first six months of 2009. In the second quarter of 2010, we began to record revenues from new gas infrastructure projects we started in Asia. However, these revenues did not compensate for the absence of revenues from our gas infrastructure projects in the Middle East and North Africa that we started at the beginning of 2009 and completed later that year. The decline in our revenues was also caused by the reduction of sales of our metering products in North America. The continuing weakness in the construction market of the United States impacted the demand for both our residential and C&I meters and we also experienced weaker demand for C&I products in Europe. However, we experienced increased demand for our gas distribution products and gas regulators in the United States, and the demand for residential gas meters recovered in some major markets outside North America in the first six months of 2010. In addition, the worldwide economic downturn negatively affected the demand for our gas utilization products as industrial end-users, particularly furnace builders and the metal and ceramics industries, kept capital expenditures at a low level. This impacted our business in Europe, where the majority of our customers for gas utilization products are located.

Segment profit. Our segment profit in our gas segment increased by $5.9 million, or 5.9%, from $99.7 million in the first six months of 2009 to $105.6 million in the first six months of 2010 despite the reduction in the revenues. The segment profit margin increased by 2.2 percentage points from 21.7% in 2009 to 23.9% in 2010.

The segment profit of our gas segment was higher in the first six months of 2010 mainly due to a shift away from lower margin meters and equipment delivered in the context of several gas infrastructure projects in the first six months of 2009. These projects included a larger proportion of components that we purchased from third parties, reducing our own profit margin in the first quarter of 2009. In addition, we further improved our cost base in the gas segment through our restructuring

initiatives at two sites in Germany and reducing headcount at our sites in the Unites States and in Slovakia which we did in 2009. This was partly offset by an increase in variable selling expenses due to the customer and product mix. In addition, we continued to increase our R&D activities and retained external engineering consultants and research institutes in connection with the development of new products, particularly for our Smart Offerings. During the first six months of 2010, we introduced a new residential gas regulator in North America, and in Europe, we introduced a smart gas meter index and expanded our two-stage regulator. We also continued our development of a new generation of ultrasonic flow meters for C&I gas applications and delivered the first units during the second quarter of 2010.

Electricity

Revenues. In the six months ended June 30, 2010, the revenues of our electricity segment decreased by $1.1 million, or 0.5%, from $207.6 million in the six months ended June 30, 2009 to $206.5 million. On a constant currency basis, our revenues decreased by 4.1%.

The decrease in revenues in the first six months of 2010 was mainly driven by delays in contracts to be supported by stimulus funds in the United States due to uncertainty surrounding the tax status of the public funds, asset ownership, and local commission funding support. Utilities remained cautious, delaying their purchasing decisions until these issues were clarified. Meanwhile, the stimulus funds are now being granted to the utilities and we are seeing an increase in the activities of our sales pipeline. Revenues were also negatively affected by our termination of the distributor relationship we describe below. A further negative impact on our revenues from our electricity segment in the six months ended June 30, 2010 was significantly extended lead times at some of our suppliers of our electronic component products during 2010. We believe that the increase in demand for commoditized electronic components that some of our suppliers use in producing circuit boards for us during the recent economic growth has affected their ability to deliver as rapidly as required. See “Risk Factors—Risks Related to Our Operations—We have recently experienced significantly extended lead times at some of our suppliers of electronic components. These have negatively impacted our revenues, particularly in our electricity segment. If we are unable to ensure sufficient supplies to prevent these lead times from lengthening, our results of operations, cash flows and financial condition may be adversely affected.” For instance, in one project where we supply the meters but complement them with a third-party communication module, the producer of the module has not met its obligations to deliver the requisite quantities as scheduled. These developments resulted in lower revenues for our meters compared to the six months ended June 30, 2009. Delayed investments of utilities led to lower revenues in Asia. An additional effect contributing to the decline was that in the first quarter of 2009, the revenues in our electricity segment were very high compared to previous quarters due to significant shipments of smart metering products as we ramped up our production capabilities for components of our EnergyAxis solutions at the end of 2008.

This decrease was partly offset by higher revenues mainly in Western Europe resulting in part from increased sales of our Smart Offerings. In addition, by the end of the second quarter of 2010, we experienced an increase in the order intake of our electricity segment. In the second quarter of 2010, we decided to adopt early an accounting policy related to revenue recognition in sales involving the delivery of multiple elements that included software. As a result, the revenues in our electricity segment for the three and six months ended June 30, 2010 were approximately $3.9 million higher than revenues would have been using the previous accounting policies for revenue recognition. For more information, see “—Critical Accounting Policies—Revenue Recognition—Early Adoption of Accounting Pronouncement.”

Segment profit. Our segment profit in electricity decreased by $0.8 million, or 3.9%, from $20.3 million in the first six months of 2009 to $19.5 million in the six months ended June 30, 2010. The segment profit margin decreased by 0.3 percentage points from 9.8% in the six months ended June 30, 2009 to 9.5% in the six months ended June 30, 2010. On a constant currency basis, our

segment profit was $18.9 million in the six months ended June 30, 2010, a decrease of 7.2% compared to the six months ended June 30, 2009.

The decrease in segment profit was mainly driven by the lower level of revenues in North America, whereas the decrease in segment profit margin is a result of fixed structure costs associated with partial ramping of resources for expected future revenues. In addition, the increased interest many customers have shown in considering our Smart Offerings, especially in the United States as the stimulus funds have become available and in Europe, has led to increased expenditure for our efforts to win this business. These expenditures include responding to requests for qualifications and related origination activities, while we have not begun to generate the revenues that would be associated with these contract wins. The decrease in margin in the electricity segment was partly offset by the fact that we generated higher revenues in Western Europe through increased sales of higher margin products from our expanded Smart Offerings portfolio.

As a result of our ongoing investments in new products, we incurred higher R&D expenses in the six months ended June 30, 2010. We further upgraded our EnergyAxis system and launched new product variants of our residential and C&I electric meters. We also increased our sales force focused on marketing our Smart Offerings.

Water

Revenues. In the six months ended June 30, 2010, the revenues of the water segment increased by $17.0 million, or 9.6%, to $193.9 million from $176.9 million in the first six months of 2009. On a constant currency basis, our revenues in the water segment increased by 4.7%.

We recorded higher sales in North America, where demand for our volumetric residential and C&I related meter products increased. This was supported by new product launches in our Smart Offerings and other C&I portfolios. We increased our sales in the Middle East and Asia, where we predominantly sold more residential products. In Western Europe, demand for our water metering products was negatively impacted by the weak construction markets in certain countries, such as the United Kingdom and Spain.

Segment profit. The segment profit in our water segment increased by $3.8 million, or 24.3%, from $15.5 million in the first six months of 2009 to $19.3 million in the six months ended June 30, 2010. The segment profit margin increased by 1.1 percentage points, from 8.8% in the first six months of 2009 to 9.9% in the six months ended June 30, 2010. On a constant currency basis, our water segment profit increased by 18.4% to $18.4 million in the six months ended June 30, 2010 compared to the six months ended June 30, 2009.

The increase in segment profit was largely a result of higher revenues in product groups with higher margins, such as our volumetric residential and C&I related products. We further invested in R&D activities, enhancing our smart meter water solutions for the United States and our residential metering product offering, mainly for European markets.

Financial Year Ended December 31, 2009 Compared to Financial Year Ended December 31, 2008

Revenues. The following table presents data on our revenues for the periods indicated:


	Year Ended December 31,
	2009		2008
	(in $ millions)

Revenues		1,695.1		1,904.5

In 2009, our revenues decreased by $209.4 million, or 11.0%, to $1,695.1 million compared to revenues of $1,904.5 million in 2008. On a constant currency basis, our revenues declined by 6.2%.

The decrease in revenues was mainly driven by worldwide economic conditions, which have negatively affected the demand for our meters and other products, as our customers decreased investments and deferred decisions relating to new capital expenditures.

In our gas segment, our revenues declined by $229.6 million, or 20.3% as construction of new homes in North America slowed and demand for our C&I and utilization products by industrial customers also declined. The decline was offset in part by project related investments for distribution stations and advanced C&I meters in connection with ongoing gasification projects in the Middle East and North Africa.

Revenues in our electricity segment grew by $49.0 million, or 12.1%, as we recorded increased revenues from EnergyAxis systems we are deploying in North America and higher unit sales of both our residential and C&I meters.

Revenues in our water segment decreased by $28.1 million, or 7.3%, as reduced levels of new construction in certain markets, such as in the United Kingdom, led to lower overall demand for our meters. The declines were offset in part by higher revenues in North America and in Western Europe mainly due to increased sales of our submetering products and our Smart Offerings.

For more information on our revenue development and trends, see “—Results of Operations—Financial Year Ended December 31, 2009 Compared to Financial Year Ended December 31, 2008.”


	Year Ended December 31,
	2009		2008
	(in $ millions)
North America
United States		448.0		440.9
Other North America		111.2		92.0

Total		559.2		532.9
Rest of the world
Germany		256.0		309.0
Europe outside Germany		510.5		641.3
Other		369.4		421.3

Total		1,135.9		1,371.6

Total		1,695.1		1,904.5

Cost of revenues.

The following table sets forth our cost of revenues, gross profit and related data for the periods indicated.


	Year Ended December 31,
	2009				2008
			% of				% of
	in $ millions		revenues		in $ millions		revenues

Cost of revenues		1,191.3		70.3		1,306.3		68.6
Gross profit		503.8		29.7		598.2		31.4

Our cost of revenues decreased by $115.0 million in 2009, or 8.8%, compared to 2008. This decrease was primarily due to lower revenues in our gas segment and to a lesser extent in our water segment, which reduced the direct costs of materials and related costs. Currency effects also contributed to the decrease in cost of revenues.

Our gross profit as a percentage of revenues decreased to 29.7% in 2009 from 31.4% in 2008. Several factors combined to drive this decrease in gross margin:


	•	As a consequence of the Smart Offering driven growth in our electricity segment, coupled with revenue declines in our gas segment due to macroeconomic conditions, we experienced a shift in our mix of products towards our electricity segment during 2009. Our electricity segment products, particularly during the design, development and expansion phases of new technologies, have been characterized by lower margins than those of our gas business.

	•	Volatile prices for raw materials also negatively affected our gross margin. The prices we paid for raw materials, including brass, steel and aluminum, fell significantly during the second half of 2008 as a result of the global economic downturn. In an effort to reduce our exposure to commodity price fluctuations, we entered into supply contracts with some of our suppliers at fixed prices, in some cases before the price for these materials declined. These contracts locked us into fixed prices in early 2009 as market prices decreased. We entered into replacements for most of these contracts during the course of 2009, fixing lower supply costs for many of these raw materials. We expect to benefit from these lower contract prices if raw material prices become volatile and increase in 2010.

	•	We incurred restructuring and employee termination expenses in 2009. As part of our initiative to improve the efficiency of our supply chain, including the outsourcing of sub-assemblies, we restructured some of our facilities, most of which were in Europe and North America. As these initiatives occurred during 2009, our gross profit does not reflect the full-year impact of the results of these restructuring activities.

	•	Manufacturing costs represented a higher percentage of revenues in 2009 than in 2008 as a result of the decline in capacity utilization in our manufacturing facilities.

	•	In 2008 we made significant investments in technical equipment and machinery at our sites in connection with our improvement initiatives. As a result, depreciation on manufacturing equipment increased in 2009 compared to 2008.

Selling expenses.

The following table sets forth information on our selling expenses for the periods indicated.

Year Ended December 31,

2009

2008

% of

in $ millions

revenues

in $ millions

revenues

Selling expenses

159.4

9.4

183.4

9.6

Selling expenses decreased by $24.0 million in 2009, or 13.1%, compared to 2008. This decrease was primarily due to lower variable selling expenses, such as commissions and shipping expenses mainly driven by lower overall sales volumes as well as currency effects. In addition, average freight costs declined. Cost control initiatives we implemented in early 2009, relating mostly to advertising, supplies and other miscellaneous expenses also contributed to the decline.

Offsetting this decline in part were increased expenses relating to our sales organization. While our overall sales headcount decreased, we have expanded the portion of our sales force, which supports our key account management organization and the opportunity management teams which we continue to build up to market our Smart Offerings and related solutions, particularly in the United States and the European Union.

General and administrative expenses.

The following table sets forth information on our general and administrative expenses for the periods indicated.


	Year Ended December 31,
	2009				2008
			% of				% of
	in $ millions		revenues		in $ millions		revenues
Management Equity Program		-33.3		-2.0		90.7		4.8
Other general and administrative expenses		170.3		10.1		155.8		8.1

Total general and administrative expenses		137.0		8.1		246.5		12.9

Our general and administrative expenses decreased by $109.5 million, or 44.4%, in 2009. Our lower general and administrative expenses were primarily due to the non-cash $33.3 million gain related to the MEP. The MEP accounted for general and administrative expenses of $90.7 million in 2008. In compensation expense, we recognize amounts determined by reference to a formula-based valuation of the shares in our company under the MEP. That formula is based on our Adjusted EBITDA. Because, as discussed below, our Adjusted EBITDA declined in 2009, the valuation of the company used for the MEP also declined. After this offering, we will no longer be required to recognize any charges or income related to the MEP. For more information relating to the MEP, see “Related Party Transactions.”

Our general and administrative expenses other than those relating to the MEP increased by $14.5 million, or 9.3%, in 2009 as compared to 2008. This increase related mainly to expenses of $23.0 million that we incurred in our preparation to become a public company, as compared to expenses of $7.0 million in 2008. For more information relating to these expenses, see “—Historical Factors Affecting Our Recent Results—Expenses For Preparation to Become a Public Company.”

Research and development expenses.

The following table sets forth information on our R&D expenses for the periods indicated.

Year Ended December 31,

2009

2008

% of

in $ millions

revenues

in $ millions

revenues

Research and development expenses

78.4

4.6

70.7

3.7

Our research and development expenses increased by $7.7 million, or 10.9%, in 2009 as compared to 2008.

We increased our R&D activities as we intensified our focus on our Smart Offerings, particularly in developing enhancements to EnergyAxis and additional functionalities for our smart meters for both use in residential and C&I context. In our electricity segment, we completed development work on a polyphase modular smart electricity meter that accommodates all existing communication modules. In our gas segment, we invested in the development of a new generation of ultrasonic flow meters for C&I gas applications. In our water segment, we continued to enhance and extend our product offering for volumetric water meters with polymer bodies. In addition, we launched a single jet water meter that is designed to deliver improved measuring performance and comes pre-equipped for communication. In connection with these activities, we increased our R&D headcount and contracted for external services, including engineering consultants and research institutes. The increase in R&D expenses was partially offset by currency effects.

Year Ended December 31,

2009

2008

% of

in $

% of

in $ millions

revenues

millions

revenues

Other operating income (expense), net

14.8

0.9

-39.5

-2.1

Most of our other operating income (expense), net was comprised of currency gains of $14.4 million in 2009 and currency losses of $45.2 million in 2008. We describe these currency gains and losses below in “—Historical Factors Affecting Our Recent Results—Foreign Exchange Effects.”

Interest expense, net. The following table sets forth information on interest expense, net for the periods indicated.

Year Ended December 31,

2009

2008

% of

in $ millions

revenues

in $ millions

revenues

Interest expense, net

55.4

3.3

117.3

6.2

Interest expense, net decreased in 2009 by $61.9 million, or 52.8%, from $117.3 million in 2008 to $55.4 million in 2009. This decrease resulted mainly from lower interest rates on outstanding euro-denominated floating rate amounts under our Senior Facilities Agreement as market rates declined substantially, and the repayment of debt. In addition, we exchanged most of the mandatorily redeemable preferred equity certificates into equity in December 2008. This was partially offset by increased amounts we were required to pay on interest rate swaps due to the declining interest rate environment.

We incurred non-cash interest expense of $0.4 million in 2009 and of $26.4 million in 2008 in connection with our mandatorily redeemable preferred equity certificates and shareholder loan.

Other income, net. The following table sets forth information on other income, net for the periods indicated.

Year Ended December 31,

2009

2008

% of

in $ millions

revenues

in $ millions

revenues

Other income, net

3.3

0.2

2.9

0.2

Other income, net includes miscellaneous income, such as dividends from investments, and expenses not associated with other functional areas. Other income, net increased by $0.4 million in 2009 compared to 2008.

Income tax expense. The following tables set forth information on our income tax expense for the periods indicated.

Year Ended December 31,

2009

2008

% of

in $ millions

revenues

in $ millions

revenues

Income tax expense

39.3

2.3

30.9

1.6


	Year Ended December 31,
	2009		2008
	%		%
Effective tax rate		42.9		-55.0	(1)


(1)		The negative tax rate in 2008 refers to the fact that we recorded income taxes despite having incurred a loss from continuing operations before taxes. The $30.9 million in income taxes for 2008 was equal to -55.0% of our income from continuing operations before income taxes. For the calculation of our effective tax rates, see Note 7 to our audited consolidated financial statements included elsewhere in this prospectus.

Our income tax expense increased by $8.4 million, or 27.2%, to $39.3 million in 2009. This amount is equal to 42.9% of income from continuing operations before income tax for 2009. In 2009, our income from continuing operations before income tax was also affected by the gain recorded in general and administrative expense as a consequence of the reduction in the MEP valuation. Our tax expenses include changes in valuation allowances on deferred tax assets of $12.6 million in 2009 as compared to $11.4 million in 2008 and expenses for uncertain tax positions of $8.2 million in 2009 as compared to $2.9 million in 2008. We expect, assuming other conditions do not change, that our marginal tax rate will trend towards 36% to 39%, taking into consideration the current level of earnings, the distribution of those earnings among various taxing jurisdictions, our business development based on our mid-term business plan and assuming no changes in tax laws.

Net income (loss). The following table sets forth information on net income (loss) from continuing operations for the periods indicated.

Year Ended December 31,

2009

2008

% of

in $ millions

revenues

in $ millions

revenues

Net income (loss)

52.3

3.1

-87.1

-4.6

We recognized net income of $52.3 million in 2009 after having incurred a net loss of $87.1 million in 2008.

Adjusted EBITDA. The following table sets forth information on our Adjusted EBITDA for the periods indicated.

Year Ended December 31,

2009

2008

% of

in $ millions

revenues

in $ millions

revenues

Adjusted EBITDA

264.1

15.6

314.6

16.5

Our Adjusted EBITDA declined by $50.5 million, or 16.1%, from $314.6 million in 2008 to $264.1 million in 2009. On a constant currency basis, our Adjusted EBITDA decreased by 12.3% to $275.9 million in 2009. This decrease was primarily driven by overall revenue decline as well as the shift in our product mix described above from our relatively higher margin gas segment to our relatively lower margin electricity segment. The revenue driven increase in gross profit in our electricity segment was not sufficient to compensate for the decline in revenues in our gas segment. As a result, Adjusted EBITDA declined slightly as a percentage of sales by 0.9 percentage points.

Our Adjusted EBITDA is equal to our consolidated segment profit as shown in our segment results appearing below.

Results of Operations by Segment in the Financial Year Ended December 31, 2009 Compared to Financial Year Ended December 31, 2008

The following table sets forth operating data and segment profit for each of our three segments, gas, electricity and water.


	Gas				Electricity				Water
	Year Ended December 31,
	2009		2008		2009		2008		2009		2008
	in $ millions
Total revenues		899.8		1,129.4		453.1		404.1		355.9		384.0

thereof to external customers		898.1		1,127.4		445.1		395.4		352.0		381.7
thereof to other segments		1.7		2.0		8.0		8.7		3.9		2.3
Segment profit		204.0		264.1		60.4		35.0		30.4		32.3

Gas

Revenues. In 2009, the revenues of our gas segment decreased by $229.6 million, or 20.3%, from $1,129.4 million in 2008 to $899.8 million in 2009. On a constant currency basis, our revenues decreased by 15.8%.

The decline in our revenues was caused mainly by the worldwide economic downturn. The weak construction market in the United States during 2009 contributed to lower demand for both our residential and C&I meters, our gas distribution products and our gas regulators. The decline in our revenues was also due in part to a reduction in inventory levels, as some of our utility and distributor customers sought to reduce inventory in the face of weak demand in construction. This effect was partly offset by higher average prices for our residential meters in the United States.

In addition, the worldwide economic downturn negatively affected the demand for our gas utilization products as our industrial customers in the furnace engineering and machine tool industries decreased their capital expenditures in light of the economic downturn, resulting in significant volume reductions. This effect mainly impacted our revenues in Europe and Asia, where the majority of our customers for gas utilization products are located.

In Western Europe, demand for our gas metering products was negatively impacted by the weak construction markets in certain countries and deferred investment decisions by utilities as they wait on adopting new technologies and wait on responding to changing regulations. In Central and Eastern Europe, demand for our residential and C&I meters also suffered as a result of declining investments by utilities in response to the economic downturn. Increased investment by our customers in gas infrastructure projects in the Middle East and North Africa partially offset this revenue decline, as distribution stations and other advanced C&I meters with communication capabilities were delivered.

Segment profit. Our segment profit in gas decreased by $60.1 million, or 22.8%, from $264.1 million in 2008 to $204.0 million in 2009. The segment profit margin slightly decreased by 0.7 percentage points from 23.4% in 2008 to 22.7% in 2009. On a constant currency basis, our gas segment profit decreased to $212.3 million, or 19.6%, in 2009 compared to 2008.

The segment profit of our gas segment was lower in 2009 mainly due to a shift to lower margin products. These products comprised lower margin meters and equipment delivered in the context of several distribution station projects containing a larger proportion of components that we purchased from third parties thereby reducing our own profit margin. In addition, capacity utilization was lower in 2009 than in 2008. These effects were offset in part by the results of our cost-saving initiatives in the segment and lower market prices for some raw materials for which we had not entered into fixed

contracts. We improved our cost base in the gas segment through cost-saving initiatives at two sites in Germany and reducing headcount at our sites in the Unites States and in Slovakia. Our distribution and selling expenses also declined due to lower sales commissions and lower variable shipping and handling costs.

In our gas segment, we increased R&D activities and retained external engineering consultants and research institutes in connection with our introduction of new products. In North America, we introduced a gas module for EnergyAxis and new types of gas regulators. Elsewhere, we introduced a new encoder for gas meters with wired communication and worked on a new generation of ultrasonic flow meters for C&I gas applications.

Electricity

Revenues. In 2009, the revenues of our electricity segment increased by $49.0 million, or 12.1%, from $404.1 million in 2008 to $453.1 million. On a constant currency basis, our revenues increased by 16.4%.

The increase in revenues in our electricity segment was primarily driven by the increase in our Smart Offerings, mainly from deployments in North America. In the United States, we deployed EnergyAxis systems, including residential and C&I smart meters for electricity utilities and multi-utilities, under contracts with, among others, Arizona Public Service Company, Salt River Project in Arizona, Black Hills and several mid-sized utilities. We also deployed EnergyAxis systems in several regions in Canada and Central America. Outside North America, we recorded higher revenues in the Middle East, mainly due to one large order of smart meters. Our revenues also increased in Western Europe, in part due to investments in the energy infrastructure. To that end, we are engaged in more than a dozen Smart Offering pilot projects in the European Union.

The increase in our revenues was offset in part by lower sales in Eastern and Central Europe, which were negatively affected by the economic downturn. In these regions, demand for our C&I meters declined as utilities decreased investment and deferred decisions relating to new capital expenditures. In Latin America, our revenues declined largely due to decreased sales of manual-read meters in response to the economic downturn.

Segment profit. Our segment profit in electricity increased by $25.4 million, or 72.6%, from $35.0 million in 2008 to $60.4 million in 2009. The segment profit margin increased by 4.6 percentage points from 8.7% in 2008 to 13.3% in 2009. On a constant currency basis, our segment profit was $62 million in 2009, an increase of 77.1% compared to 2008.

The increase in our segment profit reflected higher margins, due in large part to a more favorable product mix among our electricity products year to year, particularly in North America. In addition, we improved utilization of capacity at our Raleigh, North Carolina site where we ramped up production of our new REX 2 residential meter. We also introduced various improvements to our design production and engineering and implemented several procurement initiatives. These positive impacts were offset in part by a reduction in volumes of our higher margin C&I meters in Eastern and Central Europe. In addition, we incurred higher costs, as a substantial portion of the sales force expansion we describe above took place in the electricity segment. We also incurred higher R&D expense in our electricity segment in connection with the R&D initiatives previously described.

Water

Revenues. In 2009, the revenues of the water segment decreased by $28.1 million, or 7.3%, from $384.0 million in 2008 to $355.9 million in 2009. On a constant currency basis, our revenues in water decreased by 1.2%.

Our revenues were mainly affected by the worldwide economic downturn, as we recorded lower sales due to weaker construction demand in our key markets, such as the United Kingdom. In addition, we experienced lower sales volume in the Middle East. This decrease was partially offset by

increased sales in North America despite challenging market conditions, mainly driven by the reorganization of our sales activities, our modified product offering and to a lesser degree various pilots of our Smart Offerings for water, including our Evolution product line. We also partially offset the decline in revenues in Western Europe with increased sales of our submetering products and Smart Offerings.

Segment profit. The segment profit in our water segment decreased by $1.9 million, or 5.9%, from $32.3 million in 2008 to $30.4 million in 2009. The segment profit margin increased by 0.1 percentage points from 8.4% in 2008 to 8.5% in 2009. On a constant currency basis, our water segment profit was $33.0 million, an increase of 2.2% in 2009 compared to 2008.

The slight decrease in segment profit was largely a result of lower revenues. In addition, although we were not able to benefit from the full effect of the decrease of average raw material prices for brass and bronze in 2009 due to fixed-price contracts we had entered into earlier, we reduced our dependence on these raw materials with the introduction of our latest generation of polymer meters, which reduces cost and limits exposure to market price volatility. Our structural costs benefited from several restructuring projects including the rationalization of our operations in Latin America and in United Kingdom. We centralized our manufacturing lines in Central Europe and continued outsourcing certain non-core processes.

Our R&D expenses declined slightly between 2008 and 2009. We invested in enhancing our smart meter water solution for the United States and other markets. In addition we introduced a new residential volumetric meter that incorporates polymer materials. In 2009, we also launched a new single jet meter with improved measuring performance that is pre-equipped for AMR functionality.

Financial Year Ended December 31, 2008 Compared to Financial Year Ended December 31, 2007

Revenues. The following table presents data on our revenues for the periods indicated:


	Year Ended December 31,
	2008		2007
	(in $ millions)
Revenues		1,904.5		1,735.6

In 2008, our revenues increased by $168.9 million, or 9.7%, to $1,904.5 million compared with revenues of $1,735.6 million in 2007. We experienced the highest rate of growth in our electricity segment, where revenues increased by 19.1%. Our gas segment grew at a strong rate as well, increasing by 8.6% and accounting for more than half of our overall revenue increase. On a constant currency basis, we recorded revenues that were 7.5% higher than in 2007.

The growth in our electricity segment reflected both an increase in the volume of unit sales and an increase in unit price due to a shift in product mix towards higher-value residential and C&I smart meters. The increase in revenues of our electricity segment occurred primarily in the fourth quarter of 2008 as a result of increased sales following the introduction of our REX 2 residential smart meters.

Revenues of our gas segment increased by $89.7 million, mainly due to increases in sales of our metering products, with gains in Europe and Asia offsetting a decline in sales in North America. Gas infrastructure projects in China, the Middle East and North Africa contributed to this increase. In the United States, the decline in housing starts negatively impacted sales of our meters, our gas regulators and our gas distribution products. In addition, higher revenues from sales of our gas utilization products contributed to the revenue increase.

Revenues of our water segment also increased by $16.1 million in 2008 compared to 2007 primarily as a result of increased unit sales in the Middle East, Eastern Europe and South America. This increase was partially offset by a decline in sales in Western Europe. In addition, demand in our North American markets remained soft as a result of the economic downturn and decline in the new residential and C&I construction markets.

For more information on our revenue development and trends, see “—Results of Operations.”


	Year Ended December 31,
	2008		2007
	(in $ millions)
North America
United States		440.9		426.2
Other North America		92.0		94.1

Total		532.9		520.3

Rest of the world
Germany		309.0		291.0
Europe outside Germany		641.3		578.4
Other		421.3		345.9

Total		1,371.6		1,215.4

Total		1,904.5		1,735.6

Cost of revenues. The following table sets forth our cost of revenues, gross profit and related data for the periods indicated.


	Year Ended December 31,
	2008				2007
			% of				% of
	in $ millions		revenues		in $ millions		revenues

Cost of revenues		1,306.3		68.6		1,207.6		69.6
Gross profit		598.2		31.4		528.0		30.4

Cost of revenues increased by $98.7 million in 2008, or 8.2%, compared to 2007. This increase was primarily attributable to the increase in manufacturing expenses, primarily driven by our increased sales volume. In addition, higher expenses for raw materials, supplies and personnel contributed to this increase.

We improved our gross profit in 2008 compared to 2007 primarily as a result of an increase in product margins due to a favorable product mix, particularly in Europe and North America. This positive development was offset in part by lower volumes in North America in each of the gas and water segments. We also increased our capacity utilization throughout our facilities in 2008, which had a positive effect on our gross profit margin. In addition, prices for raw materials were extremely volatile in 2008. The prices we paid for brass, aluminum and steel fell significantly in the second half of 2008 on the back of reduced demand due largely to the worldwide financial crisis. Overall, however, our results of operations were negatively impacted in 2008 compared to 2007 by the higher average prices of these materials.

Selling expenses. The following table sets forth information on our selling expenses for the periods indicated.

Year Ended December 31,

2008

2007

% of

in $ millions

revenues

in $ millions

revenues

Selling expenses

183.4

9.6

166.5

9.6

Selling expenses increased in 2008 by $16.9 million, or 10.2%, compared to 2007. This increase was primarily due to higher fixed selling expenses, in particular compensation expense for our sales and marketing forces, as well as higher shipping and handling costs. Both fixed and variable compensation expenses increased as we expanded our key account management organization and opportunity management teams to market our Smart Offerings and related solutions, a process that continued in 2009. Shipping and handling costs increased due to higher volumes and increased average freight rates.

General and administrative expenses. The following table sets forth information on our general and administrative expenses for the periods indicated.


	Year Ended December 31,
	2008				2007
			% of				% of
	in $ millions		revenues		in $ millions		revenues
Management Equity Program		90.7		4.8		31.1		1.8
Other general and administrative expenses		155.8		8.1		152.8		8.8

Total		246.5		12.9		183.9		10.6

Our general and administrative expenses increased in 2008 by $62.6 million, or 34.0%, compared to 2007. This was primarily due to increased non-cash compensation expenses relating to the MEP. The MEP accounted for $90.7 million of our general and administrative expenses in 2008 and $31.1 million in 2007.

In addition, expenses of $7.0 million related to our preparation to become a public company contributed to this increase in 2008. There were no such expenses in 2007. For more information relating to these expenses, see “—Historical Factors Affecting Our Recent Results—Expenses for Preparation to Become a Public Company.” The remaining other general and administrative expenses decreased slightly.

Research and development expenses. The following table sets forth information on our R&D expenses for the periods indicated.

Year Ended December 31,

2008

2007

% of

in $ millions

revenues

in $ millions

revenues

Research and development expenses

70.7

3.7

60.3

3.5

Research and development expenses increased in 2008 by $10.4 million, or 17.3%, compared to 2007. This was primarily due to an increase in the R&D headcount and, to a lesser extent, increases in external services costs and indirect materials costs.

We have increased our R&D efforts in connection with our expanding product and solutions portfolio, particularly as it relates to the Smart Grid. In 2008, we focused especially on enhancing EnergyAxis and developing further functionality in both smart and manual-read electricity meters for residential and C&I purposes. In addition, we invested in the development of a new generation of ultrasonic flow meters for C&I gas applications, introduced a new generation of gas distribution products and invested in the further development of our polymer meters for our water segment.

Other operating expense, net. The following table sets forth information on other operating expense, net for the periods indicated.

Year Ended December 31,

2008

2007

% of

in $ millions

revenues

in $ millions

revenues

Other operating expense, net

39.5

2.1

2.9

0.2

In 2008, other operating expense, net consisted primarily of the $45.2 million currency loss we describe below in “—Historical Factors Affecting Our Recent Results—Foreign Exchange Effects.” In 2007, currency losses totaled $5.7 million.

Interest expense, net. The following table sets forth information on the interest expense (net) for the periods indicated.

Year Ended December 31,

2008

2007

% of

in $ millions

revenues

in $ millions

revenues

Interest expense, net

117.3

6.2

126.9

7.3

Interest expense, net decreased in 2008 by $9.6 million, or 7.6%, from $126.9 million in 2007 to $117.3 million in 2008 as a result of a reduction in outstanding liabilities combined with more favorable interest margins under the Senior Facilities Agreement as our leverage decreased. This reduction was partly offset by a higher decrease in fair value of the interest rate swaps compared to 2007.

In 2008 and 2007, interest expense, net mainly included the interest payable to the lenders under our Senior Facilities Agreement. In addition, we incurred non-cash interest expense of $26.4 million in 2008 and $25.6 million in 2007 in connection with our mandatorily redeemable preferred equity certificates due to our shareholders. Most of the mandatorily redeemable preferred equity certificates were exchanged for preferred shares included in our equity in December 2008.

Other income, net. The following table sets forth information on other income, net for the periods indicated.

Year Ended December 31,

2008

2007

% of

in $ millions

revenues

in $ millions

revenues

Other income, net

2.9

0.2

2.9

0.2

Other income, net included miscellaneous income and expenses not associated with other functional areas. Other income, net increased by less than $0.1 million in 2008 compared to 2007.

Income tax expense. The following tables set forth information on our income tax expense for the periods indicated.

Year Ended December 31,

2008

2007

% of

in $ millions

revenues

in $ millions

revenues

Income tax expense

30.9

1.6

28.0

1.6


	Year Ended December 31,
	2008	2007
	%	%

Effective tax rate	-55.0 (1)	-289.8 (1)


(1)		The negative tax rate refers to the fact that we recorded income taxes despite having incurred a loss from continuing operations before taxes. For example, the $30.9 million in income taxes for 2008 was equal to -55.0% of our loss from continuing operations before taxes. For the calculation of our effective tax rates, see Note 7 to our audited consolidated financial statements included elsewhere in this prospectus.

Our income tax expense in 2008 increased by $2.9 million, or 10.4% compared to 2007. We reported income tax expense in 2008 and 2007 despite a loss before income taxes for a number of reasons, including the non-cash expenses relating to the MEP, which are not deductible for tax purposes.

Net loss from continuing operations. The following table sets forth information on net loss from continuing operations for the periods indicated.

Year Ended December 31,

2008

2007

% of

in $ millions

revenues

in $ millions

revenues

Net loss from continuing operations

87.1

4.6

37.6

2.2

Net loss from continuing operations was $87.1 million in 2008 compared to a net loss from continuing operations of $37.6 million in 2007. The increased losses in 2008 over 2007 were primarily due to the strong increase of compensation expenses for the MEP and foreign currency losses from the remeasurement of our foreign currency denominated indebtedness.

Net income from discontinued operations. The following table sets forth information on net income from discontinued operations for the periods indicated.

Year Ended December 31,

2008

2007

% of

in $ millions

revenues

in $ millions

revenues

Net income from discontinued operations

—

114.5

6.6

We disposed of the Ipsen Group, a manufacturer of industrial furnaces, as well as NGT in 2007, as part of the plan we adopted in 2005 to focus on our key competencies. We included these businesses in discontinued operations.

Net income (loss). The following table sets forth information on net income (loss) for the periods indicated.

Year Ended December 31,

2008

2007

% of

in $ millions

revenues

in $ millions

revenues

Net income (loss)

-87.1

-4.6

76.9

4.4

Our net loss of $87.1 million in 2008 represented a decline from our net income of $76.9 million in 2007.

Adjusted EBITDA. The following table sets forth information on our Adjusted EBITDA for the periods indicated.

Year Ended December 31,

2008

2007

% of

in $ millions

revenues

in $ millions

revenues

Adjusted EBITDA

314.6

16.5

267.7

15.4

Our Adjusted EBITDA increased by $46.9 million, or 17.5%, from 2007 to 2008. On a constant currency basis, our Adjusted EBITDA increased by 12.8% to $301.9 million in 2008. The primary driver of this increase was our increase in revenues. We were able to increase our Adjusted EBITDA as a percentage of sales by 1.1 percentage points largely as a result of our focus on costs. Our total costs have increased substantially mainly due to the extraordinary cost items not reflected in Adjusted EBITDA, primarily the MEP and the impact of exchange rate fluctuations, resulting in a net loss for 2008.

Results of Operations by Segment in the Financial Year Ended December 31, 2008 Compared to Financial Year Ended December 31, 2007

The following table sets forth operating data and segment profit for each of our three segments, gas, electricity and water.


	Gas				Electricity				Water
	Year Ended December 31,
	2008		2007		2008		2007		2008		2007
	in $ millions
Total revenues		1,129.4		1,039.7		404.1		339.3		384.0		367.9

thereof to external customers		1,127.4		1,032.5		395.4		336.4		381.7		366.7
thereof to other segments		2.0		7.2		8.7		2.9		2.3		1.2
Segment profit		264.1		233.3		35.0		43.4		32.3		21.0

Gas

Revenues. In 2008, the revenues of the gas segment increased by $89.7 million, or 8.6%, from $1,039.7 million in 2007 to $1,129.4 million in 2008. On a constant currency basis, our gas segment revenues increased by 5.0%.

In 2008, increased demand from Europe and the rest of the world was partially offset by decreased sales in North America. Infrastructure investments in certain regions such as the Middle East and Asia, focused particularly on our C&I products and distribution stations, also drove the increase in segment revenues. In addition, following a strong start, the economic downturn that took hold in 2008 increasingly affected our gas utilization products later in the year as order intake softened.

Segment profit. The segment profit in our gas segment increased by $30.8 million, or 13.2%, from $233.3 million in 2007 to $264.1 million in 2008. The segment profit margin increased by 1.0 percentage points from 22.4% in 2007 to 23.4% in 2008. On a constant currency basis, segment profit increased by 8.1% in 2008 compared to 2007.

Our segment profit increase was mainly due to a favorable product mix, as we sold a larger percentage of relatively higher priced C&I and gas utilization products. This development was support by restructuring initiatives, including at one of our sites in the United Kingdom. The increase in our segment profit was offset by higher average prices for raw materials, an increase in shipping and handling costs and the increased personnel costs in research and development.

Electricity

Revenues. In 2008, the revenues of the electricity segment increased by $64.8 million, or 19.1%, from $339.3 million in 2007 to $404.1 million in 2008. On a constant currency basis, the revenues in our electricity segment in 2008 only increased by $58.8 million or 17.3%.

The revenue growth in our electricity segment reflected both an increase in the volume of unit sales and an increase in unit price due to a shift in product mix towards higher-value residential and C&I smart meters. The increase in revenues occurred primarily in the fourth quarter of 2008 and in particular in North America, as our sales increased when our REX 2 residential smart meters were introduced to the market.

We increased our revenues in Europe during the beginning of the year. Later in the year, our business was affected by the first impact of the economic downturn, particularly among demand for our higher-priced C&I meters in Russia, where we saw utilities cut back their investments into infrastructure. In addition, we increased our revenues in Latin America, in part due to sales of several EnergyAxis systems in Central America, higher sales of manual-read meters in certain countries and increased investments into the energy infrastructure.

Segment profit. The segment profit in our electricity segment decreased by $8.4 million, or 19.4%, from $43.4 million in 2007 to $35.0 million in 2008. The segment profit margin decreased by 4.2 percentage points from 12.8% in 2007 to 8.6% in 2008. On a constant currency basis, our segment profit for the electricity segment decreased by 19.4%.

Segment profit declined despite an increase in our electricity segment revenues. This was in large part due to the decline of our traditional high margin business in a number of countries that were significantly affected by the economic downturn. In addition, our capacity utilization in our Raleigh, North Carolina facility was not consistent throughout the year, as a disproportionate level of production at that site occurred late in the year when the production of the REX 2 meter was introduced. On the expense side, we incurred substantial costs to increase our sales force as we built infrastructure to market and sell our Smart Offerings. This increase also required that we increase our segmental support services. In addition, we expanded our R&D headcount to support our push into Smart Grid solutions. We offset some of these costs with profit improvement initiatives, including a cost reduction program in the procurement process for our C&I meter business in North America.

Water

Revenues. In 2008, the revenues of our water segment increased by $16.1 million, or 4.4%, from $367.9 million in 2007 to $384.0 million in 2008. On a constant currency basis, our revenues increased by 2.7%.

The increase in our revenues was mainly the result of higher volumes in the Middle East. In addition, increased sales of water meters with AMR functionalities in Europe, despite the difficult economic conditions, also contributed to this increase. Overall, however, operations in Europe remained behind our expectations due to the lower sales volumes in the United Kingdom, where the slowdown in the residential housing market had a significant negative impact on our business. Due to the weak housing market in the United States, we also recorded lower sales volumes in North America.

Segment profit. The segment profit in our water segment increased by $11.3 million, or 53.8%, from $21.0 million in 2007 to $32.3 million in 2008. The segment profit margin increased by 2.7 percentage points from 5.7% in 2007 to 8.4% in 2008. On a constant currency basis, segment profit increased by 54.8% in 2008 compared to 2007.

We completed several reorganization and outsourcing projects designed to reduce our cost base mainly at our sites in Western Europe. These initiatives positively impacted our segment profit. Despite a higher sales volume, the cost of goods sold for our water segment remained relatively stable in 2008 on a constant currency basis despite higher average raw material prices. In 2008, our structural costs increased slightly, particularly due to an increase in R&D expenses as we increased our headcount in this area. Additionally, our personnel expenses increased as we grew our sales force and added additional key management positions.

Historical Factors Affecting Our Recent Results

Our results in the six months ended June 30, 2010 and 2009 and each of 2009, 2008 and 2007 were significantly affected by a number of factors relating to our corporate history, measures we have taken to transform our company and our preparation to become a public company. The factors we describe below are those that we have taken into account in calculating our Adjusted EBITDA, which we describe in more detail below, and are the items that our management does not allocate to the segments in calculating segment profit. These factors are:


	•	foreign currency exchange effects;

	•	the management equity program, or MEP;


	•	expenses for our preparation to become a public company;

	•	employee termination and exit costs;

	•	business process reengineering and reorganization costs;

	•	IT project costs;

	•	gain from sales of real estate;

	•	strategy development costs;

	•	effects of the termination of a distributor;

	•	business combination costs;

	•	pension curtailments;

	•	impairment of intangible assets;

	•	insurance recovery; and

	•	other items.

In addition, we disposed of Ipsen Group, a manufacturer of industrial furnaces, as well as NGT Neue Gebäudetechnik GmbH, or NGT, in 2007, as part of our plan to focus on our core competencies. As we included these businesses in discontinued operations in 2007, they did not have an effect on our continuing operations, but did have a significant impact on our net income in 2007 due to the gain we realized from their sale.

Foreign Exchange Effects

As a result of our international operations, we are subject to risks associated with the fluctuations of foreign currencies against other foreign currencies. This affects our financial statements and results of operations in various ways.


	•	As part of our consolidation each period, we translate the financial statements of those entities in our group that have functional currencies other than the dollar into dollars at the period-end exchange rates (in the case of balance sheet items) and the average exchange rates for the period (in the case of statement of operations items). The translated values in respect of each entity fluctuate over time with the movement of the exchange rate for the entity’s functional currency against the dollar. We refer to this as the currency translation effect. It is not practicable to hedge against this risk.

	•	Most of our group companies make their purchases and sales primarily in their respective functional currencies. However, entities within the group make sometimes purchases and sales denominated in currencies other than their functional currencies. To the extent that an entity makes purchases in a currency that appreciates against its functional currency, its cost basis expressed in its functional currency will increase, or decrease, if the other currency depreciates against its functional currency. Similarly, for sales in a currency other than the entity’s functional currency, its revenues will increase to the extent that the other currency appreciates against the entity’s functional currency and decrease to the extent that currency depreciates against the entity’s functional currency. These movements can have a material effect on the gross margin of the entity concerned and on our consolidated gross margin.

	•	After a purchase or sale is completed, the currency transaction effect continues to affect foreign currency accounts payable and accounts receivable on the books of those entities that made purchases or sales in a foreign currency. These entities are required to remeasure these balances at market exchange rates at the end of each period. In 2008, we incurred a foreign currency loss of $7.4 million resulting from these remeasurements; in 2009 we recognized a gain of $2.9 million and in the first six months of 2010, we incurred a loss of $0.9 million, as


		compared to a gain of $0.7 million in the first six months of 2009. We intend, through our group treasury function, to enter into foreign currency derivative financial products to mitigate exchange rate losses when the appropriate financial products are available on attractive terms. However, it is often economically disadvantageous to pay the costs associated with hedging against every possible currency movement, particularly between currencies that have traditionally been rather stable, and we will continue to be subject to this risk.

In addition to these exposures, we are also exposed to the risk of fluctuations in currency exchange rates in connection with our financing arrangements, in particular those arising out of the multi-currency borrowing facilities we have drawn upon under our Senior Facilities Agreement.

Under our Senior Facilities Agreement, we initially made drawings through our U.K. subsidiary denominated in both euro and pounds sterling. With respect to the U.K. subsidiary’s euro-denominated drawing and because the functional currency of the U.K. subsidiary is the pound sterling, that subsidiary is required to mark changes in the value of its euro-denominated liability to the banks to the market value of the euro, expressed in pounds sterling, periodically as the exchange rate of euro for pounds sterling changes. With respect to the pound sterling-denominated drawing, in 2008, Elster Holdings GmbH made an inter-company loan, denominated in pounds sterling, to its U.K. subsidiary in an amount that permitted the U.K. subsidiary to repay parts of the pound sterling-denominated tranche of the Senior Facilities Agreement it had drawn. As a consequence, Elster Holdings GmbH is required to mark the changes in value of its pound sterling-denominated loan to its U.K. subsidiary to the market value of the euro, expressed in pounds sterling, periodically as the exchange rate of euro for pounds sterling changes. These attributes of our group financing structure led us to recognize a foreign exchange rate gain of $11.5 million in 2009 and foreign exchange rate losses of $37.8 million in 2008 and $5.1 million in 2007. In the first six months of 2010, we incurred a gain of $0.3 million compared to a $17.0 million gain in the first six months of 2009.

In order to reduce the volume of foreign currency exposure at the level of the U.K. subsidiary (with respect to that subsidiary’s euro-denominated debt) and at the level of Elster Holdings GmbH (with respect to its pounds sterling-denominated inter-company loan to the U.K. subsidiary), our U.K. subsidiary recently sold two of its subsidiaries, located in South Africa and Australia, to Elster Holdings GmbH for an aggregate consideration of €57.8 million. We intend to use a portion of the proceeds of this offering to enable the U.K. subsidiary to repay the corresponding euro-denominated drawing on its books. In addition, in March 2010, our U.K. subsidiary sold additional assets to our group holding company, which permitted it to extinguish the sterling-denominated debt owed to Elster Holdings GmbH by the U.K. subsidiary.

The following table sets forth the foreign exchange transaction gains and losses resulting from these assets and liabilities in the periods indicated.


	Year Ended December 31,						Six Months Ended June 30,
	2009		2008		2007		2010		2009
	(in $ millions)

Gains (losses) related to financing		11.5		-37.8		-5.1		0.3		17.0
Gains (losses) related to accounts receivable and payable		2.9		-7.4		-0.6		-0.9		0.7

Foreign currency exchange effects		14.4		-45.2		-5.7		-0.6		17.7

Management Equity Program

In November 2006, we and Rembrandt created our Management Equity Program, or MEP, as a measure to align interests between our key management personnel, our shareholders and our company. In our accounting for the effects of the MEP, we have recalculated the value of our company, using the index described in “Related Party Transactions—The Management KG and Our Management Equity Program—The Management Equity Program,” as of the end of each financial period. To the extent the formula-based value, so determined, has changed, we have recognized a

corresponding item in our compensation expense, included in our general and administrative expenses, and made a corresponding adjustment to the additional paid-in capital of the company. If a periodic valuation shows an increase in value, we record compensation expense and an increase in our additional paid-in capital, and if the periodic valuation shows a decline in value, we show an income item in compensation expense and reduce our additional paid-in capital. There is no cash outflow for our company in respect of any of these entries.

The following table sets forth the impact on compensation expense relating to our MEP in the periods indicated.

Year Ended December 31,

Six Months Ended June 30,

2009

2008

2007

2010

2009

(in $ millions)

Management Equity Program

-33.3

90.7

31.1

1.4

-10.6

These periodic revaluations and the related recognition of compensation expense or income in respect of the MEP will continue through the date of this offering. After this offering, we will no longer be required to recognize any charges or income in respect of the MEP. Accordingly, September 30, 2010 will be the last measurement date. On September 30, 2010, we will recognize MEP-related compensation gain in general and administrative expenses. Because a market price for our shares was established at the time of our IPO, the public offering price for the IPO, or $13 per ADS, will be used to determine the valuation of our company for purposes of the final recognition of accumulated compensation expense in respect of the MEP. Based upon the initial offering price of $13 per ADS, we expect to recognize a gain in general and administrative expenses for the third quarter of 2010 of approximately $14.8 million, reducing the accumulated compensation expense accordingly.

Expenses for Preparation to Become a Public Company

Our company was formed through the purchase by private equity funds and related investors (including the members of management and others who participate in the Management KG) of business units from E.ON Ruhrgas AG. After our formation and the decision to focus on the metering business, we began taking measures designed to ensure our ability to operate as an independent company and, after completion of this offering, as a public company.

The following table summarizes these expenses for the periods indicated.


	Year Ended December 31,						Six Months Ended June 30,
	2009		2008		2007		2010		2009
	(in $ millions)

Enhancement of internal controls		12.0		0.8		0.0		2.6		4.8
Conversion of financial reporting to
U.S. GAAP		7.7		3.7		0.0		0.7		2.5
Corporate relocation and governance
cost		3.3		0.3		0.0		3.3		0.2
Recapitalization cost		0.0		2.2		0.0		—		—

Total		23.0		7.0		0.0		6.6		7.5

We have incurred costs to enhance our systems of internal controls in light of the requirements applicable to public companies with respect to disclosure controls and internal controls over financial reporting. These costs related mostly to improvements in our internal audit processes and for the documentation of internal controls as well as to enhancements to our IT systems and our financial processes. The costs for the conversion of financial reporting related to our decision to begin preparing our financial statements in accordance with U.S. GAAP and consist of consulting fees, costs for the modification of our financial reporting system to enable the preparation of U.S. GAAP financial statements and the additional audit fees we paid in respect of the comparative periods. Corporate relocation and governance costs mainly encompass fees for tax and legal advice in connection with the relocation of Elster Group SE from Luxembourg to Germany, the establishment of a corporate governance structure suitable for a public company and the costs for the preparation of this offering which are not considered offering costs under the applicable U.S. GAAP accounting standards, as well as the cost to prepare for our listing on the New York Stock Exchange. In 2008, we also incurred fees, mainly tax and legal fees, in connection with the recapitalization of the Company we describe in “Our History and Recent Corporate Transactions—Transactions Relating to Our Share Capital.”

Employee Termination and Exit Costs

Year Ended December 31,

Six Months Ended June 30,

2009

2008

2007

2010

2009

(in $ millions)

Employee termination and exit costs

25.4

10.5

15.2

2.1

5.0

In connection with our efforts to focus our company on its core business and to enhance the efficiency and operating profitability of our business procedures, we have restructured some of our operations, in particular those relating to the manufacturing processes. For details on these measures and costs, see Note 5 to our audited consolidated financial statements.

Business Reengineering and Reorganization Costs

We have recorded a number of charges and expenses, as well as several gains, in recent years in connection with the transactions and other measures we have been taking as part of the decision we and our shareholders made after our acquisition in 2005 to transform the entities that had been acquired into a more focused enterprise. In addition to employee termination and exit costs and gains from the disposal of assets, we set in motion several programs and related initiatives in connection with this transformation that are included in this item. These included initiatives designed to increase the efficiency and profitability of our core businesses, including the harmonization and standardization of procedures. Examples include severance, early retirement and other compensation expense to

former management and employees, inventory write downs, consulting services, the cost of legal reorganization of our group, impairments of long-lived assets, relocation costs for certain operations and recruitment costs. At the time of our acquisition in September 2005, we had inherited a legal structure that was unfavorable from an organizational, management and cost perspective. Therefore, we decided to simplify our legal structure. Through this structure, we also hoped to implement a more cost effective legal structure by consolidating multiple legal entities that had previously existed in one jurisdiction and to support the implementation of harmonized and standardized processes. As of December 31, 2009, this program had reduced the number of legal entities that had existed at the time of the acquisition from 133 to 85. These improvement programs continued through 2009. Despite the beneficial effects of these programs, our concern over the financial crisis and economic downturn that began in 2008 led us to adopt a further program of efficiency improvements in 2008. These initiatives are intended to further rationalize our business and operations to enable us to weather what appeared to us to be an unusual economic contraction with uncertain effects on our business.

The following table sets forth the related reorganization charges and expenses we incurred in the periods indicated in connection with the focus on our core business.

Year Ended December 31,

Six Months Ended June 30,

2009

2008

2007

2010

2009

(in $ millions)

Business process reengineering and reorganization costs

16.8

3.2

13.3

2.1

5.4

Other Historical Factors Affecting Our Results

The following table summarizes the other factors we include in our analysis of factors impacting us in connection with our history and the transformation of our company.


	Year Ended December 31,						Six Months Ended June 30,
	2009		2008		2007		2010		2009
	(in $ millions)

IT project cost		8.6		3.6		4.2		0.9		1.0
Gain from sale of real estate		-2.5		-0.8		-3.4		0.0		-0.8
Effects of termination of a distributor		—		—		—		9.0		—
Strategy development costs		3.6		7.8		4.6		0.3		0.4
Pension curtailments		0.0		0.0		-3.6		0.0		0.0
Insurance recovery		0.0		0.0		-2.6		0.0		0.0
Business combination cost		1.8		0.0		0.0		0.0		0.0
Impairment of intangible assets		2.3		1.3		0.0		0.0		0.0
Other		0.3		-0.2		0.2		-0.7		0.0

Total		14.1		11.7		-0.6		9.5		0.6

IT project costs. At the time of our acquisition, we inherited an IT system that was fragmented, hindering the implementation of our improvement objectives and our smart metering strategy. Therefore, we decided to begin to harmonize and simplify our IT and communication systems. In addition, we incurred costs relating to the outsourcing of our IT infrastructure in 2008 and 2009.

Gain from the sale of real estate. We also realized gains on the sale of some our real estate assets, including our former production sites in Yateley and Harpersfield, England and in Lille, France, as well as an office in Düsseldorf, Germany. In 2008, we realized a gain on our sale of our site in Kidderminster, England and in 2009 we realized a gain on the sale of properties in Germany and Belgium.

Effects of termination of a distributor. We wrote down inventory of $8.4 million and impaired receivables in an amount of $0.6 million in connection with our decision to terminate our relationship with one of our distributors active in an emerging market served by our electricity segment. We decided to cease doing business with the distributor when we became aware that the distributor may have engaged in conduct on behalf of other parties for which it acted that, if engaged in on our behalf, could have violated our compliance policies. When we terminated the relationship, we were unable to recover the value of inventory already in the possession of the distributor.

Strategy development costs. In 2009, we initiated a number of market and strategy studies and continued many that we had begun in 2008, including the preparation of the L.E.K. Report referred to in this prospectus. In 2008, we retained consultants to assist us in determining the viability of the new direction in which we began to take our company after the acquisition in 2005 and improving our organizational structures and processes. In particular, we sought expertise in improving the supply chain in the pre-existing and newly restructured manufacturing process that resulted from our efficiency and profitability enhancement efforts. Further costs were related to market studies, including with regard to Smart Grid market volumes and potential Smart Offering rollouts. Additional consulting expenses were related to the implementation of our group transfer pricing policy and to recruiting expenses to find key management employees to assist us in our increased focus on our Smart Offerings. In 2007, these consulting expenses were associated with tuning our strategic direction, implementing a new organizational structure, designing working capital improvement initiatives, the implementation of a transfer price guideline, the verification of our efficiency and profitability enhancement initiatives and evaluations concerning the sale of non-core assets.

Business combination costs. In 2009, we recorded the acquisition cost related to a business we acquired as expense in accordance with ASC 805, formerly FASB 141(revised). Consistent with the accounting treatment that would have applied previously, under which the acquisition costs would have been capitalized together with the purchase price, we have considered these expenses as not indicative to evaluate the business performance.

Pension curtailments. In 2007, we decided to limit the post-employment benefits available under our retirement plans in our gas business in North America. We recorded a pension curtailment as a result of this decision.

Impairment of intangible assets. In connection with our increased focus on our Smart Offerings, we reduced the value on our balance sheet of trade names we use for some of our industrial products. In addition, we decided to supplement a number of previous trade names with a new naming convention based on the Elster name. We recorded impairment charges at the time we adjusted the values on our balance sheet of these trade names.

Insurance recovery. In 2007, we received proceeds from an insurance carrier as a result of a settlement. The underlying claim arose prior to September 2005 and does not relate to our performance after our acquisition from E.ON Ruhrgas AG.

Special Note Regarding Non-GAAP Financial Measures

A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows but excludes or includes amounts that would not be so adjusted in the most comparable U.S. GAAP measure. We use and disclose the non-GAAP financial measures Adjusted EBITDA and Net income before amortization of PPA. These measures are described below. We also use and disclose the non-GAAP financial measure free cash flow. We describe free cash flow below under “—Liquidity and Capital Resources—Free Cash Flow.”

The following table sets forth a reconciliation of net income (loss) to Adjusted EBITDA for the periods indicated.


	Year Ended December 31,						Six Months Ended June 30,
	2009		2008		2007		2010		2009
	(in $ millions)

Net income (loss)		52.3		-87.1		76.9		19.1		41.8
Income tax expense		39.3		30.9		28.0		11.1		25.1
Interest expense, net		55.4		117.3		126.9		38.4		25.3
Depreciation and amortization		85.4		85.3		85.8		42.6		42.0
Gain on disposal of discontinued operations		0.0		0.0		-114.5		-2.6		0.0
Foreign currency exchange effects		-14.4		45.1		5.7		0.6		-17.7
Management equity program		-33.3		90.7		31.1		1.4		-10.6
Expenses for preparation to become a public company		23.0		7.0		0.0		6.6		7.5
Strategy development costs		3.6		7.8		4.6		0.3		0.4
Employee termination and exit costs		25.4		10.5		15.2		2.1		5.0
Business process reengineering and reorganization costs		16.8		3.2		13.3		2.1		5.4
IT project costs		8.6		3.6		4.2		0.9		1.0
Gain from sales of real estate		-2.5		-0.8		-3.4		0.0		-0.8
Effects of termination of a distributor		—		—		—		9.0		—
Pension curtailments		0.0		0.0		-3.6		0.0		0.0
Insurance recovery		0.0		0.0		-2.6		0.0		0.0
Business combination costs		1.7		0.0		0.0		0.0		0.0
Impairment of intangible assets		2.3		1.3		0.0		0.0		0.0
Other		0.3		-0.2		0.2		-0.7		0.0

Adjusted EBITDA		264.1		314.6		267.7		130.9		124.6

The following table sets forth a reconciliation of net cash flow from operating activities to Adjusted EBITDA for the periods indicated.


	Year Ended December 31,						Six Months Ended June 30,
	2009		2008		2007		2010		2009
	(in $ millions)

Net cash flow from operating activities		119.6		114.1		110.9		37.0		76.0
Income taxes paid		42.7		50.6		30.3		10.8		11.0
Interest paid		45.4		74.1		92.9		24.4		21.6
Dividends from equity method investees, net of equity in earnings		-2.2		-1.7		-1.7		-2.0		-1.6
Expenses for preparation to become a public company		23.0		7.0		0.0		6.6		7.5
Strategy development costs		3.6		7.8		4.6		0.3		0.4
Employee termination and exit costs		25.4		10.5		15.2		2.1		5.0
Business process reengineering and reorganization costs		16.8		3.2		13.3		2.1		5.4
IT project costs		8.6		3.6		4.2		0.9		1.0
Insurance recovery		0.0		0.0		-2.6		0.0		0.0
Other		0.3		-0.2		0.2		-0.7		0.0
Increase (decrease) in all other assets and liabilities, net		-19.1		45.6		6.8		49.4		-1.7
Operating cash flow from discontinued operations		0.0		0.0		-6.4		0.0		0.0

Adjusted EBITDA		264.1		314.6		267.7		130.9		124.6

Management’s Uses of Adjusted EBITDA

Adjusted EBITDA on a consolidated basis is important in analyzing our liquidity, financial condition and operational flexibility because our Senior Facilities Agreement contains financial covenants that are determined based on Adjusted EBITDA. These covenants are a material term of this agreement, and the agreement is material to us because it governs substantially all of our debt, which in turn represents a substantial portion of our capitalization. See “Capitalization.” Non-compliance with the financial covenants under our Senior Facilities Agreement—our maximum total leverage ratio and our minimum interest coverage ratio, in particular—could result in the lenders’ requiring us to immediately repay all amounts borrowed. In addition, the interest rate on some of the indebtedness we have drawn under the Senior Facilities Agreement is dependent on the leverage ratio calculated under the Senior Facilities Agreement, which is based on Adjusted EBITDA. Accordingly, in managing our business on a day-to-day basis, we take into account as an important driver in our decision making the effects of the alternatives open to us on our Adjusted EBITDA as calculated under the terms of our major financing facility.

We use Adjusted EBITDA on a consolidated basis to assess our operating performance. We believe this financial measure on a consolidated basis is helpful in highlighting trends in our overall business because the items excluded in calculating Adjusted EBITDA have little or no bearing on our day-to-day operating performance. In addition, our management, in assessing our company in the periods since its acquisition, has used this measure based on its view (and its perception of the views of its private shareholders) that it is a useful indicator of our operating performance. We also use Adjusted EBITDA on a consolidated basis as a liquidity measure. It is also important for us in projecting our interest expense.

Adjusted EBITDA, which is referred to in the Senior Facilities Agreement, which we have filed as an exhibit to the registration statement that includes this prospectus, as “Consolidated EBITDA,” is defined in the Senior Facilities Agreement as consolidated profits of the Elster Group from ordinary activities before taxation:


	•	before taking into account any accrued interest, commission, fees, discounts and other finance payments incurred or payable by or owed to any member of the Elster Group in respect of financial indebtedness;

	•	after deducting the amount of any profit of any member of the Elster Group that is attributable to minority interests or the interests of any shareholder of or, as the case may be, partner in such member of the Elster Group who is not a member of the Elster Group;

	•	after taking into account any exchange gains and losses on operational trading and hedges relating to these items, but not taking into account any other realized and unrealized exchange gains and losses (including those arising on translation of currency debt);

	•	before taking into account any gain or loss arising from an upward or downward revaluation of any asset or on the disposal of an asset;

	•	plus any loss on any one-off or non-recurring items;

	•	minus any gain on any one-off or non-recurring items;

	•	before deducting reorganization and litigation costs that are incurred and included in the base case model and any additional permitted reorganization;

	•	before deducting any fees, costs, expenses and taxes incurred in connection with the preparation of the finance documents, including the Senior Facilities Agreement, as well shareholders’ agreements and other documents relating to the acquisition of Ruhrgas Industries GmbH;

	•	before deducting non-cash pension costs (including service costs and pension interest costs) but after deducting cash pension costs (we do not make this adjustment under U.S. GAAP);


	•	plus any fees, costs or charges of a non-recurring nature related to any equity offering, investments, acquisitions or financial indebtedness permitted under the finance documents (and whether or not successful); and

	•	plus any management fees paid to funds advised by CVC and holding company costs where permitted to be paid under the finance documents,

in each case, to the extent added, deducted or taken into account, as the case may be, for the purposes of determining profits of the Elster Group from ordinary activities before taxation, plus the consolidated depreciation and amortization of the Elster Group and any impairment costs of the Elster Group.

With respect to permitted acquisitions under the Senior Facilities Agreement, we include Adjusted EBITDA for such entities in calculating our pro forma Adjusted EBITDA for purposes of that agreement. The adjustments made to income from continuing operations before income taxes of such entities directly correlate to the adjustments to net income in calculating Adjusted EBITDA on a consolidated basis pursuant to the Senior Facilities Agreement.

“Consolidated EBITDA”, as defined in the Senior Facilities Agreement, differs from the measure of Adjusted EBITDA we have disclosed in a way we believe is immaterial. This difference is that the Senior Facilities Agreement excludes the modest amount of dividends we receive from companies in which we hold minority interests, including those we account for using the equity method. We do not exclude these dividends when we calculate the measure of Adjusted EBITDA we disclose in this prospectus. These dividends totaled $3.3 million in 2009 and $2.9 million in each of 2008 and 2007, and were $1.4 million in the first six months of 2009 and $1.7 million in the first six months of 2010. The companies concerned are distributors through which we sell our products and in which we own minority interests in support of their functions, and we believe that it is relevant to assessing the performance of our business to include the dividends that these companies pay in the measure of Adjusted EBITDA we use for assessing performance. Due to the immateriality of the difference between this measure of Adjusted EBITDA and the Senior Credit Facilities definition, we do not differentiate between them in this discussion.

We also use a measure equal to Adjusted EBITDA on a segment basis as the primary measure used by our chief operating decision maker to evaluate the ongoing performance of our business segments. On a segment basis, we define segment profits as earnings of a segment before income taxes, interest expense and depreciation and amortization, as well as certain gains and losses, and other income and expense items determined by our senior management to have little or no bearing on the day-to-day operating performance of our business segments. The adjustments made to earnings of a segment before income taxes, interest expense and depreciation and amortization correlate with the adjustments made to net income in calculating Adjusted EBITDA on a consolidated basis pursuant to the Senior Facilities Agreement.

Limitations of Adjusted EBITDA

While Adjusted EBITDA is an important financial measure for our management, it has inherent limitations as an analytical tool, and you should not view it in isolation. Most importantly, it is not a substitute for the U.S. GAAP measures of earnings and cash flows, which are net income (loss) and cash flows from operating activities. Material limitations associated with making the adjustments to our earnings and cash flows to calculate Adjusted EBITDA, and using this non-GAAP financial measure as compared to the most directly comparable U.S. GAAP financial measures, include:


	•	the cash portion of our net interest expense, our income tax benefit or provision and our restructuring charges, as well as the charges related to our initial public offering, and the other items for which we make adjustments in calculating Adjusted EBITDA, generally represent charges or gains that may significantly affect funds available to use in our operating, investing and financing activities;


	•	foreign exchange gains (losses), although not immediately affecting cash when recorded, may affect the amount of funds we receive from our customers or the amount of funds we need to pay our suppliers or service our debt because we expect foreign currency effects to continue in the future; and

	•	depreciation, amortization, and impairment charges, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of the plant, equipment and intangible assets which permit us to manufacture and/or market our products. These non-cash items may nevertheless be indicative of future needs for capital expenditures, for development or acquisition of intangible assets or for an understanding of relevant trends causing asset value changes.

You may find any one or all of these items important in evaluating our performance, results of operations, financial position and liquidity, and we recommend that you consider them. Our management compensates for the limitations of its use of Adjusted EBITDA by using it as a supplement to our U.S. GAAP results to provide us with a more complete understanding of the separate factors and trends affecting our business, and to manage the business as efficiently as possible within the framework of our material financing arrangements.

Adjusted EBITDA is not an alternative to net income (loss), or cash flows from operating activities, each as calculated and presented in accordance with U.S. GAAP. You should not rely on Adjusted EBITDA as a substitute for any of these U.S. GAAP financial measures. We strongly urge you to review the above reconciliations of Adjusted EBITDA to the closest U.S. GAAP financial measures and other financial information. We also strongly urge you not to rely on any single financial measure to evaluate our business but instead to form your view on our business with reference to our audited consolidated financial statements included elsewhere in this prospectus and the other information we present in this prospectus.

Net Income (Loss) Before Amortization of PPA

We define net income before amortization of PPA as net income (loss) excluding the expenses associated with the amortization of that portion of our intangible assets that comprises the allocation of the purchase price we paid in our business acquisitions in excess of the previous carrying amount of the intangible assets before the acquisition occurred. We refer to the adjusted expense as amortization before PPA. We also present this amortization measure net of the income tax effects related to that amortization before PPA. We believe that this non-GAAP financial measure is useful to management, investors and financial analysts in assessing our company’s operating performance because it excludes the effect of the non-cash expenses that are related solely to the allocation of purchase prices paid in business acquisitions to those intangible assets acquired in connection with these business acquisitions. Fair values for these balance sheet items are determined as of the time of an acquisition and then amortized over their respective useful lives, which generally cannot be changed or influenced by management after the acquisition. By excluding these amortization expenses and the related income tax effects, we believe that it is easier for our management, investors and financial analysts to compare our financial results over multiple periods and analyze trends in our operations. For example, expenses related to amortization of intangible assets are now decreasing, but the positive effect of this decrease on our net income is not necessarily reflective of the operations of our businesses.

There are important limitations related to the use of net income before amortization of PPA instead of net income calculated in accordance with U.S. GAAP. For example, net income before amortization of PPA excludes a cost that is recurring, which is the amortization charge on the allocated assets. Additionally, the amortization expenses that we exclude in our calculation of net income before amortization of PPA may differ from the expenses that our peer companies exclude when they report the results of their operations because they relate to the acquisition in which we engaged. You may find amortization on purchase price allocations to be important in evaluating our

performance, results of our operations and financial position, and we encourage you to consider it. Net income (loss) before amortization of PPA is not an alternative to net income or net loss as calculated and presented in accordance with U.S. GAAP. We urge you not to rely on any single financial measure to evaluate our business but instead to form your view on our business with reference to our audited consolidated financial statements included elsewhere in this prospectus and the other information we present in this prospectus.


	Year Ended December 31,						Six Months Ended June 30,
	2009		2008		2007		2010		2009
	(in $ millions)
Net income (loss)		52.3		-87.1		76.9		19.1		41.8
Amortization of purchase price allocations		33.7		34.7		34.2		16.7		16.1
Less: income taxes on amortization of purchase price allocations		-11.0		-11.1		-10.4		-5.5		-5.2

Net income (loss) before amortization of PPA		75.0		-63.5		100.7		30.3		52.7

Liquidity and Capital Resources

We derive most of our liquidity from cash flows from operations and borrowing under our Senior Facilities Agreement. Our cash flows can be volatile and are sensitive to various factors including changes in working capital and the timing and magnitude of capital expenditures and payments on our indebtedness.

Cash Flows


	Year Ended December 31,						Six Months Ended June 30,
	2009		2008		2007		2010		2009
	(in $ millions)

Cash flows from operating activities		119.6		114.1		110.9		37.0		76.0
Net cash flow from (used in) investing activities		-43.0		-79.0		46.0		-16.6		-18.9
Net cash flow from (used in) financing activities		-77.4		-8.7		-274.7		7.1		-56.4
Effect of foreign exchange rate changes on cash and cash equivalents		2.0		-5.5		7.6		-3.9		-0.3
Cash and cash equivalents at the end of the period		75.4		74.3		53.0		99.0		74.7
Net cash flow from discontinued operations (included in cash flows presented above)		—		—		2.5		—		—

Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009

We recognized an operating cash inflow of $37.0 million in the first six months of 2010, as compared to an operating cash inflow of $76.0 million in the first six months of 2009. The key drivers of the change were largely payments made for services and supplies obtained in 2009, severance payments and an increase in working capital.

In the six months ended June 30, 2010, we recognized a net cash outflow of $16.6 million for investing activities, compared to $18.9 million in the six months ended June 30, 2009. The outflows in the first six months of 2010 are to a significant extent attributable to replacement costs related to our production equipment and the ordinary-course purchase of new computer software licenses for workstations and servers across our group.

Our cash inflow from financing activities was $7.1 million in the six months ended June 30, 2010, as compared to an outflow of $56.4 million in the six months ended June 30, 2009, largely

because the proceeds of our bank borrowings exceeded our repayments, which were lower than the repayments we made in the first six months of 2009.

Our cash and cash equivalents increased by $24.3 million to $99.0 million at June 30, 2010 over the prior year, an increase of 32.5%. At December 31, 2009, we had cash and cash equivalents of $75.4 million.

Financial Year Ended December 31, 2009 Compared to Financial Year Ended December 31, 2008

Our operating cash flow increased by $5.5 million, or 4.8% from $114.1 million in 2008 to $119.6 million in 2009. The primary reason for the change in our cash flow was changes in our working capital. In particular, we reduced our inventory significantly in 2009 as compared to 2008, due in part to process improvements and active management that permitted us to maintain lower inventory levels. Our accounts receivable also declined due in large part to decreased sales. This was offset in part due to lower accounts payable.

In 2009, we recognized a net cash outflow of $43.0 million for investing activities, a decrease of $36.0 million from a net cash outflow of $79.0 million in 2008. We paid the first tranche of the purchase price for a business acquisition in 2009, leading to a cash decrease. In addition, investments in intangible and tangible assets were $30.5 million in 2009 compared with $81.8 million in 2008. Our capital expenditures in 2009 were largely made in our assembly facilities, related equipment and IT infrastructure. They were driven by replacement as well as improvement investments to streamline the manufacturing network and supply chain and investments for the enhancement and expansion of production capabilities for Smart Offerings, mainly in North America and Europe. In addition, we invested in our Enterprise Resource Planning, or ERP, systems, particularly in North America, which allow us to respond to higher production demand at our site in Raleigh, North Carolina. These outflows were partly offset by inflows relating to our sale of certain real estate assets, which amounted to $14.8 million.

The cash outflow from financing activities was $77.4 million in 2009 compared to $8.7 million in 2008. In contrast to 2008, the decrease in cash was mainly caused by repayments of bank borrowings in excess of the proceeds from bank borrowings in 2009.

Our cash position is also affected by the change in exchange rates, particularly the euro against the U.S. dollar and the pound sterling in 2009.

Our cash and cash equivalents increased by $1.1 million to $75.4 million at December 31, 2009 over the prior year, an increase of 1.5%. At December 31, 2008, we had cash and cash equivalents of $74.3 million.

Financial Year Ended December 31, 2008 Compared to Financial Year Ended December 31, 2007

Our operating cash flow remained stable in 2008 as compared to 2007. Higher revenues and an increase in accounts payable were largely offset by increased inventories and accounts receivable. Our inventories increased in part due to the ramping up for the introduction of new metering products. Accounts receivable increased as our revenues increased and we diversified the countries into which we sold our products. A parallel increase in our accounts payable was driven in part by new arrangements with suppliers. In connection with our refocusing on our core business and shift in procurement strategy, we outsourced some of our manufacturing to third-party suppliers, which also contributed to the increase in our overall accounts payable.

In 2008, we recognized a net cash outflow of $79.0 million for investing activities, a decrease of $125.0 million from a net cash inflow of $46.0 million in 2007. In 2008, we invested $81.8 million in property, plant and equipment and intangible assets, largely in our assembly facilities and for office equipment, compared to $53.5 million in 2007. In 2008 and 2007, our capital expenditures were also driven by investments for the enhancement and expansion of our production capabilities for Smart Offerings. In 2008, a key investment area was production capabilities for Smart Offerings in North

America. In addition, we invested in new production facilities in the United Kingdom and Slovakia. Further investments were related to replacements in our existing production equipment as part of our profit improvement initiatives. These outflows were in part offset by inflows relating to our sale of certain real estate assets. In 2007, we received $123.8 million in proceeds from the sale of discontinued operations and $14.8 million from the sale of real estate. This inflow was partially offset by the payment of $53.5 million for purchases of property plant and equipment and $39.0 million for business acquisitions.

Net cash flow from financing activities in 2008 mainly reflected a net increase in borrowings under our Senior Facilities Agreement. In addition, we had a net outflow of $10.3 million relating to our acquisition of the remaining minority interests in two subsidiaries. In 2007, our cash outflow for financing activities was mainly due to the repayment of outstanding amounts under the Senior Facilities Agreement with proceeds from the sale of discontinued operations.

Our cash position is also affected by the change in exchange rates, particularly the strengthening of the U.S. dollar against the euro and the pound sterling in 2008.

Our cash and cash equivalents increased by $21.3 million to $74.3 million at December 31, 2008 over the prior year, an increase of 40.2%. At December 31, 2007, we had cash and cash equivalents of $53.0 million.

Free Cash Flow

We define free cash flow as cash flows from operating activities less purchases of property, plant and equipment and intangible assets. Free cash flow is not defined under U.S. GAAP and may not be comparable with measures of the same or similar title that are reported by other companies. Under SEC rules, “free cash flow” is considered a non-GAAP financial measure. It should not be considered as a substitute for, or confused with, any U.S. GAAP financial measure. There are important limitations related to the use of free cash flow instead of cash flows from operating activities calculated in accordance with U.S. GAAP.

We believe the most comparable U.S. GAAP measure to free cash flow is cash flows from operating activities. We report free cash flow to provide investors with a measure that can be used to evaluate changes in liquidity after taking capital expenditures into account. It is not intended to represent residual cash flow available for discretionary expenditures, since debt service requirements or other non-discretionary expenditures are not deducted. We urge you not to rely on any single financial measure to evaluate our business but instead to form your view on our business with reference to our audited annual consolidated financial statements included elsewhere in this prospectus and the other information we present in this prospectus. In 2007, free cash flow includes our discontinued operations.

Free cash flow is determined as follows from our consolidated statements of cash flows:


	Year Ended December 31,						Six Months Ended June 30,
	2009		2008		2007		2010		2009
	(in $ millions)
Cash flows from operating activities		119.6		114.1		110.9		37.0		76.0
Purchases of property, plant and equipment and intangible assets		30.5		81.8		53.5		18.1		22.0

Free cash flow		89.1		32.3		57.4		18.9		54.0

Capital Requirements

We require capital primarily to:


	•	finance our operations;


	•	make scheduled interest and principal payments on our debt;

	•	make planned capital expenditures; and

	•	settle contingencies, if and when they occur.

We expect to meet these requirements through:


	•	cash flow generated from operations;

	•	cash and cash equivalents on hand;

	•	available undrawn credit facilities; and

	•	capital market and other financing transactions in which we may engage in the future, notably this offering.

We believe that our working capital is sufficient for our present requirements. As of June 30, 2010, we had no material commitments for capital expenditures.

Contractual Obligations

The following table sets forth information on our contractual obligations by due date.


	As of December 31, 2009
			Less Than		1 to Less				More Than
	Total		1 Year		Than 3 Years		3-5 years		5 Years
	(in $ millions)

Long-term debt obligations		1,003.9		39.0		36.5		928.4		0.0
Capital lease obligations		8.1		1.0		0.2		3.7		3.2
Operating lease obligations		21.6		5.6		6.3		3.4		6.3
Purchase obligations		0.9		0.9		0.0		0.0		0.0
Shareholder loan		6.8		0.0		0.0		0.0		6.8
Income tax payables		23.3		6.4		9.7		2.3		4.9

Total		1,064.6		52.9		52.7		937.8		21.2

Contractual obligations for our long term debt obligations do not include future interest payments. We had a purchase obligation for services in an amount of $84.5 million as of December 31, 2009 relating to our contract to outsource our IT infrastructure. We terminated this contract in February 2010. In accordance with this termination, our partner continued to manage our IT infrastructure before transferring the management of the outsourced services to us on schedule in June 2010. During the first six months of 2010, we incurred expenses of €2.4 million and expect to incur additional expenses of €1.6 million in 2010, €1.6 million in 2011 and €1.6 million in 2012 in connection with this transition, including equipment purchases and ongoing IT-network expenses from our partner after the termination of the agreement. This purchase obligation is not included in the table above. See “Our Company—IT Infrastructure.”

Payments for pension and other long-term employee benefits are not included in the table above. Please refer to Note 13 to the consolidated financial statements for detailed information on expected payments on our German and foreign employee benefit plans.

Off-Balance Sheet Transactions

We have no off-balance sheet arrangements other than operating leases relating to computer equipment and vehicles and derivative instruments. These arrangements are not material.

Senior Facilities Agreement

Overview. In connection with the acquisition of Ruhrgas Industries GmbH, Nachtwache Acquisition GmbH (now Elster Holdings GmbH, which we refer to as Elster Holdings) entered into the Senior Facilities Agreement originally dated June 12, 2005. It has since been amended on 10 occasions, most recently as of January 11, 2010 and will be subsequently amended upon the completion of this offering and the listing of our ADSs, subject to certain conditions, as described below. We refer to this amendment as the IPO amendment. CIBC World Markets plc, Deutsche Bank AG, London Branch and The Royal Bank of Scotland plc, Frankfurt Branch were Mandated Lead Arrangers under the Senior Facilities Agreement, Deutsche Bank AG is the Facility Agent and Security Agent, CIBC World Markets plc is the Documentation Agent and these institutions plus more than 60 additional institutions via a loan syndication are the financing providers. The original main purpose of the Senior Facilities Agreement was to finance the acquisition and restructuring of Ruhrgas Industries GmbH and its subsidiaries worldwide. The Senior Facilities Agreement continues to be our main source of external financing. As of June 30, 2010, $900.4 million in aggregate principal amount was outstanding under the Senior Facilities Agreement, with $11.3 million that is due in one year or less, comprising 1.2% of our outstanding debt as of that date. In addition, €77.9 million in lender guarantees and letters of credit are outstanding under the bonding facility referred to below. The following is a summary of the terms of the Senior Facilities Agreement that we believe are the most important. We have filed the Senior Facilities Agreement as an Exhibit to the registration statement of which this prospectus is a part, and refer you to the exhibit for more information on the Senior Facilities Agreement.

Structure. The Senior Facilities Agreement provides for:


	•	a senior tranche A term loan facility, in a maximum aggregate amount of €220 million and which had an outstanding aggregate principal amount of £7.5 million ($11.3 million total) as of June 30, 2010;

	•	a senior tranche B term loan facility, in a maximum aggregate amount of €222.5 million and which had an outstanding aggregate principal amount of €111.3 million and $137.1 million ($273.6 million total) as of June 30, 2010;

	•	a senior tranche B-1 term loan facility, in a maximum aggregate amount of €202.5 million and which had an outstanding aggregate principal amount of €115.9 million ($142.3 million total) as of June 30, 2010;

	•	a senior tranche C term loan facility, in a maximum aggregate amount of €222.5 million and which had an outstanding aggregate principal amount of €111.3 million and $137.1 million ($273.6 million total) as of June 30, 2010;

	•	a senior tranche C-1 term loan facility, in a maximum aggregate amount of €202.5 million and which had an outstanding aggregate principal amount of €115.9 million ($142.3 million total) as of June 30, 2010;

	•	a tranche D second lien term loan facility which we have repaid in full and which has been cancelled;

	•	a bonding facility available in various currencies up to a maximum aggregate principal amount of €140 million of which €77.9 million ($95.1 million) was outstanding as of June 30, 2010; and

	•	a revolving facility available in various currencies up to a maximum aggregate principal amount of €150 million of which £37.8 million and €0.3 million ($57.2 million) was outstanding as of June 30, 2010.

The dollar equivalents of the borrowings denominated in euros and in pound sterling are based on the European Central Bank’s foreign exchange reference rates prevailing on June 30, 2010 of €1.00=$1.2271 and €1.00=£0.8175. The Senior Facilities Agreement also provided for a tranche D

second lien term loan facility in a maximum aggregate amount of €70 million. We repaid all amounts owed under this tranche in October 2006.

Availability. The primary purpose of the term loan facilities was to finance the acquisition of Ruhrgas Industries GmbH, including the refinancing of its outstanding debt and related transaction costs. Elster Holdings and certain of its subsidiaries drew a total amount of €40.0 million, £83.5 million and $73.9 million on the tranche A term loan facility, €111.3 million and $137.1 million on the tranche B term loan facilities, €111.3 million and $137.1 million on the tranche C term loan facilities and €70.0 million on a tranche D second lien facility. Elster Holdings drew €115.9 million and $64.2 million under the tranche B-1 term loan facility and €115.9 million and $64.2 million under the tranche C-1 facility in October 2006 in order to pay back amounts borrowed under a mezzanine facility created for the purpose of the acquisition under the tranche D second lien facility. We may no longer borrow the repaid or unused amounts under the term loan facilities.

We may use the instruments available under the bonding facility for our general corporate purposes, including for lender guarantees in bid tenders. We may use proceeds under the revolving facility for our general corporate purposes and certain capital expenditures, as well as for the financing of permitted acquisitions and reorganizations.

Interest rates and fees. Borrowings under each of the facilities bear interest at a rate equal to an applicable margin plus either EURIBOR, in the case of euro denominated facilities, or LIBOR, in the case of other currency denominated facilities, plus mandatory costs to cover the cost of compliance with the Bank of England and the Financial Services Authority or the European Central Bank, as applicable. The applicable base margin for borrowings is currently in relation to (i) the tranche A term loan facility, 1.50% per annum, (ii) the tranche B and tranche B-1 term facilities, 2.00% per annum, (iii) the tranche C and tranche C-1 term facilities, 2.50% per annum, (iv) the bonding facility, 1.50% per annum and (v) the revolving facility, 1.50% per annum.

The applicable base margins for the tranche A term loan facility, the tranche B and tranche B-1 term facilities, the bonding facility and the revolving facility are subject to adjustment each quarter based on our total leverage ratio, defined in the Senior Facilities Agreement as the ratio of the consolidated total net debt to pro forma Adjusted EBITDA (each as defined in the Senior Facilities Agreement), in respect of the rolling 12 month period ending on the last day of the relevant quarter.

The tables below set out the range of ratios and the related margin percentage per annum for each facility which are currently in effect.


			Revolving Facility
	Tranche A Term		and Bonding
Total Leverage Ratio	Loan Facility		Facility
	in %		in %

Greater than 4.50:1		2.25		2.25
Equal to or less than 4.50:1 but greater than 4.00:1		1.75		1.75
Equal to or less than 4.00:1 but greater than 3.50:1		1.75		1.75
Equal to or less than 3.50:1 but greater than 3.00:1		1.50		1.50
Equal to or less than 3.00:1		1.25		1.25


	Tranche B and
	Tranche B-1 Term
	Loan Facilities
	in %

Greater than 4.50:1		2.50
Equal to or less than 4.50:1 but greater than 4.00:1		2.25
Equal to or less than 4.00:1		2.00

Following the IPO amendment, the margin percentage in respect of each facility (including the tranche C and tranche C-1 term loan facilities) will increase by 0.75% per annum for the first two financial quarters commencing after the listing of our ADSs. Thereafter, the applicable margin for each

outstanding tranche (including the tranche C and tranche C-1 term loan facilities) will be increased as follows:


	Margin Adjustment
Total Leverage Ratio	for Each Facility
	in %

Greater than 2.50:1		0.75
Equal to or less than 2.50:1 but greater than 2.25:1		0.50
Equal to or less than 2.25:1 but greater than 2.00:1		0.25
Equal to or less than 2.00:1		No Change

The table below contains the effective interest rate for the term facilities, taking into account the applicable adjusted margins, LIBOR and EURIBOR and the relevant mandatory costs as of June 30, 2010 and December 31, 2009, 2008 and 2007.


	Effective interest rate as of
	June 30,			December 31,
Facility	2010			2009		2008		2007
	in %			in %		in %

Tranche A Term Loan Facility
• EUR denominated			(1)		2.30		4.14		5.96
• GBP denominated		2.07			2.20		3.67		7.81
Tranche B and Tranche B-1 Term Loan Facilities
• EUR denominated		2.46			2.80		4.87		6.55
• USD denominated		2.35			2.29		2.58		7.63
Tranche C and Tranche C-1 Term Loan Facilities
• EUR denominated		2.96			3.30		5.37		6.80
• USD denominated		2.85			2.79		3.08		7.88


(1)		There was no euro denominated amount outstanding under Tranche A of the Term Loan Facility as of June 30, 2010.

We are also required to pay certain commitment fees in connection with the revolving facility and the bonding facility. We pay these fees quarterly in arrears at a rate of the lower of (a) 0.75% per annum and (b) 50% of the applicable margin on the daily, undrawn, uncalled amount of the total commitments under the revolving facility or the bonding facility, as applicable. We must also pay customary commissions plus a 0.125% per annum lender fee quarterly in arrears in connection with letters of credit and lender guarantees.

Guarantees and security. The obligations of borrowers (with the exception of borrowers from the United Kingdom and The Netherlands) under the facilities entered into under the Senior Facilities Agreement and related senior finance documentation are guaranteed by Elster Holdings. Subject to certain limitations set forth in the agreement, each existing and subsequently acquired or organized subsidiary that contributes at least 5% to Elster Holdings’ pro forma Adjusted EBITDA and any of their respective holding companies must be or become a guarantor. In the event that the aggregate pro forma Adjusted EBITDA of all guarantors is less than 80% of the pro forma Adjusted EBITDA of Elster Holdings, additional subsidiaries must be added as guarantors to reach the 80% threshold. This guarantor coverage needs to be maintained at all times during the terms of the Senior Facilities Agreement.

The obligations of borrowers under the facilities entered into with the lenders and other parties under the Senior Facilities Agreement and related senior finance documentation are secured by first-ranking security interests in a broad range of assets of our corporate group. Subject to certain limitations, Elster Holdings, each subsidiary borrower and each guarantor must provide security in favor of the lenders (or the Security Agent on their behalf) the name of the lenders over its material bank accounts, material fixed assets, certain insurance policies, material intellectual property, material

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inter-company receivables, material trade receivables, material real estate and shares in other entities. If an obligor acquires assets of a material or significant value, it is required to enter into an agreement granting first-ranking security over the asset as soon as reasonably practicable. In connection with these security interests, we have pledged the shares of Elster Holdings.

Repayment of principal. We must repay the outstanding principal amount of advances under the tranche A term loan facility in semi-annual installments ending on September 30, 2012, in the currency in which the amounts were originally drawn. As of June 30,2010, we had paid back 94.8% of the outstanding principal amount, or $252.9 million, including $16.7 million in the six months ended June 30, 2010. Our next payment under Tranche A is due on December 31, 2010 and we expect to make it as scheduled. We are required to repay the aggregate principal amount of advances under the tranche B and tranche B-1 term facilities on September 30, 2013, and the advances under the tranche C and tranche C-1 term facilities on September 30, 2014. The outstanding balances of the revolving facility and the bonding facility are due on September 30, 2012.

Prepayment. Until the IPO amendment, borrowers are required to prepay outstanding amounts or provide cash cover for outstanding letters for credit, lender guarantees and advances under the revolving facility, subject to certain exceptions, with:


	•	the net proceeds of all disposals of assets, other than those specifically permitted under the agreement;

	•	certain insurance proceeds in respect of the loss or destruction of assets not applied to the repurchase of assets;

	•	100% of the proceeds resulting from any stock exchange listing of Elster Holdings or any of its subsidiaries; the percentage of proceeds that must be used to make prepayments is reduced to 50% if Elster Holdings achieves and maintains a total leverage ratio of less than 2.50:1 and to zero if it achieves and maintains a leverage ratio of less than 2.00:1;

	•	the lesser of €150 million or an amount applied in prepayment which would result in a total leverage ratio of 2.5:1 in relation to a listing of Elster Group SE, including this offering, in each case, with any excess proceeds being, at our option, applied in prepayment of the facilities or retained on the balance sheet of Elster Group SE to ensure that the total leverage ratio would be 2.5:1; and

	•	50% of Excess Cash Flow, as defined in the agreement, which will be reduced to 25% and 0% if Elster Holdings achieves and maintains a total leverage ratio of less than 4.00:1 and less than 3.00:1, respectively.

The mandatory prepayments and cash covers discussed above are required to be applied to the facilities as set out in the Senior Facilities Agreement. Through June 30, 2010, no prepayments have been required under the prepayment provisions listed above. See “Use of Proceeds.”

Following the IPO amendment, borrowers will no longer be required to prepay outstanding amounts under the Senior Facilities Agreement as set out above.

Change of control. In the event Rembrandt and the Management KG, collectively, cease to beneficially own (directly or indirectly) at least 50.1% of our equity share capital (or, following our listing, at least 30.1%) or if any holder or group of holders beneficially own more than Rembrandt and the Management KG, collectively, we will be required to immediately prepay all outstanding advances and provide cash cover for all outstanding letters of credit, lender guarantees and advances under the revolving facility.

Certain covenants and undertakings. The Senior Facilities Agreement contains a number of additional undertakings and covenants that, among other things, restrict, subject to certain exceptions, the Elster Group and its subsidiaries’ ability to:


	•	engage in mergers or consolidations;

	•	change the nature of our business;

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	•	sell, transfer, lease or otherwise dispose of assets, including receivables;

	•	enter into certain non arm’s length transactions;

	•	grant liens or other security interests on our assets;

	•	grant guarantees;

	•	make investments, loans or grant credit;

	•	enter into certain finance leases, hire purchase, conditional sale agreement or other agreements for the acquisition of assets upon deferred payment terms;

	•	enter into certain hedging transactions;

	•	enter into certain joint ventures;

	•	make certain acquisitions;

	•	move our center of main interest;

	•	issue shares or other securities;

	•	enter into certain restrictive agreements;

	•	pay dividends and distributions or repurchase our shares; and

	•	redeem, purchase or otherwise withdraw any capital contributions made to our capital reserves.

Following the IPO Amendment, we will be permitted to dispose of assets up to €50 million without restriction as to the use of the proceeds under the Senior Facilities Agreement in the event that our total leverage ratio is greater than 2.5:1 or €100 million in the event our total leverage ratio is less than or equal to 2.5:1. In addition, we will be permitted to pay dividends up to 50% of our preceding year’s net income, subject to limitations, and we will no longer be restricted from making capital expenditures as defined in the Senior Facilities Agreement.

In addition, the Senior Facilities Agreement requires us to maintain compliance with a maximum total leverage ratio, a minimum interest coverage ratio and a consolidated cashflow ratio. The maximum total leverage ratio measures our consolidated total net debt to Adjusted EBITDA. We are required to maintain a total leverage ratio of less than 4.25:1 (as of June 30, 2010) to avoid limitations and restrictions under the Senior Facilities Agreement. As of June 30, 2010, our total leverage ratio for purposes of the Senior Facilities Agreement was 3.03:1. For periods through December 31, 2009, the Senior Facilities Agreement provided that our financial ratios were determined using the consolidated financial statements of Rembrandt, prepared in euro in accordance with International Financial Reporting Standards, or IFRS. Beginning on January 1, 2010, under the Senior Facilities Agreement as amended by the IPO Amendment, our financial ratios are determined using our own consolidated financial statements prepared in dollars in accordance with U.S. GAAP.

Following the IPO amendment, we will be required to maintain a total leverage ratio of less than 3.75:1 until the quarter ending June 30, 2011. Thereafter, we will be required to maintain a total leverage ratio of 3.50:1. The minimum interest coverage ratio test measures the ratio of our Adjusted EBITDA to consolidated total net cash interest expenses. This ratio was required to be no less than 2.35:1 (as of June 30, 2010) in order to avoid the application of additional limitations and restrictions under the agreement. As of June 30, 2010, this ratio was 5.89:1. In addition, we are required to maintain a consolidated cash flow to consolidated debt service ratio of at least 1.0:1.0. As of June 30, 2010, this ratio was 3.04:1.0.

Any breach of a covenant in the Senior Facilities Agreement could result in a default under the Senior Facilities Agreement, in which case the lenders could elect to declare all borrowed amounts immediately due and payable if the default is not remedied or waived within any applicable grace

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periods. Additionally, our and our subsidiaries’ ability to make investments, incur liens, make certain restricted payments and incur additional secured indebtedness is also tied to ratios based on Adjusted EBITDA.

Events of default. The Senior Facilities Agreement contains customary events of default, in each case with customary and appropriate grace periods and thresholds, including, but not limited to:


	•	nonpayment of principal or interest;

	•	violation of covenants or undertakings;

	•	representations, warranties or written statements being untrue;

	•	cross default and cross acceleration;

	•	certain liquidation, insolvency, winding-up, attachment and bankruptcy events;

	•	certain litigation, arbitration, administrative or environmental claims having a material adverse effect on the Elster Group or any of its subsidiaries;

	•	qualification by the auditors of the consolidated financial statements of the Elster Group which is materially adverse to the interests of the lenders;

	•	certain change of control events;

	•	material non-monetary judgments or judgments which are not being contested in excess of €5 million in the aggregate being made against an obligor or any material subsidiary of the Elster Group;

	•	material adverse change; and

	•	certain ERISA matters.

Upon the occurrence of an event of default under the Senior Facilities Agreement, the lenders will be able to terminate the commitments under the senior secured credit facilities, and declare all amounts, including accrued interest to be due and payable and take certain other actions, including enforcement of rights in respect of the collateral securing the outstanding facilities.

Quantitative and Qualitative Disclosure about Market Risk

Market risk is the risk of loss related to adverse changes in the market prices, including commodity prices, foreign exchange rates and interest rates, of financial instruments. We are exposed to various financial market risks in our ordinary course business transactions, primarily from changes in commodity prices, foreign exchange rates and interest rates. We have used, and we expect to continue to use, derivative instruments to manage these risks in some cases. While we do not account for all derivative instruments as hedging instruments, we do not use these instruments for trading or speculative purposes.

Commodity Price Risk

A significant portion of our business is exposed to fluctuations in market prices for commodities, especially brass, steel, aluminum and other raw materials used in the manufacture of our products. We seek to minimize these risks through our sourcing policies (including the use of multiple sources, where possible), procurement contracts under which we seek to agree to prices for up to one year to limit our exposure to price volatility. See “Our Company—Procurement and Scalable Manufacturing Footprint.”

We do not use derivative financial instruments to manage any exposure to fluctuations in commodity prices remaining after the operating measures we describe above.

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Foreign Exchange Risk

As a result of our international operations, we are subject to risks associated with the fluctuations of foreign currencies against other currencies. We describe the kinds of risks to which we are exposed in “—Historical Factors Affecting our Recent Results—Foreign Exchange Effects.” We enter into foreign currency forward contracts to assist us in managing our currency exposures. These financial instruments are sensitive to changes in foreign currency exchange rates. At the end of 2009, we implemented a hedge accounting policy that has applied since the beginning in 2010.

As of December 31, 2009, we had entered into forward contracts with a notional amount of $8.3 million, with positive fair values of $0.2 million reported as other current assets. As of December 31, 2008, we had entered into forward contracts with a notional amount of $15.1 million.

In future periods, we may use additional derivative contracts to protect against foreign currency exchange rate risks. Alternatively, we may choose not to hedge certain foreign currency risks associated with our foreign currency exposures if such exposures act as a natural foreign currency hedge for other offsetting amounts denominated in the same currency.

Interest Rate Risk

Under the terms of our Senior Facilities Agreement, we pay a variable rate of interest which is linked to adjusted LIBOR or adjusted EURIBOR depending on the currency of the borrowing. All of our debt is subject to interest rate risk as a result of changes in these rates. Our total indebtedness as of December 31, 2009 was $1,010.4 million, of which $995.5 million was under our Senior Facilities Agreement. The remaining portion of our outstanding indebtedness is mainly through various Latin American subsidiaries and denominated in local currencies and capital leases. The interest on our other third-party bank debt is linked to local market rates and negotiated on and renegotiated on an annual basis.

Almost all our indebtedness bears interest at variable rates. Under the Senior Facilities Agreement, $677.6 million of our outstanding debt was in euros and $43.7 million of the outstanding debt was in pounds sterling. Of our total borrowings, $756.2 million, or 76.0%, was hedged through interest rate swaps. At December 31, 2009, the weighted-average interest rate on our U.S. dollar borrowings, including the effect of the interest rate swaps, was approximately 4.49%. The weighted-average interest rate on our euro borrowings, including the effect of interest rate swaps was approximately 4.34%. Holding all other variables constant, an increase in the interest rate of 1% on our variable-rate debt, after giving effect to the interest rate swaps, would increase our annual interest costs by approximately $2.4 million.

To hedge exposure to fixed interest rates under our Senior Facilities Agreement, we have entered into various interest rate swap agreements in which we receive periodic variable interest payments at the relevant EURIBOR and LIBOR rates and make periodic payments at specified fixed rates. As of December 31, 2009, we were party to five interest rate swap agreements, hedging our exposures under our U.S. dollar and euro debt under the Senior Facilities Agreement.

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The table below provides information about our financial instruments that are sensitive to changes in interest rates and the scheduled minimum repayment of principal over the remaining lives of our debt at December 31, 2009. This table does not include our other third-party debt, which totaled $8.2 million as of December 31, 2009.


	Expected Maturity Date
																Beyond
	2010			2011			2012			2013			2014			2014		Total
	(in $ millions equivalent except percentages)
Floating Rate Debt
Principal: USD
Outstanding debt		—			—			—			137.1			137.1			—		274.2
Average interest rate		3.51	%		4.61	%		6.21	%		7.11	%		7.65	%
Principal: EUR
Outstanding debt		4.9			—			18.4			327.1			327.1			—		677.6
Average interest rate		3.76	%		5.22	%		5.90	%		6.28	%		6.66	%
Principal: GBP
Outstanding debt		25.7			—			18.0			—			—			—		43.7
Average interest rate		3.10	%		4.75	%		6.18	%
Interest Rate Swaps (2)
USD denominated (3)		—			—			274.2
Average interest rate (pay)		2.24	%		2.24	%		2.24	%
Average interest rate (receive) (4)		0.88	%		1.61	%		3.21	%
Net/Spread		-1.36	%		-0.63	%		0.97	%
EUR denominated (5)		—			—			482.0
Average interest rates		2.43	%		2.43	%		2.43	%
Average interest rate (receive) (6)		1.20	%		2.29	%		2.97	%
Net/Spread		-1.23	%		-0.14	%		0.54	%


(1)		In the calculation of our average interest rates for our Senior Facilities Agreement as well as the receiving leg of our interest rate swaps, we used implied forwards for the respective money market rate. Additionally, for the debt under our Senior Facilities Agreement, we applied the relevant margin adjustment applicable to each tranche as of December 31, 2009. See “—Liquidity and Capital Resources—Senior Facilities Agreement.”

(2)		All of our swaps mature on June 30, 2012.

(3)		All of our U.S. dollar denominated debt is covered by one interest rate swap agreement.

(4)		Under this swap agreement, we receive a floating rate based on U.S. dollar 6-month LIBOR as set by the British Banker’s Association.

(5)		Most of our euro denominated debt is covered under our interest rate swap agreements.

(6)		Under these swap agreements, we receive a floating rate based on 6-month EURIBOR as reported by Reuters.

The purpose of our swaps, which are not designated as accounting hedges, is to economically hedge our interest payments on a portion of our Senior Facilities Agreement debt. Changes in our cash flows attributable to the risk being hedged are expected to be offset by cash settlements on the derivatives.

We recognized a loss of $3.8 million, a loss of $16.8 million and a loss of $8.0 million for 2009, 2008 and 2007, respectively, related solely to changes in fair value of the swaps. In the first six months of 2010, we recognized a loss of $10.1 million, related solely to changes in fair value of the interest swaps.

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Critical Accounting Policies

The preparation of our consolidated financial statements requires us to apply accounting policies and make numerous estimates and assumptions that affect the reporting of our financial condition and operating performance and the comparability of the reported information over different periods.

We have identified the following accounting policies and the related assumptions, estimates and uncertainties as those that we believe are essential to an understanding of the impact that these accounting methods, assumptions, estimates and uncertainties have on our reported financial results and the attendant risks.

Each of these matters has the potential to have a significant impact on our consolidated financial statements, either because of the significance of the consolidated financial statement item to which it relates or because it requires judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which may be ongoing in nature. Actual results may differ from our estimates under different assumptions and conditions. Our critical accounting policies include:


	•	revenue recognition;

	•	calculation of warranty provisions;

	•	valuation of inventory;

	•	goodwill and intangible assets; and

	•	uncertain tax provisions.

Revenue Recognition

Our revenues consist primarily of sales of hardware, such as meters.

Our policy is to record revenues when persuasive evidence of an arrangement to sell products or services exists, the price is fixed or determinable, shipment is made or services have been rendered and collectability is reasonably assured. We can generally determine when to recognize the revenues from delivered elements, for most of our hardware sales, where we can recognize revenues using standardized processes. The majority of our revenues are recognized when products are shipped to or received by a customer.

We also generate revenues from projects in which we design and manufacture gas utilization or metering products according to customer specifications. These projects are performed under customer contracts. As soon as the outcome of customer contracts can be estimated reliably, contract revenues and expenses are recognized in profit or loss in proportion to the stage of completion of the contract. Contract revenues include the initial amount agreed in the contract adjusted to reflect any change orders. The stage of completion is assessed by applying the percentage of contract cost incurred in relation to total estimated contract cost. When the outcome of a customer contract cannot be estimated reliably, contract revenues are recognized only to the extent of contract costs incurred that are likely to be receivable. An expected loss on a contract is recognized immediately. Revenue recognition for customer contracts requires more judgment than sales of products.

We offer integrated solutions to customers, mainly utilities, by bundling certain products with services. In certain transactions, the company bundles some products with software and services such as software implementation, project management, consulting or maintenance support.

Such integrated solution arrangements which involve multiple products to be delivered or services to be rendered (items or deliverables) are divided into separate units of accounting if a delivered item has value to the customer on a standalone basis, there is objective and reliable evidence of fair value of both the delivered and undelivered items and delivery or performance of the undelivered items is probable. The total arrangement consideration is allocated among the separate units of accounting based on their relative fair values and the applicable revenue recognition criteria

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considered for each item. If software is involved in such an arrangement, revenue recognition is also dependent upon the availability of vendor-specific objective evidence, or VSOE, of fair value for at least each of the undelivered items. The lack of VSOE, or the existence of extended payment terms or other inherent risks, may affect the timing of revenue recognition for items in such arrangements involving software.

For most of our contract arrangements that combine deliverables such as smart meters, meter reading system software, installation and project management services each deliverable is generally considered a separate unit of accounting. The amount of revenues allocable to a delivered item is limited to the amount that we are entitled to collect and that is not contingent upon the delivery or performance of additional elements. For a few contracts involving software, there is no evidence of VSOE of undelivered items. Accordingly, the delivered items cannot be separated and revenues are deferred until the last item for which VSOE is unavailable is delivered.

Deferred revenues are reported within liabilities and recognized as revenues in the subsequent period when the applicable revenue recognition criteria are met.

All revenues are recognized net of applicable taxes such as sales tax or value-added tax.

Early Adoption of Accounting Pronouncement

In September 2009, the FASB issued ASU No. 2009-13 “Multiple-Deliverable Revenue Arrangements,” or ASU 2009-13, which sets forth requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered, and ASU 2009-14, “Certain Revenue Arrangements that Include Software Elements,” or ASU 2009-14, which addresses the accounting for revenue arrangements that contain both hardware and software elements.

ASU 2009-14 modified the scope of the software revenue guidance to exclude software that is sold with a tangible product if the software and non-software components function together to provide the product’s essential functionality. ASU 2009-13 eliminates the requirement to have vendor specific objective evidence, or VSOE, or third-party evidence being available in multiple element transactions to divide the deliverables into separate units of accounting.

We elected to adopt early these accounting standards prospectively as of January 1, 2010 for all new and materially modified contracts with customers that combine multiple deliverables, such as products to be delivered and services to be rendered. Upon adoption of the new standards, we concluded that substantially all of these arrangements are excluded from the scope of software revenue recognition guidance.

Under the new accounting standards for revenue recognition, we allocate the total consideration for all elements to each separable element based upon the estimated relative selling price of each element. The selling price for a deliverable is based on its VSOE, if available, third party evidence or estimated selling price, if neither VSOE nor third party evidence are available.

We sell a majority of our meters and related hardware at prices that are within a narrow range and have established VSOE for that range. We have contracts that contain multiple deliverables including hardware, software, software maintenance, and project management and installation services.

If meters and hardware represent a deliverable within a multiple element arrangement, we use the contracted price as the selling price if it is within a narrow range; if the contracted price falls outside that range, we use the midpoint of the range as the selling price. If installation services are involved in a multiple element arrangement, we use the price charged by subcontractors (third-party evidence) as the selling price.

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We do not sell software licenses separately, but use a standardized pricing structure for software to determine what we use as the selling price. The price for the software license forms the basis for software maintenance services, which are then renewed by our customers at contracted prices.

Project management services are quoted based on standard prices and are based on our consideration of the estimated hours required to provide the services plus a profit margin. We use these standard prices to estimate the selling price of our project management services.

Meters and related hardware account for a significant majority of the total contract value in an arrangement where the deliverables also include software and services. Accordingly, there were no significant changes in the selling price or the methodology used to estimate the selling price resulting from the adoption of the new accounting pronouncements.

We recognize revenue for delivered elements that have stand-alone value to the customer in accordance with our revenue recognition policies for such products or services and defer revenue for undelivered elements until delivery of an element. The amount of revenue recognized is limited to the amount that is not contingent upon future shipments of products or rendering of services or performance obligations.

As a result of this change in accounting policies for revenue recognition, revenues for the three and six months ended June 30, 2010 were approximately $3.9 million higher than revenues would have been using the previous accounting policies for revenue recognition. The increase in revenue results from shipments of products, mainly electricity meters, in those interim periods of 2010 that relate to contracts with customers containing undelivered elements for which we were unable to establish VSOE under the previous standards.

Under the accounting policies used prior to the adoption of the new pronouncements, we were precluded from recognizing revenue for delivered elements, such as meters and hardware, because we could not establish VSOE for project management services that had not been rendered. Accordingly, certain multiple-element arrangements were accounted as one unit of accounting and revenue was not recognized until the final element, typically services, was delivered.

Pursuant to the new accounting guidance, as long as we are able to estimate the relative selling price for all elements (including for outstanding services), we do not have to establish VSOE to be able to recognize revenue on delivered elements. Accordingly, revenue is recognized for new or materially modified contracts when an element is delivered and depending on the specific contract, several units of accounting are separately recorded as revenue. As a result, revenue recognition for delivered elements is no longer delayed under the new pronouncements as compared to the previous policy.

Calculation of Warranty Provisions

We offer standard warranties on our hardware products. We accrue the estimated cost of warranty claims based on historical and projected product performance trends and costs. We test our new products before the product launch in an effort to identify and mitigate potential warranty issues prior to manufacturing. We also conduct continuing quality control efforts during manufacturing. If our testing and quality control efforts fail to detect a fault in one of our products or if our expectations of warranty claims are too optimistic, our warranty accruals may turn out to be insufficient. If an unusual trend is noted, an additional warranty accrual may be assessed and recorded when a failure is probable and the cost can be reasonably estimated. We continually evaluate the adequacy of the warranty provisions and make adjustments when necessary. The warranty reserve may fluctuate due to changes in estimates for material, labor and other costs we may incur to repair or replace projected product failures. As of December 31, 2009, our accruals for warranty provisions totaled $34.8 million, compared to $32.5 million as of December 31, 2008.

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Valuation of Inventories

We value our inventories at the lower of cost or market value using the average cost method. Inventories include raw materials and supplies, sub-assemblies and work in progress, finished goods and goods for resale. Inventory amounts include the cost to manufacture the item, such as the cost of raw materials and labor and other applied direct and indirect costs. As of December 31, 2009 and 2008, we had inventory of $147.8 million and $192.9 million, respectively. We review the recoverability of inventory based on regular monitoring. We review our inventory for marketability and determine whether certain inventories are obsolete. If the estimated market value, which is based upon assumptions about future demand and market conditions, falls below the original cost, the inventory value is reduced to the market value. These estimates and assumption about the potential recoverability may deviate from the actual future recoverability and may lead to associated write-offs. Each of these factors could result in adjustments to the valuation of inventory in future periods. The inventory levels may vary from period to period in relation to the factory utilization, the supply chain utilization and the order execution.

Goodwill and Intangible Assets

Goodwill and intangible assets usually arise in business combinations. At December 31, 2009, goodwill was $981.6 million compared to $913.7 million at December 31, 2008. The increase was primarily caused by the goodwill related to a business acquisition and exchange rate changes.

On an annual basis, we test goodwill for impairment in a two-step approach as of December 31 unless there is an event which would trigger the requirement to test goodwill for impairment at an earlier date. In the first step, we compare the fair value of a reporting unit with its carrying amount. If necessary, in the second step, we compare the implied fair value of the reporting unit’s goodwill with the carrying amount of the goodwill. The implied goodwill is determined in the same manner as a business combination.

Between annual goodwill impairment tests, events may occur which could cause us to test for impairment in an interim period. Triggering events that could more likely than not reduce the fair value of our reporting units and require us to test for impairment in an interim period include significant adverse changes in legal factors or the business climate, unanticipated competition, a more-than-likely expectation that a portion of a reporting unit will be sold or otherwise disposed of or an impairment of significant long-lived assets (other than goodwill) within a reporting unit.

The operating segments to which we allocate goodwill are our reporting units, based on their similar economic characteristics. We allocate all goodwill to those reporting units that we expect will benefit from a business acquisition. When we dispose of all or a portion of a reporting unit, we include the goodwill of that reporting unit in the carrying amount of the reporting unit or portion sold in determining the amount of gain or loss from the disposition. The estimates of fair value of a reporting unit are determined based on a modified discounted cash flow analysis. A discounted cash flow analysis requires us to make various judgmental assumptions, including assumptions about the timing and amount of future cash flows, growth rates and discount rates.

The assumptions about future cash flows and growth rates are based on our annual budget and mid-term business plan for each reporting unit respectively. Such assumptions take into account numerous factors including historical experience, anticipated economic conditions, third party market studies, the introduction of new products and solutions also with regard to Smart Offerings, profitability and developments with regard to the regulatory framework as well as developments in our industry and market conditions.

Discount rate assumptions for each reporting unit take into account our assessment of the risks inherent in the future cash flows of the respective reporting unit and our weighted-average cost of capital.

Based on our most recent testing of the fair value of our reporting units as of December 31, 2009, we do not believe that any reporting unit is currently at risk of its fair value falling below the

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carrying amount of the reporting unit. Although no goodwill impairment had to be recognized to date, the actual cash-flow development compared to the planned cash-flows based on our estimates and assumptions may lead to impairment charges in the future.

Intangible assets. Separately acquired intangible assets are measured at cost. The cost of intangible assets acquired in a business combination is their estimated fair value on the date of the acquisition.

Intangible assets with indefinite useful lives are tested for impairment at least annually and a review to determine whether the indefinite life assumption continues to be appropriate is performed. Any changes to the indefinite useful life assumption are recognized prospectively by amortizing the asset over its estimated remaining useful life. Certain trade names acquired in business combinations have been established many years ago, are being used by us and are expected to provide an economic benefit in the form of a competitive advantage for an indefinite period of time.

Intangible assets with finite lives are amortized over the estimated economic life using the method that best approximates their benefits (which is generally the straight-line-method) and are assessed for impairment whenever there is an indication that the intangible asset may be impaired.

Once a triggering event has occurred, the impairment test employed is based on whether the intent is to hold the asset for continued use or to hold the asset for sale. If the intent is to hold the asset for continued use, first a comparison of undiscounted future cash flows against the carrying value of the asset is performed. If the carrying value exceeds the undiscounted cash flows, the asset would be written down to the fair value which considers discounting. If the intent is to hold the asset for sale, to the extent the carrying value is greater than the asset’s value, an impairment loss is recognized for the difference.

Significant judgments in this area involve determining whether a triggering event has occurred, the determination of the useful life, the determination of the cash flows for the assets involved and the discount rate to be applied in determining fair value.

Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset or asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life. If the recoverability test indicates that the carrying value of the asset is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset’s carrying amount and its estimated fair value.

The use of different estimates or assumptions in determining the fair value of our goodwill, indefinite-lived and definite-lived intangible assets may result in different values for these assets, which could result in impairment or, in the period in which impairment is recognized, could result in a materially different impairment charge.

Uncertain Tax Provisions

We operate with our subsidiaries in various jurisdictions and Elster Group SE and its subsidiaries are therefore subject to audits of the respective tax authorities.

We estimate income taxes in each jurisdiction in which we operate. The tax rate is subject to changes based on several factors like fluctuations in our taxable income but also with regard to the split between domestic and foreign income, new or revised tax legislation and the possibility of utilization of tax credits or loss carryforwards. Significant judgment is involved with regard to the determination of our tax position and with regard to the use of deferred tax assets and potential write-offs associated herewith. We assess the likelihood that deferred tax assets, which include net

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operating loss carry forwards and temporary differences, to be recoverable based on our annual budgets and mid-term business plan. We record valuation allowances to reduce the deferred tax assets to the extent we believe the recoverability is not ensured. In making these judgmental estimates we consider all available positive and negative evidence with regard to future taxable income, tax planning strategies among others. We are required to make judgmental assumptions about subjects which are out of the control of management.

We evaluate our tax position with regard to tax benefits and risks so far not reflected as such in our tax returns. In applying the accounting standards, we consider the relative risks and merits of positions taken in tax returns, considering statutory, judicial and regulatory guidance applicable to those positions. Accounting standards require us to make assumptions and judgments about potential outcomes that lie outside management’s control. To the extent the tax authorities disagree with our conclusions and depending on the final resolution of those disagreements, our effective tax rate may be materially affected in the period of final settlement with the tax authorities.

The tax audits can involve complex issues, which may require an extended period of time to resolve. We believe we have recorded adequate income tax provisions and reserves for uncertain tax provisions.

Recent Accounting Pronouncements Not Yet Adopted

In December 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-16 to amend Accounting Standards Codification (ASC) Topic 860 to reflect the amendments from FASB Statement No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140” (ASU 2009-16). ASU 2009-16 eliminates the concept of a qualifying special-purpose entity; removes the scope exception from applying the guidance on the consolidation of variable interest entities to qualifying special-purpose entities; changes the requirements for derecognizing financial assets; and requires enhanced disclosure. ASU 2009-16 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, and for interim periods within that first annual reporting period. ASU 2009-16 will be applied prospectively to new transfers of financial assets occurring on or after the effective date. ASU 2009-16 will not have an effect on our consolidated financial statements, because we have not transferred financial instruments to a qualifying special-purpose entity.

In December 2009, the FASB issued Accounting Standards Update No. 2009-17 to amend Accounting Standards Codification Topic 810 to reflect the amendments from FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)” (“ASU 2009-17”). ASU 2009-17 replaces the quantitative-based risks and rewards approach with a qualitative approach that focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance. It also requires an ongoing reassessment of whether an entity is the primary beneficiary and requires additional disclosures about an enterprise’s involvement in variable interest entities. ASU 2009-17 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, and for interim periods within that first annual reporting period. We are currently evaluating the impact that the adoption of ASU 2009-17 will have on our consolidated financial statements, although we do not expect that ASU 2009-17 will have a material effect on the our consolidated financial statements.

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OUR INDUSTRY

Our industry provides metering products, communications and network systems, controls, software and services to gas, electricity and water utilities around the world. Historically, our industry has provided discrete manual-read metering products and manual process and control systems for use in the residential and the C&I markets. The primary focus of the industry has historically been on the standard mechanical meter at the customer’s premises. While manual-read meters will remain an important part of our industry, our industry is increasingly focusing on meters that are equipped with communications capabilities and the software that links these meters to other control devices and enable the collection of data for utilities and end customers.

By providing measurement and control functionality, the meter remains a critical component in the distribution of gas, electricity and water. Equipped with these communication capabilities and applications, which we describe in more detail below, the meter is being enhanced to function as the critical link between the end-user and the Smart Grid. You can view a graphical illustration of the elements within the Smart Grid on the inside front cover of this prospectus.

The ABS Report estimates that the worldwide annual growth rate in units was 5.9% from 2006 to 2009. Key drivers of this growth included population expansion, residential and commercial construction, infrastructure development, installation of meters at previously unmetered endpoints, required replacement cycles and required or voluntary product upgrades. The ABS Report also estimates that, the global installed meter base at the end of 2008 was 2.9 billion gas, electricity and water meters. Annual demand reached $8.8 billion globally in 2009 as estimated by L.E.K. L.E.K. estimates that the top three providers accounted for approximately 46.7% of the overall market by value in 2009.

We view the metering business as being divided into three levels of increasing technological sophistication.


	•	Manual-read meters are devices that measure gas, electricity and water consumption data. They are based on mechanical technology, in which mechanical components measure the movement of gas or water, electromechanical technology, in which electricity is measured by the mechanical movement of a disk, or solid state technology, in which gas, electricity or water is measured by electronic devices. Manual-read meters do not have communications capabilities, requiring the manual on-site reading of the usage data recorded by each meter. In our experience, critical quality criteria for manual-read meters include measurement accuracy, reliability, durability and, especially in the case of gas meters and regulators, safety. Manual-read meters will continue to be an important and stable source of revenues for our industry in the future, as the evolution towards the Smart Grid, the meters included in it and related infrastructure will occur at differing rates within the gas, electricity and water industries across different regions and end markets.

	•	Automated Meter Reading, or AMR, typically enables one-way communication of periodic consumption data from the meter to the utility, thereby eliminating the need to enter the consumer’s premises. AMR is usually accomplished either through the use of a wireless technology such as radio frequency, or RF (which includes cellular telephony), wired telephony, or power line communications technology, or PLC, using the utility’s existing power lines. Simpler AMR systems permit data to be collected through the use of “walk-by” or “drive-by” meter readings that can be made from a point close to the meter, while more advanced transmission technologies, such as cellular telephony, many power line systems and some radio frequency systems, permit meter reading to take place from more remote locations. We believe that our industry will continue to experience demand for AMR systems as utilities seek to reduce their operating costs without the requirement for two-way communication or other more advanced capabilities.

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L.E.K. estimates that as of December 31, 2008, meters enhanced with AMR technology accounted for approximately 28% of the gas, electricity and water meters in North America and approximately 3% of the meters in the seven European countries covered by the study. L.E.K. also estimates that total demand for AMR meters in the 19 countries included in its report was to be $1.5 billion in 2009, increasing by an annual average rate of 7.8% to reach $2.2 billion by 2014.


	•	Advanced Metering Infrastructure, or AMI, is a technology that allows two-way communication between the smart meter and the utility or other parties, such as the consumer. For electricity meters, RF mesh communications technology is used in North America, whereas PLC or GPRS technology is preferred by most utilities in Europe. RF mesh technology uses a radio frequency communications network in which nodes within the system can act as communications paths to other nodes within the system, allowing a path around communications blockages and improving the reliability and efficiency of communications systems. For gas and water meters, RF is preferred due to its low implementation cost. In addition to the remote, real-time collection of consumption data, AMI technology integrates interactive features, including the ability to disconnect or reconnect service, upgrade devices and deliver instructions to other devices. These smart metering systems can provide the basis for more advanced Smart Grid applications such as in-home displays and real-time pricing. AMI currently has relatively low penetration rates worldwide and is predominantly used in electricity metering applications. The continued adoption and global rollouts across gas, electricity and water will provide extensive opportunities for our industry in the coming years.

L.E.K. estimates that meters enhanced with AMI technology accounted for only 5% of the gas, electricity and water meters in North America and 8% of the meters in the seven European countries covered by the study at the end of 2008, with only minimal penetration rates elsewhere. L.E.K. expects the installed base of 52 million units to grow at an average annual rate of 32.9% between 2009 and 2014, which it estimates will represent a total market potential of $21.5 billion between 2010 and 2014. L.E.K. expects the market to have reached an annual demand of $4.7 billion, or 47.9 million units (approximately 13% penetration), by the end of 2014 with significant AMI penetration opportunity remaining.

The Meter as the Gateway to the Smart Grid

In recent years, issues including energy and resource scarcity, shortcomings in grid reliability, concerns about global climate change and energy and water dependency risks, among others, have moved to the forefront of political and social agendas. In addition, utilities are focused on the need for improved reliability of supply, theft-reduction, leakage detection and customer service. We believe that regulators, utilities and consumers are increasingly looking for responses to the following imperatives:


	•	encouraging conservation, reduce carbon dioxide and other emissions and promote more efficient use of energy and scarce natural resources;

	•	improving grid reliability;

	•	increasing metering and automation within the grid itself in support of deregulation to allow consumers to choose among multiple vendors of gas, electricity and water;

	•	enabling increased competition in the provision of gas, electricity and water;

	•	promoting consumer awareness and the ability to intelligently implement more complex billing systems;

	•	reducing operating costs for utilities and prices for consumers;

	•	enabling dynamic pricing models, including, in the case of electricity, critical peak pricing and demand response;

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	•	permitting, in the case of water, the flexible and efficient management of and response to scarcity issues and drought conditions;

	•	reducing energy and water dependencies within and among countries;

	•	enabling, in the case of electricity, a shift to electric vehicles; and

	•	facilitating, in the case of electricity, renewable (solar and wind) generation and distributed generation, including functionality that permits consumers to feed electricity into the grid.

We believe that these imperatives are driving the adoption of the Smart Grid. The term Smart Grid is commonly used to refer to gas, electricity or water networks that allow utilities to measure and control production, transmission and distribution more efficiently through the use of communications technology. We refer to the meters, communications networks and related software solutions that have been developed in response to these imperatives as Smart Grid solutions. Smart Grid solutions use these components and related applications designed to optimize functionality for utilities and their end customers.

We believe that Smart Grid solutions will continue to evolve and deliver substantial economic and societal benefits to gas, electricity and water utilities and consumers. For example, Smart Grid solutions are designed to enable utilities to improve revenue and reduce operating costs by decreasing costs associated with meter reading and field service calls and enhance distribution systems by managing peak load usage through critical peak pricing and demand response. For consumers, Smart Grid solutions are designed to enhance control and management of energy consumption by delivering timely usage information and/or enabling prepayment systems and reduce their carbon footprints by reducing or reallocating electricity usage in response to consumption information.

To facilitate and align the objectives of regulators, utilities and consumers, industry participants often belong to various associations on interoperability standards and related matters. These include the American National Standards Institute in North America, or ANSI, the European Smart Metering Industry Group, the Wavenis Alliance and the ZigBee Alliance, which is an association of companies seeking to develop open standards for communications among devices in varying industries. These associations have helped to set some of the standards used in our industry. For example, ANSI standards are used for data that is communicated by a smart meter to a utility and help define other protocols used in our industry. Additionally, in our experience, grid infrastructure related purchase decisions are increasingly being made by the utilities’ more senior management as the size of deployments and the value of the required upfront investments increase.

We believe that the Smart Grid customer base of our industry includes municipally-owned utilities, investor-owned utilities, or IOUs, and multi-utilities around the world. Depending on their respective markets, these customers have varying requirements that are frequently based on local or regional standards and practices. In our experience local sourcing practices lead industry participants to take different approaches in offering their respective solutions. For instance, North American utilities usually seek flexible and interoperable solutions from third-party system integrators. In contrast, large European utilities tend to design and develop their own systems for their own use and source these components and sub-systems from various third-party Smart Grid vendors.

In our view, it is difficult to quantify or otherwise measure with certainty the proliferation of Smart Grids around the world, due largely to the early stage of the development of the market and the different rates of adoption from one market to the next. However, we believe that there is a significant growth opportunity for our industry in the coming years. The Scott Report estimates that as of December 31, 2009, smart metering systems comprised over 13% of all electric meters installed in the United States and will increase to over 50% within the next few years. L.E.K. estimates that there will be between 400 and 500 million AMI meters and the same number of AMR meters sold between 2010 and 2019. In addition, many of our own customers have indicated to us that they intend to upgrade their infrastructure to incorporate Smart Grid solutions and many governments around the world are promoting regulatory initiatives that support Smart Grid adoption.

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We believe that this will create opportunities for traditional metering companies as well as companies from other high-technology industries. To date, electricity utilities and multi-utilities have led the implementation of Smart Grid solutions. These installations have occurred mainly in North America and Europe and incorporate many of the technologies and capabilities described above. Smart Grids in the gas and water markets have not yet been implemented as widely, but exist in some cases, also mainly in the United States and Europe. These Smart Grids incorporate technology that allows remote monitoring and control of the network, including leak detection. Moreover, Smart Grid components, such as advanced communications technology, have been used in some developing countries for theft detection.

L.E.K. estimates that more than $10.6 billion will be invested in North America from 2010 to 2014 in AMI infrastructure with more than 105 million total AMI deployments expected across to upgrade gas, electricity and water networks. We expect that accelerated smart metering rollouts in European gas markets and global water markets will begin by 2012. We believe that further waves of implementation will follow afterwards, resulting in significant growth opportunities, both in the short term and for the foreseeable future.

Regulatory Impetus for the Emergence of the Smart Grid

New legislative and regulatory initiatives in many countries have actively supported energy efficiency and the emergence of the Smart Grid. These regulatory responses include the following legislative and regulatory enactments, which we describe in more detail under “Regulation and Supervision”:


	•	United States: The American Recovery and Reinvestment Act of 2009, or ARRA, provided $3.4 billion in matching grants for Smart Grid programs. In addition, ARRA provides significant grants for the development of water utility infrastructure, including more than $200 million for smart metering, which we expect will accelerate the AMR/AMI upgrade cycles for water utilities nationwide.

	•	European Union: In 2009, the European Union implemented a series of regulatory initiatives, commonly called the Third Energy Package, replacing the 20/20/20 requirements and providing a mandatory framework for the upgrade of all EU gas and electricity meters with smart meters by 2022. ABS estimates, as of December 31, 2008, that there were more than 370 million gas and electricity meters installed in the European Union.

In addition, governments in Australia, Canada, Russia, the Middle East and other places are implementing their own energy efficiency programs and promoting the rollout of the Smart Grid in the near future. Some of these regulations are still in the earliest stages of implementation and may be revised or implemented in different ways. In addition, these regulations could be delayed in their implementation. It is unclear what effect revision or implementation of these regulations could have on our industry, although we believe that taken together they evidence the likelihood that Smart Grid adoption will occur around the world in the coming years.

Meters and Smart Grid Solutions in the Market Segments

Gas

Gas meters are used in residential and C&I settings and are installed for a number of applications at various points along the gas distribution network, starting at the point of exploration and production and continuing throughout the transmission network. In gas, technological developments have led to a shift towards solid state meters, especially in C&I applications, which, along with other industry improvements, have enhanced accuracy and reliability. The gas industry requires downstream distribution metering at both main lines and service lines. In addition, other components in the gas distribution network play key safety roles in the gas industry by controlling pressure, switching supply on and off, as well as detecting leakage and pressure drops.

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ABS estimates that global household penetration for piped gas at the end of 2008 was comparatively low at 20.8%, much less than penetration rates for electricity. We believe that penetration is poised for growth as a result of ongoing gasification due largely to regulatory support for the replacement of “dirtier” fossil fuels, such as oil and coal with natural gas.

ABS estimates that the global gas metering market had an installed base of 395 million meters in 2008 with an annual demand of approximately $2.0 billion, representing approximately 27 million meters. In 2009, L.E.K. estimates that the top three providers accounted for approximately 52% of the market as measured by revenues. In the 19 countries covered by the L.E.K. study, demand is expected to grow by an average annual rate of 7.6% in terms of units and 9.4% in terms of value annually through 2014 as a result of household growth, meter replacements, intensive gasification or network upgrades in many regions and growing smart meter deployments.

For the time being, gas meter upgrades will remain AMR-centric as utilities continue to implement primarily one-way communication networks that use either drive-by, wireless or fixed network technology to address more immediate potential cost savings. Unlike the electricity and water markets, AMR modules are typically retro-fitted to installed gas meters. Given that manual-read meters account for more than 85% of the installed gas metering base in the 19 countries included in the L.E.K. study, there is a significant market opportunity for AMR refurbishment services and AMR modules.

Out of the more than 34 million AMR and AMI gas units deployed in the 19 countries included in the L.E.K. study, L.E.K. estimates that North America had the largest installed base in AMR-enabled gas meters as of December 31, 2008. L.E.K. estimates that AMR is expected to continue to account for the largest share in annual demand by units for 2009 to 2014 in North America. The rollout of AMI is expected by L.E.K. to grow quickly over the next decade. For example, L.E.K. estimates that AMI rollouts will trigger replacement of 15% to 20% of the installed gas meter base in the United States due to incompatibility issues that arise when older meters cannot support electronic modules or functionalities.

L.E.K. expects demand for AMR/AMI gas metering products in the 19 countries included in its study to grow at an average annual rate of 26% and 19% in units and value, respectively, through 2014 as the market in those countries for manual-read gas meters declines.

The gas utilization market provides safety devices for the control and use of gas and related components and systems for the regulation of combustion processes. This market caters to commercial boiler manufacturers, furnace builders and end-users from the metal and ceramics as well as the incineration industries. In an effort to save energy costs, the demand from our customers in this market for energy efficient products was increasing prior to the recent economic downturn, and we expect this growth to resume. We believe that the key growth drivers in the utilization market are economic growth, cost savings, residential and commercial construction, increased complexity of controls through use of renewable energy sources and legislation requiring increased energy efficiency.

Electricity

Electricity meters are installed, in both residential and C&I settings, at the delivery point to the consumer and at various points within the electricity grid. In the electricity market, while electromechanical meters have historically been the industry standard, and these meters continue to be sold in many countries around the world, functionality requirements have recently driven many utility customers to move to solid state meters.

The electricity market is the largest of the end markets we serve. ABS estimates that the worldwide installed base of electricity meters was 1.7 billion in 2008 and annual demand totaled 129 million units or $5.0 billion in that year. L.E.K. estimates that the top three providers held a combined market share, as measured by revenues of approximately 52.8% in 2009. L.E.K. projects demand to grow in the 19 countries included in its study by an annual average of 4.3% in terms of

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units and 10.0% in terms of value through 2014. This growth will primarily be driven by natural replacement cycles, the upgrade of some existing electromechanical and solid state meters to smart meters with AMR and AMI technology, urbanization and residential and commercial construction cycles. We believe that this increased value growth will result mainly from the introduction of higher value smart metering products. The electricity market is the most advanced end market in terms of Smart Grid deployment, with 48 million AMI electricity meters installed in the 19 countries covered by the L.E.K. study as of December 31, 2008.

L.E.K. estimates that the North American electricity market, which includes IOUs, municipalities and electric cooperatives, some of which are multi-utilities, had an installed base of more than 185 million meters as of December 31, 2008, with demand in 2009 expected to be approximately 17 million units, with an aggregate value of approximately $1.5 billion. The deployment of AMI metering is most advanced in North America, with more than 27 million endpoints upgraded as of June 30, 2010, as estimated in the Scott Report.

L.E.K. estimates that the electricity markets in the European countries included in the L.E.K. study had an installed base of 244 million meters as of December 31, 2008, and demand in those markets reached approximately 9.9 million units in 2009 with an aggregate value of more than $420 million. As in North America, adoption of Smart Grid technologies is primarily driven by utilities, bolstered by local and European regulation. L.E.K. expected total AMI demand in these seven European countries in 2009 to be more than 1.3 million units, representing a market opportunity of approximately $110 million and estimates European demand for AMI-enabled electricity meters will grow rapidly with an aggregate demand of almost 60 million meters from 2010 through 2014, representing a market opportunity of more than $5.5 billion.

Water

Water meters are installed for a number of application areas, including water withdrawal, processing, transmission, distribution and consumption in both the residential and C&I sectors. ABS estimates that the global water metering market (including meters for sub-metering) had an installed base of approximately 860 million meters as of December 31, 2008 with an annual demand of 87 million meters, and a value of $2.4 billion in 2008. L.E.K. estimates that the top three providers held a combined market share of approximately 45.5%, as measured by revenues, in 2009. L.E.K. estimates that demand for water meters in the 19 countries included in its study is expected to decline by an average rate of 0.3% annually in terms of units over the next five years, while growing by an average rate of 2.5% in terms of value. We believe that the decline in overall units reflects the decreasing demand in the market for manual-read meters in the short term and expect this drop to be offset by the growing market for higher value smart meter products in future years.

Water conservation continues to be a concern throughout the world and scarcity is expected to drive water meter penetration. The water metering market is currently characterized by relatively low penetration rates in several regions including Eastern Europe and the United Kingdom. ABS estimates that only 30% of connected households in the United Kingdom had water meters installed as of 2008, despite the fact that water consumption can be reduced by 10% to 25% by introducing meters. We expect that water conservation and health considerations will become subject to increased regulatory focus, with changes in governmental policies fuelling growth and adoption of more sophisticated technologies, such as smart meters and plastic meters which improve accuracy even under adverse conditions.

As described above, AMI in the water metering market is currently less developed than in the electricity market. L.E.K. estimates that the AMR-enabled water meters in the 19 countries included in the L.E.K. study accounted for 25% of the total market value in 2009, while AMI-enabled water meters accounted for 11%. L.E.K. expects demand for AMR and AMI technologies in these 19 countries to rise by 12% in terms of units sold and 9% in terms of value by 2014.

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OUR COMPANY

Overview

We are one of the world’s largest providers of gas, electricity and water meters and related communications, networking and software solutions. Our products and solutions are used to accurately and reliably measure gas, electricity and water consumption as well as enable energy efficiency and conservation. We sell our products and solutions to utilities, distributors and industrial customers in more than 130 countries across gas, electricity, water and multi-utility settings for use in residential market and the C&I market. We believe that we have one of the most extensive installed meter bases in the world, with more than 200 million meters deployed over the course of the last ten years.

L.E.K. estimates that in 2009 we had the largest global market share by revenues in the gas meter market, were one of the three largest global providers in the water meter market by revenues and had the third largest share by revenues in the electricity meter market. We believe these leading positions are due to the quality, breadth and flexibility of our portfolio of products and solutions and also our ability to participate in and benefit from the various trends that are currently influencing and transforming our industry.

Demand for our meters and solutions is driven by natural replacement cycles, urbanization, increased meter penetration and infrastructure developments. We believe that these trends, along with the movement towards energy conservation and the promotion of cleaner fuels and technologies, will continue to play an important role in our future growth. We believe our experience in providing meters and metering solutions positions us well to benefit from the many opportunities that we expect to arise as governments, regulators and utilities focus increasingly on the deployment of Smart Grid solutions. We believe that the meter is the gateway to the Smart Grid through which utilities and consumers are able to effectively measure, monitor and control the distribution of gas, electricity and water. We therefore see the Smart Grid playing a central role in the transformation of the industry and creating opportunities for us, despite the risk of increasing competition from traditional metering companies as well as new entrants from outside the metering business. The shift towards the Smart Grid has been most pronounced to date in the electricity market.

As our utility customers have incorporated an increasingly sophisticated range of communications and automation technologies into their grids, we have grown organically and used strategic investments, acquisitions and partnerships to broaden our product and service portfolio. In metering, we have developed flexible product platforms that support manual-read metering as well as various one-way and two-way communications and networking technologies.

We believe that we are an innovator in our industry and have consistently developed new products and solutions for our markets, including,


	•	the first electronic electricity meter in 1978;

	•	a commercial system using power line carrier communications, or PLC in 1981;

	•	an integrated remote connect or disconnect function deployed in commercial volumes in 2004;

	•	an AMI solution based on RF mesh network technology in 2003; and

	•	a Smart Grid solution system with over 1.5 million endpoints in 2008.

Our Strengths

We believe that we are well positioned to maintain and expand our strong market positions in the gas, electricity and water markets and to benefit from the expected industry growth that will arise

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from the trend towards Smart Grid installations. In particular, we believe that the following key strengths will enable us to achieve these goals:


	•	*We are a leading global provider of gas, electricity and water meters and metering solutions.* With more than 170 years of experience serving utility customers globally, we are one of the world’s largest providers of meters and metering solutions to utilities, with a worldwide market share in 2009 of approximately 16% across the gas, electricity and water metering markets, as estimated by L.E.K. In 2008, we were the leading global provider by revenues of gas meters, were one of the three largest water meter global providers and were the third largest global provider of electricity meters, as estimated by L.E.K. We believe that our large installed base provides us with a significant opportunity to benefit from regular meter replacement and upgrade cycles and a loyal customer base.

	•	*We are a leading enabler of Smart Grid solutions, which are already proven at scale in complex environments and across diverse utility settings.* Our EnergyAxis systems extend across the Smart Grid value chain and include smart meters, two-way communication networks, information and meter data management software and advanced applications that help customers to cost-effectively generate, deliver, manage and conserve gas, electricity and water. As of June 30, 2010, we have delivered over eleven million of our two-way communication endpoints for metering applications, including over 6.5 million that are enabled for fixed line networks. Of this total, our utility customers have deployed more than 4.5 million smart meters in more than 80 EnergyAxis systems worldwide. This gave us an estimated market share in North America of approximately 16% in terms of all endpoints shipped from 2005 through June 2010, as estimated by the Scott Report.

We have deployed an extensive integrated RF mesh AMI network, operating in Ontario, Canada, which consists of more than 1.6 million endpoints and gathers billing data on a daily basis from residential and C&I customers. An RF mesh network is a radio frequency communications network in which nodes within the system can act as communications paths to other nodes within the system, allowing a path around communications blockages and improving the reliability and efficiency of communications systems. This network also enables time-of-use, or TOU, pricing for more than 600,000 customers, which permits a utility to vary the prices for electricity based on the time of day. We believe that the extensive deployments of our solutions, including complex communications networks, at this early stage of Smart Grid implementation demonstrate our systems’ market readiness in terms of performance, reliability, flexibility and scalability.


	•	*We maintain strong customer relationships worldwide that provide us with diverse opportunities for global growth and competitive advantage.* Our customers operate in more than 130 countries and include numerous large utilities. In our experience, length of service and reputation are highly valued by customers. We believe that we have provided the utility market with accurate and reliable metering and meter automation products and solutions for over 170 years. While the adoption of Smart Grids has created opportunities for new entrants into our industry from outside the metering business, we believe that the continued importance of the meter, our industry experience and our ability to innovate, position us well to benefit from the ongoing introduction of Smart Grid solutions. We work closely with our customers to help them determine technical specifications and design individualized solutions for their networks. We believe that this engagement allows us to gain important insights into our customers’ existing and emerging needs and offers us the opportunity to develop and deliver competitive and relevant solutions.

	•	*We have a capable and experienced global management team.* Our managers have been instrumental in establishing our business strategy, driving our new product introductions and securing our leading positions in metering and Smart Grid solutions. We believe that our management’s in-depth understanding of our industry and our customers’ needs is the result

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		of many years of combined industry experience across the metering, telecommunications, system automation, software and IT services markets and most of our management has a long history with our company.

Our Strategy

Our mission is to support energy and natural resource conservation with a comprehensive portfolio of innovative and trusted metering and technology solutions that help gas, electricity and water utilities around the world improve efficiency through accurate measurement of consumption and deployment of Smart Grid solutions that create value for utilities, consumers and shareholders.

Key elements of our strategy to deliver on that mission include:


	•	*Continue to build upon our global leadership.* Through continued technological innovation and close cooperation with other key industry participants, we intend to build upon our current strong market position to be a key contributor to the transformation of the gas, electricity and water utility markets and to take advantage of the significant business opportunities we expect will arise to provide Smart Grid solutions. We believe utilities will increasingly direct new business to those suppliers that enjoy a leadership position within each market, have an extensive understanding of their business models and needs, and are able to address these through a wide portfolio of high quality, competitive products and solutions. As a global leader in metering, we believe that we are well positioned to capture a significant portion of the substantial organic growth that we believe will occur over the coming years and are prepared to meet the challenges we anticipate as we face competition from traditional metering companies and new entrants such as communications, network infrastructure and software firms, among others, seek to enter our industry. Where we perceive technological or geographic expansion as useful to our business model, we will make targeted acquisitions and enter into partnerships.

	•	*Capitalize on the expected ongoing growth in metering and related infrastructure in gas, electricity and water.* As the world’s leading provider of gas metering and infrastructure solutions, we believe we are well positioned to take advantage of expected expansion of natural gas infrastructure and conversion to natural gas as a favored fuel source, as well as the increase in gas meter penetration worldwide. We also intend to take advantage of perceived opportunities in onshore gas development and related infrastructure investment, including in industrial gas flow equipment, over the next decade. We intend to use our strong market position in water meters to take advantage of potential future opportunities for expansion in the many developed and developing regions where water meter penetration rates remain low, and we intend to take advantage of similar opportunities for growth in the electricity market given ongoing electrification initiatives and urbanization trends in developing countries.

	•	*Build on our history of innovation and engineering expertise.* We intend to continue the focus of our research and development organization on providing our customers with best-in-class meters and metering and Smart Grid solutions across the gas, electricity and water segments. We believe that our ability to succeed in implementing this strategy will be supported by our large number of market innovations, both in the past and in the developing Smart Grid market. We are among the industry participants on various standard setting bodies including the American National Standards Institute, which establish product specifications and performance in the industry.

	•	*Use our understanding of evolving customer business models and deploy our key account management teams to capture Smart Grid solutions opportunities.* We believe that our 170 year history serving the utility industry has given us familiarity with the various business models, challenges and environments of our global customer base. As our customers adopt new metering and Smart Grid solutions, we have seen that their purchasing decisions have involved a broader variety of constituencies than has been the case with traditional

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		metering investments. We intend to strengthen our account management teams further to even more effectively leverage and broaden our customer relationships to develop and deliver metering and Smart Grid solutions despite new entrants in the market. We are already engaging with new executive-level decision makers and other project sponsors (for example, IT groups for communication systems) as they become involved in Smart Grid investment decisions. We also focus on the necessity to offer regionally differing and tailored solutions to our utility customers based on their specific technological requirements. We believe that this strategy has helped us to increase the percentage of our revenues from Smart Offerings.


	•	*Focus on operational efficiency to drive consistent competitive advantage.* We believe that our strong focus on operational efficiency has provided us a scalable business platform. We plan to further develop our mixed production model, which utilizes both contract manufacturers and in-house production, to efficiently manage the significant volatility in volumes and delivery requirements often associated with large Smart Grid installations. We base our belief on our ability to ensure on-time delivery, in-field product performance and aftermarket support of these complex networks on our demonstrated execution on large contracts, including our Ontario, Arizona Public Service Company and Salt River projects. In addition, we plan to continue to further optimize our global operations and manufacturing footprint, particularly in areas including gas and water metering, where we believe unique local standards are best met via our regional production and engineering capabilities.

The Smart Grid as Enabled by Elster EnergyAxis

EnergyAxis is our comprehensive portfolio of Smart Grid solutions. EnergyAxis uses an open and flexible architecture and is based on interoperable standards. It can be customized by incorporating our own and third-party elements, including meters, meter and network communications technologies, customer interfaces, or head-end software, meter data management, or MDM, software and related applications. This allows us to tailor our Smart Grid solutions to address the specific requirements of gas, electricity and water utilities while also taking into account varying regional standards and preferences.

Depending on whether an EnergyAxis system is deployed in a gas, electricity or water network, or on a multi-utility platform, it can enable distribution automation (which extends a utility’s communication capabilities into the transmission and distribution grid), scalable demand response, loss, theft or leakage detection, home area networking and personal consumption management. In situations where customers implement Smart Grid solutions of their own design or deploy networks based on competitor solutions, we also have the capability to deliver individual EnergyAxis components.

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The graphic below illustrates the parts of the Smart Grid value chain covered by EnergyAxis. In addition to providing our integrated EnergyAxis systems using our own or third-party components, we also offer a variety of individual products and components covering each link of the Smart Grid value chain for different utilities, regions and regulatory environments.


	•	Applications: Our applications are designed to integrate Smart Grid solutions into a range of utility specified settings or legacy applications, using a number of open and standards-based interfaces. In addition, we provide or are working to develop a number of specialty applications including security management, communications scheduling, demand response and energy management, and we plan to continue to do so as the industry evolves.

	•	Meter Data Management, or MDM, refers to software that provides data validation, estimation, aggregation and storage services for utilities. MDM enables detailed management of energy requirements within the Smart Grid. MDM systems generally connect to utilities’ internal systems and support detailed grid and energy management activities such as multi-tariff billing, meter reading validation and estimation, outage management, transmission planning, demand management and customer self-service, customer prepayment and remote disconnect/reconnect. Our EIServer is a flexible and scalable MDM system supporting our multi-utility AMI applications as well as those of third parties. It has been used in conjunction with some of our largest AMI deployments.

	•	Head-End software: Head-end software is used to manage information flows across networks. Our head-end products provide distributed intelligence to reduce the complexity of the communication network, including its structure, protocols, security, monitoring and maintenance, and certain specialty applications, such as MDM.

	•	Wide Area Networks, or WANs, are communications networks that connect the utility to a variety of components, networks and systems and that commonly use public wireless technologies. We provide a variety of WAN communications technology options to communicate with endpoints, collection nodes, LAN Gateways and other assets in the system with internet protocol-, or IP-, based and other wired, wireless and fiber networks. These interfaces include wired and wireless (cellular) telephony, WiFi/WiMax RF, private RF, satellite communications and a broadband power line carrier.

	•	Collection includes the infrastructure and software that enables data from different meters and meter types to be collected for use by a meter data management system within the Smart Grid. It often consists of data collection devices, which may contain embedded software that enables certain Smart Grid functionality. Our collection products use decision-making software

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		at various locations, or distributed intelligence, to manage and maintain a wired or wireless Local Area Network, or LAN, as well as gather, filter and/or prepare data from points on the LAN for transmittal to the head-end over a WAN. Our EA GateKeeper supports our RF mesh networks and our Evolution water networks.


	•	Local Area Networks: We provide a variety of LAN communications technology options to reliably and cost-effectively communicate with utility endpoints. These wired and wireless interfaces include our EnergyAxis 900 Mhz RF mesh, our Evolution RF network based on our Wavenis technology and 900/868/435 Mhz bandwidths and a variety of utility specified PLC, Ethernet and RS232/485 wired communication using IP-based and other standards, including those of the Institute of Electrical and Electronics Engineers, the American National Standards Institute and the International Electrotechnical Commission.

	•	Meters and Communication Devices: We provide a broad range of meters for most applications across gas, electricity and water with and without communication devices, electronic correction or data storage functionality, service disconnect switches or valves. Communications technologies can either be an integral part of the meter itself, or be incorporated into the device as a module. In the Smart Grid value chain, the meter typically currently accounts for more than half of the total purchase value of a complete solution.

	•	Home Area Networks: We provide a variety of HAN communications technology options to extend the communications layer and interactivity into the consumer’s premises or other equipment. These interfaces include a variety of wired networks, including Ethernet, M-Bus and RS242/485 and wireless networks including our EnergyAxis RF mesh, our Wavenis RF, ZigBee and Blueline. We also provide some utility-related equipment that interfaces via the HAN, such as in-home displays and load control devices.

We believe that our EnergyAxis systems offer our customers the following key benefits:


	•	Speed: EnergyAxis supports what we believe to be one of the industry’s fastest LAN and WAN networks when it is implemented using our 900MHz RF mesh AMI network technology.

	•	Scalability: EnergyAxis has been deployed and is operating in the field at a scale of over 1.5 million endpoints and has demonstrated scalability in one customer’s certification process for up to 35 million endpoints.

	•	Security: EnergyAxis can employ advanced encryption technology throughout the network, from the HAN device and meter to the WAN, to protect utility and customer data.

	•	Interoperability: EnergyAxis uses open standards, such as IP, RF mesh, PLC, WiFi, cellular and satellite technologies, that ensure it can interface with a wide variety of communications technologies for use in a particular Smart Grid.

	•	Investment protection: EnergyAxis uses open standards and interoperability to ensure that it can adapt to new applications and facilitate future upgrades. Most installed EnergyAxis components can receive firmware upgrades directly from the utility over the Smart Grid, which permits changes to pricing, time of use and other parameters without on-site upgrades or replacing meters.

	•	Distributed intelligence: EnergyAxis “distributes” intelligence across the Smart Grid, extending our Smart Grid solution into a utility’s network to incorporate intelligence into smart meters, grid sensors, distribution network components and other control elements.

We enhance our existing capabilities by teaming with leading enterprise software and IT providers, including SAP, IBM, Accenture and Capgemini. These collaborations and those with other hardware, software and service providers facilitate the integration of EnergyAxis into a customer’s enterprise management system, which we believe further differentiates our solution from those of our competitors. We also collaborate with a range of other providers to offer HAN devices, demand

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response solutions and other technologies that provide the personal, commercial and industrial energy management solutions that Smart Grid customers increasingly demand.

We believe that our ability to offer customized solutions, using EnergyAxis and our partner supported Smart Offerings, creates an important marketing advantage as customers in different regions often have unique specifications based on local or regional standards and practices. For example, in North America, where our large electric utility customers often prefer integrated, RF-based Smart Grid networks, we are able to leverage EnergyAxis’ capabilities in 900MHz RF mesh. In Europe, by contrast, where many of our electric utility customers generally favor PLC technology and tend to design and develop their own systems from multiple vendors, we offer both a comprehensive Smart Grid system as well as individual Smart Grid components.

Our Gas Products and Solutions

In our gas segment, we offer a full spectrum of gas metering and distribution products and solutions for the residential and C&I sectors. Our products and solutions service gas markets from the source of natural gas to consumers. Our gas metering products are complemented by our utilization products, which comprise process-heating equipment, including burner-control systems for gas-fired industrial heat treatment processes, and heat-control systems for residential and commercial boilers, and by our gas distribution products, which consist of valves, risers and other gas infrastructure products.

Our product portfolio includes a broad range of mechanical and solid state meters (in which mechanical components and electronic devices, respectively, measure the flow of gas) and related components for residential and C&I use and related solutions, such as AMR, AMI, remote flow control, consumption regulation, measurement and MDM software solutions.


	•	Our residential meters consist mainly of diaphragm gas meters, which enclose and measure defined volumes of gas in low flow applications (standard AMR- or AMI-enabled); and

	•	Our C&I meters consist of industrial diaphragm gas meters, suitable for high volumes, rotary gas meters, which have components that rotate to enclose the gas being measured, turbine gas meters, which measure the flow of gas, and ultrasonic gas meters, which use ultrasound technology to measure gas flows. We also offer meters specific to transmission settings, such as ultrasonic and turbine gas meters.

We use a set of customizable communications technologies, which we offer to our customers in different regions. In North America, we offer EnergyAxis RF mesh (900 MHz) and third-party technology, while in Europe we usually offer wireless networks, including RF technology based on Wavenis and ZigBee and wired networks, including M-Bus and Ethernet.

During the course of the past decade, many of our customers in North America in particular have implemented AMR functionality into their networks. We have, for the most part, addressed this market requirement by combining third-party AMR communication modules with our own meters. We also offer our TRACE system, a flexible walk-by and drive-by AMR solution for gas meters using RF communications technology to collect billing information and perform detailed meter readings. In the future, an increasing number of gas utilities will move to implement AMI capabilities into their networks, and we believe this market evolution will provide us with an opportunity to grow our business beyond manual-read and AMR metering.

In addition, we offer repair, calibration, commissioning and maintenance services as well as project engineering. We also offer gas pressure regulation and communication products such as low and middle pressure regulators, valves, volume converters, data loggers, flow computers, gas quality measurement, and metering and regulation stations as well as monitoring systems.

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We believe that our gas business is not only driven by regulatory initiatives in many countries that require more efficient use of energy, but also by replacement cycles, ongoing gasification and government initiatives mandating gas meter automation worldwide.

We market our gas products under recognized brands such as Elster American Meter, Elster Kromschröder, Elster Perfection and Elster Instromet. Our customers include gas exploration and production, gas transmission, gas distribution and general industrial companies, integrators, end-users, power plants as well as multi-utilities.

Our gas utilization products consist of process-heating equipment, such as burner-control systems for gas-fired industrial heat treatment processes, and heat-control systems for residential and commercial boilers. We also offer products for natural and propane gas distribution systems, such as polyethylene piping products, mechanical pipe joining products and pre-fabricated meter sets that allow quick, easy and safe connections between gas mains and residential or C&I consumer premises.

We are the world’s largest gas metering company, based on 2009 revenues, as estimated by L.E.K. ABS estimates that we were the leading company in North America for gas meters in 2008, with a very strong position for residential meters. We also believe that we are a market leader in Europe, with a strong position in both the C&I and residential segments. In the first six months of 2010, our gas segment accounted for 52.9% of our total revenues. In 2009, 2008 and 2007, our gas segment accounted for 53.0%, 59.2% and 59.5% of our total revenues, respectively.

Our Electricity Products and Solutions

Our electricity segment offers electromechanical and solid state single-phase and polyphase meters, each of which can be equipped with AMR and AMI technology:


	•	Single-phase meters are mainly deployed in homes and by small businesses. Our primary brand, the REX product family, offers numerous and highly flexible capabilities. Our REX branded meters offered integrated communication modules within the meter and allowed remote connect or disconnect functionalities in 2004.

	•	Polyphase meters are generally used by industrial businesses or in large commercial applications on certain conditions. We offer these meters under the Alpha brand, which focuses on durability and performance.

	•	Transmission and distribution meters are high performance meters designed to measure the flow of electricity within a utility’s grid and are sold under our Alpha brand.

	•	In-home displays enable meter reading throughout the house and allow customers easy access to consumption and price data.

We offer numerous technologies to our electricity customers that can be adapted to the specifics of each market and the requirements of each customer and includes security functions, plug & play capabilities and IP-based protocols. In addition, our electricity segment offers most common communications technologies such as RF mesh, PLC, cellular and satellite communication. In Europe, due to the unique structure of the electricity grid, our focus has been generally on either PLC networks, as in Germany, France, The Netherlands and Spain, or on General Packet Radio Service, or GPRS, in several countries such as the United Kingdom and Ireland. In the North American market, we have primarily been focused on RF mesh (900 MHz) technology due to the high level of spectrum availability for use and the greater demand for increased functionality, such as distribution automation, which RF mesh enables.

We market most of our electricity meters under the Elster name. We market our Smart Offerings for electricity mostly under the brand EnergyAxis. We continue to market some of our Smart Offerings under the EnergyICT and Coronis brands.

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We are the world’s third largest electricity metering company, based on 2009 revenues, as estimated by L.E.K. The Scott Report estimates that, from 2005 through June 2010, we were one of the top three providers of electricity AMI solutions in North America by shipped units. In the first six months of 2010, our electricity segment accounted for 23.9% of our total revenues. In 2009, 2008 and 2007 our electricity segment accounted for 26.3%, 20.8% and 19.4% of our revenues, respectively. Within Europe, we have historically focused on the C&I market segment. Thus far, we have had a limited presence in the European residential metering segment. This is now an area of focus, and we believe opportunity, for our company.

Our Water Products and Solutions

We offer a full water metering product portfolio covering brass and polymer based mechanical and solid state meters (in which water is measured by mechanical or electronic devices) for residential and C&I applications. Our polymer meters are designed to cope with variable water qualities and are generally less expensive than brass meters.


	•	Single- and multi-jet meters record the volume of water consumed by measuring the velocity of water flowing through a known area, and are generally used for residential and small commercial applications.

	•	Volumetric meters employ an oscillating piston to measure volume of water consumption, a technology that is suited to low-flow environments, and therefore used primarily in homes and small businesses.

	•	Our electronic residential meter offering includes hybrid (containing an electronic register and mechanical sensor) and solid state meters (containing a fully electronic sensor and register), utilizing fluid oscillation measuring sensors.

	•	Bulk flow meters monitor large flows of water for water system management and commercial billing purposes.

	•	Combination meters include a small residential meter and large bulk flow meter within a single meter design and are used where wide variations in flow can be expected, such as in hospitals, schools, offices and other applications where both low and high flows can occur.

	•	Irrigation meters are designed specifically for distribution and billing applications where the water quality is poor and has high suspended content such as boreholes and raw water.

	•	Water meters for “sub-metering” purposes, which is the separate metering of individual dwelling units in apartment buildings for water cost allocation, a system common in Germany, France and Eastern Europe.

Most of our meters can be equipped with pulse or encoded output devices for easy connection to reading, billing or water management systems, and cold and warm water versions are available on most product designs. We offer our water meter products under brand names, such as Kent. Our water segment serves a global customer base primarily comprised of multi-utilities, municipal and privately owned water-only utilities. We also work with other systems providers to develop AMR solutions, including meters with integrated radio technology for our sub-metering products. These products enable smaller system providers to utilize our technology in their solution offering.

In recent years, an increasing number of our water utility customers, including in the United States, Europe and the Middle East, have been implementing AMR functionality into their networks and we have been addressing this need through the combination of our meters with either our two-way Evolution offering or third party AMR modules. We believe that customers will increasingly demand meters that use two-way communication. As of June 30, 2010, we have delivered around 4.6 million two-way communication endpoints to our water utility customers, of which over 2 million are fixed line enabled.

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Our Evolution system is based on our Wavenis communications technology and enables time-based rates, remote valve actuation, on-demand consumption readings, real-time notification of leaks, tampering or backflow and in-home consumption monitoring. Evolution enables intelligent two-way communication that avoids the flexibility constraints of traditional AMR, features secure and reliable transmissions, and is easily scaleable.

We are one of the world’s three largest water metering companies, based on 2009 revenues, as estimated by L.E.K. We believe that we have a long history of innovation in the industry, having introduced polymer water meters more than 30 years ago. We believe we have a leading market position in residential water meters and are a major supplier to C&I markets, where we have seen increased sales of our solid state C&I water meters. In the first six months of 2010, our water segment accounted for 23.2% of our total revenues. In 2009, 2008 and 2007, our water segment accounted for 20.8%, 20.0% and 21.1% of our total revenues, respectively.

Projects and Backlog

Our Requests for Proposal Activity

Given the worldwide drive to enable Smart Grid automation across gas, electricity, and water meter settings, we participate in pilot projects as described below. In addition, we are in the process of larger scale AMI rollouts for two utilities, Salt River Project and Arizona Public Service Company.

Our Total Backlog and Our Total Contracted Future Revenues

We define our total order backlog as open purchase orders across the entire company. Our total order backlog as of December 31, 2009 was equal to $445.3 million, compared to $542.1 million as of December 31, 2008. Our total backlog was $508.7 million as of June 30, 2010 and $424.0 million as of June 30, 2009. We define our total contracted future revenues as our total order backlog plus additional contract revenues under awarded contracts with an initial value of $500,000 or more. Additional contract revenues represent contracted deliverables for which orders have not yet been placed (and therefore do not include anything that we categorize as backlog). At December 31, 2009, our total contracted future revenues were more than $730 million. This had increased to more than $800 million at June 30, 2010. We cannot predict how many purchase orders will ultimately be placed under these awarded contracts.

Marketing, Sales and Distribution and Project Management

Pilot Phase

To demonstrate to larger potential utility customers that our meters, Smart Offerings and other technologies will work if they are deployed in their environments, we, like our competitors, often commit to pilot projects. We define pilot projects as smaller deployments of meters and communication technologies utilities engage in for testing purposes before broader deployments. Utilities will often require that technologies that they have not previously deployed in a particular setting be subject to pilot testing before we and our competitors are invited to bid for the corresponding contract. During a pilot project, in which our competitors may participate simultaneously with us, the utility is testing its own concepts and plans as well as the performance of meters, networking systems and other technologies. Once the utility has defined the technical specifications for a larger scale roll-out (and has taken the necessary steps on its part, such as obtaining approvals, to be in a position to undertake a large-scale roll-out), it will often invite vendors to bid for full projects.

In our recent experience, pilot projects are no longer necessary when manual-read meters are the subject of a large-scale deployment, as the technologies in use are well known and there is limited interaction with other systems. Accordingly, all of our current pilot projects are in the Smart Grid area. In addition, many smaller utilities do not engage in pilot projects even for technologies that

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are new for them due to the time and expense involved, but instead choose more standard solutions where vendors can more easily provide performance warranties.

When installing a pilot project, we initially configure our system based on prior experience, with subsequent modifications made in response to specific customer requests. While our technology has not failed to function in these pilots, customers may ultimately disagree with our system configuration, based on how their systems are administered and managed or depending on the degree to which they desire to modify our operating system without our involvement. From 2009 and in 2010 to date, there was only one pilot project, for a customer with approximately 250,000 endpoints, in which we deployed our components in a configuration that, although the components functioned, was not acceptable to the customer. However, technical success in a pilot project frequently does not result in the selection of our bid for a full scale roll-out. In addition to performance requirements, a number of other factors affect the selection of a vendor through a tender process, including price, regulatory proceedings and the customer’s preference for one technology over another. For more information, see “Risk Factors—Risks Related to Our Operations—We derive most of our revenues from sales to or for the utility industry, which has been subject to long and unpredictable capital investment and related sales cycles, which could negatively affect our results of operations, cash flows and financial condition.”

Depending on the nature of the pilot project, we may provide smart meters, communications modules, software and other components for testing in pilots, and often provide on-site design and technical support. Our pilot projects vary in size, ranging from 100 meters to tens of thousands of meters, and can last anywhere from two to three months to 18 months or more. We define the start of the pilot phase as our agreement to participate in the pilot, and the end as when the utility awards contracts for a larger-scale deployment. As of June 30, 2010, we were engaged in 61 projects in the pilot phase that each included at least 500 customer endpoints, of which 28 were in North America and 33 were in other regions, mainly Europe. Of the total number of pilots, 7 were for gas projects, 20 for electricity projects, 19 for water projects and 15 for projects combining two or more utility categories. The total number of customer endpoints at the utilities where we were engaged in pilot projects as of June 30, 2010 was more than 146 million.

While there are some initial costs in setting up a pilot project to adapt it to the utilities’ specifications, utilities usually pay for these projects once they are operational. The revenues we receive from pilots are generally insignificant as they are usually of modest scale. However, pilot projects play an important role in our strategy to market our Smart Offerings during the growth phase of this part of our industry. We believe that the ability to demonstrate the functionality of our Smart Offerings to utilities in their own infrastructure is helpful in our marketing efforts. We have both won and lost contracts for larger-scale rollouts after having engaged in pilot projects, and given the relative novelty of the Smart Grid market we cannot quantify the relationship between participation in pilot projects and contract wins in the future. We intend to continue to engage in pilots when to do so may be helpful for our marketing efforts.

Our Sales and Marketing Organization

We employ more than 800 dedicated sales, key account management and engineering personnel to serve our worldwide customer base. We also have established relationships with a number of distributors who sell our products to smaller utilities and other customers in various markets.

We have cultivated long-standing relationships with our customer base, which we believe allows us to understand each customer’s needs and requirements and to deliver products and Smart Grid solutions that are tailored to them. We use our direct sales teams, supported by technical and systems specialists, to provide ongoing support for these relationships. We employ indirect sales forces consisting of distributors, partners, third-party agents and representatives when appropriate to better serve our customers at reduced cost. We also license our Smart Grid technologies to selected third-party meter manufacturers who employ this technology in their meters.

To position ourselves for Smart Grid adoption, we have established a targeted account management initiative focused on designing full service solutions for Smart Grid technologies across the entire

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value chain. We have also created key account teams to target large Smart Grid opportunities that we identify across gas, electricity, water and multi-utilities with a sales approach that is focused on delivering a range of services, from individual components to entire systems, to our customers across the EnergyAxis value chain. All of our major global utility customers have dedicated key account teams, which allow us to leverage our assets and know-how worldwide, and to efficiently allocate internal resources. When project opportunities arise, opportunity management teams are formed, which consist of cross-functional experts from a variety of backgrounds in areas such as solutions architecture, project and contract management, as well as controlling and logistics. Opportunity management teams work together with a customer to develop the best individualized solution to meet that customer’s needs. Our project management teams, which are comprised of experienced specialists, take over the implementation process and focus on the rollout of the individual solution. In addition to supporting our developing Smart Grid solutions business, we are increasingly entering into service level agreements and statements of work with our customers to define the level of service we are to provide as the solutions we are offering become larger, more comprehensive and IT-like in scope.

We have a global and diversified client base. No single customer represented more than 5% of our total revenues in the first six months of 2010 and for the 2009, 2008 or 2007 financial years, and only six of our customers individually accounted for more than $20 million of our total revenues in 2009.

Our marketing efforts focus in part on increasing brand recognition both at trade shows and other industry functions, through the distribution of brochures, published papers and newsletters and by print advertising and direct mailing campaigns. We have a network of websites covering our worldwide subsidiaries that inform customers about our products and services. In addition, we stay in contact with our customers through targeted communication campaigns, analysis relating to market trends and at conferences around the world.

Procurement and Scalable Manufacturing Footprint

Procurement is a crucial business process for us, as we need to continuously procure materials and services, as well as raw materials for our operations.

We have a central procurement group in place, which serves the global and centralized management function of coordinating and integrating procurement processes throughout our different business units around the world. Through our procurement group, we seek to create synergies by using global sourcing tools for key commodities while maintaining a strong focus on local execution and site ownership within our segments. This group continues to drive our global sourcing efforts for efficient procurement. We have reduced our supplier base from approximately 4,000 as of December 31, 2007 to approximately 3,500 as of December 31, 2009.

We manage a portion of our procurement process through a centralized eSourcing platform that is utilized by all our strategic sourcing staff and that allows us to react quickly to changes in market conditions. This platform facilitates an effective global benchmarking and bidding process and has delivered savings at auctions performed to date. As part of our procurement strategy, we also source from regions where we can obtain quality and rapid response at competitive prices. We are further developing our sourcing strategy, with a focus on flexibility of capacity, to be able to supply large and complex projects, such as major Smart Grid rollouts, where large numbers of smart meters and other components may be needed on relatively short notice.

We also use forward purchase contracts with global commodity suppliers when purchasing raw materials such as brass, steel and aluminum, sub-assemblies and components, allowing us to set the price of certain components in advance. In many cases, especially for brass, steel and aluminum, we seek to manage our exposure to changing prices by executing procurement contracts for periods of up to one year with our suppliers of these materials or of components that include them. This is designed to protect us from price swings, and particularly price spikes, that can occur without warning, but to maintain sufficient flexibility in production volume. However, it also exposes us to paying higher prices than would otherwise have been the case should prices decline during the life of

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the contracts. See “Risk Factors—Risks Related to Our Operations—We may face volatility in the prices for, and availability of, components, raw materials and energy used in our business, which could adversely impact the competitive position of our products, decrease profit margins and negatively impact timely delivery to customers.”

While we continue to perform quality control and calibration operations ourselves, we source a number of the components and other parts used in our meters from third-party suppliers. We work closely with our suppliers with a goal of ensuring that component parts meet our standards and are manufactured according to our specifications. We believe that sourcing some meter components can be more cost efficient than producing each part in our facilities, especially when sourced from lower cost regions. We are often required to rapidly ramp up production when new contracts are awarded. This is crucial with more advanced Smart Grid technologies, as meters are often more customized and inventories are low. For this reason, a key part of our strategy is maintaining a reliable and flexible supplier base that can be ramped up on relatively short notice. For more information, see “Risk Factors—Risks Related to Our Operations—We have contracted with third-party manufacturers, especially for electronic products, to provide a substantial portion of our production capabilities. Our results of operations, cash flows and financial condition may be adversely affected if we are unable to manage our outsourcing arrangements effectively, if we are unable to project our demand accurately or if our suppliers are unable to keep pace with our requirements.”

Our procurement and manufacturing strategies differ in our gas, electricity and water segments due to the complexity of the manufacturing processes and requirements of our customers. In our gas and water segments, we typically use our own facilities to manufacture and finalize assembly for most of our gas and water meters, as the process of manufacturing such meters is significantly more complex than the manufacturing process for electricity meters. In particular, the manufacturing processes for gas and water meters require various quality checks and certifications to ensure compliance with applicable safety and measurement requirements. We do, however, outsource the manufacture of some of the component parts of our gas and water meters to third parties. These parts include some diaphragm parts and electronic registers for our gas meters and metal and plastic moldings and registers for our water meters.

In our electricity segment, by contrast, we purchase most of the components for our electric meters from third-party suppliers. We maintain strategic relationships with original equipment manufacturers who supply these parts for assembly in our facilities and manage the sub-suppliers whose products they use in producing components for us. We believe that this ensures our flexibility regarding meter production volumes and usually allows us to increase or decrease volumes on relatively short notice. However, in recent periods, the economic growth in some of our markets has resulted in significantly extended lead times at our suppliers of electronic components we use in our meters, such as circuit boards. See “Risk Factors—Risks Related to Our Operations—We have contracted with third-party manufacturers, especially for electronic products, to provide a substantial portion of our production capabilities. Our results of operations, cash flows and financial condition may be adversely affected if we are unable to manage our outsourcing arrangements effectively, if we are unable to project our demand accurately or if our suppliers are unable to keep pace with our requirements.”

Competition

Generally speaking, the global manual-read metering and Smart Grid market is characterized by several large global companies, specialized manufacturers and providers. Our primary competitors are Itron and Sensus in the gas, electricity and water meter markets and Landis+Gyr in the gas and electricity meter markets. Each of these competitors also offers Smart Grid solutions. In addition, as our industry has evolved in response to the use of new technology, we have also started to compete with companies outside of our industry, particularly companies in the communications, network infrastructure, software and other technology industries, with respect to the elements of Smart Grid solutions that consist of communications devices, network hardware and software. Other additional competitors, named below, are local or regional companies usually focused on one or several elements of the manual-read or Smart Grid markets.

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Gas

L.E.K. estimates that we are the world’s largest producer of gas meters as measured by 2009 revenues, followed by Itron. Other major producers include Dresser which focuses on the worldwide market, and Sensus, which is focused on the North American market in gas. In gas metering, we also compete with BI Group, Emerson Electric, ESCO Technologies (Aclara), Landis+Gyr, Honeywell (RMG), Pietro Fiorentini, PRI and Romet. For our utilization products, we compete with Karl Dungs, Honeywell, Siemens and SIT La Precisa. We also compete with Central, Continental Industries, George Fisher, Harmon and Handly and R.W. Lyall in gas distribution products.

Electricity and Smart Grid

In the electricity meter market, we are the third largest producer of electricity meters as measured by 2009 revenues as estimated by L.E.K., behind Itron and Landis+Gyr. Other major competitors include Sensus and Holley Group, which is mainly focused on China. In addition, we also compete with General Electric, ESCO Technologies (Aclara) and Iskraemeco. Most of these competitors also offer Smart Grid solutions.

While the emergence of Smart Grid technologies has led to more opportunities for us, it has also created opportunities for other competitors to enter into what were traditionally meter company markets. In particular, these competitors include communications, network infrastructure, software and other technology companies that offer products tailored to specific sections of the Smart Grid value chain. These competitors include Echelon Corporation, a networking hardware and software company, eMeter, a software company, Oracle, a computer technology company, Silver Spring Networks, a technology networking company and Trilliant Incorporated, a communications networking company. These competitors do not produce or manufacture their own meters, but their products can be combined with other competitors’ meters and, in some cases, our own meters to be incorporated into Smart Grid solutions.

In addition, regulators may mandate new standards or issue rules which favor different Smart Grid technologies, especially in the areas of interoperability. For instance, regulators could mandate a national network based on a wireless technology, such as WiMax, and require all meters to be compatible with a mandated system. Such regulation could create an advantage for competitors that have already developed the technology, which a regulator selected as a standard, forcing other market competitors to withdraw their products from the market or make substantial investments to develop new technology.

Water

In the water meter market, we are one of the top three companies as measured by 2009 revenues as estimated by L.E.K. The top three producers in the water metering market are Itron, Elster and Neptune. In addition, Badger Meter is a major player, mainly in the North American market. In addition, we compete with Arad, Diehl Metering, ESCO Technologies (Aclara), Roper Industries and Sensus.

For more information, see “Risk Factors—Risks Related to Our Operations—We face increasing competition, which is broadly based and global in scope. Some of our competitors are well positioned in our areas of strategic focus, including Smart Grid technologies. If our competitors are more successful than we are at winning market share and developing their reputations in new technological or product areas, we could experience a material adverse effect on our results of operations, cash flows and financial condition.”

Research and Development

Research and development is a high priority for our business, with a particular focus on new product development. We manage our research and development programs in coordination with

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product management. In total, we have approximately 500 employees working in research, design and development in various locations, mainly in the United States and Europe.

Our research, design and development activities are focused mainly on the next generation of new products. Our new product pipeline encompasses a range of products and technology, with a focus on enhancing our existing product lines and developing new offerings. We seek to develop higher functionality premium products, such as solid state residential and C&I meters that provide enhanced communications features. In addition, we focus on maintaining competitiveness in more mature markets through cost reduced designs. We aim to implement this strategy by minimizing material content and process costs, for instance by moving from brass or bronze basing to polymer housings and standardizing mechanical and electronic registers to common platforms.

For our Smart Offerings, we are continuing to develop and offer a range of options, adapted to local market requirements and regulations, to move data to and from meters. A significant part of our investments are directed towards our EnergyAxis offerings. We believe that our research and development projects reflect an understanding of changes in customer demand, by focusing on, in addition to our Smart Offerings, features to improve our manual-read meters, including enhanced accuracy, durability under varying conditions and price. We intend to continue to invest in research and development in order to continue to meet our customers’ demand for Smart Grid and other energy efficiency solutions.

Intellectual Property, Patents and Licenses

Our intellectual property rights include patents, copyrights, trade secrets, trademarks, utility models and designs. We believe that our intellectual property is a valuable asset that protects our investment in technology and software and supports our licensing efforts with third parties. We depend, in part, on our ability to obtain and maintain ownership of, and rights of use in, the intellectual property related to our product and solution portfolio.

Our patents cover a range of technologies related to metering, portable handheld computers, water leak detection, AMR-, AMI- and Smart Grid-related technologies. When granted, each patent has a duration of between 15 and 20 years, depending on the country. For example, in the United States, a patent is valid for 20 years from the date of filing with the patent office. Most of the patents relating to our AMI- and Smart Grid-related technologies were granted in 2005 and after.

We also rely on a combination of copyrights and trade secrets to protect our products and technologies. We have registered trademarks for most of our major product lines. Our registered trademarks include, but are not limited to, Elster, Kromschröder, Elster Perfection, American Meter, Hauck and Instromet.

Disputes over the ownership, registration and enforcement of intellectual property rights arise in the ordinary course of our business. These disputes are often resolved by cross-licensing, which allows each party to the dispute to utilize the technology of each other party, under license, in competing products. As such, we license some of our technology to other companies, some of which are our competitors and also use their licensed technology in our products and services. There are a small number of cross-licenses that were granted to us or that we granted to a competitor. These cross-licenses are not subject to termination and their terms are perpetual. Currently, we are not a party to any material intellectual property litigation.

IT Infrastructure

At the time of our acquisition, we inherited a fragmented IT system which hindered the implementation of our business strategy and improvement objectives. In addition, in connection with our multiple acquisitions, we assume existing IT infrastructure at new companies. In connection with our restructuring initiatives and the focus on our core business, we implemented a harmonization program to standardize and simplify our IT and communication systems.

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In June 30, 2008, Elster Group GmbH, now Elster Holdings GmbH agreed to outsource certain of our technical and communication infrastructure to a third party. As part of the implementation of the agreement, Elster Group GmbH transferred certain employees, IT equipment and existing third-party contracts to our partner, and it agreed to provide various IT services to our subsidiaries in the context of individual agreements under the Master Services Agreement.

We terminated this contract in February 2010. In accordance with this termination, our partner is under the obligation to continue to manage our IT infrastructure until the end of March 2011 and thereafter properly transfer the management of services to us or another third party. We are currently planning to reassume management of our IT infrastructure and/or outsource all or parts of it after the termination of the contract.

Material Agreements

Since 2008, we have entered into material contracts relating to the amendment of our preferred equity certificates and the resulting shareholder loan to the Management KG. See “Our History and Recent Corporate Transactions—Our Current Capital Structure” for more details relating to the conversion of the remaining preferred equity certificates of Management KG.

In the usual course of our business, we enter into numerous contracts with various other entities including customers, distributors and suppliers. Other than the agreements described above and amendments to our Senior Facilities Agreement, we have not entered into any material contracts outside the ordinary course of our business within the past two years.

Insurance

We maintain usual and customary insurance policies, coverage and deductibles maintained by a company in our industry, as well as director and officer liability insurance. These policies include fire and casualty insurance for our facilities and product liability insurance. We consider the coverage we have to be adequate in light of the risks we face.

Legal Proceedings

From time to time, we and our subsidiaries are involved in litigation in the ordinary course of our business activities. Currently, there are no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which we are aware), which may have, or have had in the recent past, significant effects on our financial condition or profitability.

Our former Ipsen furnace business has been subject to a number of claims relating to alleged asbestos exposure. Pursuant to the agreement under which we sold our Ipsen furnace business, we are required to indemnify the purchaser against present or future asbestos claims noticed to us by August 15, 2015, up to a maximum out-of-pocket amount for us of €15 million. The agreement under which we sold our Ipsen furnace business further provides that the amount of the indemnity be reduced by payments made to the purchaser under Ipsen’s current or pre-existing insurance policies. We have covered the contingent liability arising out of this out-of-pocket maximum with an indemnity from our former owner, E.ON Ruhrgas AG, in an equal amount. In addition, according to our due diligence conducted at the time of the disposition, Ipsen’s current and pre-existing insurance coverage is in excess of the €15 million amount. As a consequence, we do not believe that these cases will have a material adverse effect on our financial condition. At the time of the disposition, 14 cases were open, and 62 new claims have been subsequently notified. Of the 76 total claims notified, 37 have been dismissed.

In addition, there are currently three asbestos cases (filed in 1999, 2002 and 2003 by individual plaintiffs) in which Elster American Meter Company has been named as an additional defendant. All three cases have been included in the New York County Asbestos Litigation (NYCAL) program and are currently classified as inactive. While on the inactive docket, all discovery in these matters has

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been stayed until further notice. Elster American Meter Company maintains insurance coverage for liability and defense costs. Accordingly, we do not believe these cases will have a material adverse effect on our financial condition.

Sales in Sanctioned Countries

Under U.S. laws and regulations, certain countries are identified as state sponsors of terrorism. U.S. laws place restrictions on investments in these countries and on U.S. persons doing business with these countries and certain of their nationals. The U.S. Department of the Treasury’s Office of Foreign Assets Control, or OFAC, and the Office of Export Enforcement of the U.S. Department of Commerce, or OEE, administer certain laws and regulations, or U.S. Economic Sanctions Laws, that impose restrictions upon U.S. persons, and, in some contexts, foreign entities and persons, with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of U.S. Economic Sanctions Laws, or Sanctions Targets. We believe that we have undertaken strong and effective measures to comply with these laws and regulations and remain committed to compliance. While we have no employees, assets or liabilities in countries identified under U.S. laws and regulations as state sponsors of terrorism, we have made sales into Sanctions Targets in the past and intend to do so in the future. In the three years ended December 31, 2009, we had sales of approximately $85.1 million to Sanctions Targets. Specifically, in the years ended December 31, 2009, 2008 and 2007, we earned revenues from products sold to customers in Iran of $21.8 million, $29.8 million and $24.1 million, respectively, mostly from sales of electricity meters. We have ceased selling electricity meters in Iran after having ceased doing business with a distributor in that country. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Historical Factors Affecting Our Results—Other Historical Factors Affecting Our Results—Effects of termination of a distributor.” This represents approximately 1.3%, 1.6% and 1.4%, respectively, of our total revenues for those years. In the first six months of 2010, we had sales of approximately $5.0 million, or 0.6% of our revenues, to Sanctions Targets, of which $3.8 million related to sales to customers in Iran.

Our largest customer in Iran was the state-owned electricity grid company until the cessation of business described above. We did business with that customer through an independent third party located in Tehran and, as with other large customers, occasionally met with representatives of the Ministry of Energy. Our largest remaining customer in Iran is a private distributor of our utilization products. We actively employ systems and procedures for compliance with applicable export control laws and regulations, including those in the United States, the European Union and Germany, and we believe that all our sales are currently made in accordance with this compliance policy and applicable law.

After completing an investigation with the assistance of external counsel, we submitted a voluntary disclosure report in March 2010 to OFAC and OEE, regarding conduct in 2005 and 2006. The report concludes that a U.S. person employed by our U.S. affiliate participated in the settlement of a warranty claim made by one of our Iranian customers against two of our European operating units which may implicate certain of the U.S. Economic Sanctions Laws. We also described in our voluntary disclosure to OFAC and OEE our sales of certain meters to counterparties in Iran and Syria. On July 29, 2010, the OEE notified us that the file relating to our voluntary disclosure report was being closed and no further action would be taken. The OFAC review is still ongoing. While the report states our conclusion that these product sales either did not violate the relevant U.S. Economic Sanctions Laws or should not be penalized under such laws, OFAC may not concur with our assessments.

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For more information relating to our business in certain countries that are sanctions targets, see “Risk Factors—Risks Related to Our Operations—We have undertaken, and may continue to undertake, business in countries subject to EU or U.S. sanctions and embargoes, and we may be unable to prevent possible sales or transfers of our products to countries, governments, entities or persons targeted by EU or U.S. sanctions.”

Real Property

The following table sets forth the location, size and primary use of our material real properties and whether such real properties are owned or leased.


	Approximate Size		Owned or Leased
Location	(Land/Building) m²	Primary Uses	(Land/Building)

Raleigh, North Carolina (1)	*/17,280	Research, Design & Development, Production, Administration	Leased
Plattsmouth, Nebraska	*/24,340	Production	Leased
Nebraska City, Nebraska (2)	79,000/23,775	Production, Meter Services, Research, Design & Development, Warehouse, Office Space	Owned and Leased
Geneva, Ohio	24,000/9,600	Production, Warehouse	Owned
Cleona, Pennsylvania	60,100/8,120	Production, Office Space	Owned
Ocala, Florida	*/28,000	Production, Office Space	Leased
Luton, United Kingdom (3)	*/5,853	Research, Design & Development, Production, Administration	Leased
Essen, Belgium	25,500/8,450	Production, Office Space	Owned
Silvolde, Netherlands	18,700/7,000	Production, Office Space	Owned
Stara Tura, Slovakia	48,000/27,126	Production, Storage, Office Space, Research, Design & Development	Owned
Essen, Germany	*/1,774	Headquarters	Leased
Lotte-Büren, Germany	112,500/25,800	Research, Design & Development, Production, Distribution, Administration	Owned
Mainz-Kastel, Germany	55,996/24,368	Research, Design & Development, Production, Distribution, Administration	Owned
Lampertheim, Germany (3)	*/8,268	Research, Design & Development, Production, Office Space	Leased


*		Not applicable for leased properties.

(1)		Includes three buildings, two of which are used for office space (6,596 m²) and one used for production (10,683 m²).

(2)		Includes buildings used for warehouses, office space and industrial manufacturing (6,456 m²) and a building for meter services (3,084 m²).

(3)		Includes a water tower.

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Employees and Labor Relations

The following table contains the numbers, functions and geographic locations of our employees at the dates shown.


	As of December 31,
	2009		%		2008		%		2007		%

Function
Manufacturing, assembly and operation		4,369		63.7		5,054		66.3		4,901		66.5
Sales and Marketing		834		12.2		861		11.3		803		10.9
Research & Development		561		8.2		551		7.2		502		6.8
Packaging warehousing and supply management		436		6.4		460		6.0		458		6.2
Finance, controlling, accounting		284		4.1		289		3.8		278		3.8
Management		98		1.4		111		1.5		125		1.7
Other (IT, HR, etc.)		271		4.0		298		3.9		289		3.9

Total		6,853		100		7,624		100		7,356		100

Location
Europe		3,686		53.8		4,128		54.1		4,099		55.7
North America		1,853		27.0		2,101		27.6		2,109		28.7
Rest of the World		1,314		19.2		1,395		18.3		1,148		15.6

Total		6,853		100		7,624		100		7,356		100

In addition to the employee totals above, we also use a number of temporary external employees in South America, in connection with manufacturing activities. We also occasionally use temporary employees to assist us in ordinary course office functions. We had 367, 605 and 458 temporary external employees as of December 31, 2009, 2008 and 2007, respectively.

As an international company operating in more than 30 countries, we are subject to various labor regulatory regimes. In a number of our facilities, the employees are represented in works councils or labor unions. In 2009, we experienced one work stoppage in one of our facilities in France, which produces products for our gas segment, affecting approximately 80 employees. The stoppage lasted three days. Other than as described above, we have not experienced any other material work stoppages in the last three years.

Employee Incentive Plans

IPO bonus plan

Upon the completion of this offering, we will pay bonuses to about 70 of our key employees (other than the most senior level of our management). These employees will be eligible to receive one-time bonuses in an aggregate amount of up to €5.0 million. The awards are subject to the discretion of our CEO. No members of our Administrative Board or Managing Directors are eligible to participate in the plan.

Long-Term Incentive Plan (LTIP)

Concurrently with this offering, we will implement a new long-term incentive plan, or LTIP, for certain members of our management, including our CEO and other key employees. We plan to grant the first awards immediately upon the listing of our ADSs. Under this program, participants will be eligible to receive annual awards of ADSs. These awards will vest after four years (except for certain circumstances such as a change in control or takeover of our company), depending on the performance of the company. The grants for our Managing Directors will be resolved upon by our

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Administrative Board and the grants to other participants will be made by the compensation committee of our Administrative Board.

The vesting of 50% of the award will depend on total shareholder return at the end of the four-year period, measured against a comparison group of 30 other U.S.-listed companies. The vesting of the other 50% will depend on growth targets in our earnings per ADS and will be determined over the four-year vesting period. For the awards being granted in connection with this offering, achievement of performance conditions related to our earnings per ADS is determined at the end of each of the 2011, 2012 and 2013 financial years.

Except in limited circumstances such as retirement or redundancy, awards will lapse without vesting if an employee leaves our company. Under the LTIP, we may grant awards up to an amount of €7,072,000 in each financial year, plus amount of any awards which have lapsed in accordance the LTIP.

We awarded 674,441 ADSs under the LTIP upon the listing of our ADSs.

Significant Subsidiaries

The following table shows information about our significant subsidiaries as of December 31, 2009.


			Proportion
			of Our
Corporate Name	Country of Residence	Field of Activity	Ownership

Elster American Meter Company, LLC	United States	Gas metering		100	%
Elster GmbH	Germany	Gas and electricity metering		100	%
Elster Holdings GmbH	Germany	Holding company		100	%
Elster Holdings Netherlands B.V.	Netherlands	Holding company		100	%
Elster Holdings UK Ltd.	United Kingdom	Holding company		100	%
Elster Holdings US, Inc.	United States	Holding company		100	%

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REGULATION AND SUPERVISION

Overview

We are subject to various laws, regulations and ordinances in all of the jurisdictions in which we conduct business. Governments and regulatory authorities around the world, especially in North America and the European Union, have enacted numerous laws and regulations to promote energy efficiency and clean technology. Other areas of regulation that affect our business relate to regulation and allocation of radio frequencies, data protection, repair, warranty and recalibration periods and environmental, health and safety regulations. These regulations have had, and are expected to continue to have, a material effect on our industry.

Regulatory Initiatives to Promote Energy Efficiency and Clean Technology

United States

In the United States, a series of legislation has been enacted in recent years to encourage the implementation of the Smart Grid.

In February 2009, the American Recovery and Reinvestment Act of 2009, or ARRA, was enacted as part of an effort to promote the recovery of the U.S. economy. It includes a Smart Grid Grant Investment Program to modernize the U.S. electricity grid by making it more efficient and reliable. It is anticipated that this program will encourage the rollout of smart grid demonstration projects in geographically diverse areas, increase federal matching grants for smart grid technology, including the introduction of residential smart meters, encourage related research and development, and provide electric utilities with additional incentives to invest in smart grid technologies through cost recovery mechanisms administered by the U.S. Federal Energy Regulatory Commission.

In October 2008, the Emergency Economic Stabilization Act of 2008 was enacted. In addition to a well-publicized financial rescue package, this legislation included the Energy Improvement and Extension Act of 2008, which added new and extended existing tax incentives for combined heat and power systems, plug-in electric vehicles and smart meters and Smart Grid, including through the introduction of an accelerated recovery period for the depreciation of smart electricity meters and qualifying Smart Grid equipment. These incentives were designed to accelerate the introduction of energy-efficient technologies into the marketplace and to promote market acceptance of specialized products that use new efficient technologies prior to the phase-out of certain tax incentives.

In 2007, the Energy Independence and Security Act of 2007, or EISA, was enacted and was designed to increase energy efficiency and the availability of energy from renewable sources. Among other things, EISA requires the U.S. National Institute of Standards and Technology to establish protocols and standards to ensure interoperability, functionality and cybersecurity in Smart Grid technologies. EISA also directed individual states to encourage utilities to employ Smart Grid technologies and allow utilities to recover Smart Grid investments through rate mechanisms that are to be approved by the U.S. Federal Energy Regulatory Commission.

In August 2005, the Energy Policy Act of 2005, or the EPAct 2005, was enacted. EPAct 2005 included several provisions designed to promote energy efficiency and the use of renewable energy sources. In particular, EPAct 2005 requires each state regulatory authority to evaluate whether to allow each electric utility that it regulates to install time-based meters and communications devices that will allow customers to participate in time-based pricing rate schedules and other demand response programs. In addition, EPAct 2005 requires all federal agencies, to the maximum extent practicable, to have advanced metering capabilities for all federal buildings, including, at a minimum, hourly measurements of electricity consumption and daily data reports, by October 1, 2012.

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Canada

In May 2009, Ontario’s legislature passed the Green Energy Act, which was intended to create new green economy jobs and better protect the environment. The Green Energy and Green Economy Act, including related policies and regulations, was designed to provide Ontario’s government with the necessary authority to promote energy conservation among homeowners, government, schools and industry by encouraging lower energy use.

European Union

In March 2007, the European Union set precise, legally binding targets for the promotion of energy efficiency. Also, the European Renewable Energy Directive 2009/28/EC promotes the use of energy from renewable sources and sets targets for the share of energy consumption from renewable sources, complementing the goal to increase energy efficiency by 20% by 2020.

In April 2006, Directive 2006/32/EC on energy end-use efficiency and energy services, or the Energy Efficiency Directive, was enacted. The European Energy Efficiency Directive, among other things, requires member states to ensure, to the extent technically possible, financially reasonable and proportionate in relation to potential energy savings, that customers are provided with competitively priced individual meters that accurately reflect the final customer’s actual energy consumption and that provide information on the actual time of use. These meters must be installed whenever a meter is exchanged, a new connection is made in a new building or a building undergoes major renovations. In addition, as part of the European Energy Efficiency Directive, member states are required to adopt and achieve an indicative energy saving target of 9% by 2016 in the framework of a national energy efficiency action plan. On October 19, 2006, the European Commission passed an “Energy Efficiency Action Plan” (COM (2006) 545 Final) outlining a framework of policies and measures with a view to intensifying the process of realizing the over 20% estimated savings potential in the European Union’s annual primary energy consumption by 2020. A revised Energy Efficiency Action Plan is currently under discussion.

The European Energy Efficiency Directive was due for implementation by May 17, 2008, but a considerable number of member states failed to comply with the deadline and the European Commission has accordingly commenced infringement proceedings in July 2008. In addition to the implementation into national law, all member states are required to develop national energy efficiency action plans and most member states have fulfilled this obligation.

As part of the third legislative package for the European energy market of July 13, 2009, the European Parliament and Council introduced annexes to the European Electricity Directive 2009/72/EC and the European Gas Directive 2009/73/EC which, under certain circumstances, require the implementation of intelligent metering systems. Under the provisions of the relevant annexes, member states are required to ensure the implementation of intelligent metering systems that are supposed to facilitate active participation of consumers in the gas and electricity supply markets. Pursuant to both directives, the implementation of metering systems may be subject to an economic assessment of all long-term costs and benefits to the market and individual consumers. This assessment is scheduled to occur by September 3, 2012 and, subject to that assessment, member states are obliged to prepare timetables with a target of up to ten years for the implementation of intelligent metering systems. Where rollout of smart meters is assessed positively, at least 80% of the consumers are required to be equipped with intelligent metering systems by 2020. Member states are obliged to ensure the interoperability of metering systems to be implemented within their territories and required to have due regard to the use of appropriate standards and best practice.

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Radio Frequency Regulation

We are required to comply with the laws and regulations of, and often obtain approvals from, national and local authorities in connection with the products that we sell. Among other things, the design, manufacture, marketing and use of certain of our AMR, AMI and smart metering products is subject to the laws and regulations of the jurisdictions in which we sell such equipment. These laws and regulatory requirements vary from country to country, and jurisdiction to jurisdiction. In the United States, the Federal Communications Commission is primarily responsible for enforcing these laws and regulations, pursuant to the Communications Act of 1934, as amended. Any failure to comply with applicable laws or regulations could result in the imposition of financial penalties against us, the adverse modification or cancellation of required authorizations, or other material adverse actions. For more information, see “Risk Factors—Risks Related to Our Operations—Changes and developments in the regulations and policies of the countries we serve may affect demand for our products or cause us to incur significant costs.”

In particular, many of our AMR, AMI and smart metering products rely on the use of radio frequencies (which are highly regulated), and must comply with applicable technical requirements intended to minimize radio interference to other communications services and ensure product safety, by, among other things, limiting human exposure to radio frequency emissions. As a result, the approval of the regulatory authority of each country in which we design, manufacture, or market our products is often required. Moreover, we may be held accountable if our devices cause interference to other users of the radio spectrum. In certain cases, the approval of the communications carrier of whose system our products operate must also be obtained.

When we manufacture AMR, AMI and smart metering products with integrated communication devices, we typically seek approval from governmental entities and carriers ourselves. In other cases, including in the case of meters that allow the attachment of communication devices provided by third parties, we rely on other entities to obtain and maintain the necessary government and carrier approvals. In each case, testing of our product by the regulator, or by a testing lab approved by the regulator, typically is required to demonstrate compliance with applicable laws and regulations. Moreover, we must manufacture our products in accordance with the approved design. We currently plan to provide our own internal cellular modems in the next few years and will, as a result, need to seek new regulatory and carrier approvals for those devices before we manufacture and sell them. Although we expect to obtain those approvals, there can be no assurance that will be the case.

The increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards for these products, generally following extensive investigation and deliberation over competing technologies. The delays inherent in this governmental approval process have in the past caused, and may in the future cause, the cancellation, postponement or rescheduling of the installation of communication systems by our customers, which in turn may have a material adverse impact on the sale of our products to our customers.

Certain of our AMR, AMI and smart metering products are designed to use radio frequencies that are licensed to utilities or other end-users of those devices. However, most of the communications technology employed in those meters uses unlicensed spectrum. Where use of unlicensed spectrum is permitted, the band is typically shared among a number of different types of users, and use is allowed only on a non-interference basis. That is, a meter using an unlicensed band must not cause interference to others, and may not claim protection from interference that it may encounter from other users. As a result, our meters may not work as intended in every situation or environment.

Our AMR, AMI and smart metering products use three main communications technologies, and the frequencies that our products use vary from jurisdiction to jurisdiction.

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	•	In the United States, we generally use the unlicensed 902-928 MHz Industrial, Scientific and Medical (ISM) band in applications such as our EnergyAxis Local Area Network. Our products use 25 channels in this band.

	•	Our Wavenis technology allows operation in the European 868 MHz unlicensed band, the North American unlicensed 902-928 MHz ISM band and the licensed 400 MHz band in Europe, Asia and Australia.

	•	Our TRACE mobile technology uses the 400 MHz band.

For those of our technologies using the 400 MHz band in the United States, the utility generally acquires the necessary license and we configure the product for the specific frequency. The 400 MHz band is available in some other countries around the world, but subject to certain licensing requirements depending on the jurisdiction.

Governments may change laws and regulations relating to spectrum use in the future, and the licenses and other authorizations on which we rely may not be renewed on acceptable terms. Among other things, a government may reallocate spectrum for a different use if there are very few users in a particular band, or it may adopt new technical standards, or other new regulations that are intended to allow greater sharing in a given spectrum band. For example, the U.S. Federal Communications Commission has initiated a rulemaking proceeding in which it is considering adopting additional requirements for certain unlicensed devices to limit interference between devices operating in the 902-928 MHz band, in which certain of our devices operate. Although the outcome of the proceeding is uncertain, we do not expect that it will require us to make material changes to our equipment.

Outside of the United States, many of the AMR, AMI and smart metering products also require the use of radio frequencies and are also subject to regulations in the jurisdictions concerned. In Europe, Asia and Australia we use different bands such as the 433.07 to 434.79 MHz bands, the 863 to 870 MHz bands or the 900 MHz bands. In some countries, such as Australia, New Zealand and parts of Latin America, we also use the 916 to 928 MHz band.

In Europe, the use of GSM900 frequencies (880 to 890 MHz and 925 to 935 MHz) has been reserved for cellular digital mobile communication under the European GSM Directive (87/372/EC) and requires special frequency licenses. The European Parliament and Council passed an amendment of the GSM Directive on September 16, 2009 to make GSM900 available to other technologies for the provision of additional compatible and advanced pan-European services that coexist with GSM. The European Commission has followed with a decision (2009/766/EC) to harmonize the use of GSM 900 and GSM1800 frequencies (1710 to 1785 MHz and 1805 to 1880 MHz ).

In Asia, generally no license is currently required for our use of the relevant frequency bands. Whether or not a license is required, most countries provide for technical requirements for the use of such frequencies and equipment test procedures to avoid electrical interference with other equipment.

Data Protection

We believe that the ability to ensure the confidentiality, integrity and availability of data is a key factor for the future development of AMR, AMI and Smart Grid systems. This is particularly the case for the electricity segment and may, in the future, also characterize development in the gas and water segments.

The European Data Protection Directive (95/46/EC) imposes a general regulatory framework for the collection, processing and use of personal data (AMR, AMI and Smart Grid systems rely on data typically relating to one person or a small number of individuals). Although the European Data Protection Directive has been implemented by all member states, data protection laws across member states still vary to a considerable degree. In addition, national data protection authorities often do not apply existing laws in a consistent manner. Privacy issues in connection with AMR, AMI

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and Smart Grid solutions have been discussed in the European Union and several member state data protection authorities have formed initial views on the subject matter. We employ various techniques to guarantee the confidentiality, integrity and availability of data and we believe we are in material compliance with all applicable data protection rules. However, we are exposed to the risk that European Union or member state legislation will set new standards, which may force us to change or adjust our data protection techniques. Failure to comply with current or future data protection rules could result in the imposition of substantial fines, suspension of production, alteration of our production processes or cessation of operations or other actions against us or our customers, which could materially and adversely affect our business, financial condition and results of operations. For more information, see “Risk Factors—Risks Related to Our Operations—Changes and developments in the regulations and policies of the countries we serve may affect demand for our products or cause us to incur significant costs.”

Certifications and Approvals

In the United States, there is no centralized certification process for metering systems. Some U.S. states require individual certification procedures and approvals for meters. In Canada, our meters are subject to certifications from the relevant agencies. We are able to obtain certification in our facilities for most of North America.

In the European Union, metering systems must receive an EC type certificate and individual approval. EC type certificates granted in one member state are also valid in the other member states. Individual approvals for metering systems vary among member states and the types of meters. Changes in certification or approval requirements as well as compliance issues with our new products may have an adverse impact on our business. Interoperability requirements may force us to open certain aspects of our business to increasing competition.

Repair, Warranty and Recalibration Periods

The metering industry is subject to additional national regulation in many jurisdictions, which includes specific rules requiring meters to be recalibrated and repaired at specified intervals. The intervals depend on the segment (gas, electricity or water) and the jurisdiction and may vary between one and 25 years.

In the United States, meter or technology replacement is typically prescribed by local utilities. Public utility commissions dictate how often meters or a sample of meters must be tested. Once tested, the utility can decide to replace or rework an older meter that no longer meets minimum requirements. In addition, a public utility commission can require a change to the existing base of installed meters by requiring new functionality that cannot be supported by older meters.

Outside of the United States, verification and repair requirements are covered by the laws of various jurisdictions. In Germany, for instance, cold water meters are required to be recalibrated and repaired every six years, whereas hot water and heat meters need to be recalibrated and repaired every five years. Other European jurisdictions, including The Netherlands, Austria, Switzerland, the Czech Republic and Slovakia, have enacted similar regulations.

Because of the relative expense involved in repairing meters, many customers install new meters at the time national regulations call for recalibration and repair. As a result, if these national regulations were to change or extend the time for recalibration and repair, our sales of meters in these jurisdictions could decrease.

In the United States, warranties on electricity meters are typically one year from installation or 18 months from shipment and are generally restricted to product repair or replacement. Outside of the United States, warranty periods vary and may be substantially longer.

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Environmental, Health and Safety Regulations

We are subject to a variety of federal, state, local and foreign environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes and the clean-up of contaminated sites. In connection with these regulatory regimes, we are occasionally required to respond to standard inquiries about our facilities and properties. In addition, we are subject to certain safety and health regulations in various jurisdictions around the world. In connection with our sale of Ipsen Group, we are required to indemnify the purchaser against present or future claims made by August 15, 2015 relating to asbestos exposure, up to a maximum of €15 million. For more information see “Our Company—Legal Proceedings.”

There is a risk that we have not been, or will at all times be, in compliance with all of these requirements, including reporting obligations and permit restrictions, and we could incur material fines, penalties, costs and liabilities relating to environmental, health of safety matters. While we currently incur capital and other expenditures to comply with these environmental laws, these laws may become more stringent and our processes may change. See “Risk Factors—Risks Related to Our Operations—Environmental laws and regulations may expose us to liability and increased costs.”

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MANAGEMENT

Overview of Our Corporate Governance Structure

We are a European public limited liability company (Societas Europaea, or SE) with its registered seat in Germany. We are subject to European legislation on SEs, most importantly Council Regulation (EC) 2157/2001, which we refer to as the SE Regulation. We are also governed by the German SE Implementation Act (SE-Ausführungsgesetz) and the general provisions of German corporate law, in particular the German Stock Corporation Act (Aktiengesetz). As a result, we are treated to a large extent like a German stock corporation (Aktiengesellschaft), including with respect to capital measures such as capital increases and reductions, shareholders’ meetings and accounting.

The corporate bodies of an SE are determined in its Articles of Association. In addition to the shareholders’ meeting, an SE with its registered seat in Germany may elect to have either a two-tiered governance system, comprising a supervisory board and a management board, or a single-tiered governance system comprising solely a board called an administrative board (Verwaltungsrat). The Articles of Association of our company provide for a single-tier governance system, with our Administrative Board as the governing body, directing the business of the company, establishing the general principles for its activities and supervising their implementation.

A German single-tier SE must also appoint at least one managing director (geschäftsführender Direktor). Managing directors conduct the daily operations of an SE and represent the company vis-à-vis third parties. Managing directors may also be members of the Administrative Board, but the majority of the Administrative Board must at all times be comprised of non-managing members. At present, we have three Managing Directors. One of these, our Chief Executive Officer, is also a member of our Administrative Board.

In carrying out their duties, members of the Administrative Board must exercise the standard of care of a prudent and diligent business person. In complying with this standard of care, the members of our Administrative Board are generally required to take into account a broad range of considerations in their decisions, including the interests of our company and those of our shareholders, employees and creditors as well as, to a certain degree, the general public. The Administrative Board is required to respect the fundamental rights of the shareholders under German corporate law to equal treatment and equality of information.

The Managing Directors must also observe the standard of care of a prudent and diligent business person in carrying out their duties as Managing Director. However, to the extent that the Administrative Board has exercised its right to give the Managing Directors binding instructions, a Managing Director will generally not bear liability for having followed these instructions, unless the instructions were illegal and the Managing Director was or should have been aware of that fact.

Members of the Administrative Board or Managing Directors who violate their duties are liable to our company for damages. We may only waive or reach a settlement with respect to claims against such persons for compensatory damages if three years have elapsed since the claim first arose, and if our shareholders’ meeting has adopted a resolution to this effect by a simple majority, as long as no group of shareholders whose combined shareholdings amount to at least 10% of the share capital has recorded an objection in the notary’s minutes of the meeting.

We must bring an action in our name against a member of the Administrative Board or a Managing Director for breach of duty if a majority of the shares voted at a shareholders’ meeting so resolve. However, as a general rule under German law, shareholders have no direct recourse against a member of the Administrative Board or a Managing Director of a German SE for breach of duty to the company. Under German law, these individuals may be liable for a breach of duty to shareholders, as opposed to breach of duty to the company itself, only where a breach of duty to the company also constitutes a violation of a statutory provision enacted specifically for the protection of shareholders.

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Shareholders may either assert claims for breaches of this sort or, subject to certain conditions, compel the company to pursue claims for compensatory damages.

Under German law, shareholders of a German SE or other persons may be liable to the company for damages if they intentionally exert their influence on the company to cause a member of the Administrative Board, a Managing Director, or a holder of a special power of attorney to represent and bind the company (Prokurist) to act in a way that is detrimental to the company.

Rembrandt is and, immediately after the offering, will remain our controlling shareholder. Under German law, a controlling shareholder may not cause us to act against our interests (through voting its shares or otherwise) unless either the controlling shareholder compensates us for any resulting detriment or we have entered into a domination agreement (Beherrschungsvertrag) governed by German law with the controlling shareholder. A domination agreement permits a controlling shareholder to give binding instructions to the dominated company in exchange for an agreement to assume any annual net loss and for an agreement to pay a certain portion of profits to minority shareholders. Rembrandt and we have not entered into a domination agreement.

German Corporate Governance Code

The German Corporate Governance Code (Deutscher Corporate Governance Kodex), or Governance Code, was originally published by the German Ministry of Justice (Bundesministerium der Justiz) in 2002 and was most recently amended in May 2010. The Governance Code contains recommendations and suggestions relating to the management and supervision of German companies that are listed on a stock exchange. It follows internationally and nationally recognized standards for good and responsible corporate governance. The Governance Code aims at making the German corporate governance system transparent and understandable. The Governance Code contains corporate governance recommendations and suggestions with respect to shareholders and the general shareholders’ meeting, the management board and supervisory board, transparency, accounting policies and audits. There is no duty to comply with the recommendations or suggestions of the Governance Code. The German Stock Corporation Act only requires listed companies to issue an annual declaration that either states that the company has complied with Governance Code recommendations, or lists the recommendations that the company has not complied with and explains its reasons for deviating from the Governance Code recommendations. In addition, in this annual declaration, a listed company is also required to declare whether it intends to comply with the recommendations or list the recommendations with which it does not plan to comply in the future. These declarations have to be made accessible to shareholders at all times. If the company changes its policy on certain recommendations between such annual declarations, it must disclose this fact and explain its reasons for deviating from the recommendations. Non-compliance with suggestions contained in the Governance Code need not be disclosed. We believe that the German Corporate Governance Code applies to us, although we note that its provisions are primarily drafted with a view to the two-tier corporate governance system typical in Germany and to companies whose shares are listed on German stock exchanges. Consequently, not all provisions will be applicable to our company.

Employee Involvement

Employees from our operations in the European Union and the European Economic Area, or EEA, take part in our SE Works Council (SE Betriebsrat). The role of the SE Works Council is to ensure our compliance with the statutory rights to information and consultation for our employees in the European Union and the EEA. The SE Works Council has representatives from every EU member state in the European Union and the EEA in which our group operates and has special responsibility for cross-border matters within Europe and has the right to be informed and to be heard with regard to all matters of this nature. We agreed the details concerning the SE Works Council in the Agreement Regarding Employee Participation in Elster Group SE, or Employee Participation

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Agreement, between our management and a special negotiating body that we convened in accordance with applicable law to negotiate employee participation issues relating to our transition to an SE.

In addition, Elster Holdings GmbH, a direct subsidiary of our company, includes representatives of the employees of that company’s subsidiaries on its supervisory board (Aufsichtsrat). In the Employee Participation Agreement, we agreed to appoint nominees of the employees to fill half the seats on Elster Holdings GmbH’s supervisory board. The chairman of the supervisory board of Elster Holdings GmbH is appointed by us at our discretion. In case of a tie, his or her vote is decisive.

General Meeting of Shareholders

A general meeting of the shareholders of our company may be called by the Administrative Board. The annual shareholders’ meeting must take place within the first six months of a financial year. Shareholders representing in the aggregate at least five percent of our shares may also request that a meeting be called. Our shareholders’ meeting must be held in Germany.

Each of our shares carries one vote. Resolutions of the shareholders’ meeting are adopted by simple majority of the votes cast unless statutory law or our Articles of Association require otherwise. The right to participate in and vote at a shareholders’ meeting extends only to those shareholders who have timely notified us of their attendance at the shareholders’ meeting and whose shares are registered in the share register. As a holder of ADRs, you will need to comply with certain procedures to vote your shares. See “Description of American Depositary Shares—Voting Rights.”

Administrative Board

Our Administrative Board determines the strategic direction and guiding principles, and supervises their implementation. It also has a top-level management function. In particular, its main functions are to:


	•	appoint and dismiss our Managing Directors and represent our company in its transactions with the Managing Directors;

	•	approve matters where approval is reserved to it by mandatorily applicable law or our Articles of Association;

	•	establish committees of the Administrative Board and appoint their members;

	•	review and approve our annual accounts, our annual report and our Managing Directors’ recommendation to the shareholders’ meeting regarding how our profits (if any) should be allocated; and

	•	ensure that adequate monitoring systems exist to detect at an early stage risks threatening the existence of our company.

Our Articles of Association provide that our Administrative Board will consist of a minimum of five and a maximum of ten members. Currently, our Administrative Board consists of seven members in total, of whom Mr. Simon Beresford-Wylie is also one of our three Managing Directors (Chief Executive Officer, or CEO). The remaining six are non-managing members.

The members of the Administrative Board are appointed by our shareholders’ meeting by a simple majority of the votes cast. There is no share ownership requirement to qualify as a member of the Administrative Board. According to our Articles of Association, our shareholders’ meeting appoints Administrative Board members for an approximate four year term of office and may reappoint them. In addition, German law does not require the majority of our Administrative Board members to be independent and neither our Articles of Association nor the rules of procedure for our Administrative

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Board provide otherwise. The shareholders’ meeting may remove an Administrative Board member at any time by a three-quarters super-majority of the votes cast, coupled with a resolution, also adopted by a three-quarters super-majority of the votes cast, to the effect that the shareholders have no confidence in the suitability of the member to continue in office. Members of the Administrative Board are entitled to resign from their office for any reason on one month’s notice to the Administrative Board, or without prior notice if a compelling reason exists.

The Administrative Board has elected a chairperson and a deputy chairperson from among its members. The deputy chairperson exercises the chairperson’s rights and obligations at any time when the chairperson is prevented from doing so. Neither the chairperson nor the deputy chairperson may be Managing Directors of our company.

Meetings of the Administrative Board are convened as often as the business of our company requires, but at least once each calendar quarter. The Administrative Board has a quorum if, upon due notice being given to all of its members, at least half of them are present or represented. Members are deemed present if they participate by video or telephone conference, or similar means of communication that ensures all participating members are able to hear and be heard by one another. Absent members may also participate in the voting by submitting his or her ballot through another member. If a quorum cannot be reached, a new meeting with the same agenda shall be duly called. The reconvened meeting will have a quorum if at least three members, of which the majority must be non-managing members, of the Administrative Board are present or represented.

Resolutions of the Administrative Board are passed by majority of the votes of the members present or represented, unless our Articles of Association provide otherwise. In case of a tie, the vote of the chairperson is decisive.

Resolutions may also be passed outside of meetings in the form of a written resolution.

Members of the Administrative Board may not deal with, or vote on, matters relating to proposals, arrangements or contractual agreements between themselves and our company or the institution of a lawsuit against them by our company, and they may be liable to our company if they have a material interest in any contractual agreement between our company and a third party which was not disclosed to, and approved by, the Administrative Board.

The Administrative Board has established its own rules of procedure.

The following table lists the individuals who were already members of our Administrative Board before the offering and their ages, functions, terms (which expire on the date of the relevant year’s annual shareholders’ meeting) and principal occupations.


Name	Age		Function	Term Expires	Principal Occupation

Simon Beresford-Wylie		52	Chief Executive Officer	2013	CEO of Elster Group SE
Howard Dyer		60	Chairman	2013	Chairman of Elster Group SE
Gregor Hilverkus		38	Non-Managing Member	2013	Managing Director of CVC Capital Partners
Steven Koltes		54	Non-Managing Member	2013	Managing Partner of CVC Capital Partners
Marc Strobel		43	Deputy Chairman	2013	Partner of CVC Capital Partners

The following is a summary of the business experience of these members of the Administration Board listed above:

Mr. Simon Beresford-Wylie has been Chief Executive Officer of Elster Group SE since November 2009. Prior to joining Elster, he was the CEO of Nokia-Siemens Network and a member of the Nokia Group Executive Board. Mr. Beresford-Wylie joined the Nokia Group in 1998 and held a variety of senior leadership positions within the Nokia Group in Asia-Pacific and Europe until 2007 when

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Nokia-Siemens Network was formed and he became CEO. From 1995 to 1998, he was CEO of Indian mobile network operator Modi Telstra, and prior to this was an executive with Australia’s Telstra Corporation. He holds a degree from the Australian National University, and is a graduate of the Executive Development Program of Stanford University/National University of Singapore. Mr. Beresford-Wylie is also currently a non-executive director at Vitec Group plc.

Mr. Howard Dyer has been the Chairman of Elster Group since 2005 and also recently served as interim CEO of the Elster Group until November 2009. Mr. Dyer is also the Chairman of the Minit Group. He previously served as Chairman of New Look Group Limited, CEO of Hamleys plc, Executive Chairman and CEO of Ascot plc and a non-executive director of Asprey plc. Mr. Dyer was the CEO of the North America division and director of Williams Holdings plc. He previously worked at Alcan as the commercial director of its extrusions division in the United Kingdom and managing director of its foil division in the United Kingdom. He is certified in production engineering by Oxford Brookes University.

Mr. Steven Koltes is a Managing Partner and co-founder of CVC Capital Partners and holds overall responsibility for CVC’s activities in the German speaking countries. Mr. Koltes joined CVC in London in 1987, having previously headed Citicorp’s Mezzanine Finance Division in London. From 1980 to 1987 he worked in Citicorp’s Corporate and Investment banks in New York, Zurich and London. Mr. Koltes holds a BA degree from Middlebury College. In addition to his involvement in our company, Mr. Koltes serves on the supervisory board of Evonik Industries AG and serves as a non-executive member of the board of Flint Group Holdings S.à r.l., a company related to investments made by funds advised by CVC in Flint Group.

Mr. Gregor Hilverkus is a Managing Director of CVC Capital Partners. He joined CVC in 2001, having previously worked as Co-Founder and CFO of the media and music company Ecapella.com GmbH in Cologne and with J.P. Morgan in Mergers & Acquisitions. Mr. Hilverkus studied Business Administration and holds a degree from the Otto Beisheim School of Management (WHU), Koblenz, Germany. In addition to his involvement in our Company and his acting as a non-executive director of our parent company Rembrandt Holdings S.A., Mr. Hilverkus serves as a non-executive member of the board of Gabriel Investment S.à r.l. and Gabriel Holdings S.à r.l., companies related to the investment made by funds advised by CVC in Evonik Industries, as well as Brandlen Finance S.A., DSI Investments S.à r.l. and Tension Holding S.A., companies related to the investment made by funds advised by CVC in DSI.

Mr. Marc Strobel was elected Deputy Chairman of Elster Group in 2010 and is a Partner of CVC Capital Partners. He joined CVC in 2000 having previously worked at Doughty Hanson in Frankfurt and London. Before that, he was an associate at Lehman Brothers, New York and London, and an analyst at Wasserstein Perella & Co., Frankfurt. Mr. Strobel holds a degree in Business Administration from the European Business School, Oestrich-Winkel, Germany and an MBA from the Wharton School, University of Pennsylvania. In addition to his involvement in our company and his acting as a non-executive director of our parent company Rembrandt Holdings S.A., Mr. Strobel is a managing director of Gabriel Acquisitions GmbH and serves as a non-executive member on the board of Charterhouse Inuit (Luxco I) S.A., companies related to investments made by funds advised by CVC in Evonik Industries and ista International, respectively.

In addition, the individuals listed in the table below, who are independent (according to the criteria set forth below), have joined the Administrative Board at the time of this offering.

Name

Age

Function

Term Expires

Principal Occupation

Michael Cannon

Non-Managing Member

2014

Board Member

John J. Delucca

Non-Managing Member

2014

Board Member

Mr. Michael Cannon is retired after a 35 year career in high technology companies. Mr. Cannon currently serves as a consultant to Dell Inc, where he served as President, Global Operations from February 2007 until his retirement in 2009. Prior to joining Dell, Mr. Cannon was the Chief Executive

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Officer of Solectron Corp, a $12 billion electronic manufacturing services company, which he joined as CEO in 2003. From July 1996 until joining Solectron, Mr. Cannon served as the Chief Executive Officer of Maxtor Corporation, a disk drive and storage systems manufacturer. Prior to joining Maxtor, Mr. Cannon held senior management positions at IBM. Mr. Cannon studied Mechanical Engineering at Michigan State University and completed the Advanced Management Program at Harvard Business School. Mr. Cannon has served on the Board of Directors of Adobe Systems, a software company, since 2003.

Mr. John J. Delucca currently serves as a director, as chairman of the audit committee and as a member of the compensation committee of Endo Pharmaceuticals, Inc., as a director and as a member of each of the audit and governance and nominating committee of Tier Technologies, Inc., and as a director and chairman of the audit committee of ITC Deltacom. Mr. Delucca served as Executive Vice President and Chief Financial Officer of REL Consultancy Group from 2003 until 2004, Executive Vice President, Finance and Administration, and Chief Financial Officer of Coty, Inc. from 1999 to 2002 and as Senior Vice President and Treasurer of RJR Nabisco, Inc. from 1993 to 1998. Mr. Delucca also has served as Managing Director and Chief Financial Officer of Hascoe Associates; President and Chief Financial Officer of the Lexington Group; and Managing Director of The Trump Group. Mr. Delucca received a BA degree in Business Administration from Bloomfield College and an MBA from Fairleigh Dickinson University.

None of the current members of our Administrative Board directly owns any of our share capital. However, Messrs. Dyer and Beresford-Wylie are limited partners in the Management KG, which is a direct holder of 10% of our ordinary shares, and as such are beneficial owners of shares in our company. For more information, see “Related Party Transactions—The Management KG and Our Management Equity Program—The Management KG.” In addition, Messrs. Dyer, Hilverkus, Koltes and Strobel have financial and other relationships through Rembrandt, our principal shareholder. See “Principal and Selling Shareholders.”

The business address of each of the members of our Administrative Board is Elster Group SE, Frankenstrasse 362, 45133 Essen, Germany.

Committees of the Administrative Board

Our Administrative Board may appoint one or more committees composed of members of the Administrative Board, in order to consider particular matters and to supervise the implementation of its resolutions. Our Administrative Board has established an audit and compliance committee and a compensation committee, and expects to establish a nomination and corporate governance committee before completion of this offering.

Audit and Compliance Committee

Our Audit and Compliance Committee, which we refer to as our Audit Committee, is currently comprised of non-managing members of the Administrative Board. Our Audit Committee carries out the functions typically carried out by the audit committee of a U.S. company. Pursuant to the Articles of Association and the rules of procedure of our Audit Committee, these are in particular:


	•	preparing the decisions of the Administrative Board concerning approval of our company’s annual financial statements, including review of the financial statements, our annual reports, our Managing Directors’ proposal for the recommendation of the Administrative Board to the shareholders’ meeting regarding how our profits (if any) should be allocated and the reports of our independent auditors;

	•	reviewing the interim financial statements of our company that are made public or filed with any securities regulatory authority;

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	•	handling auditor independence issues, preparing the resolution of our shareholders’ meeting to mandate our auditor to audit our consolidated and unconsolidated annual financial statements (including the determination of the focus of the audit), approving any consulting services by the auditor and supervising the auditor;

	•	handling risk management issues and supervising the risk management system;

	•	establishing and maintaining procedures pursuant to which our employees can report to the Audit Committee, on an anonymous and confidential basis, complaints regarding our accounting and auditing practices, and enacting rules pursuant to which complaints we receive from third parties will be reported to the Audit Committee;

	•	approving related party transactions, as described in “Related Party Transactions—Procedures for Related Party Transactions;”

	•	discussing any flaws relating to our internal control systems, as reported by the Administrative Board to the Audit Committee; and

	•	monitoring our bookkeeping and records.

Subject to certain limited exceptions including the one described below, beginning upon the closing of this offering, each member of the Audit Committee must be independent according to the following criteria:


	•	no member of the Audit Committee may, directly or indirectly, accept any consulting, advisory or other compensatory fees from our company or its subsidiaries other than in such member’s capacity as a member of the Administrative Board or any of its committees; and

	•	no member of the Audit Committee may be an “affiliated person” of our company or any of its subsidiaries except for such member’s capacity as a member of the Administrative Board or any Board committee, for this purpose, the term “affiliated person” means a person that directly or indirectly controls or is controlled by, or possesses (directly or indirectly) the power to direct or cause the direction of the management (whether through the ownership of voting securities, by contract or otherwise).

We refer to any member of our Administrative Board who meets these criteria as “independent” or as an “independent director.”

Currently, the members of the Audit Committee are Mr. Cannon, Mr. Delucca (Chairman) and Mr. Hilverkus.

Under SEC rules, a minority of the members of our Audit and Compliance Committee (one member in our case) may be exempt from the independence requirements we describe above for a transition period of one year from the effective date of our registration statement. We expect to appoint independent directors to our Audit and Compliance Committee, such that it consists exclusively of independent directors, at our annual meeting of shareholders in 2011.

Compensation Committee

Our Compensation Committee currently consists of Mr. Cannon (Chairman), Mr. Delucca and Mr. Dyer. One member of the Compensation Committee is independent. Pursuant to our Articles of Association and the rules of procedure that the Administrative Board has adopted for the Compensation Committee, the Compensation Committee carries out in particular the following functions:


	•	develop general compensation principles for the Administrative Board and compensation arrangements for the Managing Directors and the non-managing members of the Administrative Board; classify in detail the various components of compensation (fixed, variable and

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		stock-based) and all other ancillary benefits, including retirement and severance benefits, and analyze associated performance targets;


	•	prepare the resolutions concerning the compensation and benefits, including stock-based benefits, of the Managing Directors and the non-managing members of the Administrative Board, to the extent permitted by law; and

	•	regularly review the adequacy of compensation in light of legal requirements under German law, best practices among similarly-situated companies in the same and comparable industries and more generally, and among other companies whose shares are listed on the same securities exchange on which our company maintains its primary listing.

Nomination and Corporate Governance Committee

In accordance with our Articles of Association, our Administrative Board has established a Nomination and Corporate Governance Committee. The Nomination and Corporate Governance Committee consists of at least three non-managing members of the Administrative Board. Pursuant to our Articles of Association and the rules of procedure that the Administrative Board has adopted for the Nomination Committee, the Nomination and Corporate Governance Committee carries out in particular the following functions:


	•	identify, pre-screen, interview and recommend to the Administrative Board individuals qualified to become Administrative Board members and Managing Directors, consistent with criteria approved by the Administrative Board;

	•	monitor best practices and trends in corporate governance among similarly-situated companies in the same and comparable industries and more generally, and among other companies whose shares are listed on the same securities exchange on which our company maintains its primary listing; and

	•	develop and recommend to the Administrative Board a set of corporate governance principles applicable to the company.

The initial members of the Nomination and Corporate Governance Committee are Mr. Cannon, Mr. Dyer (Chairman) and Mr. Strobel.

Managing Directors

Applicable law and our Articles of Association require us to appoint at least one Managing Director. Currently, the company has three Managing Directors. The Administrative Board appoints Managing Directors with a simple majority. Members of the Administrative Board may also be appointed as Managing Directors as long as a majority of the members of the Administrative Board would continue to be non-managing members. Currently, our Chief Executive Officer, Simon Beresford-Wylie, is also a member of the Administrative Board. There is no share ownership requirement to qualify as Managing Director.

A Managing Director may be appointed for an indefinite term. A Managing Director may be removed from office at any time by a majority resolution of the non-managing members of the Administrative Board coupled with a resolution, also adopted by a majority of the non-managing members of the Administrative Board, to the effect that the Administrative Board has no confidence in the suitability of the Managing Director to continue in office.

Our Managing Directors conduct the daily business of our company in accordance with applicable laws, our Articles of Association and the rules of procedure for the Managing Directors adopted by the Administrative Board. Our Administrative Board may also issue binding instructions to the Managing

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Directors. The Managing Directors are in general responsible for the management of our group and for handling our daily business relations with third parties, the internal organization of our business and communications with our shareholders. In addition, they have the primary responsibility for:


	•	the preparation of our annual financial statements;

	•	the making of a proposal for the Administrative Board’s recommendation to our shareholders’ meeting on how our profits (if any) should be allocated; and

	•	regular reporting to the Administrative Board on our current operating and financial performance, our budgeting and planning processes and our performance under them and on future business planning (including strategic, financial, investment and personnel planning).

Notwithstanding the joint responsibility of all Managing Directors for management matters of our company, the rules of procedure for the Managing Directors provide that the Managing Directors will unanimously establish a plan on the internal allocation of responsibilities among themselves. If the Managing Directors are unable to adopt such an allocation plan, the Administrative Board will adopt one by majority resolution. According to the allocation plan our Managing Directors have established under the rules of procedure currently in place:


	•	our Chief Executive Officer is responsible for, among other things, strategy and business development, operations and technology;

	•	our Chief Financial Officer is responsible for, among other things, finance and treasury, accounting, financial reporting, controlling and taxes; and

	•	our Chief Legal Officer is responsible for, among other things, legal affairs, compliance oversight, relationships with regulators and disclosure controls and procedures.

The Managing Directors decide as a group on matters not allocated to one of them under the allocation plan whenever any one of them indicates that a matter should be decided as a group. In any event, the Managing Directors deliberate and vote as a group on any resolution recommending to the Administrative Board any of the matters listed below that require the approval of our Administrative Board.

The following actions may be taken by our Managing Directors only with the prior express authorization of our Administrative Board, including an approval of the majority of the non-managing members of the Administrative Board:


	•	the acceptance of our overall business plan and annual budget;

	•	the incurrence of indebtedness in excess of €20 million or granting of any security interest in that amount in any individual transaction or series of related transactions by our company or any of its subsidiaries, other than pursuant to the Senior Facilities Agreement;

	•	before the completion of this offering, the amendment of or any waiver under or the taking of any action that would require the amendment of or waiver under, or lead to a breach under, the Senior Facilities Agreements and/or the related intercreditor agreements;

	•	the entry into, termination of, amendment of or waiver under any contract (including employment contracts) or other arrangement between (a) our company or any subsidiary and (b) any member of the Administrative Board or any person or legal entity that is affiliated with or otherwise closely connected to a member of the Administrative Board;

	•	the acquisition or disposal of a company, a business, assets or real estate with a value in excess of €20 million in any individual transaction or series of related transactions by our company or any subsidiary, unless contained in an annual approved budget; and

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	•	the entering into capital expenditure commitments in excess of amounts contained in an approved annual budget, if that commitment exceeds €5 million in any individual case or exceeds €10 million in total.

The Administrative Board may make further types of actions contingent upon its approval.

The rules of procedure for the Managing Directors provide that the Managing Directors shall generally adopt their resolutions by majority vote if unanimity cannot be achieved.

Our company may be represented by two Managing Directors acting together or by a Managing Director together with a holder of a special power of attorney (Prokurist). According to our Articles of Association, our Administrative Board may grant a Managing Director, acting alone, the ability to represent our company.

The following table lists our current Managing Directors and their ages and functions.

The following is a summary of the business experience of our current Managing Directors, other than that of Mr. Beresford-Wylie, whose business experience is summarized under “—Administrative Board” above:

Christoph Schmidt-Wolf has been Elster’s Chief Financial Officer since 2005. Prior to that he was the Chief Financial Officer of Tenovis from 2003 to 2004 and then Vice President for Finance in Europe of Avaya in 2005. Mr. Schmidt-Wolf also served as Chief Financial Officer of Stepstone ASA from 1999 to 2001 and worked as a management consultant in 2002. Previously he worked in various financial roles at Compaq, including Controller for the EMEA region, from 1988 to 1999 and at Hewlett Packard from 1983. Mr. Schmidt-Wolf has a degree in Industrial Engineering and Management from the Technical University of Darmstadt in Germany. Mr. Schmidt-Wolf serves as a managing limited partner (geschäftsführender Kommmanditist) of the Management KG.

Thomas Preute became a Managing Director in 2010. He has been Elster’s Chief Compliance Officer since 2007 and General Counsel and Vice President since 2003, when he joined Ruhrgas Industries GmbH. He previously worked as head of corporate law at E.ON Ruhrgas AG, in private legal practice and at Commerzbank AG in private banking. Mr. Preute studied law at the Universities of Freiburg, Hamburg and Munich, Germany, and holds a doctoral degree in law (Dr. iur.) from Augsburg University in Germany. He serves as a managing limited partner of the Management KG.

The business address of our Managing Directors is Elster Group SE, Frankenstrasse 362, 45133 Essen, Germany.

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Compensation and Share Ownership

Compensation of the Administrative Board

For our 2009 financial year, the individual members of our Administrative Board received the following compensation:


	Base					Other			Total
Name	salary		Bonus			compensation			compensation
	in €

Simon Beresford-Wylie		142,020.54		70,833.34	(3)		353.86	(5)		213,207.74
Howard Dyer		600,000.00		488,100.00	(4)		208,824.67	(6)		1,296,924.67
Gregor Hilverkus (1)		0		0			0			0
Steven Koltes (2)		0		0			0			0
Marc Strobel (1)		0		0			0			0

Total		742,020.54		558,933.34			209,178.53			1,510,132.41


(1)		We did not make any payments to Mr. Hilverkus or Mr. Strobel in connection with their services on our Administrative Board.

(2)		We made payments of €20,000, plus applicable value added tax and withholding tax of 25% to CVC Capital Partners in respect of Mr. Koltes’s service on our Administrative Board.

(3)		This amount represents the accrued bonus for 2009 for Mr. Beresford-Wylie. This bonus will be paid in 2010.

(4)		Of this total, €337,500 represents a bonus for services in 2009 and was paid to Mr. Dyer in 2009. The rest was accrued for services in 2009 and will be paid in 2010.

(5)		This amount represents the premium on accident insurance purchased by us for Mr. Beresford-Wylie.

(6)		Of this total, €208,224.67 represents amounts paid for the rent of Mr. Dyer’s office space in London and other office services (see “Related Party Transactions—Lease of Office Space”) and €600 represents the premium on accident insurance purchased by us for Mr. Dyer.

Compensation of the Managing Directors

The compensation of our Managing Directors is composed of various components, including annual fixed and variable remuneration, fringe benefits and deferred benefits based on company pension obligations. For our 2009 financial year, our Managing Directors received the following compensation:


						Other			Pension		Total
Name	Base salary		Bonus			compensation			benefit		compensation
	in €

Simon Beresford-Wylie		142,020.54		70,833.34	(1)		353.86	(3)		0		213,207.74
Christoph Schmidt-Wolf		350,000.00		285,350.00	(2)		50,826.92	(4)		0		686,176.92

Total		492,020.54		356,183.34			51,180.78			0		899,384.66


(1)		This amount represents the accrued bonus for 2009 for Mr. Beresford-Wylie. This bonus will be paid in 2010.

(2)		Of this total, €138,000.00 represents a bonus for services in 2009 and was paid to Mr. Schmidt-Wolf in 2009. The rest was accrued for services in 2009 and will be paid in 2010.

(3)		This amount represents the premium on accident insurance purchased by us for Mr. Beresford-Wylie.

(4)		This amount represents €18,000.00 automobile allowance, €18,000.00 housing allowance, €14,280.00 service fees for the Administrative Board of Elster GmbH and €546.92 for the premium on accident insurance purchased by us for Mr. Schmidt-Wolf.

None of the members of our Administrative Board and Managing Directors own any shares in our company directly. However, some of them participate in our Management Equity Program, or MEP, through their interests in the Management KG. See “Related Party Transactions—The

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OUR HISTORY AND RECENT CORPORATE TRANSACTIONS

History of the Elster Group

Our company traces its roots to the earliest days of the metering industry. One of American Meter’s predecessors was founded in Pennsylvania in 1836 and was an early producer of gas meters in the United States. In Europe, our history also dates back to the nineteenth century. Elster Meters was founded in 1848 and G. Kromschröder was founded in 1865.

Substantial parts of our operations were later combined under the holding company Ruhrgas Industries GmbH, a German limited liability company (Gesellschaft mit beschränkter Haftung, or GmbH), which was a subsidiary of German Ruhrgas AG. In March 2003, E.ON AG completed its acquisition of Ruhrgas AG, including Ruhrgas Industries GmbH. On June 15, 2005, Nachtwache Acquisition GmbH, an investment vehicle indirectly owned by funds advised by CVC Capital Partners, a private equity group, entered into a share purchase agreement with E.ON Ruhrgas AG to acquire Ruhrgas Industries GmbH. The closing occurred on September 12, 2005.

Our Corporate Structure

The following chart shows our expected corporate structure immediately after the offering. This chart assumes that the capital measures we describe below in “—Capital Measures in Connection with the Offering” have taken place under the assumptions we describe there, and that the underwriters do not exercise their over-allotment option.

Our company, now named Elster Group SE, is a holding company. It was incorporated on October 4, 2004. It acquired 100% of Elster Holdings GmbH, which we refer to as Elster Holdings, on May 23, 2005. Elster Holdings is an intermediate holding company that directly and indirectly owns our operating subsidiaries around the world. Elster Holdings was previously named Nachtwache

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Acquisition GmbH, and Ruhrgas Industries GmbH was merged into that company. As is customary in European cross-border acquisitions, the acquirors used a company in the same country as the companies being acquired largely because this enables more elements of the transaction to take place in a single country. We have retained Elster Holdings in our corporate structure because removing it would give rise to unnecessary transaction costs.

In preparation for this offering, we transformed our company into a Luxembourg stock corporation (société anonyme, or S.A.) named Elster Group S.A. on April 8, 2009. Our shareholders resolved to transform Elster Group S.A. into a European public limited liability company (Societas Europaea, or SE) on June 22, 2009. This transformation became effective upon the registration of the shareholders’ resolution in the Luxembourg register of commerce and companies on October 5, 2009.

In early 2010, we moved our registered office from Luxembourg to Essen, Germany. The relocation became effective on February 23, 2010 when it was entered into the commercial register of the local court (Amtsgericht) of Essen. As a result of the change of legal form and our relocation, our company is now a German-based European public limited liability company with its registered office at Frankenstrasse 362, D-45133 Essen, and registered with the commercial register of the local court of Essen under HRB 22030.

The relocation of our registered office to Germany is permitting us to centralize all of our group management functions at a single geographic location. We believe this will result in a more efficient corporate and management structure.

Transactions Relating to Our Share Capital

As a Luxembourg company, we initially had a registered capital of €12,500 divided into 500 shares with a nominal value of €25 each. After the acquisition was completed in 2005, we owned 100% of Elster Holdings, and Nightwatch Holdings S.A. owned 100% of our company. Nightwatch Holdings S.A. was renamed Elster Holdings S.A. on March 22, 2006 and Rembrandt Holdings S.A. on December 19, 2008, and is still our principal shareholder. We refer to this company as Rembrandt. Rembrandt is owned by funds advised by CVC Capital Partners.

Capital Measures in Connection with the Acquisition of Our Group

On September 9, 2005, in connection with the acquisition, our share capital was increased to €1,320,750 through the issuance of 52,330 newly issued shares with a nominal value of €25 each. Rembrandt subscribed for 47,047 of these shares and Nachtwache Metering Management Vermögensverwaltungs GmbH & Co. KG (which we refer to as the Management KG) subscribed for the remaining 5,283 shares. The Management KG is a limited partnership organized under German law in which 40 individuals, including 34 members of our management, are limited partners. These limited partners currently own 91.365% of the Management KG’s limited partnership interests. The remaining 8.635% of the Management KG’s limited partnership interests are owned by Nachtwache Reserve GmbH, which is a subsidiary of Rembrandt.

We also issued the following securities in September 2005:


	•	198,573,625 non-convertible preferred equity certificates “A,” which we refer to as the A PECs, each with a nominal value of €1 and bearing an interest rate of 8% per annum, to Rembrandt;

	•	125,686,400 non-convertible preferred equity certificates “B,” which we refer to as the B PECs, each with a nominal value of €1 and bearing interest at a rate of 6.8% per annum, to Rembrandt; and

	•	5,067,925 B PECs to the Management KG.

On November 14, 2006 we redeemed 88,361,315 of the B PECs held by Rembrandt against payment of €98,430,000 (representing the principal amount of the B PECs plus accrued interest) and

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1,164,011 of the B PECS held by the Management KG against payment of €1,570,000 (representing the principal amount plus accrued interest).

Our Recapitalization in 2008

In December 2008, as a measure to strengthen our balance sheet in response to the worldwide economic downturn, we recapitalized our outstanding shares and our shareholders contributed a number of their PECs into our equity. We took the following steps at that time:


	•	Our 52,830 existing shares were reclassified as 52,830 Class B Shares, still with a nominal value of €25 each.

	•	Our share capital was increased by €25 to €1,320,775 through the issuance of one Class A Share with a nominal value of €25.

	•	Rembrandt subscribed for that single share through a contribution in kind in which Rembrandt contributed its 198,573,625 A PECs and its 37,325,085 B PECs to our equity.

	•	We allocated the value of this contribution in kind in excess of the nominal value of €25 of the share, which was €293,217,142 (including accrued interest), to a segregated premium account relating to the single Class A Share. The Class A Share carried the entitlement to a cumulative preferred dividend in the amount of 6.29% per annum (calculated on its nominal value plus the segregated premium).

Following this recapitalization, Rembrandt held the single Class A Share and 47,547 Class B Shares. The Management KG held 5,283 Class B Shares. The Management KG also held 3,903,914 of the B PECs. The A PECs have ceased to exist in their entirety.

Our Recapitalization in 2009 in Preparation for the Offering

In connection with our transformation into an SE in October 2009 and our initial public offering, we restructured our share capital in order to establish a capital structure that would permit us to relocate our corporate seat to Germany and engage in this offering. These are the steps we took at that time:


	•	We reduced the nominal value of the Class A Share and the Class B Shares from €25 each to €1 each, which is the minimum amount required for an SE organized under the laws of Germany, so that the share capital consisted of 25 Class A Shares and 1,320,750 Class B Shares.

	•	We increased our share capital by an amount of €15 million through the issuance of 15 million new Class B Shares against conversion to share capital of other reserves in that amount.

	•	Rembrandt subscribed for 13,500,000 of the new Class B Shares and the Management KG subscribed for the other 1,500,000 new Class B Shares.

	•	We further increased our share capital by converting both the accrued but unpaid preferred dividends related to the Class A Share in an amount of €15,714,753 and the share premium in the amount of €293,217,142 into share capital. This created additional share capital of €308,931,895 through the issuance of 308,931,895 new Class A Shares, each with nominal value of €1, no segregated premium account.

	•	We reclassified all of the Class B Shares as ordinary shares.

	•	We converted the Class A shares into preferred shares with an entitlement to a cumulative preferred dividend in the amount of 5.96%. The holders of preferred shares were excluded from any dividend and distribution rights in any profits of our company to the extent that the amount thereof exceeds the aggregate preferred dividend accrued and unpaid. The holders were excluded from any participation in the distribution of liquidation proceeds in excess of the

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		nominal value of the preferred shares plus the aggregate amount of any accrued but unpaid preferred dividend.

We took all of these measures before our relocation to Germany.

In addition, our shareholders executed a voting undertaking agreement to ensure that until the completion of this offering, Rembrandt would control 90% of the voting rights in our company and the Management KG would control 10%. We are not a party to this agreement.

We took all of these measures before our relocation to Germany.

Our Current Capital Structure

After the recapitalization in 2009 and prior to this offering, Rembrandt holds 14,688,675, or 90%, of our ordinary shares and 308,931,920 of our preferred shares. The Management KG holds 1,632,075, or 10%, of our ordinary shares. Rembrandt holds a further 0.8635% of our ordinary shares indirectly through its 8.635% holding in the Management KG.

On November 30, 2009, the terms and conditions of the remaining 3,903,914 B PECs held by the Management KG were amended. In this amendment, the aggregate of the €1 nominal value of each of the B PECs became a shareholder loan to us in the amount of €3,903,914. No B PECs remained outstanding. The shareholder loan accrues interest at an annual rate of 6.8%. We do not intend to pay out any of this interest before the completion of this offering. We intend to repay the shareholder loan in full, including accrued interest to the date of repayment, using part of the proceeds of this offering. See “Use of Proceeds.”

Capital Measures in Connection with the Offering

Rembrandt is selling ordinary shares in this offering that it already held prior to this offering. We and Rembrandt are replacing the preferred shares Rembrandt has previously held with new ordinary shares. By the time the closing of the offering occurs, this replacement will have been completed and no preferred shares will remain outstanding. However, none of these new shares are being sold in the offering. To effect this change, immediately after Rembrandt, the Management KG, the underwriters and we determined the initial public offering price for the ADSs, we engaged in corporate transactions that have the effect of converting a portion of the preferred shares Rembrandt has previously held into ordinary shares while retaining the relative value of the shareholdings of Rembrandt and the Management KG immediately prior to such corporate transactions and eliminating the remainder of the preferred shares.

The number of preferred shares converted to ordinary shares, the value of the ordinary shares and the number of preferred shares that are eliminated depend on the initial public offering price for the ADSs. Immediately after the initial public offering price was determined, our shareholders and we determined how many preferred shares would be converted into ordinary shares. Our shareholders resolved on a conversion of a portion of Rembrandt’s preferred shares into ordinary shares, using the initial public offering price as a basis such that Rembrandt is left holding ordinary shares the aggregate value of which, at the initial public offering price per ordinary share, is equal to its total claim arising out of its preferred shares (including accrued cumulative preferred dividend) immediately prior to the conversion. Before this conversion, our shareholders reduced our capital by an amount equal to the portion of the preferred shares Rembrandt has previously held but which were not intended to be converted into ordinary shares and without any further value accruing to Rembrandt in addition to the ordinary shares it has held as a consequence of such conversion.

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Our shareholders resolved on the transactions described above in an extraordinary general meeting of our shareholders held on September 30, 2010. For these transactions, we are applying the initial public offering price of $13 per ADS. As each ADS represents the right to receive one-fourth of an ordinary share in our company, this corresponds to an initial public offering price of $52 per ordinary share, or €38.20 per ordinary share using an exchange rate of $1.3611 per €1.00, which was the European Central Bank’s foreign exchange reference rate of dollars for euro in effect on September 29, 2010. The following transactions are being consummated:


	•	The conversion of our preferred shares into 8,533,906 ordinary shares, which is the result obtained by dividing Rembrandt’s aggregate interest in the preferred shares it holds, €326,032,698 (the sum of the aggregate nominal value of these preferred shares (€308,931,920) plus the cumulative preferred dividend on these preferred shares accrued up to September 30, 2010, at a rate of 5.96% per annum (€17,100,778)), by the initial public offering price per ordinary shares in euro, or €38.20.

	•	Immediately before the conversion described above, the remaining 300,398,014 preferred shares held by Rembrandt that are not being converted into ordinary shares were redeemed, and the capital was decreased accordingly. Rembrandt is waiving its right to receive any of the proceeds of that capital reduction and redemption, and these preferred shares have ceased to exist without any further value accruing to Rembrandt.

When these transactions have been completed, Rembrandt will hold a total of 23,222,581 ordinary shares, 603,012 of which it is selling in this offering.

We expect that the capital transactions described above will be entered into the commercial register for our company before the closing of this offering.

In addition, our shareholders held an extraordinary shareholders’ meeting and adopted a resolution to increase our capital by up to €4,000,000 through the issuance of new ordinary shares on September 24, 2010. The underwriters intend to subscribe for 3,365,385 of these new shares pursuant to the terms of the underwriting agreement, as described in “Underwriting”. This capital increase is being entered into the commercial register for our company and the new shares will be delivered before the completion of this offering.

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RELATED PARTY TRANSACTIONS

Since January 1, 2007, there has not been, nor is there currently proposed, any material transaction or series of similar material transactions to which we were or are a party in which any of our directors, executive officers, holders of more than 10% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons, had or will have a direct or indirect material interest, other than the compensation and shareholding arrangements we describe where required in “Management,” “Our History and Recent Corporate Transactions” and “Principal and Selling Shareholders,” and the transactions we describe below.

The Management KG and Our Management Equity Program

The Management Equity Program

In November 2006, Rembrandt created our Management Equity Program, or MEP, as a measure to align interests among our key management personnel, Rembrandt and our company. Prior to this initial public offering, or IPO, Rembrandt Holdings S.A., an entity controlled by funds advised by CVC Capital Partners and which we refer to as Rembrandt, held 90% of the ordinary shares in our company. The remaining 10% of the ordinary shares in our company were held by Nachtwache Metering Management Vermögensverwaltungs GmbH & Co. KG, a limited partnership organized under German law, which we refer to as the Management KG. In addition, the Management KG held a shareholder loan, into which the B PECs were amended in November 2009, in a principal amount of approximately €3.9 million plus accrued interest in an amount expected to be approximately €1.0 million. We are repaying this loan in its entirety using a portion of the net proceeds of this offering. For more information on our shareholder structure, see “Our History and Recent Corporate Transactions—Our Current Capital Structure.”

A number of members of our management, totaling 34 current employees, five former employees and one additional unrelated party, participate in the MEP. These individuals participate by holding limited partnership interests totaling 91.365% in the Management KG. The remaining 8.635% of the Management KG is currently held by Nachtwache Reserve GmbH, a limited liability company organized under German law, which is wholly-owned by Rembrandt. Rembrandt Nachtwache Verwaltungs GmbH, which is controlled by Rembrandt, acts as general partner but holds no economic interest in the assets of the Management KG.

The advisory board of Nachtwache Reserve GmbH, acting as the Co-Investment Committee, has the role of deciding which managers are eligible to participate in the MEP and the number of shares in which they may invest in the MEP. When a manager invests in the MEP, he or she does not purchase shares directly, but instead purchases a portion of the limited partnership interests in the KG that corresponds to the portion of the shares held by the Management KG that the Co-Investment Committee has reserved for him or her. When a member of management acquires limited partnership interests in the Management KG, he or she pays a price for the limited partnership interests that is determined by reference to the estimated fair market value of the shares at the time of the investment or, if higher, the nominal value of the shares. Some of the limited partnership holders who invested at or shortly after the creation of the MEP acquired their limited partnership interests at nominal value because the company had a negative value at that time. When the purchase is made, the participant’s capital account in the Management KG is credited, by transfer from the capital account of Nachtwache Reserve GmbH, with a proportional interest in the undivided aggregate number of shares the Management KG holds that corresponds to the Co-Investment Committee’s allocation to him or her; he or she receives no entitlement to individual shares in our company and has no rights with respect to those shares. The limited partnership interests purchased by Managers investing in the Management KG also represent the proportionate shares of the B PECs, or the subsequent shareholder loan into which the B PECs were amended in November 2009, at their nominal value together with a €100 liability deposit. For members of management who invested later, we based the valuations on valuations made by an auditing firm. These valuations, as well as the

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valuations underlying our periodic compensation expense or income relating to the MEP, were based upon an adjusted earnings measure with further adjustments in respect of debt and marketability considerations as well as a multiple intended to serve as a benchmark to reflect the valuations of similarly situated companies.

Once he or she has invested in the MEP, a participant becomes eligible to receive the economic benefits relating to his or her arithmetic proportion of the shares in our company held by the Management KG after two years from his or her individual investment or, if earlier, upon the closing of our initial public offering, regardless of whether the two-year period has lapsed. These benefits would include his or her proportionate share of the proceeds of any sale by the Management KG of shares it holds in our company and of any dividends or other distributions on the shares. However, at any time before he or she becomes eligible to receive the economic benefits relating to his or her portion of the shares underlying the Management KG, the participant may lose some or all of these benefits if, for example, he or she leaves his or her job under circumstances, such as termination for cause, that cause him or her to be considered a “bad leaver” for purposes of the MEP. In that case, the participant’s interest in the shares of our company booked to his or her capital account at the Management KG is transferred back to Nachtwache Reserve GmbH, and, depending on the circumstances, he or she is entitled to a cash payment equal to the lower of the amount of his or her original investment in the Management KG plus interest at 3% per annum or the then-current market value of the underlying shares and B PECs (now shareholder loan) in our company. For these purposes, market value is determined using a formula based on our operating performance and balance sheet, as set forth in the partnership agreement relating to the Management KG, which is an exhibit to the registration statement of which this prospectus is a part. Bad leavers accordingly forfeited the opportunity to participate in any appreciation of the shares of our company over the level of their original investments plus interest, and were exposed to the risk of a forced realization of any loss of portions of their original investments depending on the market value at the time of their departures. Once a participant has become entitled to the economic value of the shares, the interests in his or her capital account corresponding to those shares can no longer be forfeited back to Nachtwache Reserve GmbH, unless he or she is a bad leaver. This means that if at any time the Management KG sells shares in our company, these participants are entitled to share in the proceeds of the sale. Accordingly, the Management KG will credit the capital accounts of each participant with his or her proportionate share of the proceeds less expenses that the Management KG receives in the offering. The participants will subsequently be able to withdraw that cash from their capital accounts in the Management KG. Participants will receive those cash proceeds without regard to whether they voted in favor of the resolution the Management KG adopted permitting it to sell ADSs in this offering, as described below under “—The Management KG” ).

The MEP is, for purposes of the preparation of our financial statements in accordance with U.S. GAAP, accounted for as a cash-settled stock-based compensation plan, even though we do not in fact make any cash or share-based payments under the program. We recognize non-cash compensation expense relating to the MEP in general and administrative expenses and a corresponding amount in additional paid-in capital of the company because there is no cash outflow for our company in respect of these charges. Compensation expense is based on the formula price underlying the terms of the MEP and recognized pro rata over a two-year vesting period. After the vesting period, changes in the formula value are remeasured at the end of each period and fully recognized as compensation expense for that period. The MEP, including the leaver provisions described above, terminates on the date of our initial public offering, or IPO, which means that there will not be any subsequent measurement dates for compensation expense for those participants who have not yet become eligible to receive the economic benefits relating to their proportion of the shares in our company that the Management KG continues to hold after the closing date of our IPO. At the date of the offering, we expect to recognize compensation gain in general and administrative expenses to reflect the value of the MEP awards. While the valuation prior to the IPO was based on the formula set forth in the MEP, because a market price for our shares was established

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at the time of our IPO, the initial public offering price for the IPO, or $13 per ADS, is being used to determine the valuation of our company for purposes of the final recognition of accumulated compensation expense in respect of the MEP. Based upon the initial offering price of $13 per ADS, we expect to recognize a gain in general and administrative expenses for the third quarter of 2010 of approximately $14.8 million, reducing the accumulated compensation expense accordingly.

In 2008 and 2007, non-cash compensation expense related to our MEP negatively impacted our results of operations, contributing substantially to our losses from continuing operations in each of those years. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Historical Factors Affecting Our Recent Results—Management Equity Program.”

The Management KG

The 40 individuals participating in the MEP together hold 91.365% of the limited partnership interests in the Management KG. These limited partnership interests corresponded to an aggregate of 9.1365% of the ordinary shares in our company prior to the offering. This assumes that each of these participants meets the criteria described above in the MEP to receive the economic interest in the underlying shares.

As indicated above, no shares in our company are identified within the Management KG as belonging to any individual participant in the Management KG, and no such participant is able to elect to sell shares acting alone. Under the documents constituting the Management KG, any sale by the Management KG of shares in our company requires the affirmative vote of holders of limited partnership interests representing 75% of the total outstanding limited partnership interests (other than those of Nachtwache Reserve GmbH), and the dissolution of the Management KG, with all of the shares in our company that the Management KG now holds being distributed to its limited partners, would require unanimous consent of all of the limited partners. The Management KG may also exercise the voting rights of the shares in our company, with Nachtwache Reserve GmbH giving the voting instruction for the proportion of the shares it holds and a resolution (adopted with a 75% majority) of the remaining limited partners being required for the exercise of voting rights attached to the remaining proportion of the shares the Management KG holds. In the event that a resolution is not adopted by the requisite vote of the limited partners, the voting rights attached to these shares will not be exercised and the shares of the company held by the Management KG will not be voted.

The participants in the Management KG have adopted a resolution providing that the Management KG will sell 5% of the shares it holds in the offering, with the proceeds to be allocated to the participants as described above according to their limited partnership interests in the Management KG.

In the table appearing below, we set forth information relating to those members of our Administrative Board and our Managing Directors who beneficially own limited partnership interests in the Management KG, and the percentage of the shares in our company to which these limited partnership interests arithmetically correspond, both before and after this offering by the Management KG (assuming that the Management KG sells 5% of its shares in the offering and attributing shares to them corresponding arithmetically to the proportion of the limited partnership interests in the Management KG they own). We have calculated the percentages of shares in our company following this offering based on the assumption that the conversion of preferred shares into ordinary shares, as described in “Our History and Recent Corporate Transactions—Capital Measures in

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Connection with the Offering,” will have taken place under the offering price assumptions described in that discussion.


	Percentage
	Holding			Percentage of our Shares			Proportionate		Percentage of our Shares
	of Limited			Prior to this Offering			Number of ADSs		After this Offering
	Partnership			Corresponding to Holding of			to be Sold by the		Corresponding to Holding of
Name	Interests			Limited Partnership Interests (1)			Management KG		Limited Partnership Interests

Howard Dyer		26.25	%		1.72	%		85,683		1.44	%
Christoph Schmidt-Wolf		15.00	%(3)		0.98	%		48,962		0.82	%
Simon Beresford-Wylie		10.00	%		0.66	%		32,641		0.55	%
Thomas Preute		1.50	%(4)		0.10	%		4,896		0.08	%
Others, as a group (2)		38.62	%		2.54	%		126,045		2.12	%

Totals		91.37	%(5)		6.00	%		298,228		5.02	%


(1)		Assuming completion of the conversion of preferred shares into ordinary shares, as described in “Our History and Recent Corporate Transactions—Capital Measures in Connection with the Offering” in this prospectus, using the initial public offering price of $13 per ADS.

(2)		None of these individuals own limited partnership interests in the Management KG that arithmetically correspond to a proportion of the shares or ADSs in our company equal to 0.5% or more of our outstanding ordinary shares immediately before or after this offering.

(3)		Approximately 33% of the limited partnership interest attributed to Mr. Schmidt-Wolf are held by him on behalf of his spouse, Mrs. Martina Schmidt-Wolf.

(4)		Approximately 50% of the limited partnership interest attributed to Mr. Preute are held by him on behalf of his spouse, Mrs. Christiane Preute.

(5)		Nachtwache Reserve GmbH currently holds 8.63% of the limited partnership interests in the Management KG, corresponding to 0.57% of our shares prior to this offering. Nachtwache Reserve GmbH’s proportionate number of ADSs to be sold by the Management KG is 28,184 resulting in Nachtwache Reserve GmbH holding a limited partnership interest after this offering corresponding to 0.47% of our shares.

Because of the requirements summarized above that resolutions of the Management KG be passed with 75% majorities both for the Management KG to sell our shares and for it to vote them, none of the individual limited partners in the Management KG possesses individual voting or dispositive control over these shares. These limited partners disclaim beneficial ownership of our shares.

The Management KG has agreed that, after this offering, it will not sell any of our shares it holds for 180 days without the consent of the Joint Bookrunners, subject to limited exceptions. After that date, the Management KG may sell shares, subject to the terms of the MEP and any securities law restrictions that may be applicable to these sales. In addition, should the Management KG at a future date adopt a unanimous resolution to dissolve itself and have its shares distributed to its participants, those participants, may sell shares, subject to the terms of the MEP, the lock-up described above and any securities law restrictions applicable to these sales by them. For further information on the securities law restrictions that may be applicable to the Management KG and participants in the MEP with respect to these sales, see “Shares and ADSs Eligible for Future Sale.” Any future sale of ADSs or shares by the Management KG would require it to adopt a new resolution, approved by limited partners holding 75% or more of the limited partnership interests.

Lease of Office Space

In 2007, we entered into agreements with Howard Dyer and Minit Group, which is controlled by Howard Dyer, the chairman of our Administrative Board, to lease office space in London and provide various office services. We have paid a total amount of approximately $1.5 million since January 1, 2007. We intend to terminate these agreements upon completion of this offering.

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Loan to Our Shareholder

In 2006, our company made a loan to Rembrandt to fund legal and administrative expenses in advances it incurred as a result of its operations as a holding company. As of June 30, 2010, there was approximately $2.4 million outstanding under this agreement and the interest rate was approximately 2.0%. Rembrandt intends to repay all advances under the agreement with proceeds it receives from this offering. Following the offering, our company plans to terminate the loan agreement.

Procedures for Related Party Transactions

Our Audit Committee and Administrative Board must approve certain transactions performed by or on behalf of any company belonging to our group. These include any material transaction or arrangement, other than those on arm’s length terms, as well as transactions with members of our Administrative Board and senior management. We discourage our employees, senior management and members of our Administrative Board from entering into transactions that may cause a conflict of interest. Any related party transaction must be reported to our audit committee. Pursuant to its charter, our Audit Committee must then approve any related-party transactions, including those transactions involving our directors. In approving or rejecting such proposed transactions, the Audit Committee will consider the relevant facts and circumstances available and deemed relevant to the Audit Committee, including the material terms of the transactions, risks, benefits, costs, availability of other comparable services or products and, if applicable, impact on a director’s independence. Our Audit Committee will approve only those transactions that, in light of known circumstances, are in, or are not inconsistent with, our best interests, as our Audit Committee determines in the good faith exercise of its discretion. A copy of our Audit Committee charter may be found at our corporate website upon the completion of this offering.

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PRINCIPAL AND SELLING SHAREHOLDERS

The following table shows the current beneficial ownership of our company’s shares by our existing shareholders and how many ADSs they will beneficially own after the offering is completed. This table assumes no exercise of the underwriters’ option to purchase additional ADSs from Rembrandt.

For purposes of this illustration, we assume that the transactions described in “Our History and Recent Corporate Transactions—Capital Measures in Connection with the Offering” have been completed and that all of our ordinary shares are held in the form of ADSs before and after the offering. Our ADSs each represent one-fourth of an ordinary share. We are not directly or indirectly owned or controlled by any foreign government. The address of Rembrandt Holdings S.A. is 20 Avenue Monterey, L-2163 Luxembourg. The address of all other selling shareholders is c/o Elster Group SE, Frankenstrasse 362, 45133 Essen, Germany.


	ADSs Owned					ADSs being		ADSs Owned
	Prior to the Offering					Sold in the Offering		after the Offering
Name	Number			Percent		Number		Number			Percent

Rembrandt Holdings S.A. (1)		92,890,324			93.43		2,412,048		90,478,276			80.15
Nachtwache Metering Management Vermögensverwaltungs GmbH & Co. KG (the Management KG):
Howard Dyer (2)		1,713,679			1.72		85,683		1,627,996			1.44
Christoph Schmidt-Wolf(2)		979,245	(5)		0.98		48,962		930,283	(5)		0.82
Simon Beresford-Wylie(2)		652,830			0.66		32,641		620,189			0.55
Thomas Preute (2)		97,925	(6)		0.10		4,896		93,028	(6)		0.08
Nachtwache Reserve GmbH (2)(3)		563,694			0.57		28,184		535,509			0.47
Other MEP participants as a group (2)(4)		2,520,928			2.54		126,045		2,394,883			2.12

Total Management KG		6,528,300			6.57		326,412		6,201,888			5.49
Public Shareholders		—			—		—		16,200,000			14.35

Total		99,418,624			100.00		2,738,460		112,880,164			100.00


(1)		Rembrandt Holdings S.A. is 100% collectively owned by CVC European Equity Partners IV (A) L.P., CVC European Equity Partners IV (B) L.P., CVC European Equity Partners IV (C) L.P., CVC European Equity Partners IV (D) L.P. and CVC European Equity Partners IV (E) L.P. CVC European Equity Partners IV (A) L.P. and CVC European Equity Partners IV (B) L.P. are managed by their general partner, CVC European Equity Partners IV (AB) Limited. CVC European Equity Partners (C) L.P., CVC European Equity Partners IV (D) L.P., CVC European Equity Partners IV (E) L.P. are managed by their general partner, CVC European Equity Partners IV (CDE) Limited. We refer to CVC European Equity Partners IV (AB) Limited and CVC European Equity Partners IV (CDE) Limited as the General Partners. Each of the General Partners acts as sole investment manager to the funds it manages and accordingly exercises voting and dispositive control over the shares held by those funds, including the shares of Rembrandt. The board of directors of each of the General Partners consists of the following individuals: Mark Grizzelle, Steven Koltes, Michael Smith, Brian Scholfield and Carl Hansen. These individuals are the natural persons who, in each case acting together in their capacities as members of the respective board of directors, possess voting and dispositive control over the shares held by the General Partners and the shares held by Rembrandt Holdings, S.A. The General Partners and directors disclaim beneficial ownership in the shares of our company.

(2)		Holds no ADSs or ordinary shares in our company, but does hold limited partnership interest in the Management KG. While none of the shares in our company that the Management KG holds may be attributed to any individual participant, the participants do have the right to receive their pro rata portion of the proceeds of any sale of our shares by the Management KG and to vote on any resolutions of the Management KG, in each case based on their respective interests in the Management KG. We therefore have included in the table the number of ADSs that arithmetically corresponds to the named individuals’ proportionate interests in the Management KG. These individuals disclaim beneficial ownership of the shares underlying these ADSs.

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(3)		Nachtwache Reserve GmbH is controlled by Rembrandt. It does not have individual dispositive control over the shares in our company that may be attributed to it through its ownership of limited partnership interests in the Management KG.

(4)		Other than the four individuals named above, no participant in the MEP holds limited partnership interests in the Management KG to which 0.5% or more of our ordinary shares may be attributed before or after the offering. The Management KG intends to sell 5% of the shares it owns in the offering. For further information regarding the MEP, the Management KG and its holding of our shares, see “Related Party Transactions—The Management KG and Our Management Equity Program.”

(5)		Approximately 33% of the limited partnership interests attributed to Mr. Schmidt-Wolf are held by him on behalf of his spouse, Mrs. Martina Schmidt-Wolf.

(6)		Approximately 50% of the limited partnership interests attributed to Mr. Preute are held by him on behalf of his spouse, Mrs. Christiane Preute.

In addition to those Administrative Board members who beneficially own shares in our company through the MEP, Messrs. Hilverkus, Koltes and Strobel have an economic interest in shares held by funds advised by CVC Capital Partners. CVC European Equity Partners IV (A) L.P., CVC European Equity Partners IV (B) L.P., CVC European Equity Partners IV (C) L.P., CVC European Equity Partners IV (D) L.P., CVC European Equity Partners IV (E) L.P. collectively own 100% of Rembrandt Holdings S.A., which we refer to as Rembrandt.

CVC European Equity Partners IV (A) L.P. and CVC European Equity Partners IV (B) L.P. are managed by their general partner, CVC European Equity Partners IV (AB) Limited. CVC European Equity Partners (C) L.P., CVC European Equity Partners IV (D) L.P., CVC European Equity Partners IV (E) L.P. are managed by their general partner, CVC European Equity Partners IV (CDE) Limited. We refer to CVC European Equity Partners IV (AB) Limited and CVC European Equity Partners IV (CDE) Limited as the General Partners. Each of the General Partners acts as sole investment manger to the funds it manages and accordingly exercises voting and dispositive control over the shares held by those funds, including the shares of Rembrandt. The board of directors of each of the General Partners consists of the following individuals: Mark Grizzelle, Steven Koltes, Michael Smith, Brian Scholfield and Carl Hansen. These individuals are the natural persons who, in each case acting together in their capacities as members of the respective board of directors, possess voting and dispositive control over the shares held by the General Partners and the shares held by Rembrandt Holdings, S.A. The General Partners and directors disclaim beneficial ownership in the shares of our company. The General Partners are indirectly wholly-owned subsidiaries of CVC Capital Partners SICAV FIS S.A. Mr. Koltes’ spouse, Corinne Koltes-Sulzer, and each of Mr. Strobel and Mr. Hilverkus, hold a beneficial interest in minority shareholdings in CVC Capital Partners SICAV FIS S.A.

Mr. Koltes is a member of the Board of Directors of each of CVC Capital Partners SICAV FIS S.A., together with a number of its subsidiaries, including the General Partners.

Mrs. Koltes-Sulzer holds an interest as a limited partner of CVC European Equity Partners IV (B) L.P. Mr. Strobel holds an interest as a limited partner of CVC Employees IV L.P., which holds an interest as a limited partner of CVC European Equity Partners IV (D) L.P.

Mr. Koltes, Mrs. Koltes-Sulzer, Mr. Strobel and Mr. Hilverkus disclaim any beneficial ownership of the shares in Elster Group SE indirectly owned by CVC European Equity Partners IV (A) L.P., CVC European Equity Partners IV (B) L.P., CVC European Equity Partners IV (C) L.P., CVC European Equity Partners IV (D) L.P. and CVC European Equity Partners IV (E) L.P. except to the extent of their respective pecuniary interest therein.

None of our shareholders are registered broker-dealers or affiliated with registered broker-dealers, and as of the date of this prospectus, there are no registered U.S. holders of our ordinary shares or ADSs.

If the underwriters exercise their over-allotment option in full, Rembrandt will directly or indirectly own 78.5% of the outstanding ordinary shares in our company after this offering is completed. The

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SHARES AND ADSS ELIGIBLE FOR FUTURE SALE

Sales of substantial numbers of our ADSs in the public market could adversely affect prevailing market prices of our ADSs. Prior to this offering, there has been no public market for our ordinary shares or the ADSs, and while application has been made for the ADSs to be listed on the NYSE, we cannot assure you that a regular trading market will develop in the ADSs. We do not expect that a trading market will develop for our ordinary shares not represented by the ADSs. Furthermore, since no shares or ADSs will be available for sale from our principal shareholders shortly after this offering because of the contractual and legal restrictions on resale described below, sales of substantial numbers of ADSs in the public market after these restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future.

Following this offering, our company will have outstanding an aggregate of 28,220,041 ordinary shares, which would equal 112,880,164 ADSs. All of the shares sold in this offering in the form of ADSs will be freely tradable without restriction or further registration under the U.S. Securities Act of 1933 except for shares or ADSs that are purchased by “affiliates” as that term is defined in Rule 144 under the Securities Act.

Lock-Up Agreements

We, and our shareholders, Rembrandt and the Management KG, as well as some of our officers and directors, have agreed that, subject to several customary exceptions, for a period of 180 days from the effective date of the registration statement of which this prospectus forms a part, we and they will not, without the prior written consent of each of Deutsche Bank Securities Inc., Goldman Sachs International and J.P. Morgan Securities LLC, dispose of any of our shares or ADSs or securities which are convertible or exchangeable into these securities. Deutsche Bank Securities Inc., Goldman Sachs International and J.P. Morgan Securities LLC in their sole discretion may release any of the securities subject to these lock-up agreements at any time without notice. The release of any lock-up will be considered on a case-by-case basis. For more information, see “Underwriting.”

Rule 144

Under Rule 144, a person (or persons whose shares are aggregated):


	•	who is not considered to have been one of our affiliates at any time during the 90 days preceding a sale; and

	•	who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than an affiliate,

is entitled to sell his shares without restriction, subject to our compliance with the reporting obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

In general, under Rule 144, beginning 90 days after the date of this prospectus, a person who is our affiliate and has beneficially owned ordinary shares for at least six months is entitled to sell within any three-month period a number of shares that does not exceed the greater of:


	•	1.0% of the number of ordinary shares then outstanding, which is expected to compare to approximately 282,200 shares (equivalent to 1,128,800 ADSs) immediately after this offering; and

	•	the average weekly trading volume of the ordinary shares on the NYSE during the four calendar weeks preceding the filing of a notice on Form 144 in connection with the sale.

Any such sales by an affiliate are also subject to manner of sale provisions, notice requirements and our compliance with Exchange Act reporting obligations.

In addition, in each case, these shares would remain subject to lock-up arrangements and would only become eligible for sale when the lock-up period expires.

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ARTICLES OF ASSOCIATION

The following summarizes the material rights of holders of the shares of our company under German and applicable EU corporate law and the material provisions of our Articles of Association. This description is only a summary and does not describe everything that the Articles of Association contain. Copies of the Articles of Association will be publicly available from the commercial register (Handelsregister) in Essen or electronically at www.unternehmensregister.de. English translations of both our current Articles of Association and the form of our Articles of Association which we expect to enter into in connection with this offering are included as exhibits to the registration statement that includes this prospectus.

Share Capital

As of September 13, 2010 and without giving effect to the issue of new shares of our company in connection with this offering, but after giving effect to all of the transactions described in “Our History and Recent Corporate Transactions—Transactions Relating to Our Share Capital,” the issued share capital of our company consisted of €16,320,750 divided into 16,320,750 registered ordinary shares with a nominal value of €1 each. We also had 308,931,920 outstanding preferred shares with a nominal value of €1 each. For a description of these offering-related transactions, see “Our History and Recent Corporate Transactions—Transactions Relating to Our Share Capital” and “Our History and Recent Corporate Transactions—Capital Measures in Connection with the Offering.”

Preferred Shares

Holders of our preferred shares are entitled to receive a preferred dividend from our annual net profit amounting to 5.96% of the nominal value of each preferred share. Dividends that are not paid are carried forward to the following year. In addition, preferred shares rank senior to ordinary shares in the event of a distribution of liquidation proceeds of our company. We intend to replace the preferred shares with ordinary shares in connection with this offering. See “Our History and Recent Corporate Transactions—Capital Measures in Connection with the Offering.”

Authorized Capital

Under the German Stock Corporation Act, which in this context also applies to a German SE, a stock corporation’s shareholders’ meeting can authorize the management board, or, as the case may be, the management board and the administrative board acting jointly, to issue shares in a specified aggregate nominal amount of up to 50% of the issued share capital of such company at the time the resolution becomes effective. The shareholders’ authorization becomes effective upon registration in the commercial register (Handelsregister) and may extend for a period of no more than five years thereafter.

On May 20, 2010, our shareholders resolved to amend the Articles of Association of our company to authorize the Managing Directors to increase the share capital with the Administrative Board’s consent against contributions in cash or in kind. The Managing Directors may use these authorizations until March 31, 2015 to issue new shares in one or more tranches for any legal purpose in an aggregate amount of up to €10 million, in which case all of our existing shareholders would have preemptive rights to subscribe for these new shares. The preemptive rights may, however, be excluded in the following circumstances:


	•	to the extent that new shares must be granted to holders of subscription warrants or convertible bonds that we or any Company in which we have a direct or indirect majority holding have issued, in accordance with the terms of issuance of such warrants or convertible bonds;

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	•	if (i) the new shares represent 10% or less of the existing share capital when the authorized capital or issuance or the new shares is registered in the commercial register and (ii) the issue price of the new shares is not considerably lower than the stock exchange price at that time of the shares in our company (based, we expect, on the price of our ADSs on the NYSE and on an exchange rate to be set in the Administrative Board’s resolution approving the share issuance); or

	•	to the extent necessary to avoid balancing out fractional amounts.

If we conduct a capital increase against contributions in kind, our Managing Directors may exclude the shareholders’ preemptive rights with the consent of the Administrative Board.

The resolution became effective upon its entry into the commercial register on June 2, 2010.

In addition, before the completion of this offering our shareholders are increasing the authorization to issue new shares to €12.0 million.

Conditional Capital

Under the German Stock Corporation Act, a stock corporation’s shareholders’ meeting can authorize conditional capital of up to 50% of the issued share capital at the time of the resolution. Conditional capital is share capital that the shareholders have approved in advance for specific purposes subject to the issuance of the new capital in conformity with the terms of the shareholders’ resolution.

On May 20, 2010, our shareholders’ meeting passed a resolution to conditionally increase our share capital by up to €5 million through the issuance of up to 5 million shares. This conditional capital may only be used in connection with an issuance of convertible bonds or bonds with subscription warrants attached.

This resolution became effective upon its entry into the commercial register on June 2, 2010.

In addition, before the completion of this offering our shareholders are increasing the conditional capital to €7.0 million.

Preemptive Rights

Under the German Stock Corporation Act, an existing shareholder in a stock corporation has a preemptive right to subscribe for new shares to be issued by the corporation in proportion to the number of shares he or she holds in the corporation’s existing share capital. This also applies to an SE that is incorporated in Germany. These rights do not apply to shares issued out of conditional capital. The German Stock Corporation Act only allows the exclusion of preemptive rights in limited circumstances, including those enumerated above with respect to our authorized capital. For an SE incorporated in Germany, at least three quarters of the votes cast at the relevant shareholders’ meeting must vote for such exclusion. In addition to approval by the shareholders’ meeting, the exclusion of preemptive rights requires a justification. The justification must be based on the principle that the interest of the company in excluding preemptive rights outweighs the shareholders’ interest in their preemptive rights and may be subject to judicial review.

Shareholders’ Meetings and Voting Rights

A meeting of the shareholders of our company, or shareholders’ meeting, may be called by the Administrative Board. Shareholders representing in the aggregate at least five percent of our ordinary shares may request that a shareholders’ meeting be called. This request must be in writing and must describe the purpose and the justification of such shareholders’ meeting. Our shareholders’ meeting must be held in Germany.

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Under German law and the Articles of Association of our company, our company must publish invitations to shareholders’ meetings in the electronic version of the German Federal Gazette (elektronischer Bundesanzeiger) at least thirty days before the last day on which the shareholders must notify our company that they intend to attend the meeting.

Shareholders representing in the aggregate at least 5% of our ordinary shares or owning shares with an aggregate nominal value of at least €500,000 may also request the addition of one or several items to the agenda of any shareholders’ meeting. The request must be addressed to our registered office by registered mail at least thirty days prior to the date of such meeting.

Under German law, shareholders have no right of access to the corporate records of a stock corporation or SE with its registered seat in Germany. Access to information from the company—except for any information disclosed as required by law—is generally limited to a shareholder’s right to demand information from management during the shareholders’ meeting to the extent necessary to evaluate a particular item of the agenda and to vote the shares at the shareholders’ meeting.

Shareholders who are registered in the share register may participate in and vote at the shareholders’ meeting. A notice by a shareholder of his or her intention to attend a shareholders’ meeting must be given to our company at least six days (or a shorter period, if so determined by our Administrative Board) before the meeting, not counting the day of notice and the day of the meeting. In certain cases, a shareholder can be prevented from exercising his or her voting rights. This would be the case, for instance, for resolutions on the waiver or assertion of a claim by our company against the shareholder. Under German law, shareholders may only exercise their voting rights and resolve on corporate matters in a shareholders’ meeting and may not exercise their vote through written consents. In addition, German law does not permit cumulative voting. Because the depositary’s nominee will actually be the registered owner of the shares, you must rely on it to exercise the rights of a shareholder on your behalf. See “Description of American Depositary Shares.”

Each share carries one vote at a meeting of the shareholders. Resolutions are generally passed with a simple majority of the votes cast. Under the German Stock Corporation Act, a number of significant resolutions must be passed by a majority of at least 75% of the share capital represented in connection with the vote taken on that resolution. However, this is generally interpreted to require a majority of at least 75% of the votes actually cast. The majority required for some of these resolutions may also be lowered by the Articles of Association.

Although our company must notify shareholders of an ordinary or extraordinary shareholders’ meeting as described above, neither the applicable German statutory or European law nor the Articles of Association of our company have a minimum quorum requirement. This means that holders of a minority of our shares could potentially control the outcome of resolutions.

According to the Articles of Association of our company, resolutions to amend the Articles of Association may be passed only by at least a super-majority of 75% of the votes cast unless mandatory law provides otherwise. Pursuant to German statutory law the 75% super-majority requirement also applies to the following matters:


	•	the exclusion of preemptive rights in a capital increase;

	•	capital decreases;

	•	the creation of authorized capital or conditional capital;

	•	dissolution of the company;

	•	a merger (Verschmelzung) with another company or another corporate transformation;

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	•	a transfer of all or virtually all of the assets of our company; and

	•	the conclusion of any domination (Beherrschungsvertrag), profit and loss transfer (Ergebnisabführungsvertrag) or similar inter-company agreements.

Dividend Rights

Shareholders participate in profit distributions in proportion to the number of shares they hold.

Under German law, our company may declare and pay dividends only from the profits as they are shown in our company’s unconsolidated annual financial statements prepared in accordance with applicable German law.

Liquidation Rights

If we are liquidated, any liquidation proceeds remaining after all of our liabilities have been paid off would be distributed among our shareholders in proportion to their holdings in accordance with German statutory law.

Repurchase of Our Own Shares

We may not acquire our own shares unless authorized by the shareholders’ meeting or in other very limited circumstances set out in the German Stock Corporation Act. Shareholders may not grant a share repurchase authorization lasting for more than five years. The rules in the German Stock Corporation Act generally limit repurchases to 10% of our share capital and resales must generally be made either on a stock exchange, in a manner that treats all shareholders equally or in accordance with the rules that apply to preemptive rights relating to a capital increase.

On May 20, 2010, our shareholders authorized us to repurchase our shares and/or our ADSs for a period until March 31, 2015. Under this resolution, any shares and/or ADSs that we repurchase may be (i) sold on a stock exchange; (ii) offered and transferred to third parties against contributions in kind, including in connection with business combinations or the acquisition of companies or interests therein; (iii) offered for purchase or transferred to current or former employees of our company or any of our subsidiaries; (iv) used to service subscription warrants or convertible bonds that we or any of our subsidiaries have issued or will issue; (v) sold to third parties against payment in cash at a price which is not significantly below the price quoted on the primary stock exchange where our shares or ADSs are listed (based, we expect, on the price of our ADSs on the NYSE) and, if ADSs are sold, significantly below the price of our ADSs on the New York Stock Exchange or (vi) redeemed. In addition, our Administrative Board is authorized to offer for purchase or transfer repurchased shares and/or ADSs to our Managing Directors as stock-based compensation. Before the completion of this offering, our shareholders are extending this authorization until September 30, 2015.

Squeeze-Out of Minority Shareholders

Under German law, the shareholders’ meeting of a stock corporation (and accordingly, a European public limited liability company) may resolve upon request of a shareholder that holds at least 95% of the share capital that the shares held by any remaining minority shareholders be transferred to this shareholder against payment of “adequate cash compensation”. This amount must take into account the full value of the company at the time of the resolution, which is generally determined using the future earnings value method (Ertragswertmethode).

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DESCRIPTION OF AMERICAN DEPOSITARY SHARES

American Depositary Shares

Deutsche Bank Trust Company Americas, as depositary, will register and deliver the ADSs. Each ADS will represent ownership of one-fourth of an ordinary share deposited with the office in Frankfurt of Deutsche Bank AG, Frankfurt Branch, as custodian for the depositary. Each ADS will also represent ownership of any other securities, cash or other property which may be held by the depositary. The depositary’s corporate trust office at which the ADSs will be administered is located at 60 Wall Street, New York, NY 10005, USA. The principal executive office of the depositary is located at 60 Wall Street, New York, NY 10005, USA.

The Direct Registration System, or DRS, is a system administered by DTC pursuant to which the depositary may register the ownership of uncertificated ADSs, which ownership shall be evidenced by periodic statements issued by the depositary to the ADS holders entitled thereto.

As an ADS holder, we will not treat you as one of our shareholders and you will not have shareholder rights. German law governs shareholder rights. The depositary will be the holder of the ordinary shares underlying your ADSs. As a holder of ADSs, you will have ADS holder rights. A deposit agreement among us, the depositary and you, as an ADS holder, and the beneficial owners of ADSs sets out ADS holder rights as well as the rights and obligations of the depositary. The laws of the State of New York govern the deposit agreement and the ADSs.

The following is a summary of the material provisions of the deposit agreement. For more complete information, you should read the entire deposit agreement and the form of American Depositary Receipt. For directions on how to obtain copies of those documents, see “Additional Information.”

Holding the ADSs

How will I hold my ADSs?

You may hold ADSs either (1) directly (a) by having an American Depositary Receipt, or ADR, which is a certificate evidencing a specific number of ADSs, registered in your name, or (b) by holding ADSs in the DRS, or (2) indirectly through your broker or other financial institution. If you hold ADSs directly, you are an ADS holder. This description assumes you hold your ADSs directly. If you hold the ADSs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of ADS holders described in this section. You should consult with your broker or financial institution to find out what those procedures are.

Dividends and Other Distributions

How will you receive dividends and other distributions on the shares?

The depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent as of the record date (which will be as close as practicable to the record date for our ordinary shares) set by the depositary with respect to the ADSs.


	•	Cash. The depositary will convert any cash dividend or other cash distribution we pay on the ordinary shares or any net proceeds from the sale of any ordinary shares, rights, securities or other entitlements into U.S. dollars if it can do so on a reasonable basis and at the then prevailing market rate, and can transfer the U.S. dollars to the United States. If that is not possible or lawful or if any government approval is needed and cannot be obtained, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is possible to do so. It will hold the foreign currency it cannot convert for the

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		account of the ADS holders who have not been paid. It will not invest the foreign currency and it will not be liable for any interest.


	•	Before making a distribution, any taxes or other governmental charges, together with fees and expenses of the depositary, that must be paid will be deducted. See “Taxation.” It will distribute only whole U.S. dollars and cents and will round fractional cents to the nearest whole cent. If the exchange rates fluctuate during a time when the depositary cannot convert the foreign currency, you may lose some or all of the value of the distribution.

	•	Shares. The depositary may, upon our timely instruction, distribute additional ADSs representing any ordinary shares we distribute as a dividend or free distribution to the extent reasonably practicable and permissible under law. The depositary will only distribute whole ADSs. It will try to sell ordinary shares which would require it to deliver a fractional ADS and distribute the net proceeds in the same way as it does with cash. If the depositary does not distribute additional ADSs, the outstanding ADSs will also represent the new ordinary shares. The depositary may sell a portion of the distributed ordinary shares sufficient to pay its fees and expenses in connection with that distribution.

	•	Elective Distributions in Cash or Shares. If we offer holders of our ordinary shares the option to receive dividends in either cash or shares, the depositary, after consultation with us and having received timely notice of such elective distribution by us, has discretion to determine to what extent such elective distribution will be made available to you as a holder of the ADSs. We must first instruct the depositary to make such elective distribution available to you and furnish it with satisfactory evidence that it is legal to do so. The depositary could decide it is not legal or reasonably practical to make such elective distribution available to you, or it could decide that it is only legal or reasonably practical to make such elective distribution available to some but not all holders of the ADSs. In such case, the depositary shall, on the basis of the same determination as is made in respect of the ordinary shares for which no election is made, distribute either cash in the same way as it does in a cash distribution, or additional ADSs representing ordinary shares in the same way as it does in a share distribution. The depositary is not obligated to make available to you a method to receive the elective dividend in shares rather than in ADSs. There can be no assurance that you will be given the opportunity to receive elective distributions on the same terms and conditions as the holders of ordinary shares.

	•	Rights to Purchase Additional Shares. If we offer holders of our ordinary shares any rights to subscribe for additional shares or any other rights, the depositary may after consultation with us and having received timely notice of such distribution by us, make these rights available to you. We must first instruct the depositary to make such rights available to you and furnish the depositary with satisfactory evidence that it is legal to do so. If the depositary decides it is not legal and practical to make the rights available but that it is practical to sell the rights, the depositary will use reasonable efforts to sell the rights and distribute the net proceeds in the same way as it does with cash. The depositary will allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them.

If the depositary makes rights available to you, it will exercise the rights and purchase the shares on your behalf. The depositary will then deposit the shares and deliver ADSs to you. It will only exercise rights if you pay it the exercise price and any other charges the rights require you to pay.

U.S. securities laws may restrict transfers and cancellation of the ADSs represented by shares purchased upon exercise of rights. For example, you may not be able to trade these ADSs freely in the United States. In this case, the depositary may deliver restricted depositary shares that have the same terms as the ADRs described in this section except for changes needed to put the necessary restrictions in place.

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	•	Other Distributions. Subject to receipt of timely notice from us with the request to make any such distribution available to you, and provided the depositary has determined such distribution is lawful and reasonably practicable and feasible and in accordance with the terms of the deposit agreement, the depositary will send to you anything else we distribute on deposited securities by any means it thinks is legal, fair and practical. If any of these conditions required for the depositary to make the distribution are not met, the depositary has a choice: it may decide to sell what we distributed and distribute the net proceeds in the same way as it does with cash; or, if it cannot sell what we distributed, then it may dispose of what we distributed in a manner it deems reasonable, for nominal or no consideration, in which case you may receive no value for it. The depositary may sell a portion of the distributed securities or property sufficient to pay its fees and expenses in connection with that distribution.

The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. We have no obligation to register ADSs, shares, rights or other securities under the Securities Act. We also have no obligation to take any other action to permit the distribution of ADSs, shares, rights or anything else to ADS holders. This means that you may not receive the distributions we make on our shares or any value for them if it is illegal or impractical for us to make them available to you.

Deposit, Withdrawal and Cancellation

How are ADSs issued?

The depositary will deliver ADSs if you or your broker deposit ordinary shares or evidence of rights to receive ordinary shares with the custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will register the appropriate number of ADSs in the names you request and will deliver the ADSs to or upon the order of the person or persons entitled thereto.

Except for ordinary shares deposited by us, the selling shareholders, the underwriters or their affiliates in connection with this offering, no shares will be accepted for deposit during a period of 180 days after the date of this prospectus. The 180-day lock-up period is subject to adjustment under certain circumstances as described in the section entitled “Shares and ADSs Eligible for Future Sale—Lock-Up Agreements.”

How do ADS holders cancel an American Depositary Share?

You may turn in your ADSs at the depositary’s corporate trust office or provide appropriate instructions to your broker. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will direct the custodian to deliver the ordinary shares and any other deposited securities underlying the ADSs to you or a person you designate at the office of the custodian or through a book-entry delivery. Or, at your request, risk and expense, the depositary will deliver the deposited securities at its corporate trust office, if feasible.

How do ADS holders interchange between Certificated ADSs and Uncertificated ADSs?

You may surrender your ADR to the depositary for the purpose of exchanging your ADR for uncertificated ADSs. The depositary will cancel that ADR and will send you a statement confirming that you are the owner of uncertificated ADSs. Alternatively, upon receipt by the depositary of a proper instruction from a holder of uncertificated ADSs requesting the exchange of uncertificated ADSs for certificated ADSs, the depositary will execute and deliver to you an ADR evidencing those ADSs.

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Voting Rights

How do you vote?

You may instruct the depositary to vote the deposited securities. Otherwise, you won’t be able to exercise your right to vote unless you withdraw the ordinary shares your ADSs represent. However, you may not know about the meeting enough in advance to withdraw the ordinary shares.

If we ask for your instructions and upon timely notice from us, the depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you. The materials will (1) describe the matters to be voted on and (2) explain how you may instruct the depositary to vote the ordinary shares or other deposited securities underlying your ADSs as you direct, including an express indication that such instruction may be given or deemed given in accordance with the last paragraph of this section if no instruction is received, to the depositary to give a proxy to a proxy bank to vote the deposited securities represented by their ADSs in accordance with the recommendations of the proxy bank. For instructions to be valid, the depositary must receive them on or before the date specified. The depositary will try, as far as practical, subject to the laws of Germany and the provisions of our constitutive documents, to vote or to have its agents vote the ordinary shares or other deposited securities as you instruct. The depositary will only vote or attempt to vote as you instruct.

We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ordinary shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and there may be nothing you can do if your ordinary shares are not voted as you requested.

In order to give you a reasonable opportunity to instruct the depositary as to the exercise of voting rights relating to deposited securities, if we request the depositary to act, we will try to give the depositary notice of any such meeting and details concerning the matters to be voted upon sufficiently in advance of the meeting date.

If a proxy bank is appointed in accordance with the German Stock Corporation Act which may either be the custodian or another major German commercial bank as reasonably chosen by the depositary, the depositary will provide the ADS holders with the recommendation of the proxy bank with regard to the matters to be voted on. If you are an ADS holder and do not provide voting instructions in a timely fashion to the depositary in the manner specified by the depositary, you will be deemed to have instructed the depositary to vote or cause the securities represented by your ADSs to be voted in accordance with the recommendations of the proxy bank, in accordance with the German Stock Corporation Act.

Fees and Expenses


Persons Depositing or Withdrawing Shares Must Pay:		For:

Registration or transfer fees		Transfer and registration of ordinary shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw ordinary shares

Expenses of the depositary		Cable, telex, facsimile and electronic transmissions and deliveries (as expressly provided in the deposit agreement)

		Converting foreign currency to U.S. dollars

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Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, including any applicable interest and penalties thereon and any share transfer or other taxes or governmental charges, for example, stock transfer taxes, stamp duty or withholding taxes		As necessary

Fees incurred by the depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to the ordinary shares, ADSs, ADRs and other deposited securities		As necessary

Fees incurred by the depositary in connection with the delivery of the deposited securities		As necessary

Any charges incurred by the depositary or its agents for servicing the deposited securities		As necessary

The depositary collects its fees for issuance and cancellation of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.

Payment of Taxes

You will be responsible for any taxes or other governmental charges payable on your ADSs or on the deposited securities represented by any of your ADSs. The depositary may refuse to register any transfer of your ADSs or allow you to withdraw the deposited securities represented by your ADSs until such taxes or other charges are paid. It may apply payments owed to you or sell deposited securities represented by your ADSs to pay any taxes owed and you will remain liable for any deficiency. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any net proceeds, or send to you any property, remaining after it has paid the taxes. You agree to indemnify us, the depositary, the custodian and each of our and their respective agents, officers, directors, employees and affiliates for, and hold each of them harmless from, any claims with respect to taxes (including applicable interest and penalties thereon) arising from any tax benefit obtained for you.

Reclassifications, Recapitalizations and Mergers


If we:		Then:

Change the nominal or par value of our ordinary shares		The shares or other securities received by the depositary will become deposited securities.


Reclassify, split up or consolidate any of the deposited securities		Each ADS will automatically represent its equal share of the new deposited securities.

Distribute securities on the ordinary shares that are not distributed to you		The depositary may also deliver new ADSs or ask you to surrender your outstanding ADRs in exchange for new ADRs identifying the new deposited securities. The depositary may also sell the new deposited securities and distribute the net proceeds if we are unable to assure the depositary

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		that the distribution (a) does not require registration under the Securities Act or (b) is exempt from registration under the Securities Act.

Recapitalize, reorganize, merge, liquidate, sell all or substantially all of our assets, or take any similar action		Any replacement securities received by the depositary shall be treated as newly deposited securities and either the existing ADRs or, if necessary, replacement ADRs distributed by the depositary will evidence the replacement securities. The depositary may also sell the replacement securities and distribute the net proceeds if the replacement securities may not be lawfully distributed to all shareholders.

Amendment and Termination

How may the deposit agreement be amended?

We may agree with the depositary to amend the deposit agreement and the form of ADR and the ADSs without your consent for any reason. If an amendment adds or increases fees or charges, except for taxes and other governmental charges or expenses of the depositary for registration fees, facsimile costs, delivery charges or similar items, including expenses incurred in connection with foreign exchange control regulations and other charges specifically payable by ADS holders under the deposit agreement, or materially prejudices a substantial existing right of ADS holders, it will not become effective for outstanding ADSs until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, you are considered, by continuing to hold your ADSs, to agree to the amendment and to be bound by the ADRs and the deposit agreement as amended.

How may the deposit agreement be terminated?

The depositary will terminate the deposit agreement if we ask it to do so, in which case the depositary will give notice to you at least 60 days prior to termination. The depositary may also terminate the deposit agreement if the depositary has told us that it would like to resign and we have not appointed a new depositary within 60 days. In such case, the depositary must notify you at least 30 days before termination.

After termination, the depositary and its agents will do the following under the deposit agreement but nothing else: collect distributions on the deposited securities, sell rights and other property and deliver ordinary shares and other deposited securities upon cancellation of ADSs after payment of any fees, charges, taxes or other governmental charges. Six months or more after termination, the depositary may sell any remaining deposited securities by public or private sale. After that, the depositary will hold the money it received on the sale, as well as any other cash it is holding under the deposit agreement, for the pro rata benefit of the ADS holders that have not surrendered their ADSs. It will not invest the money and has no liability for interest. The depositary’s only obligations will be to account for the money and other cash. After termination, our only obligations will be to indemnify the depositary and to pay fees and expenses of the depositary that we agreed to pay.

Books of Depositary

The depositary will maintain ADS holder records at its depositary office. You may inspect such records at such office during regular business hours but solely for the purpose of communicating with other holders in the interest of business matters relating to the Company, the ADSs and the deposit agreement.

The depositary will maintain facilities in New York to record and process the issuance, cancellation, combination, split-up and transfer of ADRs.

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These facilities may be closed from time to time, to the extent not prohibited by law or if any such action is deemed necessary or advisable by the depositary or us, in good faith, at any time or from time to time because of any requirement of law, any government or governmental body or commission or any securities exchange on which the ADRs or ADSs are listed, or under any provision of the deposit agreement or provisions of, or governing, the deposited securities, or any meeting of our shareholders or for any other reason.

Limitations on Obligations and Liability

Limits on our Obligations and the Obligations of the Depositary; Limits on Liability to Holders of ADSs

The deposit agreement expressly limits our obligations and the obligations of the depositary. It also limits our liability and the liability of the depositary. We and the depositary:


	•	are only obligated to take the actions specifically set forth in the deposit agreement without gross negligence or willful misconduct;

	•	are not liable if either of us is prevented or delayed by law or circumstances beyond our control from performing our obligations under the deposit agreement, including, without limitation, requirements of any present or future law, regulation, governmental or regulatory authority or share exchange of any applicable jurisdiction, any present or future provisions of our memorandum and articles of association, on account of possible civil or criminal penalties or restraint, any provisions of or governing the deposited securities or any act of God, war or other circumstances beyond each of our control as set forth in the deposit agreement;

	•	are not liable if either of us exercises, or fails to exercise, discretion permitted under the deposit agreement;

	•	are not liable for the inability of any holder of ADSs to benefit from any distribution on deposited securities that is not made available to holders of ADSs under the terms of the deposit agreement, or for any special, consequential or punitive damages for any breach of the terms of the deposit agreement;

	•	have no obligation to become involved in a lawsuit or other proceeding related to the ADSs or the deposit agreement on your behalf or on behalf of any other party;

	•	may rely upon any documents we believe in good faith to be genuine and to have been signed or presented by the proper party;

	•	disclaim any liability for any action/inaction in reliance on the advice or information of legal counsel, accountants, any person presenting ordinary shares for deposit, holders and beneficial owners (or authorized representatives) of ADRs, or any person believed in good faith to be competent to give such advice or information;

	•	disclaim any liability for inability of any holder to benefit from any distribution, offering, right or other benefit made available to holders of deposited securities but not made available to holders of ADSs; and

	•	disclaim any liability for any indirect, special, punitive or consequential damages.

The depositary and any of its agents also disclaim any liability for any failure to carry out any instructions to vote, the manner in which any vote is cast or the effect of any vote or failure to determine that any distribution or action may be lawful or reasonably practicable or for allowing any rights to lapse in accordance with the provisions of the deposit agreement, the failure or timeliness of any notice from us, the content of any information submitted to it by us for distribution to you or for any inaccuracy of any translation thereof, any investment risk associated with the acquisition of an interest in the deposited securities, the validity or worth of the deposited securities, the credit-

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worthiness of any third party, or for any tax consequences that may result from ownership of ADSs, ordinary shares or deposited securities.

In the deposit agreement, we and the depositary agree to indemnify each other under certain circumstances.

Requirements for Depositary Actions

Before the depositary will issue, deliver or register a transfer of an ADS, make a distribution on an ADS, or permit withdrawal of ordinary shares, the depositary may require:


	•	payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for the transfer of any ordinary shares or other deposited securities and payment of the applicable fees, expenses and charges of the depositary;

	•	satisfactory proof of the identity and genuineness of any signature or other information it deems necessary; and

	•	compliance with (i) laws or governmental regulations relating to the execution and delivery of ADSs or the withdrawal of deposited securities; and (ii) regulations it may establish, from time to time, consistent with the deposit agreement, including presentation of transfer documents.

The depositary may refuse to issue and deliver ADSs or register transfers of ADSs generally when the register of the depositary or our transfer books are closed or at any time if the depositary or we think it is necessary or advisable to do so.

Your Right to Receive the Shares Underlying Your ADRs

You have the right to cancel your ADSs and withdraw the underlying ordinary shares at any time except:


	•	when temporary delays arise because: (1) the depositary has closed its transfer books or we have closed our transfer books; (2) the transfer of ordinary shares is blocked to permit voting at a shareholders’ meeting; or (3) we are paying a dividend on our ordinary shares;

	•	when you owe money to pay fees, taxes and similar charges; or

	•	when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of ordinary shares or other deposited securities.

This right of withdrawal may not be limited by any other provision of the deposit agreement.

Pre-release of ADSs

The deposit agreement permits the depositary to deliver ADSs before deposit of the underlying shares, unless requested by us in writing to cease doing so. This is called a pre-release of the ADSs. The depositary may also deliver ordinary shares upon cancellation of pre-released ADSs (even if the ADSs are cancelled before the pre-release transaction has been closed out). A pre-release is closed out as soon as the underlying ordinary shares are delivered to the depositary. The depositary may receive ADSs instead of ordinary shares to close out a pre-release. The depositary may pre-release ADSs only under the following conditions: (1) before or at the time of the pre-release, the person to whom the pre-release is being made represents to the depositary in writing that it or its customer (a) beneficially owns the ordinary shares or ADSs to be deposited, (b) indicates the depositary as owner of such ordinary shares or ADSs in its records, and (c) unconditionally guarantees to deliver such ordinary shares or ADSs to the depositary or the custodian, as the case may be; (2) the pre-release is fully collateralized with cash or other collateral that the depositary considers appropriate; and (3) the depositary must be able to close out the pre-release on not more than five business days’

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notice. Each pre-release is subject to further indemnities and credit regulations as the depositary considers appropriate. In addition, the depositary will limit the number of ADSs that may be outstanding at any time as a result of pre-release, although the depositary may disregard the limit from time to time, if it thinks it is appropriate to do so, including (1) due to a decrease in the aggregate number of ADSs outstanding that causes existing pre-release transactions to temporarily exceed the limit stated above or (2) where otherwise required by market conditions.

Direct Registration System

In the deposit agreement, all parties to the deposit agreement acknowledge that the DRS and Profile Modification System, or Profile, will apply to uncertificated ADSs upon acceptance thereof to DRS by the DTC. DRS is the system administered by DTC pursuant to which the depositary may register the ownership of uncertificated ADSs, which ownership shall be evidenced by periodic statements issued by the depositary to the ADS holders entitled thereto. Profile is a required feature of DRS which allows a DTC participant, claiming to act on behalf of an ADS holder, to direct the depositary to register a transfer of those ADSs to DTC or its nominee and to deliver those ADSs to the DTC account of that DTC participant without receipt by the depositary of prior authorization from the ADS holder to register such transfer.

In connection with and in accordance with the arrangements and procedures relating to DRS/Profile, the parties to the deposit agreement understand that the depositary will not verify, determine or otherwise ascertain that the DTC participant which is claiming to be acting on behalf of an ADS holder in requesting registration of transfer and delivery described in the paragraph above has the actual authority to act on behalf of the ADS holder (notwithstanding any requirements under the Uniform Commercial Code). In the deposit agreement, the parties agree that the depositary’s reliance on, and compliance with, instructions received by the depositary through the DRS/Profile System and in accordance with the deposit agreement, shall not constitute negligence or bad faith on the part of the depositary.

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TAXATION

German and United States Taxation

The following discussion describes the material German tax and U.S. federal income tax consequences for a U.S. holder of acquiring, owning, and disposing of the ADSs. To the extent the discussion relates to legal conclusions under current German and U.S. federal income tax law, and subject to the qualifications it contains, it represents the opinion of Cleary Gottlieb Steen & Hamilton LLP, our special German and U.S. counsel. A U.S. holder, which we refer to as a U.S. holder, is a resident of the United States for purposes of the Convention Between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, which we refer to as the Treaty, that is fully eligible for benefits under the Treaty. A holder will be entitled to Treaty benefits in respect of the ADSs if it is:


	•	the beneficial owner of the ADSs (and the dividends paid with respect thereto);

	•	a citizen or an individual resident of the United States, a corporation or other entity treated as a corporation for U.S. federal income tax purposes created or organized under the laws of the United States or any state thereof, an estate the income of which is subject to U.S. federal income tax without regard to its source, or a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or the trust has elected to be treated as a domestic trust for U.S. federal income tax purposes;

	•	not also a resident of Germany for German tax purposes; and

	•	not subject to a limitation on benefits (i.e., anti-treaty shopping) article that applies in limited circumstances.

Special rules apply to pension funds and certain other tax-exempt investors.

This discussion does not address the treatment of ADSs that are (i) held in connection with a permanent establishment or fixed base through which a U.S. holder carries on business or performs personal services in Germany or (ii) part of business assets for which a permanent representative in Germany has been appointed.

This discussion applies only to U.S. holders that acquire the ADSs in the initial offering and hold the ADSs as capital assets for U.S. federal income tax purposes. It does not purport to be a comprehensive description of all tax considerations that may be relevant to a decision to purchase the ADSs by any particular investor, including tax considerations that arise from rules of general application to all taxpayers or to certain classes of taxpayers that are generally assumed to be known by investors. In particular, this discussion does not address tax considerations applicable to a U.S. holder that may be subject to special tax rules, including, without limitation, a dealer in securities or currencies, a trader in securities that elects to use a mark-to-market method of accounting for securities holdings, banks, thrifts, or other financial institutions, an insurance company, a tax-exempt organization, a person that holds the ADSs as part of a hedge, straddle or conversion transaction for tax purposes, a person whose functional currency for tax purposes is not the U.S. dollar, a person subject to the U.S. alternative minimum tax, or a person that owns or is deemed to own 10% or more of the company’s voting stock. In addition, the discussion does not address tax consequences to an entity treated as a partnership for U.S. federal income tax purposes that holds the ADSs. The U.S. federal income tax treatment of each partner of the partnership generally will depend upon the status of the partner and the activities of the partnership. Prospective purchasers that are partners in a partnership holding the ADSs should consult their own tax advisers.

This discussion is based on German tax laws (including, but not limited to interpretation circulars issued by German tax authorities, which are not binding for the courts), U.S. federal income tax laws

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(including the Internal Revenue Code of 1986, as amended, which we refer to as the Code, final, temporary and proposed U.S. Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof), and the Treaty. These laws are subject to change, possibly on a retroactive basis. There is no assurance that German or U.S. tax authorities will not challenge one or more of the tax consequences described in this discussion. In addition, this discussion is based upon the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms.

Prospective holders of ADSs may wish to consult their own tax advisors regarding the German and U.S. tax consequences of the purchase, ownership and disposition of the company’s ADSs in light of their particular circumstances, including the effect of any state, local, or other foreign or domestic laws or changes in tax law or interpretation.

German Taxation of ADSs

General

For German tax purposes, the ADSs will represent a beneficial ownership interest in the underlying shares. Dividends are accordingly attributable to U.S. holders and U.S. holders are treated as holding an interest in the company’s shares for German tax purposes.

German Taxation of Dividends

The full amount of a dividend distributed by the company, excluding an amount that is treated as repayment of capital under German tax laws, is subject to German withholding tax at a rate of 25% plus a solidarity surcharge of 5.5% on the withholding tax, resulting in an aggregate rate of 26.375%. The basis for the withholding tax is the dividend approved for distribution by the company’s general shareholder meeting.

Withholding tax is withheld by the company and remitted to the German tax authorities regardless of whether or not a holder must report the dividend for tax purposes and regardless of whether or not a holder is a resident of Germany.

Pursuant to the Treaty, the German withholding tax may not exceed 15% of the dividends received by U.S. holders. The excess of the total withholding tax, including the solidarity surcharge, over the maximum rate of withholding tax permitted by the Treaty is refunded to U.S. holders upon application. For example, for a declared dividend of 100, a U.S. holder initially receives 73.625 (100 minus the 26.375% withholding tax). The U.S. holder is entitled to a partial refund from the German tax authorities in the amount of 11.375% of the gross dividend, which is equal to the excess of the amount withheld at the total German domestic dividend withholding rate (including the solidarity surcharge) over the amount computed under the applicable Treaty rate (hence, the excess of the 26.375% total German withholding over the 15% Treaty withholding tax rate). As a result, the U.S. holder ultimately receives a total of 85 (85% of the declared dividend) following the refund of the excess withholding.

Withholding Tax Refund for U.S. Holders

U.S. holders are eligible for treaty benefits under the Treaty (as discussed above in ‘‘—German and United States Taxation”). Accordingly, U.S. holders are entitled to claim a refund of the portion of the otherwise applicable 26.375% German withholding tax on dividends that exceeds the applicable Treaty rate.

Individual claims for refunds may be made on a separate form, which must be filed with the German Federal Central Tax Office (Bundeszentralamt für Steuern, An der Küppe 1, D-53225 Bonn, Germany). The form is available at the same address, on the German Federal Tax Office’s website (www.bzst.de) or from the Embassy of the Federal Republic of Germany, 4645 Reservoir Road, NW, Washington D.C. 20007-1998. The refund claim becomes time-barred after four years following the

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calendar year in which the dividend is received. As part of the individual refund claim, a U.S. holder must submit to the German tax authorities the original withholding certificate (or a certified copy thereof) issued by the paying agent and documenting the tax withheld and an official certification of United States tax residency on IRS Form 6166. IRS Form 6166 may be obtained by filing a properly completed IRS Form 8802 with the Internal Revenue Service, P.O. Box 71052, Philadelphia, PA 19176-6052. Requests for certification must include the U.S. holder’s name, social security number or employer identification number, the type of U.S. tax return filed, the tax period for which the certification is requested and a user fee of $35. An online payment option is also available at www.irs.gov. If the online payment option is used, then the completed IRS Form 8802 and all required attachments should be mailed to Internal Revenue Service, P.O. Box 16347, Philadelphia, PA 19114-0447. The Internal Revenue Service will send the certification on IRS Form 6166 to the U.S. holder, who must then submit the certification with the claim for refund of withholding tax.

Under a simplified refund procedure based on electronic data exchange (Datenträgerverfahren) a broker that is registered as a participant in the electronic data exchange procedure with the Bundeszentralamt für Steuern may file an electronic collective refund claim on behalf of all of the U.S. holders for whom it holds the company’s ADSs in custody. The simplified refund procedure permits the refund of only two-fifths of the withholding tax withheld and remitted. It is not possible to use the simplified procedure to claim a further refund for example based on special privileges under the Treaty.

Pursuant to recently introduced tax rules aiming to combat harmful tax practices and tax evasion, a reduction of withholding tax may become subject to additional disclosure requirements. The new rules, however, are not expected to apply to U.S. holders who directly hold the company’s ADSs.

German Taxation of Capital Gains

The capital gains from the disposition of ADSs realized by a holder that is not a German resident would be subject to German tax if such holder at any time during the five years preceding the disposition, directly or indirectly, held ADSs that represent 1% or more in the company’s shares. If such holder had acquired the ADSs without consideration, the previous owner’s holding period and size of the holding would also be taken into account.

However, U.S. holders are eligible for treaty benefits under the Treaty (as discussed above in ‘‘—German and United States Taxation”). Pursuant to the Treaty, U.S. holders are not subject to German tax even under the circumstances described in the preceding paragraph.

German statutory law requires a Disbursing Agent (as defined below) to levy withholding tax on capital gains from the sale of shares or other securities held in a custodial account in Germany. The statute does not explicitly condition the obligation to withhold taxes on capital gains being subject to taxation in Germany under German statutory law or on an applicable income tax treaty permitting Germany to tax such capital gains. However, an interpretation circular issued by the German Federal Ministry of Finance (dated December 22, 2009, reference number IV C 1- S2252/08/10004 at no.s 313, 315) provides that taxes need not be withheld when the holder of the custody account is not a resident of Germany for tax purposes and the income is not subject to German taxation. The interpretation circular further states that there is no obligation to withhold such tax even if the non-resident holder owns 1% or more of the shares of a German company. While interpretation circulars issued by the German Federal Ministry of Finance are only binding on the tax authorities but not on the tax courts, in practice, Disbursing Agents nevertheless rely on guidance contained in such interpretation circulars. Therefore, a Disbursing Agent would only withhold tax at 26.375% on capital gains derived by a U.S. holder from the sale of ADSs held in a custodial account in Germany in the unlikely event that the Disbursing Agent did not follow this guidance. In this case, the U.S. holder would be entitled to claim a refund of the withholding tax from the German tax authorities under the Treaty. The term “Disbursing Agent” means a bank, a financial services institution, a securities trading enterprise or a securities trading bank, each as defined in the German Banking Act, (in each case

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including a German branch of a foreign enterprise, but excluding a foreign branch of a German enterprise) that holds the ADSs in custody for the investor or conduct their sale or other disposition and disburses or credits the income from the ADSs to the holder of the ADSs.

German Inheritance and Gift Tax

Under German domestic law, the transfer of ADSs will be subject to German gift or inheritance tax if:

(a) the decedent or donor or heir, beneficiary or other transferee (i) maintained his or her residence or a habitual abode in Germany or had its place of management or registered office in Germany at the time of the transfer, or (ii) is a German citizen who has spent no more than five consecutive years outside Germany without maintaining a residence in Germany or (iii) is a German citizen who serves for a German entity established under public law and is remunerated for his or her service from German public funds (including family members who form part of such person’s household, if they are German citizens) and is only subject to estate or inheritance tax in his or her country of residence or habitual abode with respect to assets located in such country (special rules apply to certain former German citizens who neither maintain a residence nor have their habitual abode in Germany), or

(b) at the time of the transfer the ADSs are held by the decedent or donor as business assets forming part of a permanent establishment in Germany or for which a permanent representative in Germany has been appointed, or

(c) the ADSs subject to such transfer form part of a portfolio that represents at the time of the transfer 10% or more of the registered share capital of the company and that has been held directly or indirectly by the decedent or donor, either alone or together with related persons.

Under the United States-Germany Inheritance and Gifts Tax Treaty, a transfer of ADSs by gift or upon death is not subject to German inheritance or gift tax, if the donor or the transferor is domiciled in the United States within the meaning of the United States-Germany Inheritance and Gift Tax Treaty and is neither a citizen of Germany nor a former citizen of Germany and, at the time of the transfer, the ADSs are not held by the decedent or donor as business assets forming part of a permanent establishment in Germany or for which a permanent representative in Germany has been appointed. Notwithstanding the foregoing, in case the heir, transferee or other beneficiary (i) has, at the time of the transfer, his or her residence or habitual abode in Germany, or (ii) is a German citizen who has spent no more than five (or, in certain circumstances, ten) consecutive years outside Germany without maintaining a residence in Germany or (iii) is a German citizen who serves for a German entity established under public law and is remunerated for his or her service from German public funds (including family members who form part of such person’s household, if they are German citizens) and is only subject to estate or inheritance tax in his or her country of residence or habitual abode with respect to assets located in such country (or special rules apply to certain former German citizens who neither maintain a residence nor have their habitual abode in Germany), the transferred ADSs are subject to German inheritance or gift tax.

If, in this case; Germany levies inheritance or gift tax on the ADSs with reference to the heir’s, transferee’s or other beneficiary’s residence in Germany or his or her German citizenship, and the United States also levies federal estate tax or federal gift tax with reference to the decedent’s or donor’s residence (but not with reference to the decedent’s or donor’s citizenship), the amount of the U.S. federal estate tax or the U.S. federal gift tax, respectively, paid in the United States with respect to the transferred ADSs is credited against the German inheritance or gift tax liability, provided the U.S. federal estate tax or the U.S. federal gift tax, as the case may be, does not exceed the part of the German inheritance or gift tax, as computed before the credit is given, which is attributable to the transferred ADSs. A claim for credit of the U.S. federal estate tax or the U.S. federal gift tax, as the case may be, may be made within one year of the final determination (administrative or judicial) and payment of the the U.S. federal estate tax or the U.S. federal gift tax, as the case may be, provided

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that the determination and payment are made within ten years of the date of death of the decedent or of the date of the making of the gift by the donor. Similarly and subject to the same limitations, Similarly, U.S. state-level estate or gift taxes is also creditable against the German inheritance or gift tax liability to the extent that U.S. federal estate or gift tax is creditable.

Other German Taxes

There are no transfer, stamp or similar taxes which would apply to the purchase, sale or other disposition of ADSs in Germany. Net worth tax (Vermögensteuer) is no longer levied in Germany.

U.S. Taxation

General

A U.S. holder of the ADSs will be treated for U.S. federal income tax purposes as the beneficial owner of the shares represented by those ADSs. No gain or loss will be recognized upon an exchange of the ADSs for such shares.

U.S. Taxation of Dividends

U.S. holders must include the gross amount of cash dividends paid in respect of the ADSs, without reduction for German withholding tax, in ordinary income on the date that they are treated as having received them.

Subject to certain exceptions for short term and hedged positions, the U.S. dollar amount of dividends received by a non-corporate U.S. holder with respect to the ADSs before January 1, 2011 will be subject to taxation at a maximum rate of 15% if the dividends are “qualified dividends.” Dividends received with respect to the ADSs will be qualified dividends if (i) the company is eligible for the benefits of a comprehensive income tax treaty with the United States that the IRS has approved for the purposes of the qualified dividend rules or if the ADSs are readily tradable on an established securities market and (ii) the company was not, in the year prior to the year in which the dividend was paid, and is not, in the year in which the dividend is paid, a passive foreign investment company, or PFIC.

The Treaty has been approved for the purposes of the qualified dividend rules. We believe that the ADSs will be considered readily tradable on an established securities market. Based on the company’s audited financial statements and relevant market and shareholder data, the company believes that it was not treated as a PFIC for U.S. federal income tax purposes with respect to its 2008 and 2009 taxable year. In addition, based on its current expectations regarding the value and nature of its assets, the sources and nature of its income, and relevant market and shareholder data, the company does not anticipate becoming a PFIC for its 2010 taxable year, and the foreseeable future.

German tax withheld from dividends will be treated, up to the 15% rate provided under the Treaty, as a foreign income tax that, subject to generally applicable limitations under U.S. tax law, is eligible for credit against the U.S. federal income tax liability of U.S. holders or, if they have elected to deduct such taxes, may be deducted in computing taxable income. Such election would then apply to all foreign income taxes and certain other foreign taxes of the U.S. holder. As discussed in the preceding section regarding German Taxation, German withholding tax will be imposed at a rate of 25% plus solidarity surcharge of 5.5% on the withholding tax (in total 26.375%). However, U.S. holders qualify for benefits under the Treaty (as discussed above in “—German and United States Taxation”). Accordingly, U.S. holders may request a refund of German tax withheld in excess of the 15% rate provided in the Treaty. Fluctuations in the dollar-euro exchange rate between the date on which U.S. holders receive a dividend and the date on which they receive a related refund of German withholding tax may give rise to foreign currency gain or loss, which is treated as ordinary income or loss for U.S. tax purposes.

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U.S. Taxation of Sales or Other Taxable Dispositions

Sales or other taxable dispositions by U.S. holders of ADSs will give rise to capital gain or loss equal to the difference between the U.S. dollar value of the amount realized on the disposition and the U.S. holder’s U.S. dollar basis in the ADSs. Any such capital gain or loss will be long-term capital gain or loss, subject to taxation at reduced rates for non-corporate taxpayers, if the ADSs were held for more than one year. The deductibility of capital losses is subject to limitations.

U.S. Information Reporting and Back-Up Withholding

Dividends paid in respect of ADSs, and payments of the proceeds of a sale of ADSs, paid within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and will be subject to backup withholding (currently imposed at a 28% rate) unless the holder (i) is an exempt recipient or (ii) provides a correct taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons are not subject to information reporting or backup withholding. However, such a holder may be required to provide a certification to establish its non-U.S. status in connection with payments received within the United States or through certain U.S.-related financial intermediaries. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a holder’s U.S. federal income tax liability. A holder may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for a refund with the IRS and furnishing any required information.

New Legislation

Newly enacted legislation requires certain U.S. holders who are individuals, estates or trusts to pay an additional 3.8% tax on, among other things, dividends on and capital gains from the sale or other disposition of ADSs for taxable years beginning after December 31, 2012. In addition, for taxable years beginning after March 18, 2010, new legislation requires certain U.S. holders who are individuals to report information relating to an interest in our ADSs, subject to certain exceptions (including an exception for ADSs held in accounts maintained by certain financial institutions). U.S. holders should consult their tax advisors regarding the effect, if any, of this legislation on their ownership and disposition of the ADSs.

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UNDERWRITING

Overview

Subject to the terms and conditions of the underwriting agreement dated September 29, 2010, the underwriters named below, through their representatives Deutsche Bank Securities Inc., Goldman Sachs International and J.P. Morgan Securities LLC, have severally agreed to purchase from us, Rembrandt and the Management KG the following respective number of our ADSs at a public offering price less the underwriting discount set forth on the cover page of this prospectus:


	Number
	of ADSs

Underwriters
Deutsche Bank Securities Inc.		4,050,000
Goldman Sachs International		4,050,000
J.P. Morgan Securities LLC		4,050,000
Canaccord Genuity Inc.		900,000
Piper Jaffray & Co.		900,000
RBC Capital Markets Corporation		900,000
Robert W. Baird & Co. Incorporated		900,000
Stephens Inc.		450,000

Total		16,200,000

The underwriting agreement provides that the obligations of the several underwriters to purchase the ADSs offered hereby are subject to certain conditions precedent and that the underwriters will purchase all of the ADSs offered by this prospectus, other than those covered by the over-allotment option described below, if any of these ADSs are purchased.

All of the shares that we, Rembrandt and the Management KG are offering will be delivered in the form of ADSs.

We have been advised by the representatives of the underwriters that the underwriters propose to offer the ADSs to the public at the public offering price set forth on the cover of this prospectus and to dealers at a price that represents a concession not in excess of $0.3510 per ADS under the public offering price. After the initial public offering, representatives of the underwriters may change the offering price and other selling terms.

Rembrandt has granted to the underwriters an option, exercisable not later than 30 days after the date of this prospectus, to purchase up to 2,430,000 additional ADSs at the public offering price less the underwriting discount set forth on the cover page of this prospectus. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the ADSs offered by this prospectus. To the extent that the underwriters exercise this option, each of the underwriters will become obligated, subject to conditions, to purchase approximately the same percentage of these additional ADSs as the number of ADSs to be purchased by it in the above table bears to the total number of ADSs offered by this prospectus. Rembrandt will be obligated, pursuant to the option, to sell these additional ADSs to the underwriters to the extent that the option is exercised. If any additional ADSs are purchased, the underwriters will offer the additional ADSs on the same terms as those on which the 16,200,000 ADSs are being offered.

Offers and sales in the United States by Goldman Sachs International will be made through its U.S. broker-dealer affiliate, Goldman, Sachs & Co.

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The underwriting discount per ADS is equal to the public offering price per ADS less the amount paid per ADS by the underwriters to us or the selling shareholders, as the case may be. The underwriting discount is 4.5% of the initial public offering price. We and the selling shareholders have agreed to pay the underwriters the following discount, assuming either no exercise or full exercise by the underwriters of the underwriters’ over-allotment option:


			Total Discount
			Without Exercise		With Full Exercise
	Discount		of Over-Allotment		of Over-Allotment
	per ADS		Option		Option

Discount paid by us	$	0.585	$	7,875,001	$	7,875,001
Discount paid by the selling shareholders	$	0.585	$	1,601,999	$	3,023,549

To meet German law requirements, the representatives of the underwriters initially subscribed, on behalf of the underwriters, for all of the shares underlying the ADSs to be sold by us at a subscription price per share equal to their notional value per share. This subscription price will be credited against the amount due from the underwriters at closing.

In addition, we estimate that our share of the total expenses of this offering, excluding underwriting discount, will be approximately $15 million. We will reimburse the underwriters for reasonable expenses validly incurred in connection with the offering up to an aggregate amount of $250,000.

We and the selling shareholders have agreed to indemnify the underwriters against some specified types of liabilities, including liabilities under the U.S. Securities Act of 1933, as amended, and to contribute to payments the underwriters may be required to make in respect of any of these liabilities.

We have entered into an agreement with the representatives of the underwriters pursuant to which we have agreed not to offer, sell, contract to sell or otherwise dispose of, or enter into any transaction that is designed to, or could be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by us or any of our affiliates, of any of our ADSs, shares or other securities convertible into or exchangeable or exercisable for ADSs, shares or derivatives of our securities owned by these persons prior to this offering or securities issuable upon exercise of options or warrants held by these persons for a period of 180 days after the effective date of the registration statement of which this prospectus is a part without the prior written consent of each of the representatives of the underwriters. This consent may be given at any time without public notice.

Each of Rembrandt and Management KG has entered into an agreement with the representatives of the underwriters pursuant to which each such entity has agreed not to offer, sell, contract to sell or otherwise dispose of, or enter into any transaction that is designed to, or could be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by it or any of its affiliates, of any ADSs, shares or other securities convertible into or exchangeable or exercisable for ADSs, shares or derivatives of our securities owned by these persons prior to this offering or securities issuable upon exercise of options or warrants held by these persons for a period of 180 days after the effective date of the registration statement of which this prospectus is a part without the prior written consent of each of the representatives of the underwriters. This consent may be given at any time without public notice.

In addition, each of our officers and directors have agreed not to offer, sell, contract to sell or otherwise dispose of, or enter into any transaction that is designed to, or could be expected to, result in the disposition of any ADSs, shares or other securities convertible into or exchangeable or exercisable for ADSs, shares or derivatives of our securities owned by these persons prior to this offering or securities issuable upon exercise of options or warrants held by these persons for a period of 180 days after the effective date of the registration statement of which this prospectus is a part

194

without the prior written consent of each of the representatives of the underwriters. This consent may be given at any time without public notice.

There are no agreements between the representatives and any of our shareholders or affiliates releasing them from these lock-up agreements prior to the expiration of the 180-day period.

The representatives of the underwriters have advised us that the underwriters do not intend to confirm sales to any account over which they exercise discretionary authority.

In connection with the offering, the underwriters may purchase and sell ADSs in the open market. These transactions may include short sales, purchases to cover positions created by short sales and stabilizing transactions.

Short sales involve the sale by the underwriters of a greater number of ADSs than they are required to purchase in the offering. Covered short sales are sales made in an amount not greater than the underwriters’ option to purchase additional ADSs from Rembrandt in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional ADSs or purchasing ADSs in the open market. In determining the source of ADSs to close out the covered short position, the underwriters will consider, among other things, the price of ADSs available for purchase in the open market as compared to the price at which they may purchase ADSs through the over-allotment option.

Naked short sales are any sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing ADSs in the open market. A naked short position is more likely to be created if underwriters are concerned that there may be downward pressure on the price of the ADSs in the open market prior to the completion of the offering.

Stabilizing transactions consist of various bids for or purchases of our ADSs made by the underwriters in the open market prior to the completion of the offering.

The underwriters may impose a penalty bid. This occurs when a particular underwriter repays to the other underwriters a portion of the underwriting discount received by it because the representatives of the underwriters have repurchased ADSs sold by or for the account of that underwriter in stabilizing or short covering transactions.

Purchases to cover a short position and stabilizing transactions may have the effect of preventing or slowing a decline in the market price of our ADSs. Additionally, these purchases, along with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of our ADSs. As a result, the price of our ADSs may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the NYSE, in the over-the-counter market or otherwise.

A prospectus in electronic format is being made available on Internet web sites maintained by one or more of the lead underwriters of this offering and may be made available on web sites maintained by other underwriters. Other than the prospectus in electronic format, the information on any underwriter’s website and any information contained in any other website maintained by an underwriter is not part of the prospectus or the registration statement of which the prospectus forms a part.

Some of the underwriters or their affiliates have provided investment banking and other financial services to us and other affiliates of Rembrandt in the past, for which they received customary fees and commissions. In particular, Deutsche Bank Aktiengesellschaft, an affiliate of Deutsche Bank Securities Inc., acts as agent for the lenders under our Senior Facilities Agreement and is a lender under our Senior Facilities Agreement. We paid a fee of approximately €300,000 (equivalent to approximately $436,000 at the time of payment) to certain affiliates of Deutsche Bank Aktiengesellschaft who are lenders under our Senior Facilities Agreement in exchange for their giving consent to

195

amend the Senior Facilities Agreement to facilitate this offering. We also paid a fee of €250,000 (equivalent to $363,400 at the time of payment) for providing services as an agent for the lenders under the Senior Facilities Agreement in connection with the amendment process. As discussed in “Use of Proceeds,” a portion of the net proceeds of this offering will be used to pay outstanding debt under our Senior Facilities Agreement. Proceeds from the offering will be used to repay approximately $4.3 million of the term loan facility obligations held by Deutsche Bank Aktiengesellschaft and certain of its affiliates. In addition, some of the underwriters may in the future provide investment banking and other financial services to us and other affiliates of Rembrandt, for which they may receive customary fees and commissions.

Pricing of this Offering

We have applied to list our ADSs on the NYSE. Prior to this offering, there has been no public market for our ADSs. Consequently, the initial public offering price of our ADSs will be determined by negotiation among us, the selling shareholders and the representatives of the underwriters. Among the primary factors that will be considered in determining the public offering price are:


	•	prevailing market conditions;

	•	our results of operations in recent periods;

	•	the present stage of our development;

	•	the market capitalizations and stages of development of other companies that we and the representatives of the underwriters believe to be comparable to our business; and

	•	estimates of our business potential.

Notice to Investors in the European Economic Area

In any EEA Member State that has implemented Directive 2003/71/EC (together with any applicable implementing measures in any Member State, the “Prospectus Directive”), this communication is only addressed to and is only directed at qualified investors in that Member State within the meaning of the Prospectus Directive.

This prospectus has been prepared on the basis that all offers of ADSs will be made pursuant to an exemption under the Prospectus Directive, as implemented in member states of the European Economic Area (“EEA”), from the requirement to produce a prospectus for offers of ADSs. Accordingly any person making or intending to make any offer within the EEA of ADSs which are the subject of the placement contemplated in this prospectus should only do so in circumstances in which no obligation arises for us or any of the underwriters to produce a prospectus for such offer. Neither we nor any of the underwriters have authorized, nor do we or they authorize, the making of any offer of ADSs through any financial intermediary, other than offers made by the underwriters which constitute the final placement of ADSs contemplated in this prospectus.

196

In relation to each member state of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), an offer to the public of any ADSs which are the subject of the offering contemplated by this prospectus (the “ADSs”) may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of any ADSs may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:

(a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;

(c) by the underwriters to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive); or

(d) in any other circumstances falling within Article 3(2) of the Prospectus Directive,

provided that no such offer of ADSs shall result in a requirement for the publication by us or any underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer to the public” in relation to any ADSs in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any ADSs to be offered so as to enable an investor to decide to purchase any ADSs, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

Notice to Other Non-U.S. Investors

Dubai International Financial Centre

This document relates to an Exempt Offer, as defined in the Offered Securities Rules module of the DFSA Rulebook, or the OSR, in accordance with the Offered Securities Rules of the Dubai Financial Services Authority. This document is intended for distribution only to Persons, as defined in the OSR, of a type specified in those rules. It must not be delivered to, or relied on by, any other Person. The Dubai Financial Services Authority has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The Dubai Financial Services Authority has not approved this document nor taken steps to verify the information set out in it, and has no responsibility for it. The ADSs to which this document relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the ADSs offered should conduct their own due diligence on the ADSs. If you do not understand the contents of this document you should consult an authorized financial adviser.

Hong Kong

The ADSs may not be offered or sold by means of this document or any other document other than (i) in circumstances which do not constitute an offer or invitation to the public within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong) or the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), and no advertisement, invitation

197

or document relating to the ADSs may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to ADSs which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.

Japan

The ADSs may not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of any Japanese person or to others, for re-offering or re-sale directly or indirectly in Japan or to any Japanese person, except in each case pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Act of Japan and any other applicable laws and regulations of Japan. For purposes of this paragraph, “Japanese person” means any person resident in Japan, including any corporation or other entity organized under the laws of Japan.

Singapore

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, the ADSs may not be offered or sold or made the subject of an invitation for subscription or purchase and there may not be any circulation or distribution of this prospectus or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the ADSs, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore, or the SFA, (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275, of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Switzerland

This document, as well as any other offering or marketing material relating to the ADS which are the subject of the offering contemplated by this prospectus, neither constitutes a prospectus pursuant to Article 652a or Article 1156 of the Swiss Code of Obligations nor a simplified prospectus as such term is understood pursuant to article 5 of the Swiss Federal Act on Collective Investment Schemes. Neither the ADS nor the shares underlying the ADS will be listed on the SIX Swiss Exchange and, therefore, the documents relating to the ADS, including, but not limited to, this document, do not claim to comply with the disclosure standards of the listing rules of SIX Swiss Exchange and corresponding prospectus schemes annexed to the listing rules of the SIX Swiss Exchange.

The ADS are being offered in Switzerland by way of a private placement, i.e., to a small number of selected investors only, without any public offer and only to investors who do not purchase the ADS with the intention to distribute them to the public. The investors will be individually approached from time to time. This document, as well as any other offering or marketing material relating to the ADS, is confidential and it is exclusively for the use of the individually addressed investors in connection with the offer of the ADS in Switzerland and it does not constitute an offer to any other person. This document may only be used by those investors to whom it has been handed out in connection with the offering described herein and may neither directly nor indirectly be distributed or made available to other persons without our express consent. It may not be used in connection with

198

ENFORCING CIVIL LIABILITIES

Elster Group SE is a European public limited liability company (Societas Europaea, or SE), and its registered offices and most of its assets are located outside of the United States. In addition, most of the members of our Administrative Board, our senior management and the experts named herein are residents of Germany and jurisdictions other than the United States. As a result, it may not be possible for you to effect service of process within the United States upon these individuals or upon Elster Group SE or to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. securities laws against Elster Group SE in the United States. Awards of punitive damages in actions brought in the United States or elsewhere are generally not enforceable in Germany. In addition, actions brought in a German court against Elster Group SE or the members of its Administrative Board to enforce liabilities based on U.S. federal securities laws may be subject to certain restrictions; in particular, a German court does generally not award punitive damages. Litigation in Germany is also subject to rules of procedure that differ from the U.S. rules, including with respect to the taking and admissibility of evidence, the conduct of the proceedings and the allocation of costs. Proceedings in Germany would have to be conducted in the German language,and all documents submitted to the court would, in principle, have to be translated into German. For these reasons, it may be difficult for a U.S. investor to bring an original action in a German court predicated upon the civil liability provisions of the U.S. federal securities laws against us, the members of our Administrative Board and senior management and the experts named in this prospectus. In addition, even if a judgment against our company, the non-U.S. members of our Administrative Board, senior management or the experts named in this prospectus based on the civil liability provisions of the U.S. federal securities laws is obtained, a U.S. investor may not be able to enforce it in U.S. or German courts.

LEGAL MATTERS

The validity of the shares and the ADSs and certain other legal matters with respect to German, U.S. federal and New York law will be passed upon for us by Cleary Gottlieb Steen & Hamilton LLP, our German and U.S. counsel. Certain legal matters with respect to German, U.S. federal and New York law in connection with this offering will be passed upon for the underwriters by Latham & Watkins LLP, German and U.S. counsel for the underwriters.

EXPERTS

The consolidated financial statements of Elster Group SE as of December 31, 2009 and 2008 and for each of the years in the three year period ended December 31, 2009 and the financial statement schedule are included in this prospectus which forms part of this registration statement or elsewhere in the registration statement in reliance upon a report of KPMG AG Wirtschaftsprüfungsgesellschaft, independent registered public accounting firm, Marie-Curie-Strasse 30, 60439 Frankfurt am Main, Germany, that appears elsewhere in this prospectus, and upon the authority of that firm as experts in accounting and auditing.

The audit report covering the 2009 consolidated financial statements refers to a change in the accounting for business combinations.

ADDITIONAL INFORMATION

We have filed with the SEC a registration statement on Form F-1 under the Securities Act. This prospectus does not contain all of the information set forth in the registration statement, and some parts have been omitted in accordance with the rules and regulations of the SEC. For further information about us and the ADSs, please refer to the registration statement, which you may access at the SEC’s website, www.sec.gov, or inspect in person, without charge, at the offices of the SEC.

201

You may also obtain a copy at prescribed rates from the Public Reference Section of the SEC at the address set forth below.

After the offering, we will be subject to the information reporting requirements of the Exchange Act applicable to foreign private issuers. As a result, we will be required to file an annual report for 2010 on Form 20-F by June 30, 2011. Beginning with 2011, we will be required to file our annual report on Form 20-F within 120 days after the end of each year. In addition, we will be required to submit current reports on Form 6-K and other information with the Securities and Exchange Commission. We also intend to submit reports on Form 6-K including unaudited quarterly financial information for the first three quarters each year. Such reports and other information we file with the SEC can be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports and other information regarding registrants that file electronically with the SEC.

As a foreign private issuer, we are exempt from the rules under the Exchange Act governing the furnishing and content of proxy statements, and our directors, senior management and principal shareholders are exempt from the reporting and “short-swing profit” recovery provisions contained in Section 16 of the Exchange Act.

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Report of Independent Registered Public Accounting Firm

The Administrative Board
Elster Group SE:

We have audited the accompanying consolidated balance sheets of Elster Group SE and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2009. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Elster Group SE and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009 in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for business acquisitions in 2009.

KPMG AG

Wirtschaftsprüfungsgesellschaft

Frankfurt am Main, Germany

February 23, 2010

F-2

ELSTER GROUP SE

CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31,
(in thousands of US Dollar ($), except per share and share data)


	2009		2008		2007

Revenues	$	1,695,122	$	1,904,501	$	1,735,617
Cost of revenues		-1,191,297		-1,306,257		-1,207,570

Gross profit	$	503,825	$	598,244	$	528,047
Operating expenses
Selling expenses		-159,419		-183,419		-166,521
General and administrative expenses		-136,997		-246,454		-183,913
Research and development expenses		-78,403		-70,707		-60,279
Other operating income (expense), net		14,833		-39,505		-2,938

Operating income	$	143,839	$	58,159	$	114,396
Non-operating expense
Interest expense, net		-55,424		-117,263		-126,896
Other income, net		3,278		2,910		2,851

Total non-operating expenses	$	-52,146	$	-114,353	$	-124,045

Income (loss) from continuing operations before income tax	$	91,693	$	-56,194	$	-9,649
Income tax expense		-39,349		-30,898		-27,959

Net income (loss) from continuing operations	$	52,344	$	-87,092	$	-37,608
Net income from discontinued operations		0		0		114,503

Net income (loss)	$	52,344	$	-87,092	$	76,895

Net income (loss) attributable to noncontrolling interests	$	3,456	$	4,646	$	4,558

Net income (loss) attributable to Elster Group SE	$	48,888	$	-91,738	$	72,337

Basic and diluted earnings (loss) per share from continuing operations	$	1.42	$	-5.68	$	-2.58
Earnings per share from discontinued operations		—		—	$	7.02

Basic and diluted earnings (loss) per share	$	1.42	$	-5.68	$	4.44

Weighted average shares outstanding		16,320,750		16,320,750		16,320,750
Pro forma earnings per share (unaudited)		1.97
Pro forma weighted average shares outstanding (unaudited)		24,854,656

See accompanying notes to consolidated financial statements.

F-3

ELSTER GROUP SE

CONSOLIDATED BALANCE SHEETS
as at December 31,
(in thousands of US Dollar, except share data)


	2009		2008

ASSETS
Current assets
Cash and cash equivalents	$	75,392	$	74,273
Accounts receivable (net of allowance for doubtful accounts of $7,337 and $9,031, respectively)		265,652		281,428
Receivables from related parties		8,615		9,952
Inventories		147,791		192,879
Prepaid expenses		24,656		26,485
Other current assets		40,252		38,750
Income tax refunds		35,518		15,947
Deferred tax assets		18,531		26,743

Total current assets	$	616,407	$	666,457

Noncurrent assets
Property, plant and equipment, net		234,243		255,427
Other intangible assets, net		263,844		280,662
Goodwill		981,571		913,659
Other assets		32,605		36,338
Income tax refunds		0		3,898
Deferred tax assets		12,772		25,040

Total noncurrent assets	$	1,525,035	$	1,515,024

Total assets	$	2,141,442	$	2,181,481

LIABILITIES AND EQUITY
Current liabilities
Pension and other long-term employee benefits, current portion	$	11,306	$	10,880
Payroll, bonuses and related accruals		57,211		53,287
Short-term debt and current portion of long-term		38,969		27,079
Accounts payable		195,635		199,307
Warranties		34,762		32,458
Other current liabilities		77,236		112,237
Deferred revenue		5,823		7,902
Income tax payable		6,429		5,473
Deferred tax liabilities		10,791		16,536

Total current liabilities	$	438,162	$	465,159

Noncurrent liabilities
Pension and other long-term employee benefits, less current portion		152,390		147,102
Payroll, bonuses and related accruals		1,318		1,148
Long-term debt, less current portion		971,400		1,024,107
Mandatorily-redeemable preferred equity certificates and shareholder loan		6,818		6,248
Other non-current liabilities		43,355		4,660
Income taxes payable		16,885		10,986
Deferred tax liabilities		88,410		103,254

Total noncurrent liabilities	$	1,280,576	$	1,297,505

Total liabilities	$	1,718,738	$	1,762,664

Equity
Preferred shares, € 1 nominal value (308,931,920 and 293,217,167 shares issued and outstanding as of December 31, 2009 and 2008)		436,465		410,825
Ordinary shares, € 1 nominal value (16,320,750 shares authorized, issued and outstanding as of December 31, 2009 and 2008)		20,040		20,040
Additional paid-in capital		70,132		103,382
Accumulated deficit		-138,393		-161,641
Accumulated other comprehensive income		28,307		40,278

Total equity attributable to Elster Group SE	$	416,551	$	412,884

Noncontrolling interests	$	6,153	$	5,933

Total equity	$	422,704	$	418,817

Total liabilities and equity	$	2,141,442	$	2,181,481

See accompanying notes to consolidated financial statements.

F-4

ELSTER GROUP SE

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY AND COMPREHENSIVE INCOME (LOSS)

(in thousands of US Dollar, except for number of shares data)


													Accumulated Other Comprehensive Income (Loss)
													Pensions and						Total Equity
	Preferred Shares				Ordinary Shares				Additional				Other						Attributable to
	Number of				Number of				Paid-in		Accumulated		Post-Retirement		Currency				Elster Group		Noncontrolling
	Shares		Amount		Shares		Amount		Capital		Deficit		Plans		Translation		Derivatives		SE		Interests		Total Equity

January 1, 2007		0	$	0		16,320,750	$	20,040		-18,418		-141,279		16,700		-16,468		0		-139,425		7,485	$	-131,940

Share-based compensation
arrangement				0				0		31,100				0		0		0		31,100		0		31,100
Dividends paid																						-3,314		-3,314
Change of noncontrolling interests				0				0														-1,441		-1,441
Comprehensive income																								0
Changes in actuarial gains and past service costs, net of income tax of $-9,198				0				0		0		0		15,360		0		0		15,360		0		15,360
Foreign currency translation adjustment, net of tax effect of $223				0				0		0		0		0		-15,457		0		-15,457		-295		-15,752
Net income				0				0		0		72,337				0		0		72,337		4,558		76,895
Total comprehensive income				0				0		0		72,337		15,360		-15,457		0		72,240		4,263		76,503

December 31, 2007		0		0		16,320,750		20,040		12,682		-68,942		32,060		-31,925		0	$	-36,085	$	6,993	$	-29,092

Exchange of mandatorily-redeemable PECs for Class A shares (Note 15 and 16)		293,217,167		409,864				0		0		0				0		0		409,864		0		409,864
Share-based compensation arrangement				0				0		90,700		0				0		0		90,700		0		90,700
Accretion of preferred dividends				961								-961												0
Dividends paid				0				0														-5,359		-5,359
Change of noncontrolling interests				0				0														-1,743		-1,743
Comprehensive loss
Changes in actuarial gains (losses) and past service costs, net of tax effect of $8,594				0				0		0				-14,612		0		0		-14,612				-14,612
Foreign currency translation adjustment, net of tax effect of $1,003				0				0		0		0				54,045		0		54,045		1,396		55,441
Change in fair value of cash flow hedges, net of tax effect of $-269				0				0		0		0				0		710		710		0		710
Net loss				0				0		0		-91,738				0		0		-91,738		4,646		-87,092
Total comprehensive loss				0				0		0		-91,738		-14,612		54,045		710		-51,595		6,042		-45,553

December 31, 2008		293,217,167		410,825		16,320,750		20,040		103,382		-161,641		17,448		22,120		710		412,884		5,933		418,817

Share-based compensation arrangement				0				0		-33,250		0				0		0		-33,250				-33,250
Accretion of dividends on Class A shares and exchange for preferred shares (Note 16)		15,714,753		25,640								-25,640								0				0
Dividends paid																						-3,048		-3,048
Comprehensive loss
Changes in actuarial gains (losses) and past service costs, net of tax effect of $2,394				0				0		0				-5,215		0		0		-5,215				-5,215
Foreign currency translation adjustment, net of tax effect of $-6				0				0		0		0				-6,046		0		-6,046		-188		-6,234
Change in fair value of cash flow hedges, net of tax effect of $269				0				0		0		0				0		-710		-710				-710
Net income				0				0		0		48,888				0		0		48,888		3,456		52,344
Total comprehensive income				0				0		0		48,888		-5,215		-6,046		-710		36,917		3,268		40,185

December 31, 2009		308,931,920		436,465		16,320,750		20,040		70,132		-138,393		12,233		16,074		0		416,551		6,153		422,704

See accompanying notes to consolidated financial statements

F-5

ELSTER GROUP SE

CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31,
(in thousands of US Dollar ($))


	2009		2008		2007
Cash flows from operating activities
Net income (loss)	$	52,344	$	-87,092	$	76,895
Adjustments to reconcile net income (loss) to cash from operating activities
Depreciation, amortization and impairment losses		88,618		87,380		93,321
Share-based compensation expense		-33,250		90,700		31,100
Share-based compensation expense of discontinued operations		0		0		9,675
Gain on sale of discontinued operations and other businesses, net		0		0		-109,126
Gain on sale of other long-lived assets, net		-2,506		-1,807		-1,454
Accrued interest		2,631		26,386		25,584
Dividends from equity accounted investees, net of income in earnings		2,176		1,724		1,689
Changes in operating assets and liabilities
Change in accounts receivable		32,419		-29,937		-4,529
Change in accounts payable		-14,161		35,435		-11,207
Change in inventories		53,180		-19,822		43,554
Change in other assets and liabilities		-61,830		11,178		-44,582

Cash flows from operating activities	$	119,621	$	114,145	$	110,920
Purchases of property, plant and equipment and intangible assets		-30,492		-81,812		-53,535
Proceeds from disposals of property, plant and equipment and intangible assets		14,838		3,746		14,660
Business combinations, net of cash acquired		-27,389		-2,700		-38,973
Proceeds from sale of discontinued operations, net of cash disposed of		0		0		123,840
Proceeds from disposition of equity accounted investees		0		1,772		0

Net cash flow from (used in) investing activities	$	-43,043	$	-78,994	$	45,992
Cash flows from financing activities
Proceeds from bank borrowings		84,555		130,664		39,704
Repayment of bank borrowings		-157,835		-122,717		-295,826
Repayment of capital lease obligations		-1,103		-940		-183
Purchase of noncontrolling interests		0		-10,337		-15,063
Dividends to noncontrolling interests		-3,048		-5,359		-3,314

Net cash flow used in financing activities	$	-77,431	$	-8,689	$	-274,682

Net increase (decrease) in cash and cash equivalents		-853		26,462		-117,770
Effect of exchange rate fluctuations on cash held		1,972		-5,526		7,561
Increase of cash through change in scope of consolidation		0		363		0
Cash and cash equivalents at January 1		74,273		52,974		163,183

Cash and cash equivalents at December 31	$	75,392	$	74,273	$	52,974

Thereof cash flow from discontinued operations
Operating cash flows		0		0		6,434
Investing cash flows		0		0		-5,613
Financing cash flows		0		0		1,643

Total cash flow	$	0	$	0	$	2,464

Income taxes paid		42,657		50,577		30,283
Interest paid		45,372		74,116		92,883

See accompanying notes to consolidated financial statements

F-6

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of US Dollar, except per share data)


1.	Corporate information

Elster Group SE, Essen, Germany, was originally incorporated as Gold Silver S.à r.l. on October 4, 2004 as a Luxembourg corporation to serve as a vehicle for private equity funds managed by CVC Capital Partners; it acquired the Ruhrgas Industries Group from E.ON Ruhrgas AG on September 12, 2005. After being renamed Nightwatch Investments S.à r.l. and further renamed Elster Group S.à r.l. on March 15, 2006, it was legally reorganized and became Elster Group SE, Luxembourg. Elster Group SE transferred its jurisdiction of incorporation from Luxembourg to Essen, Germany, on February 23, 2010 and is now a German corporation. The name changes and legal reorganizations were transactions under common control of the owners.

The business of Elster Group SE and its subsidiaries (hereinafter referred as the “Company” or “Elster Group”) is the development, manufacturing and distribution of metering solutions for water, gas and electricity, as well as gas utilization and distribution products. The products and services are offered in more than 130 countries for both residential and commercial and industrial customers.

Prior to its disposition in 2007, the industrial furnace segment was a global manufacturer of high-level thermo-chemical heat treatment equipment; the furnace business and other activities unrelated to Elster Group’s primary activities are presented as discontinued operations.


2.	Significant accounting policies

Basis of preparation

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). The accounting policies set out below have been consistently applied to all periods presented in these consolidated financial statements.

Subsequent events

Management has evaluated events occurring subsequent to December 31, 2009 through February 23, 2010, the date these consolidated financial statements were available to be issued, for their effect on these financial statements.

Use of estimates and judgments

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets and intangible assets; allowances for doubtful accounts and sales returns; reserves for obsolete inventory; the valuation and recognition of derivatives, deferred tax assets, and share-based compensation; impairments of goodwill and long lived assets and provisions for employee benefit obligations, warranties, environmental liabilities, income tax uncertainties and other contingencies.

Estimates and underlying assumptions are reviewed on an ongoing basis.

Basis of consolidation

The accompanying consolidated financial statements include the accounts of Elster Group SE, Essen, Germany, and its subsidiaries.

F-7

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Elster Group uses the equity method of accounting for its investment in entities if it has significant influence on their operating and financial policies, but no control.

All intercompany balances and transactions have been eliminated.

Foreign currency translation

The consolidated financial statements are presented in thousands of US Dollars (“USD” or “$”) which is the reporting currency of Elster Group, except for share information and per share amounts.

The assets and liabilities of Elster Group and its subsidiaries for which the functional currency is not the USD, are translated using period-end spot rates, whereas items of income and expense are translated using average exchange rates during the respective periods. Differences arising from such translation are included in accumulated other comprehensive income (loss) in stockholders’ equity. Currency effects from long-term investments in foreign subsidiaries are also included in accumulated other comprehensive income (loss).

Gains and losses from foreign currency transactions are included in other operating income (expenses). The net foreign exchange gain (loss) in 2009, 2008 and 2007 was $14,412, $(45,153) and $(5,709), respectively.

Revenue recognition

Revenues result primarily from sales of Elster Group’s products, the most significant of which are meters for electricity, gas or water. Revenues on product sales are recognized when


	•	persuasive evidence of an arrangement exists;

	•	delivery has occurred;

	•	the sales price is fixed or determinable; and

	•	collectability is reasonably assured.

Elster Group also generates revenue from projects in which the company engineers and manufactures gas utilization or metering products according to customer specifications. These projects are performed under customer project contracts and are referred to as customer contracts. As soon as the outcome of customer project contracts can be estimated reliably, contract revenue and expenses are recognized in profit or loss in proportion to the stage of completion of the contract. Contract revenues include the initial amount agreed in the contract (adjusted to reflect any change orders). The stage of completion is assessed by applying the percentage of contract cost incurred in relation to total estimated contract cost. When the outcome of a customer contract cannot be estimated reliably, contract revenue is recognized only in that extent of contract costs incurred that are likely to be receivable. An expected loss on a contract is recognized immediately.

Elster Group offers integrated solutions to customers, mainly utilities, by bundling certain products with services. In certain transactions, the company bundles some products, known as “smart” meters, with software and services such as software implementation, project management, consulting or maintenance support.

F-8

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

based on their relative fair values and the applicable revenue recognition criteria considered for each item. If software is involved in such an arrangement, revenue recognition is also dependent upon the availability of vendor-specific objective evidence (“VSOE”) of fair value for at least each of the undelivered items. The lack of VSOE, or the existence of extended payment terms or other inherent risks, may affect the timing of revenue recognition for items in such arrangements involving software.

Certain software implementation services are essential to such arrangements. Revenue for software implementation projects that meet the conditions for separation from the bundled arrangement is recognized using either the percentage-of-completion method, in case project costs can be estimated, or the completed contract method if project costs cannot be reliably estimated. Hardware and software maintenance support fees are recognized ratably over the life of the related service contract.

For most of the Group’s contract arrangements that combine deliverables such as smart meters, meter reading system software, installation and project management services, each deliverable is generally considered a separate unit of accounting. The amount of revenue allocable to a delivered item is limited to the amount that the Group is entitled to collect and that is not contingent upon the delivery or performance of additional elements. For a few contracts involving software, there is no evidence of VSOE of undelivered items. Accordingly, the delivered items cannot be separated and revenue is deferred until the last item for which VSOE is unavailable is delivered.

Deferred revenues are reported within liabilities and recognized as revenue in the subsequent period when the applicable revenue recognition criteria are met.

All revenue is recognized net of applicable taxes such as sales tax or value-added tax.

Shipping and handling fees

Shipping and handling fees that are collected from the customers in connection with Elster Group’s sales are recorded as revenue in the consolidated statement of operations. The costs incurred with respect to shipping and handling are recorded as selling expenses and were $24,525, $35,617 and $31,403 in 2009, 2008 and 2007, respectively.

Advertising

Advertising costs are recorded in selling expense and are expensed as incurred. Advertising expenses were $5,550, $7,711 and $6,544 in 2009, 2008 and 2007, respectively.

Income taxes

Deferred taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and on tax loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period in which the change is enacted. Deferred income tax assets are reduced by a valuation allowance to the extent that it is more likely than not that some portion or all of the deferred tax assets will not be realized. Interest and penalties on income taxes are classified as income tax expense.

The Group recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based solely on the technical merits of the position. The tax benefits recognized in the financial statements from such a

F-9

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.

Research and development costs

Research and development costs primarily include employee compensation and third party contracting fees. For software developed by Elster to be marketed or sold, the capitalization of development costs starts after technological feasibility is established. Due to the relatively short period of time between technological feasibility and the completion of product and software development, and the immaterial nature of these costs, Elster generally does not capitalize product and software development expenses.

Cash and cash equivalents

Cash and cash equivalents are comprised of cash on hand, current balances on bank accounts and highly liquid, short-term deposits with an original maturity of three months or less.

Restricted cash balances pledged as collateral to financial institutions in connection with performance and bid guarantees to customers and other sureties of $2,756 and $2,222 as of December 31, 2009 and 2008, respectively, are included in other current assets in the accompanying consolidated balance sheets.

Accounts receivable

The Group’s accounts receivable are generally unsecured and Elster Group is at risk to the extent such amounts become uncollectible. The Group continually monitors accounts receivable balances and records an allowance for doubtful accounts at the time collection becomes questionable based on payment history or age of the receivable. The allowance for doubtful accounts is based on the company’s specific review of outstanding receivables at period end considering Elster Group’s experience. Accounts receivable are written-off against the allowance when Elster Group determines that an account or a portion thereof will not be collected.

Inventories

Inventories are valued at the lower of cost or market using the first-in, first-out method. The cost of inventories includes material, capitalized labor and overhead costs.

Inventory consigned or shipped to customers under an agreement for which revenue has not been recognized by the Company is presented as inventory.

Property, plant and equipment

Property, plant and equipment are stated at cost, less accumulated depreciation and accumulated impairment losses. Plant and equipment under capital leases are stated at the present value of minimum lease payments.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The useful lives are generally as follows:


Buildings			10 to 50 years
Plant and machinery			5 to 15 years
Other equipment			3 to 12 years

Leasehold improvements are capitalized and amortized over the term of the applicable lease, including renewal periods if reasonably assured, or over the useful lives, whichever is shorter.

F-10

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labor, any other costs directly attributable to bringing the asset to a working condition for its intended use. This also includes costs of dismantling, removing the items and restoring the site on which they are located, if required.

Improvements and replacements are capitalized to the extent that they increase the useful economic life or increase the expected economic benefit of the underlying asset. Repair and maintenance costs are expensed as incurred.

Interest cost incurred on borrowings related to construction of major projects that exceed a period of three months of construction is capitalized. Capitalized interest is added to the cost of qualified assets and amortized over the estimated useful lives of the related assets.

Long-lived assets are reviewed for impairment whenever events or circumstances indicate the carrying amount of an asset or asset group may not be recoverable. Assets are grouped and evaluated for impairment at the lowest level for which there are identified cash flows that are largely independent of the cash flows of other groups of assets. The carrying value of a long-lived asset is considered impaired when the estimated undiscounted future cash flow to result from the use of the asset and its eventual disposition is less than its carrying value. The amount of the impairment loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is generally determined using a discounted cash flow analysis.

Business combinations

Business combinations are accounted for using the purchase method of accounting and the consolidated financial statements of Elster Group include the operations of an acquired business from the date of acquisition. Net assets of the acquired company and intangible assets that arise from contractual or legal rights, or are capable of being separated, are recorded at their fair value as of the date of acquisition. Prior to 2009, amounts allocated to in-process research and development (IPR&D) were expensed in the period of acquisition if there was no alternative future use. Costs to complete these IPR&D are expensed as research and development expenses in the subsequent periods as incurred.

In 2009, Elster Group adopted ASC 805, “Business Combinations”, (ASC 805; formerly FASB Statement No. 141(Revised)) which replaces former FASB Statement No. 141. ASC 805 retains the fundamental purchase method of accounting for acquisitions, but requires a number of changes. ASC 805 requires assets acquired and liabilities assumed arising from contingencies to be recorded at fair value on the acquisition date; that IPR&D be capitalized as an intangible asset and amortized over its estimated useful life; and that acquisition-related costs are expensed as incurred. ASC 805 also requires that restructuring costs generally be expensed in periods subsequent to the acquisition date and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes.

Goodwill

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a business combination. Goodwill is reviewed for impairment at least annually.

The goodwill impairment test is a two-step test. First, the fair value of the reporting unit is compared to its carrying value. If the fair value is less than the carrying value, a second step is performed. In the second step, an implied goodwill value is determined by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit. If the implied fair value of the goodwill, as calculated, is less than the carrying amount of the goodwill, an impairment charge is recorded for the difference. Elster Group performs its annual impairment

F-11

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

review of goodwill at December 31 and whenever a triggering event occurs between annual impairment tests.

Other intangible assets

Separately acquired intangible assets are measured at cost. The cost of intangible assets acquired in a business combination is their estimated fair value on the date of the acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization.

Intangible assets with indefinite useful lives are tested for impairment at least annually and a review to determine whether the indefinite life assumption continues to be appropriate is performed. Any changes to the indefinite useful life assumption are recognized prospectively by amortizing the asset over its estimated remaining useful life. Certain trade names acquired in business combinations have been established many years ago, are being used by the Company and are expected to provide an economic benefit in the form of a competitive advantage for an indefinite period of time.

Intangible assets with finite lives are amortized over the estimated economic life using the method that best approximates their benefits (generally the straight-line-method) and are assessed for impairment whenever there is an indication that the intangible asset may be impaired. Subsequent expenditures are only capitalized when they increase the future economic benefit embodied in the specific asset to which they relate. All other expenditures, including expenditures on internally generated goodwill and trade names, are expensed as incurred.

The estimated useful lives for finite-lived intangible assets are as follows:


Customer-related intangible assets			6 to 18 years
Contract-based intangible assets and software			3 to 5 years
Technology-related intangible assets			8 to 15 years

If the estimated useful life changes the carrying value is amortized prospectively over the revised useful life.

Derivative financial instruments

Elster Group enters into forward foreign currency contracts in order to manage currency risks arising from its forecasted and firmly committed foreign currency denominated cash flows. Elster Group enters into these contracts in order to limit future foreign exchange rate risk. Elster Group also enters into interest rate swaps to manage its interest rates on its long-term debt.

Elster Group does not utilize derivative instruments for speculative purposes.

All derivatives are measured at fair value and reported either as current assets, if the fair value is positive, or as current liabilities, if the fair value is negative, on the consolidated balance sheet. All changes in fair value of derivatives are recorded in income unless a derivative is designated as hedging instrument.

In general, Elster Group has not designated any derivatives as hedging instruments and recorded all changes in fair value in income. The change in the fair value of foreign currency derivatives is recognized in operating income, the change in fair value of interest rate swaps in interest expense, net. However, in 2008, Elster Group had designated certain foreign currency forwards as a hedge of foreign currency denominated cash flows. The effective portion of the change in fair value of those foreign currency derivatives designated in a cash flow hedge was initially recognized in other comprehensive income (loss) and the ineffective portion was recognized in operating income; the

F-12

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

balance recorded in other comprehensive income (loss) was subsequently recognized in income in the same period as the hedged item affects income.

Leases

Lease agreements are classified as either capital or operating leases.

When substantially all of the risks and benefits of ownership have been transferred to the Company, the lease is classified as a capital lease. Assets leased under the terms of a capital lease are capitalized at the lower of the fair value of the leased asset or the present value of the minimum lease payments. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term, unless there is reasonable certainty that the Group will obtain ownership by the end of the lease term in which case the period of expected use is the useful life of the asset.

Rent expense on operating leases is recognized on a straight-line basis over the term of the lease including renewal terms if, at inception of the lease, renewal is reasonably assured.

Employee benefits

Defined benefit plans

Certain of Elster Group’s subsidiaries sponsor defined benefit pension plans. In addition, the Group’s subsidiaries in the U.S. and Canada provide other postretirement benefits consisting of healthcare and life insurance benefits. The cost of providing these benefits is determined for each plan using the projected unit credit actuarial valuation method.

The Company recognizes the funded status of its defined benefit pension and other postretirement benefit plans on its consolidated balance sheet and all actuarial gains and losses and unrecognized past service costs and credits are reflected in other comprehensive income (loss).

Also, certain subsidiaries provide termination benefits under terms of applicable laws or collective bargaining agreements or they pay long term service awards to their employees which are recognized when probable and reasonably estimable.

Share-based payments

Rembrandt Holdings SA, Luxembourg, the immediate parent and controlling shareholder (“Rembrandt”), sponsors a Management Equity Program (“MEP”) through Nachtwache Metering Management Vermögensverwaltungs GmbH&Co. KG (“Management KG”), an entity which is controlled by Rembrandt, which grants certain members of senior management of Elster Group share-based payments.

The obligation of the parent related to the MEP arrangement is accounted as a cash-settled plan and remeasured through the date of settlement. Elster Group recognizes compensation expenses for the MEP and a corresponding contribution by the parent in additional paid-in capital within equity because the Company will not make or fund any payments under the MEP.

Warranty provisions

Elster Group offers standard warranties on its products. The estimated cost of warranty claims is accrued based on historical and projected product performance trends and costs. Warranty claims are reviewed in order to identify potential warranty trends. If an unusual trend is noted, an additional warranty accrual may be recorded when a failure event is probable and the cost can be reasonably

F-13

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

estimated. Management continually evaluates the sufficiency of the warranty provisions and makes adjustments when necessary. The noncurrent warranty balance includes estimated warranty claims beyond one year.

The changes in the carrying amount of the warranty provision are as follows:


	2009		2008
January 1	$	32,458	$	33,373
Change through business combinations		111		0
Warranties issued		13,687		9,642
Utilizations		-10,587		-3,692
Changes in estimates and transfers		-1,896		-5,161
Foreign exchange fluctuation		989		-1,704

December 31	$	34,762	$	32,458

Thereof
Current		34,762		32,458
Noncurrent		0		0

The increase in utilizations in 2009 primarily relates to a specific warranty case involving units of a product of our gas segment for a single customer.

Earnings (loss) per share

Earnings (loss) per share is computed by dividing the net income (loss) attributable to ordinary shares by the weighted average number of ordinary shares outstanding for the period. There were no dilutive instruments outstanding.

All stock splits have been recognized retrospectively. For purposes of this computation, cumulative dividends on preferred shares are excluded from net income (loss) attributable to ordinary shares.

Pro forma earnings (loss) per share (unaudited)

The Company and Rembrandt intend to replace the preferred shares with ordinary shares at the time of a contemplated initial public offering of the Company’s ordinary shares. According to those intentions, the number of ordinary shares that is expected to be issued to Rembrandt in exchange for the preferred shares depends on the offering price in a way that the aggregate value of the ordinary shares issued to Rembrandt in exchange for all preferred shares equals the nominal value of all preferred shares plus accreted unpaid preferred dividends. Unaudited pro forma earnings per share are presented alongside the historical earnings per share for the latest period prior to the period of the offering.

Recent accounting pronouncements not yet adopted

In December 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-16 to amend Accounting Standards Codification (“ASC”) Topic 860 to reflect the amendments from FASB Statement No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140” (ASU 2009-16). ASU 2009-16 eliminates the concept of a qualifying special-purpose entity; removes the scope exception from applying the guidance on the consolidation of variable interest entities to qualifying special-purpose entities; changes the requirements for derecognizing financial assets; and requires enhanced disclosure. ASU 2009-16 is effective as of the beginning of

F-14

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

each reporting entity’s first annual reporting period that begins after November 15, 2009, and for interim periods within that first annual reporting period. ASU 2009-16 will be applied prospectively to new transfers of financial assets occurring on or after the effective date. ASU 2009-16 will not have an effect on the Company’s consolidated financial statements, because Elster Group has not transferred financial instruments to a qualifying special-purpose entity.

In December 2009, the FASB issued Accounting Standards Update No. 2009-17 to amend Accounting Standards Codification Topic 810 to reflect the amendments from FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)” (“ASU 2009-17”). ASU 2009-17 replaces the quantitative-based risks and rewards approach with a qualitative approach that focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance. It also requires an ongoing reassessment of whether an entity is the primary beneficiary and requires additional disclosures about an enterprise’s involvement in variable interest entities. ASU 2009-17 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, and for interim periods within that first annual reporting period. The Company is currently evaluating the impact that the adoption of ASU 2009-17 will have on its consolidated financial statements, but ASU 2009-17 is not expected to have a material effect on the Elster Group’s consolidated financial statements.

In September 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13 “Multiple-Deliverable Revenue Arrangements “ (ASU 2009-13) which sets forth requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangements when other items have not yet been delivered, and ASU 2009-14, “Certain Revenue Arrangements that Include Software Elements” which addresses the accounting for revenue arrangements that contain both hardware and software elements. These ASUs which expand the scope and supersede certain guidance in ASC 605-25, “Revenue Recognition—Multiple-Element Arrangements” may be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted, or it may be applied retrospectively to all comparable periods presented. These amendments eliminate the requirement that VSOE be available for all undelivered elements when software is involved or VSOE or third-party evidence be available in multiple-element transactions not involving software. An entity must adopt both ASU 2009-13 and 2009-14 in the same period using the same transition method. The application of these amendments may significantly affect the timing or amount of revenue recognized in multiple element transactions and the Company is currently evaluating the alternative methods of transition and the impact of these pronouncements.


3.	Discontinued Operations

Elster Group’s remaining furnace segment run by the subsidiary Ipsen Group was sold in December 2007. The sale of this business was in accordance with the decision of Elster Group’s management to focus on the Group’s key competence as a metering solutions provider.

Further, in 2007, the Elster Group sold its subsidiary NGT Neue Gebäudetechnik GmbH, Essen, Germany (NGT) which formed part of the gas segment. Management decided to dispose of NGT to focus the Group’s activities on its core business “metering”.

The operations of Ipsen Group and NGT are eliminated from continuing operations as a result of the sale transaction and Elster Group had no continuing involvement in the operations after they were sold.

F-15

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As a result of the disposition, Ipsen Group and NGT are included in discontinued operations in Elster Group’s consolidated statements of operations.

Net income from discontinued operations in 2007 includes the following:


	2007
	Ipsen Group		NGT
Revenues	$	222,619	$	14,907
Expenses and other gains and losses		-215,218		-12,233

Operating income from operations		7,401		2,674

Financial result		-2,508		-2,422

Earnings before taxes of discontinued operations		4,893		252

Income taxes		280		-48

Net income from operations of discontinued operations	$	5,173	$	204
Gain on disposal of discontinued operations, net of tax of $0		96,562		12,564

Net income from discontinued operations	$	101,735	$	12,768

The carrying amounts of Ipsen Group’s assets and liabilities on the date of sale and the consideration, which was entirely received in cash, were as follows:


	2007

Consideration (net of transaction costs of $4,899)	$	120,438

Current assets		69,625
Cash and cash equivalents		19,382
Noncurrent assets		61,198
Goodwill		81,433
Current and noncurrent liabilities		-203,795
Unrecognized actuarial losses, net of tax of $1,172		-2,105
Accumulated foreign translation losses recognized on disposal		-1,862

Net assets of Ipsen Group on the date of sale		23,876

Gain on disposal of Ipsen Group	$	96,562

The carrying amounts of NGT’s assets and liabilities on the date of sale and the consideration, which was entirely received in cash, were as follows:


Consideration in cash (net of transaction costs of $665)	$	22,796

Current assets		12,714
Cash and cash equivalents		12
Noncurrent assets		1,431
Goodwill		6,829
Liabilities		-10,719
Unrecognized actuarial losses, net of tax of $15		-35

Net assets of NGT on the date of sale		10,232

Gain on disposal of NGT	$	12,564

F-16

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


4.	Business Combinations

EnergyICT N.V., Kortrijk, Belgium (2009)

On October 5, 2009, Elster Group acquired a 100% interest in EnergyICT N.V., Kortrijk, Belgium (“EICT”). The consideration is $67,893 in cash: $24,091 was paid upon closing and $43,802 shall be paid three years after closing. The fair value of the consideration after giving effect to discounting of the amount due after three years is $63,603. Transaction costs of $1,733 were expensed.

EICT which develops and provides advanced energy information and communications technology and smart grid solutions and services to utilities, energy distributors and businesses. EICT has sales offices in the United States, the United Kingdom, Germany, France, Australia and the Netherlands.

The cost of the acquisition has been allocated based on preliminary estimates of fair value of the assets and liabilities acquired, and the remaining amount has been assigned to goodwill, as presented in the following table:


			Useful Life
	Fair Values		(Years)
Current assets, including cash and cash equivalents of $2,633	$	8,569
Property, plant and equipment		486		various
Other intangible assets
Tradenames		2,482		indefinite
Customer relationship		8,468		6
Technology-based intangible assets		5,195		6
Other noncurrent assets		145
Deferred tax assets		1,104
Trade payables		-937
Other current liabilities		-4,684
Deferred tax liabilities		-5,556

Total fair value of net assets acquired		15,272

Total purchase price	$	63,603

Goodwill	$	48,331

The goodwill arising from the purchase price allocation primarily derives from the high growth rates that are expected in the future and the expectations of future growth with new customers and new technological developments. These expectations are not reflected in the value of any acquired intangible asset and therefore form part of goodwill. EICT has skilled and high qualified employees as a key success factor in meeting the expectations; the value of the workforce is part of the goodwill. In addition, the expected synergies from combining EICT’s existing business with Elster Group do not represent separate identified assets of EICT, but are part of the goodwill. Management has allocated the goodwill to the Electricity segment. Such goodwill is not deductible for tax purposes.

Coronis (2007)

On June 18, 2007, Elster Group consummated the acquisition of all equity interests in Coronis Systems SA, a designer and developer of advanced meter infrastructure solutions, components and platforms based in France with distribution and support operations in the U.S. and China. The cost of $32,617 included a contingent purchase price of $2,700 and transaction costs of $1,724. The entire

F-17

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

purchase price was paid in cash, including the contingent portion which had been determined in 2007 and paid in 2008.

The purchase price was allocated to the following assets and liabilities acquired based on their estimated fair value, the exceeding amount of $16,573 was allocated to goodwill:


	Fair		Useful Life
	Values		(Years)
Current assets, including cash and cash equivalents of $221	$	6,105
Property, plant and equipment		135
Intangible assets
Tradenames		1,872		10
Customer relationship		1,203		10
Technology-based intangible assets		16,605		8
Deferred tax assets		4,037
Trade payables		-2,587
Other liabilities		-4,858
Deferred tax liabilities		-6,468

Total fair value of net assets acquired		16,044

Total purchase price	$	32,617

Goodwill	$	16,573

Goodwill arising from this business combination has been allocated to the electricity segment. Goodwill is not tax deductible and represents expected synergies from products and markets to the combined entities.

Aeroteh (2007)

On December 20, 2007, Elster Group acquired all equity interests in SC Elster Aeroteh G.P.SA, a manufacturer of gas meters, pressure regulators and measuring stations based in Bucharest, Romania. The purchase price including transaction cost amounting to $1,818 was $9,735 and was paid in cash.

The purchase price has been allocated to the following assets acquired and liabilities based on their estimated fair value; the exceeding amount has been assigned to goodwill:


Noncurrent assets	$	1,269
Current assets, including cash and cash equivalents of $458		6,485
Current and noncurrent liabilities		-4,186

Total fair value of net assets acquired		3,568

Total purchase price		9,735

Goodwill	$	6,167

Goodwill arising from this business combination has been allocated to the gas segment. Goodwill is not tax deductible and represents expected benefits from synergies.

F-18

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


5.	Employee termination and exit costs

Elster has restructured some of its operations, in particular the manufacturing processes of certain products. Associated with these restructuring programs were the termination of manufacturing activities and the transfer of these activities to other Elster sites or to outside manufacturing service providers. In certain cases this caused the closure of an entire Elster site. In addition, the restructuring measures included the reduction of headcount and resulted in employee termination benefit costs.

In 2009, the Gas segment announced a restructuring plan to reduce the headcount at its Osnabrueck, Germany, site. The amount recognized for involuntary termination benefits under the terms of a collective bargaining agreement was $11,077 in 2009. The manufacturing site in Mainz, Germany, was subject to a separate restructuring plan with related expenses for involuntary termination of $2,251 in 2009.

A manufacturing site of Elster’s Gas segment in the United Kingdom was subject to a restructuring plan that included relocation of manufacturing operations to other Elster sites in Slovakia and Germany as well as to external contractors and the closure of that site in the United Kingdom. These restructuring measures led to involuntary termination benefits and related costs of $625 in 2009, $837 in 2008 and $1,849 in 2007.

In 2007, the Gas segment announced a plan to close the plant in Cambridge, Canada. The plan was fully accomplished in 2007 and all employees, except two, were terminated. The Company accrued $386 related to termination benefits in 2007. The entity was not able to sublease the property, the lease had a remaining term until 2011, and the conclusion was reached in 2008 that a sublease was not reasonably obtainable under the changed market conditions; the Company accrued additional charges of $1,670 in 2008.

The Gas segment has executed the relocation of manufacturing operations between plants in the United Kingdom and the closure of one site which resulted in restructuring expenses of $116 in 2009, $333 in 2008 and $1,170 in 2007.

Manufacturing sites of the Water segment in Germany have been involved in a number of individual restructuring programs aimed at downsizing the size of the operations, resulting in significant reduction of the number of employees. Each program was accompanied by a collective bargaining agreement negotiated with the worker’s council. The amount recognized for involuntary termination benefits was $1,346 in 2008 and $2,528 in 2007.

In 2009, the Water segment initiated several restructuring plans for the operations in the United Kingdom, including workforce reduction in Luton, the closure of a site in Chesterfield and outsourcing of manufacturing to Malaysia. The total amount recognized in 2009 was $1,516.

The Spanish operation of the Water segment has been subject to a number of restructuring programs relating to outsourcing projects and production relocations and therefore accrued involuntary termination benefits of $2,438, $1,662 and $3,144 in 2009, 2008 and 2007, respectively.

In 2009, Elster Group announced the relocation of manufacturing of water meters from Russia and Poland to Slovakia. Restructuring expenses of $1,526 related to the relocation have been recognized, primarily for inventory write downs and penalties paid to suppliers.

Several other Elster subsidiaries in Italy, France, Belgium, the Netherlands, Luxembourg, Hungary, Brazil and the United States implemented restructuring measures aimed to improve operational efficiency and recorded charges of $2,762 in 2009, $919 in 2008 and $2,723 in 2007 for outsourcing and relocation projects.

F-19

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In addition to the restructuring measures, Elster subsidiaries in Italy, Germany, France, the United Kingdom, Slovakia, Australia, South Africa, Colombia, Argentina, Brazil and the United States recognized expenses for involuntary termination benefits as the consequence of restructuring measures and capacity adjustments amounting to $3,052, $3,690 and $3,391 in 2009, 2008 and 2007, respectively.

The following summary presents employee termination and exit costs by segment:


	Gas						Electricity						Water
	2009		2008		2007		2009		2008		2007		2009		2008		2007
Employee termination and exit costs	$	16,880	$	5,803	$	7,240	$	842	$	229	$	659	$	7,310	$	4,425	$	7,292


	Total Segments						Corporate						Total
	2009		2008		2007		2009		2008		2007		2009		2008		2007

Employee termination and exit costs	$	25,032	$	10,457	$	15,191	$	331	$	0	$	0	$	25,363	$	10,457	$	15,191

The charges for employee termination and exit activities were recognized in the following captions of the statement of operations:


	2009		2008		2007
Cost of revenues	$	18,847	$	4,800	$	8,203
Selling expenses		2,912		1,589		2,461
General and administrative expenses		2,440		3,106		3,296
Research and development expenses		1,164		962		1,231

	$	25,363	$	10,457	$	15,191

The following table reflects the change in the restructuring liability in 2009, 2008 and 2007:


	Liability at								Foreign		Liability at
	January 1,				Payments				Exchange		December 31,
	2009		Accrued		Made		Releases		Rate Change		2009

Accrued liability	$	2,219	$	10,104	$	-1,879	$	-217	$	541	$	10,768

Thereof:
Current		2,096										9,884
Noncurrent		123										884


	Liability at								Foreign		Liability at
	January 1,				Payments				Exchange		December 31,
	2008		Accrued		Made		Releases		Rate Change		2008

Accrued liability	$	4,505	$	2,430	$	-3,519	$	-873	$	-324	$	2,219

Thereof:
Current		4,482										2,096
Noncurrent		23										123

F-20

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Liability at								Foreign		Liability at
	January 1,				Payments				Exchange		December 31,
	2007		Accrued		Made		Releases		Rate Change		2007
Accrued liability	$	13,038	$	3,654	$	-10,389	$	-2,341	$	543	$	4,505

Thereof
Current		12,730										4,482
Noncurrent		308										23

Elster Group does not expect to incur additional costs under the announced restructuring plans.


6.	Interest expense, net

Interest expense, net consists of the following:


	2009		2008		2007

Interest income
Interest income on bank deposits	$	2,467	$	2,574	$	2,087
Other		102		210		1,878

		2,569		2,784		3,965

Interest expense
Interest on debt		38,158		77,604		99,488
Payments from interest rate swaps		8,713		-5,839		-11,782
Interest on mandatorily redeemable preferred equity certificates and shareholder loan		369		26,353		25,584
Change in fair value of interest rate swaps		3,824		16,770		8,046
Other		6,929		5,159		9,525

		57,993		120,047		130,861

Interest expense, net	$	55,424	$	117,263	$	126,896

Other interest expenses primarily comprise the amortization of deferred financing fees related to the senior facilities agreement.


7.	Income taxes

The components of income tax expense of continuing operations are as follows:


	2009		2008		2007

Current income tax
Germany	$	10,339	$	9,779	$	16,685
Foreign		31,543		29,293		24,320

		41,882		39,072		41,005

Deferred income tax
Germany		-158		-4,609		14,591
Foreign		-2,375		-3,565		-27,637

		-2,533		-8,174		-13,046

Income tax expense from continuing operations	$	39,349	$	30,898	$	27,959

F-21

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Income (loss) from continuing operations before income taxes originated in the following jurisdictions:


	2009		2008		2007
Germany	$	-28,809	$	-82,436	$	-1,041
Foreign		120,502		26,242		-8,608

	$	91,693	$	-56,194	$	-9,649

Total income tax expenses, including the items directly recorded in equity consist of the following:


	2009		2008		2007

Income tax from continuing operations	$	39,349	$	30,898	$	27,959
Income tax from discontinued operations		0		0		-232
Income tax recognized in other comprehensive income (loss)		-2,657		-9,328		8,975

	$	36,692	$	21,570	$	36,702

Reconciliation between the expected income tax expense (benefit) based on German corporate income tax rates to income tax expense from continuing operations reported in the consolidated statements of operations is provided in the following table:


	2009			2008			2007

Income (loss) from continuing operations before taxes	$	91,693		$	-56,194		$	-9,649

“Expected” income tax expense (benefit)		14,515			-8,896			-2,545
Foreign tax rate differentials		2,995			2,531			-9,632
German municipal trade tax		6,431			5,065			7,932
Tax exempt income		-2,636			-1,040			-2,328
Non deductible expenses		4,354			6,484			17,938
Non deductible expenses arising from Management equity program		-5,263			14,358			8,204
Uncertain tax positions		8,175			2,870			2,946
Prior year tax adjustments		-71			-3,204			3,095
Changes in tax rate and tax law		308			560			-8,868
Changes in valuation allowances		12,560			11,380			13,116
Tax effects from basis differences in investments in subsidiaries		366			1,361			796
Tax credits		-3,224			-1,370			-2,225
Withholding tax effects		1,576			980			700
Others		-737			-181			-1,170

Actual income tax expense	$	39,349		$	30,898		$	27,959

Effective income tax rate		42.9	%		-55.0	%		-289.8	%

A significant driver of the Company’s effective income tax rates in each period presented is attributable to the non-deductible expenses arising from the Management equity program (MEP) which is sponsored by the parent. The parent does not obtain a deduction for such charges on its income tax return.

F-22

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In 2009, the Company recorded valuation allowances of $13,076 on a carryforward of interest expense deductions in Germany that will be subject to restrictions on its future utilization as a result of a corporate reorganization in Germany and the tax loss carryforward of a German subsidiary that transferred assets and relocated operations to other subsidiaries and is no longer expected to recover the deferred tax asset.

In 2007, a new tax law was enacted in Germany taking effect on January 1, 2008 which reduces federal corporate tax rates in Germany from 25% to 15% (26.38% and 15.83%, including solidarity tax increment). For deferred income tax purposes, this reduction of the corporate income tax rate in Germany had been taken into account in 2007, as deferred taxes are required to be calculated using the enacted tax rate applicable to the year in which the deferred tax item is expected to be realized or settled. The tax rate change in Germany contributed a deferred income tax benefit of $8,461 in 2007.

Deferred income tax assets and liabilities as of December 31, 2009 and 2008 consist of the following:


	2009				2008
	Deferred Tax		Deferred Tax		Deferred Tax		Deferred Tax
	Asset		Liability		Asset		Liability
Inventories	$	6,078	$	371	$	9,141	$	2,740
Receivables and other assets		6,935		19,411		4,909		10,088
Prepaid expenses		53		1,670		548		549
Tangible fixed assets		3,555		32,433		4,970		29,710
Other intangible assets		8,778		84,690		41		82,629
Goodwill		0		4,681		0		3,899
Shares in related companies		0		3,174		0		2,804
Provisions for pensions		26,765		0		23,406		0
Other liabilities		35,821		16,881		17,963		8,000
Tax loss and tax credit carryforwards		38,405		0		55,170		0
Valuation allowance on deferred tax assets		-30,977		0		-43,736		0

	$	95,413	$	163,311	$	72,412	$	140,419

Net deferred tax liabilities			$	-67,898			$	-68,007

In assessing the recoverability of deferred tax assets, Elster Group’s management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences become deductible. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are recoverable, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances as at December 31, 2009. The amount of the deferred tax asset considered recoverable, however, could be reduced in the near term if the Company’s estimates of future taxable income during the carryforward period were reduced.

Based on the results of this assessment, valuation allowances were recorded against deferred taxes. These valuation allowances relate primarily to certain types of operating tax loss and foreign tax credit carryforwards.

F-23

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The amount and the expiration period of tax loss carryforwards are as follows as of December 31, 2009:



Expiration of tax loss carryforwards
Within one year	$	3,434
Within two years		3,160
Within three years		3,914
Within four years		0
Within five years or later		15,642
Indefinite		67,400

Total tax loss carryforwards	$	93,550

In addition to net operating losses at federal corporate income tax level, there are German trade tax and foreign state and local income tax losses of $54,392 as of December 31, 2009 available to the Company. The respective tax rates vary between 1.6% and 15.0%. Tax credit carryforwards of $1,503 do not expire and can be used indefinitely.

Changes in valuation allowances comprise the following elements:


	Temporary		Tax Losses
Valuation Allowances Arising from	Differences		Carryforward		Total

As of January 1, 2007	$	2,904	$	34,633	$	37,537

Charged (credited) to income tax provision (benefit)		575		14,372		14,947
Reversals		-1,680		0		-1,680
Utilization/Expiration of tax losses		0		-918		-918
Effect of foreign exchange fluctuation and tax rate changes		-48		-7,476		-7,524

As of December 31, 2007	$	1,751	$	40,611	$	42,362

Charged (credited) to income tax provision (benefit)		657		14,785		15,442
Reversals		-350		0		-350
Utilization/Expiration of tax losses		0		-3,299		-3,299
Effect of foreign exchange fluctuation and tax rate changes		47		-10,466		-10,419

As of December 31, 2008	$	2,105	$	41,631	$	43,736

Charged (credited) to income tax provision (benefit)		15		18,346		18,361
Reversals		-2,096		0		-2,096
Utilization/Expiration of tax losses		0		-29,059		-29,059
Effect of foreign exchange fluctuation and tax rate changes		422		-387		35

As of December 31, 2009	$	446	$	30,531	$	30,977

F-24

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits including all German corporate and trade tax as well as foreign tax jurisdictions is as follows:


	2009		2008		2007
Balance at beginning of the year	$	23,184	$	15,502	$	7,203
Additions for tax positions taken in the current year		18,271		8,114		7,783
Reductions for tax positions taken in prior years		-130		-31		-61
Effects of exchange rate changes		461		-401		577

Balance at the end of the year	$	41,786	$	23,184	$	15,502

During the years ended December 31, 2009, 2008 and 2007, the Company recognized $205, $604 and $268, respectively, in interest and penalties related to unrecognized tax benefits. As of December 31, 2009 and 2008, total interest and penalties related to unrecognized tax benefits accrued were $1,409 and $1,153, respectively.

Included in the balance of unrecognized tax benefits at December 31, 2009 and 2008 were potential benefits of $18,558 and $10,127, respectively, that, if recognized, would affect the Company’s effective tax rate. The Company anticipates recognizing a range of $1,797 to $3,237 of the total amount of unrecognized tax benefits within the next twelve months as a result of statute of limitations and tax examinations expected to be finalized within the next twelve months in several countries.

Tax years that remain subject to examination in the Group’s major tax jurisdictions are:


	Years Subject
Major Tax Jurisdictions	to Examination

Germany		Subsequent to 2004
U.S. Federal		Subsequent to 2005

F-25

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


8.	Earnings (loss) per share

The following table summarizes the information used to compute earnings (loss) per share:


	2009		2008		2007

Historical earnings (loss) per share
Numerator
Net income (loss) from continuing operations attributable to Elster Group SE	$	48,888	$	-91,738	$	-42,166
Accretion of dividends on preferred shares	$	-25,640		-961		0

Net income (loss) from continuing operations attributable to ordinary shares	$	23,248	$	-92,699	$	-42,166

Net income from discontinued operations		0		0		114,503
Net income (loss) attributable to ordinary shares	$	23,248	$	-92,699	$	72,337

Denominator
Weighted average number of ordinary shares outstanding adjusted for stock split (see note 16)		16,320,750		16,320,750		16,320,750

Earnings (loss) per ordinary share
Basic and diluted net loss from continuing operations per ordinary share, adjusted for stock split (see note 16)	$	1.42	$	-5.68	$	-2.58

Net income from discontinued operations per ordinary share, adjusted for stock split (see note 16)	$	0	$	0	$	7.02

Basic and diluted net income (loss) per ordinary share, adjusted for stock split (see note 16)	$	1.42	$	-5.68	$	4.44

Pro forma earnings per share (unaudited)
Numerator
Net income used to compute pro forma earnings per share	$	48,888

Denominator
Weighted average number of ordinary shares outstanding, adjusted for stock split (see note 16)		16,320,750
Pro forma adjusted to reflect weighted average effect of conversion of preferred shares into ordinary shares (see note 23)		8,533,906

Weighted average number of ordinary shares outstanding, used to compute pro forma loss per ordinary share		24,854,656

Pro forma basic and diluted earnings per ordinary share		1.97

F-26

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


9.	Accounts receivable

Accounts receivable consist of the following as of December 31:


	2009		2008
Customer contracts	$	12,791	$	17,744
Trade accounts receivables		260,198		272,715

Accounts receivable before valuation allowance		272,989		290,459

Less valuation allowances		-7,337		-9,031

Accounts receivable	$	265,652	$	281,428

Customer contracts comprise the following:


	2009		2008

Aggregate costs incurred	$	95,373	$	67,158
Recognized profits		16,956		11,964
Recognized losses		-273		-563
Progress billings		-99,265		-60,815

Customer contracts	$	12,791	$	17,744

The customer contracts are expected to be completed within the next twelve months.

The following schedule shows the development of the valuation allowance for doubtful accounts:


	2009		2008

Balance at beginning of the year	$	9,031	$	7,912
Additions		3,707		3,633
Write offs		-5,732		-1,786
Effects of exchange rate changes		331		-728

Balance at end of the year	$	7,337	$	9,031


10.	Inventories

Inventories consist of the following as of December 31:


	2009		2008

Raw materials	$	101,589	$	126,395
Work in progress		14,989		20,429
Finished goods		32,216		48,689

		148,794		195,513

Reserves		-1,003		-2,634

Inventories	$	147,791	$	192,879

Inventories of $23,750 held by certain of Elster Group’s subsidiaries have been pledged as collateral in accordance with the terms of Elster Group’s senior facility agreement. See Note 14 for further information.

F-27

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


11.	Property, plant and equipment

Property, plant and equipment, including assets under capital lease, consist of the following as of December 31:


			Accumulated
2009	Cost		Depreciation		Net
Land	$	35,678	$	427	$	35,251
Buildings		63,930		10,915		53,015
Plant and machinery		161,264		46,081		115,183
Other equipment		25,942		2,299		23,643
Construction in process		7,671		520		7,151

Property, plant and equipment	$	294,485	$	60,242	$	234,243


			Accumulated
2008	Cost		Depreciation		Net

Land	$	37,631	$	1,900	$	35,731
Buildings		69,749		9,636		60,113
Plant and machinery		143,693		29,533		114,160
Other equipment		31,837		7,928		23,909
Construction in process		21,645		131		21,514

Property, plant and equipment	$	304,555	$	49,128	$	255,427

Depreciation expense, including depreciation of assets under capital lease of $923, $770 and $1,102, was $42,051, $42,403 and $43,254 in 2009, 2008 and 2007, respectively. Interest charges in the amount of $738, $658 and $758 were capitalized in connection with construction projects during the years 2009, 2008 and 2007, respectively.

During the years 2009, 2008 and 2007, impairment losses were recognized amounting to $941, $722 and $1,195, respectively.

Elster Group leases machinery and equipment used in manufacturing under a number of capital lease agreements. Cost of the assets under capital lease at December 31, 2009 and 2008 was $16,310 and $15,376, respectively. Accumulated depreciation at December 31, 2009, and 2008 was $5,727 and $5,112, respectively.

Real estate property with a carrying amount of $24,945 (2008: $24,546) serves as collateral for unfunded Altersteilzeit employee benefits in Germany (see Note 13). In addition, equipment with a carrying amount of $34,107 that is owned by certain subsidiaries serves as collateral in accordance with the terms of Elster Group’s senior facility agreement. See Note 14 for further information.

F-28

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


12.	Goodwill and other intangible assets

Intangible assets consist of the following as of December 31:


			Accumulated
2009	Cost		Amortization		Net
Trade names and brands	$	28,584	$	7,982	$	20,602
Customer related assets		223,071		78,667		144,404
Contract-based intangible assets		47,795		36,460		11,335
Technology-related intangible assets		161,954		74,451		87,503

Other intangible assets	$	461,404	$	197,560	$	263,844

Goodwill	$	981,571	$	0	$	981,571


			Accumulated
2008	Cost		Amortization		Net

Trade names and brands	$	25,526	$	4,500	$	21,026
Customer related assets		211,385		54,729		156,656
Contract-based intangible assets		38,636		31,878		6,758
Technology-related intangible assets		152,499		56,277		96,222

Other intangible assets	$	428,046	$	147,384	$	280,662

Goodwill	$	913,659	$	0	$	913,659

Amortization expense was $43,385, $42,939 and $42,517 in 2009, 2008 and 2007, respectively.

The following presents the estimated amortization expense for intangible assets that are subject to scheduled amortization for each of the next five fiscal years:


2010	$	44,204
2011		37,924
2012		33,156
2013		26,613
2014		24,357

The carrying amount of intangible assets with an indefinite useful life, i.e. certain trade names, is $14,419 and $16,718 at December 31, 2009 and 2008, respectively.

In 2009, impairment losses of $2,241 (2008: $1,317) were recorded in cost of revenues on certain trade names and brands of Elster Group’s Gas and Water segments; the carrying amount of these trade names and brands at December 31, 2009 is $9,513 and represents the fair value of such assets. The estimation of the fair value is based on discounted cash flows and involves significant unobservable inputs.

F-29

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Goodwill has been allocated to the segments as follows:


							Consolidated
	Gas		Electricity		Water		Totals
January 1, 2008		593,396		182,897		151,423		927,716

Additions		7,707		2,223		59		9,989
Foreign currency translation		-18,562		-5,484		0		-24,046

December 31, 2008	$	582,541	$	179,636	$	151,482	$	913,659

Additions		0		48,331		3,822		52,153
Foreign currency translation		12,825		2,934		0		15,759

December 31, 2009	$	595,366	$	230,901	$	155,304	$	981,571

Additions to goodwill in 2009 result from business combinations, primarily the acquisition of EICT (see Note 4). Additions to goodwill in 2008 are attributable to the acquisitions of noncontrolling interests in subsidiaries which were accounted similar to business combinations under the accounting standards then applicable.


13.	Pension and other long-term employee benefits

Elster Group provides postretirement benefits for most of its employees, either directly or by contributions to pension funds managed by third parties. The benefits provided vary according to legal regulations, tax requirements and economic conditions of the countries. Certain group subsidiaries provide benefits under defined benefit pension plans. These benefits are normally based on the employees’ remuneration and years of service. German pension benefit plans are unfunded. Funded defined benefit pension plans mainly exist in the US, the UK, Canada, Australia and Belgium. These funded plans involve contributions by Elster Group to a separate pension fund that invests in accordance with the respective investment guideline and local law.

The US based subsidiaries provide postretirement healthcare and life insurance benefits. The German subsidiaries participate in an early retirement program designed to create an incentive for employees, within a certain age group, to retire early (Altersteilzeit). The measurement date for the defined benefit plans was December 31.

For defined contribution plans, the subsidiaries make contributions to pension funds managed by third parties as required by law or collective bargaining agreements or voluntarily. Total costs recognized for defined contribution pension plans in the accompanying statements of operations in 2009, 2008 and 2007 were $25,512, $23,879 and $20,506 respectively.

The cost of employees’ benefits under defined benefit and defined contribution plans is allocated to the functional costs appropriate to the employees in the statements of operations.

F-30

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

German pension plan

The components of net periodic benefit costs for German benefit plans are as follows:


	Pension Benefits						Other Benefits
Net Periodic Benefit Cost	2009		2008		2007		2009		2008		2007
Service cost	$	1,106	$	1,292	$	2,047	$	3,068	$	2,134	$	2,480
Interest cost		5,115		4,630		4,254		463		494		372
Gain on curtailments		-74		0		0		0		0		0
Amortization of net (gain) loss		-507		-653		-149		0		0		0

Net periodic benefit cost	$	5,640	$	5,269	$	6,152	$	3,531	$	2,628	$	2,852


	Pension Benefits				Other Benefits
Change in Benefit Obligation	2009		2008		2009		2008

Benefit obligation at beginning of year	$	91,799	$	93,411	$	9,166	$	10,108
Service cost		1,106		1,292		3,068		2,134
Interest cost		5,115		4,630		463		494
Actuarial loss		5,879		1,308		0		0
Curtailments/Settlements		-67		0		0		0
Benefits paid		-4,747		-4,811		-3,812		-3,166
Exchange rate changes		3,026		-4,031		266		-404

Benefit obligation at end of year	$	102,111	$	91,799	$	9,151	$	9,166

Unfunded status at end of year	$	102,111	$	91,799	$	9,151	$	9,166

Liability consists of:


	2009		2008		2009		2008

Current liabilities	$	5,186	$	4,906	$	2,533	$	3,141
Noncurrent liabilities	$	96,925	$	86,893	$	6,618	$	6,025

Total accumulated benefit obligation for German defined benefit pension plans was $94,129 and $84,832 as of December 31, 2009 and 2008, respectively.

The actuarial loss impacting the projected benefit obligation was primarily due to decreases in the discount rates.

F-31

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amounts recognized for German defined benefit plans in accumulated other comprehensive income (loss) consist of the following:


	2009		2008		2007
Actuarial gains, net in the accumulated other comprehensive income (loss) at the beginning of year	$	17,667	$	19,540		5,622
Net actuarial gain (loss) reported in the period		-6,106		-1,220		14,923
Amortization of actuarial gain, net		-507		-653		-149
Curtailment/Settlement		-7		0		0
Disposal of NGT		0		0		-50
Disposal of Ipsen Group		0		0		-806

Actuarial gains, net in the accumulated other comprehensive income (loss) at the end of year	$	11,047	$	17,667		19,540

Actuarial gains of $115 included in accumulated other comprehensive income (loss) will be amortized into income in 2010.

The discount rate reflects the time value of money and the characteristics of the liability, i.e., the estimated timing of the benefit payments. Therefore the determination of discount rates is based on rates of return as of the measurement date. Assumptions regarding future mortality are based on published statistics and mortality tables.

The weighted-average assumptions used to determine German benefit obligations as at December 31 are:


	Pension Benefits						Other Benefits
	2009			2008			2009			2008

Discount rate		5.3	%		5.7	%		5.1	%		4.9	%
Rate of compensation increase		2.8	%		2.8	%		—			—

The weighted-average assumptions used to determine German net periodic benefit cost for years 2009, 2008 and 2007 are:


	Pension Benefits									Other Benefits
	2009			2008			2007			2009			2008			2007

Discount rate		5.7	%		5.5	%		4.5	%		4.9	%		4.3	%		3.2	%
Rate of compensation increase		2.8	%		2.8	%		2.8	%		—			—			—

The benefits expected to be paid out of German defined benefit plans over the next ten years are:


	Pension		Other
	Benefits		Benefits

2010	$	5,186	$	3,426
2011		5,372		2,882
2012		5,496		2,678
2013		5,604		2,072
2014		5,929		1,738
Years 2015—2019	$	31,889	$	5,477

F-32

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Foreign pension plans

The components of net periodic benefit costs for all foreign benefit plans are as follows:


	Pension Benefits						Other Benefits
Net Periodic Benefit Cost	2009		2008		2007		2009		2008		2007
Service cost	$	411	$	365	$	1,015	$	418	$	555	$	1,056
Interest cost		4,091		4,262		4,910		1,642		1,751		2,123
Expected return on plan assets		-2,967		-4,225		-5,178		0		0		0
Amortization of prior service cost		0		-78		-521		-1,260		-1,176		-1,176
Gain/loss on settlements or curtailments		106		0		-3,562		0		0		0
Amortization of net (gain) loss		105		-557		-126		-629		-739		-216

Net periodic benefit cost	$	1,746	$	-233	$	-3,462	$	171	$	391	$	1,787


	Pension Benefits				Other Benefits
Change in Benefit Obligation	2009		2008		2009		2008

Benefit obligation at beginning of year
	$	66,913	$	72,803	$	29,124	$	27,844
Service cost		411		365		418		555
Interest cost		4,091		4,262		1,642		1,751
Actuarial loss (gain)		4,230		-357		-208		1,577
Curtailments/Settlements		-1,043		0		0		0
Benefits paid		-5,104		-4,090		-2,707		-2,460
Transfers		499		-41		0		0
Exchange rate changes		2,270		-6,029		108		-143

Benefit obligation at end of year	$	72,267	$	66,913	$	28,377	$	29,124


Change in plan assets	2009		2008		2009		2008

Fair value of plan assets at beginning of year	$	39,021	$	58,300	$	0	$	0
Actual return on plan assets		7,635		-14,171		0		0
Transfers		487		0		0		0
Employer contributions		5,097		2,838		0		0
Plan participants’ contributions		101		87		0		0
Curtailments/Settlements		-1,022		0		0		0
Benefits paid		-4,756		-3,781		0		0
Exchange rate changes		1,647		-4,252		0		0

Fair value of plan assets at end of year	$	48,210	$	39,021	$	0	$	0

Unfunded status at end of year	$	24,057	$	27,892	$	28,377	$	29,124


Liability consists of:	2009		2008		2009		2008

Current liabilities	$	244	$	356	$	3,343	$	2,477
Noncurrent liabilities	$	23,813	$	27,536	$	25,034	$	26,647

Total accumulated benefit obligation for all foreign defined benefit pension plans was $71,119 and $66,043 as of December 31, 2009 and 2008, respectively.

F-33

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Information for pension plans with an accumulated benefit obligation in excess of plan assets as of December 31:


	2009		2008
Projected benefit obligation	$	68,182	$	64,515
Accumulated benefit obligation	$	67,901	$	64,175
Fair value of plan assets	$	44,795	$	37,081

Amounts recognized for all foreign defined benefit plans in accumulated other comprehensive income consist of the following:


	2009		2008		2007

Actuarial gains, net accumulated in the other comprehensive income (loss) at the beginning of year	$	4,509	$	24,588	$	12,251
Net actuarial gain (loss) reported in the period		668		-18,783		15,150
Amortization of actuarial gain, net		-524		-1,296		-342
Curtailment/Settlement		127		0		0
Disposal of Ipsen Group		0		0		-2,471

Actuarial gains, net accumulated in the other comprehensive income (loss) at the end of year	$	4,780	$	4,509	$	24,588

Past service credits accumulated in the other comprehensive income (loss) at the beginning of year	$	6,200	$	7,454	$	9,151
Amortization of past service credits		-1,260		-1,254		-1,697

Past service credits accumulated in the other comprehensive income (loss) at the end of year	$	4,940	$	6,200	$	7,454

Net amount recognized in accumulated other comprehensive income (loss) at the end of year	$	9,720	$	10,709	$	32,042

For foreign defined benefit plans actuarial gains of $596 and past service credits of $1,217 included in accumulated other comprehensive income (loss) will be amortized into income in 2010.

The weighted-average assumptions used to determine foreign benefit obligations as at December 31 are:


	Pension Benefits						Other Benefits
	2009			2008			2009			2008

Discount rate		5.6	%		6.4	%		5.5	%		6.5	%
Rate of compensation increase		3.3	%		3.4	%		—			—

The weighted-average assumptions used to determine foreign net periodic benefit cost for years 2009, 2008 and 2007 are:


	Pension Benefits									Other Benefits
	2009			2008			2007			2009			2008			2007

Discount rate		6.4	%		6.2	%		4.3	%		6.5	%		6.3	%		5.0	%
Expected return on plan assets		7.6	%		7.3	%		7.8	%		—			—			—
Rate of compensation increase		3.4	%		3.4	%		3.4	%		—			—			—

F-34

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Assumed health care cost trend rates at December 31 are:


	Other Benefits
	2009			2008			2007
Health care cost trend rate assumed for the next year		6.9	%		8.0	%		9.0	%
Rate to which the cost trend rate is assumed to decline		5.0	%		5.0	%		5.0	%
(the ultimate trend rate)
Year that the rate reaches the ultimate trend rate		2012			2012			2012

The table below shows the impact of a one percent point change in the assumed rate of health care cost:


	1-% Increase		1-% Decrease

Effect on total of service and interest cost	$	74	$	-105
Effect on postretirement benefit obligation	$	-2,422	$	2,652

The fair value of Elster Group pension plan assets as of December 31, 2009 is measured as followed:


			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)

Investment funds	$	45,867	$	45,849			$	18
Insurance contracts		2,343				2,343		0

Total Assets	$	48,210	$	45,849	$	2,343	$	18

Elster Group pension plan assets involve investments funds and guaranteed insurance contracts managed by local trustees and fund managers in several foreign countries. Consistent with their investment strategy and local laws and regulations, the investment funds and insurance carriers invest in a diversified portfolio of equity securities (2009 and 2008: 59%), fixed income securities (2009: 33%, 2008: 38%), real estate (2009: < 1%, 2008: 2%) and other assets (2009: 8%, 2008: 1%).

The fair value of investment funds held by the pension plan is the quoted price of the investment or mutual fund share on the last business day of the year. The insurance contracts have a guaranteed return on the accrued balances and future premiums plus a participation right in higher returns generated by the investments made. The fair values have been obtained from the insurance carriers.

On average, the expected rate of return is 7.5% on equity securities and 5.5% on fixed income instruments. The respective rates of return take into account country-specific conditions and are based, among other things, on interest and dividend income expected over the long term, as well as increases in the value of the portfolio after deduction of directly allocable taxes and expenses.

F-35

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Elster expects to pay $5,261 in contributions to defined benefit plans in 2010. The benefits expected to be paid over the next ten years are:


	Pension Benefits		Other Benefits
2010	$	3,819	$	2,326
2011		4,142		2,231
2012		4,494		2,200
2013		4,438		2,105
2014		4,501		2,044
Years 2015—2019	$	23,541	$	10,028


14.	Debt


							Principal in
							Currency of
	Effective Interest Rate %						Debt		Maturity		Carrying Amount
	2009		2008		2007						2009		2008

Senior facility agreement, comprised of:											$	959,216	$	965,456
Tranche A
Euro-denominated		2.3		4.14		5.96		40,000		Sept. 30, 2012		4,937		13,181
GBP-denominated		2.02		3.67		7.81		83,502		Sept. 30, 2012		25,718		41,509
Tranche B
Euro-denominated		2.8		4.87		6.55		227,190		Sept. 30, 2013		327,182		318,126
USD-denominated		2.29		2.58		7.63		137,076		Sept. 30, 2013		137,093		137,203
Tranche C
Euro-denominated		3.3		5.37		6.80		227,190		Sept. 30, 2014		327,189		318,209
USD-denominated		2.79		3.08		7.88		137,076		Sept. 30, 2014		137,097		137,228

Other bank loans		various		various		various						44,630		78,700

Capital leases												6,523		7,030

Total debt											$	1,010,369	$	1,051,186

Thereof:
Noncurrent debt											$	971,400	$	1,024,107
Current debt											$	38,969	$	27,079

The following table presents the maturity of principal payments for debt (other than capital leases):


Debt Principal Payments

2010	$	38,969
2011		0
2012		36,461
2013		464,208
2014		464,208

	$	1,003,846

A syndicate of banks represented by Deutsche Bank AG has provided subsidiaries of Elster Group with financing through a combination of term loans (composed of Tranche A, B and C, a revolving credit facility, an ancillary facility and a bonding facility, which financing arrangement is hereinafter referred to as “senior facility agreement” (SFA). The SFA was used to finance the

F-36

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Ruhrgas Industries Group acquisition (see Note 1). In accordance with the SFA, various agreements between the syndicate of banks and several Elster Group subsidiaries have been entered into under which Elster Group SE’s investments in the equity of all its significant subsidiaries and intercompany loans to such subsidiaries and all or a significant portion of those subsidiaries’ assets were pledged as collateral for payments under the SFA.

The SFA contains a number of covenants and restrictions, which are applicable for as long as any balance is outstanding or may be drawn or any commitment to provide funding is in place. The covenants are defined in the contract underlying the SFA and address Elster Group’s level of indebtedness and several other ratios. The covenants also provide a restriction on capital expenditure and the payment of dividends or extension of loans or advances by the subsidiaries that are borrowers under the SFA to Elster Group SE; such subsidiaries account for almost all of the equity attributable to Elster Group SE on the consolidated balance sheet at December 31, 2009. Balances outstanding under the SFA may become due in case of a change in control event as defined in the contract.

Elster Group was in compliance with the covenants as of December 31, 2009.

As of December 31, 2009, Elster Group had unused credit lines amounting to $265,553. There is a commitment fee of 0.75% of the amount not drawn. The credit lines are available for general corporate purposes. The credit lines may be cancelled in case of an event of default as defined in contract including without limitation payment default, insolvency and material adverse change.

Obligations under capital lease arrangements, included in other current and noncurrent liabilities in the accompanying consolidated balance sheets, are payable as follows:


	Minimum Lease
Capital Lease Payments	Payments		Interest		Present Value
2010	$	1,082	$	319	$	763
2011		158		3		155
2012		6		0		6
2013		25		3		22
2014		3,634		911		2,723
More than five years		3,193		339		2,854

	$	8,098	$	1,575	$	6,523

Thereof:
Capital lease obligations, current portion						763
Capital lease obligations, noncurrent portion						5,760


15.	Mandatorily-redeemable preferred equity certificates and shareholder loan

In connection with the Ruhrgas Industries acquisition in 2005 (see Note 1), Rembrandt, the immediate parent of Elster Group, and Management KG, a subsidiary of Rembrandt, provided shareholder financing of $335,201 in the form of mandatorily redeemable preferred equity certificates (“PECs”) which are denominated in Euro to Elster Group.

There were two classes of PECs. PEC tranche A accrued interest at 8%. PEC tranche B accrued 6.8% of the nominal amount annually. Their original term ended 49 years after issuance. Interest only became due and payable at the end of a calendar year if declared by the Board of Directors. Such declaration was mandatory if Elster Group were able to pay the interest after settlement of senior claims, including the senior facility agreement. Undeclared interest was cumulative.

F-37

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The PECs included several redemption rights. The first redemption right could be exercised by the issuer anytime prior to the maturity of the instrument in part or in full. The issuer’s second redemption right was mandatory either upon liquidation or upon maturity. Both termination rights were subject to conditions; the redemption amount was the nominal value of the PECs plus accrued unpaid interest.

Unlike tranche A, interest and redemption payments on PECs of tranche B were funded by gains, if any, from disposals of subsidiaries.

Effective December 19, 2008, Rembrandt has exchanged PECs with a total balance of $409,864 (principal of $329,743 plus accrued unpaid interest thereon of $80,121) for one preferred share (Class A share). The Class A shares were not redeemable but entitled to a preferred dividend of 6.29% per annum calculated on the basis of its nominal value plus allocated premium of $409,864.

After the exchange of the PECs by the Company’s parent, the only outstanding PECs were those of tranche B ($5,457 and additionally accumulated interest of $791) held by Management KG. On November 30, 2009, the terms and conditions of those remaining PECs held by Management KG were amended and the PECs have changed to a shareholder loan that continues to accrue interest at an annual rate of 6.8%.

The amount of interest expense charged to the consolidated statements of operations in 2009, 2008 and 2007 was $369, $26,353 and $25,584, respectively and was included in interest expense, net (see note 6). The carrying amount of the shareholder loan ($6,818) as of December 31, 2009 includes accrued interest of $1,196.


16.	Equity

As of December 31, 2008, the Company had 52,830 ordinary shares (Class B shares) and one preferred share (Class A share) issued and outstanding. All shares were nonredeemable, but the Class A preferred share held by Rembrandt carried an entitlement to a preferred dividend of 6.29% per annum calculated on the basis of its nominal value plus allocated premium of $409,864.

In October 2009, the Company restructured its share capital by (i) reducing the nominal value of each ordinary share from € 25 to € 1 and (ii) issuing 15 million new ordinary shares to Rembrandt and Management KG in proportion to their prior ownership in Class B. The two steps of the restructuring of the ordinary shares are collectively accounted as a stock split with retrospective application to all periods presented.

Further, the capital restructuring in October 2009 involved the conversion of the Class A share (293,217,167 preferred shares), including any accreted unpaid preferred dividends (15,714,753 preferred shares) into 308,931,920 preferred shares. The preferred shares have a nominal value of € 1 each, are nonredeemable and carry an entitlement to a preferred dividend of 5.96% per annum calculated on the basis of their aggregate nominal value. The capital restructuring of the Class A share into preferred shares is presented as a stock split, but did not change the classification of the preferred shares on the consolidated balance sheet.


17.	Share based payments

Rembrandt, the immediate parent and controlling shareholder, sponsors a Management Equity Program (“MEP”) for certain members of senior management of Elster Group.

Executives of Elster Group purchased a unit in Management KG, a limited partnership that is controlled by Rembrandt and holds approximately 10% of ordinary shares of the Company as well as a shareholder loan of $6,818 including accrued interest of $1,196 at December 31, 2009 (Note 15).

F-38

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Participants in the plan are entitled to their proportionate share in the proceeds from a sale of Elster Group, including a sale of any shares held by Management KG in connection with an initial public offering.

Management KG is required to sell its interest in Elster Group if Elster Group is sold; participating executives may be required to sell their limited units before a sale occurs if their service for Elster Group ends depending on the circumstances of the end of their service. They vest in the MEP award two years after grant, or earlier if a sale of the Company or an initial public offering occurs, and may receive a formula price after that vesting period if certain conditions are met. Regardless of vesting, the MEP awards are not exercisable by management at their discretion prior to a sale of Elster Group.

The compensation expense to Elster Group under the terms of the MEP managed by the limited partnership is recognized over the two year vesting period and remeasured at the end of each reporting period based on the applicable formula price for a participant.

A corresponding amount is recognized in equity rather than as a liability because the MEP is sponsored by Elster Group’s parent company, Rembrandt, which will arrange for the payment and has no rights to reimbursement from Elster Group.

The amount recognized in general and administrative expenses and in equity is $(33,250), $90,700 and $31,100 for the years 2009, 2008 and 2007 respectively. Rembrandt will not obtain a tax benefit from payments made to the Company’s executives under the terms of the MEP.


18.	Derivative financial instruments

Certain of Elster Group’s subsidiaries are exposed to changes in foreign currency exchange rates in connection with future payments or balances denominated in foreign currencies. The Group has set forth in a treasury guideline that all of its operations are to use forward currency contracts to manage their currency exposures under the supervision of Elster Group’s treasury department. It is the Group’s policy to enter into forward contracts only to hedge currency risks arising from underlying business transactions. The contracts are either designated as a cash-flow hedging instrument or are not designated. The main currencies in which Elster Group is engaged are USD, GBP and EUR. Depending on the nominal amount of the underlying transactions, foreign currency transactions denominated in other currencies may also be managed through Group treasury.

The notional amount of foreign exchange currency forwards not designated for hedge accounting was $8,286 and $2,000 of December 31, 2009 and , 2008. The change in fair value of all foreign currency derivatives amounted to an increase of $399 in 2009 and decreases of $210 and $796 in 2008 and 2007, respectively, and was recognized in operating income. At December 31, 2009, no foreign currency forward contracts were designated as a hedging instrument. In 2008, the notional amount of foreign currency forward contracts designated as a cashflow hedge was $13,054.

F-39

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company is also exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. The Company seeks to minimize this risk by entering into arrangements with counterparties with high credit ratings.


19.	Fair value measurements

Fair value measurements are categorized according to a three-tier hierarchy, which prioritizes the inputs used in estimating fair values:

(i) Level 1 is defined as observable input, such as quoted prices in active markets;

(ii) Level 2 is defined as inputs other than quoted prices in active markets, that are directly or indirectly observable; and

(iii) Level 3 is defined as unobservable inputs for which little or no market data exists, and therefore, requires an entity to develop its own assumptions.

The following table discloses the applicable hierarchy of estimates for the Company’s derivative instruments, which are the only financial instruments measured at fair value on a recurring basis:


	Fair Value as of
	December 31,		Fair Value Measurements Using Fair Value Hierarchy
	2009		Level 1		Level 2		Level 3
Assets
Foreign exchange currency forward contracts	$	196		0	$	196		0
Embedded derivatives		85		0		85		0
Liabilities
Interest rate swaps	$	7,972		0	$	7,972		0
Embedded derivatives		635		0		635		0


			Fair Value Measurements
	Fair Value as of		Using Fair Value
	December 31,				Hierarchy
	2008		Level 1		Level 2		Level 3

Assets
Foreign exchange currency
forward contracts	$	946		0	$	946		0
Interest rate swaps		818		0		818		0
Embedded derivatives		171		0		171		0
Liabilities
Foreign exchange currency
forward contracts	$	194		0	$	194		0
Interest rate swaps		4,627		0		4,627		0
Embedded derivatives		727		0		727		0

The fair value of interest rate swaps is calculated by discounting the future cash flows on the basis of the market interest rates applicable for the remaining term of the contract as of the balance sheet date. To determine the fair value of foreign exchange currency forward contracts and embedded derivatives as well, the forward rate is compared to the current forward rate for the remaining term of the contract as of the balance sheet date. The result is then discounted on the basis of the market interest rate prevailing at the balance sheet date for the respective currency.

F-40

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Embedded derivatives relate to contracts to purchase or sell non-financial assets in a foreign currency other than the currency in which the price of such assets is routinely denominated in international commerce.

The following table presents the carrying amounts and fair values of Elster Group’s financial instruments:


	2009				2008
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
Cash and cash equivalents	$	75,392	$	75,392	$	74,273	$	74,273
Financial assets recognized at cost
Accounts receivables (without customer contracts)		252,861		252,861		263,684		263,684
Other assets		3,500		3,500		2,693		2,693
Financial assets at fair value
Derivatives recognized at fair value through income		281		281		1,773		1,773
Derivatives designated as hedging instrument		0		0		980		980
Financial liabilities recognized at amortized cost
Accounts payables		195,635		195,635		199,307		199,307
Debt		1,003,846		1,003,846		1,044,156		1,044,156
Other current and non current liabilities		49,245		49,245		12,793		12,793
Financial liabilities at fair value
Derivatives recognized at fair value through income		8,607		8,607		5,548		5,548

Almost all financial assets have short maturities and therefore the fair value does not differ significantly from the carrying amount.

Because of the variable interest rates for the financial debt, no significant difference between fair value and net carrying amount occurred.


20.	Commitments and contingencies

Capital commitments

At December 31, the Group had commitments to purchase the following property, plant and equipment assets:


	2009		2008

Buildings and leasehold	$	11	$	24
Other equipment, fixtures, furniture and office		923		586

Total capital commitments	$	934	$	610

F-41

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Operating lease commitments

Elster Group has entered into leases on several motor vehicles and machinery and office equipment. These leases have mainly an average life of between two and five years with no renewal option included in the contracts. Additionally, Elster Group has entered into a lease for land and buildings that has a remaining term of more than ten years.

Future minimum rentals payable under non-cancellable operating leases as at December 31, 2009 are:


2010	$	5,569
2011		3,393
2012		2,889
2013		2,132
2014		1,321
More than five years	$	6,343

Expenses arising from operating leases were $4,941, $5,373 and $2,509 in 2009, 2008 and 2007, respectively. The minimum lease payments for operating lease agreements during 2009, 2008 and 2007 were $827, $1,974, $2,036, contingent lease payments were 3,844, $2,886 and $473 in 2009, 2008 and 2007.

Other commitments

As of December 31, 2009, Elster was party to a service contract to certain information technology and communication services from a third party provider which would have required the company to make minimum payments of $84,527 over a term of eight years. Elster terminated the service contract in February 2010 and will only make payments for certain services the company continues to require until the end of March 2011. Thereafter, the management of services will be properly transferred to Elster or another third party.

Legal claims

Various legal actions, including lawsuits for product liabilities, are pending or may be instituted or asserted against Elster Group’s subsidiaries. Legal disputes are subject to many uncertainties. However, although their outcome cannot be predicted with certainty, potential obligations arising from these legal disputes are remote in the opinion of management.

The risk of material contingent liabilities arising from warranty costs, other claims, penalties or possible losses is remote in the opinion of the management.


21.	Related party disclosures

Elster Group has business relationships with numerous subsidiaries outside the scope of consolidation and associates.

In 2009, 2008 and 2007 Elster Group generated revenues with unconsolidated subsidiaries of $9,755, $13,396 and 14,390 in and revenues with equity method investees of $21,213, $23,835 and $29,952. As of December 31, 2009 and 2008, the Company had receivables due from related companies of $8,615 and $9,952 and payables of $1,612 and $451 due to related parties.

F-42

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In 2007, Elster entered into agreements with the Chairman of the Administrative Board and Minit Operational Board Ltd., a company the Chairman controls to lease office space in London and provide various office services. The company has paid a total amount of approximately $1,081 in the aggregate since.

In 2006, Elster entered into a loan agreement with Rembrandt, to fund the legal and administrative expenses Rembrandt incurs as a holding company. As of December 31, 2009, there was approximately $2,485 outstanding under this agreement.


22.	Segment reporting

Elster Group’s operating businesses are organized and managed separately according to the nature of the products and services provided. Each business offers products for different applications and markets and provides separate financial information that is evaluated regularly by the Chairman of the Board, the Chief Executive Officer and the Chief Financial Officer of Elster Group, collectively, the chief operating decision maker. Decisions by the chief operating decision maker on how to allocate resources and assess performance are based on a reported measure of segment profit. The segment profit, used for purposes of such decisions, does not include: depreciation and amortization, certain adjustments identified by management, interest and income taxes; and is reconciled to net income from continuing operations below.

Elster Group has identified the following reportable segments of its continuing operations:

• Gas

• Electricity

• Water

The Gas business provides products and solutions for gas metering, gas utilization and distribution. It develops, designs, manufactures and sells meters and metering solutions for residential and industrial use. These uses are mainly distinguished by the level of gas pressure and the volume to be measured. Residential gas metering products are primarily diaphragm meters and industrial meters are primarily ultrasonic, turbine and rotary meters. All products may be combined with high-end communication solutions and gas evaluation devices. Gas utilization products include process heating equipment and heating control devices. Gas distribution products consist of valves, risers and other gas infrastructure products. The Gas North America and Gas Europe and Rest of World business units are aggregated into a reportable Gas segment due to their similar economic characteristics, the similar nature of the products and production processes, the customers who buy the products and how the Company distributes the products to these customers. In 2007, Elster Group sold NGT Neue Gebäudetechnik GmbH, Essen, Germany (NGT) which formed part of the gas segment and accounted for its activities as a discontinued operation in 2007. The gas segment presented below does not include NGT.

Products of the Electricity business comprise electromechanical and electronic single-phase and polyphase meters for residential and commercial and industrial applications, and are more frequently bundled with high-end communication solutions and evaluation capabilities. The Electricity North America and Electricity Europe and Rest of World segments are aggregated into a reportable Electricity segment due to their similar economic characteristics, the similar nature of the products and services as well as the production processes, the customers who buy the products and how the Company distributes the products to these customers and the similar regulatory environment for electricity meters.

F-43

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Segment information

The following table presents revenue and operating results and certain balance sheet information regarding Elster Group’s operating segments for the years 2009, 2008 and 2007. While not included in the measure of segment profit reviewed by the chief operating decision maker for purposes of allocation of resources and performance assessment, information about depreciation and amortization is regularly provided. Segment working capital comprises those balance sheet positions which represent the operating activities of the segment.

Corporate includes activities which are not allocated to any of the operating segments, as well as the effects from consolidation.


	Gas						Electricity						Water
	2009		2008		2007		2009		2008		2007		2009		2008		2007

Total revenues	$	899,792	$	1,129,383	$	1,039,677	$	453,089	$	404,129	$	339,269	$	355,870	$	384,032	$	367,922

thereof to external customers		898,071		1,127,359		1,032,477		445,050		395,419		336,440		352,001		381,723		366,700
thereof to other segments		1,721		2,024		7,200		8,039		8,710		2,829		3,869		2,309		1,222

Segment profit	$	203,958	$	264,111	$	233,346	$	60,424	$	34,952	$	43,434	$	30,418	$	32,276	$	20,983

Depreciation and amortization		-48,908		-50,837		-48,793		-23,286		-19,817		-14,840		-11,673		-13,004		-15,486

Segment working capital	$	110,928	$	135,926	$	157,660	$	76,415	$	61,150	$	43,687	$	48,016	$	65,808	$	65,281

Capital expenditure	$	14,991	$	31,686	$	25,999	$	9,125	$	35,845	$	7,900	$	7,523	$	13,853	$	13,818



	Total Segments						Corporate and Elimination						Consolidated Totals
	2009		2008		2007		2009		2008		2007		2009		2008		2007

Total revenues	$	1,708,751	$	1,917,544	$	1,746,868	$	-13,629	$	-13,043	$	-11,251	$	1,695,122	$	1,904,501	$	1,735,617
thereof to external customers		1,695,122		1,904,501		1,735,617		0		0		0		1,695,122		1,904,501		1,735,617
thereof to other segments		13,629		13,043		11,251		-13,629		-13,043		-11,251		0		0		0

Segment profit	$	294,800	$	331,339	$	297,763	$	-30,750	$	-16,709	$	-30,037	$	264,050	$	314,630	$	267,726

Foreign currency exchange effects														14,412		-45,153		-5,709
Management equity program														33,250		-90,700		-31,100
Expenses for preparation to become a public company														-22,949		-6,969		0
Strategy development costs														-3,644		-7,835		-4,594
Employee termination and exit costs														-25,363		-10,457		-15,191
Business process reengineering and reorganisation costs														-16,818		-3,169		-13,313
IT project costs														-8,602		-3,652		-4,205
Gain from sale of real estate														2,506		829		3,411
Pension curtailment														0		0		3,562
Insurance recovery														0		0		2,629
Business combination cost														-1,733		0		0
Impairment of intangible assets														-2,241		-1,317		0
Other														-316		204		-197
Depreciation and amortization		-83,867		-83,658		-79,119		-1,568		-1,684		-6,653		-85,435		-85,342		-85,772
Interest income														7,255		2,784		3,965
Interest expense														-62,679		-120,047		-130,861
Income tax expense														-39,349		-30,898		-27,959

Income (loss) from continuing operations														52,344		-87,092		-37,608

Segment working capital	$	235,359	$	262,884	$	266,628	$	-5,967	$	-3,942	$	-12,421	$	229,392	$	258,942	$	254,207

Accounts receivable/payable with associates														-42,949		-4,792		-589
Inventory held related to deferred revenue														0		3,389		0
Advanced payments received less paid														31,365		17,461		22,043
Current assets (other than accounts receivable and inventories)														202,964		192,150		214,251
Accounts payable														195,635		199,307		181,368
Noncurrent assets														1,525,035		1,515,024		1,551,999

Total Assets														2,141,442		2,181,481		2,223,279

Capital expenditure	$	31,639	$	81,384	$	47,717	$	-1,147	$	428	$	325	$	30,492	$	81,812	$	48,042

F-45

ELSTER GROUP SE

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Geographical information

The following table presents the continuing operations’ revenue and long-lived assets for the years 2009, 2008 and 2007. Long-lived assets comprise tangible assets including property, plant and equipment.


	North America incl. Mexico						Europe						All Other Countries						Consolidated Totals
	2009		2008		2007		2009		2008		2007		2009		2008		2007		2009		2008		2007


Total revenues	$	559,218	$	532,903	$	520,300	$	766,540	$	950,257	$	869,419	$	369,364	$	421,341	$	345,898	$	1,695,122	$	1,904,501	$	1,735,617


thereof United States		448,043		440,851		426,231														448,043		440,851		426,231

thereof Germany								256,038		308,990		291,022								256,038		308,990		291,022


Long-lived assets	$	63,562	$	75,639	$	72,757	$	154,320	$	164,997	$	163,374	$	16,361	$	14,791	$	15,962	$	234,243	$	255,427	$	252,093


thereof United States		63,363		75,414		72,402														63,363		75,414		72,402

thereof Germany								81,519		81,075		80,155								81,519		81,075		80,155

Sales to external customers disclosed according to geography are based on the location of the customer (destination). Disclosure of long-lived assets is based on the location of the asset.


23.	Pro forma information for exchange of preferred shares (unaudited)

The Company and Rembrandt intend to replace the preferred shares with ordinary shares at the time of a contemplated initial public offering of the Company’s ordinary shares. According to those intentions, the number of ordinary shares that is expected to be issued to Rembrandt in exchange for the preferred shares depends on the offering price in a way that the aggregate value of the ordinary shares issued to Rembrandt in exchange for all preferred shares equals the nominal value of all preferred shares plus accreted unpaid preferred dividends. Unaudited pro forma earnings per share information is presented alongside the historical earnings per share for the latest period prior to the period of the offering.

The pro forma information is based on an assumption that Rembrandt will receive 8,533,906 ordinary shares in exchange for all preferred shares. The number of ordinary shares obtained in exchange for the preferred shares is based on a value per ordinary share of $52.00 which is 4 times the price per ADS on the closing date of the initial public offering.

F-46

ELSTER GROUP SE

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands of US Dollar ($), except per share data)

(unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009

Revenues	$	433,104	$	427,350	$	831,280	$	837,202
Cost of revenues		-293,568		-300,829		-574,606		-585,413

Gross profit		139,536		126,521		256,674		251,789
Operating Expenses
Selling expenses		-40,687		-38,287		-80,774		-76,946
General and administrative expenses		-33,360		-43,298		-69,873		-68,424
Research and development expenses		-20,726		-19,322		-41,381		-36,731
Other operating income (expense), net		-2,377		17,750		-382		21,166

Operating income		42,386		43,364		64,264		90,854
Non-Operating Expenses
Interest expense, net		-16,906		-11,121		-38,360		-25,335
Other income, net		1,214		888		1,749		1,410

Total non-operating expenses		-15,692		-10,233		-36,611		-23,925
Income before income tax		26,694		33,131		27,653		66,929
Income tax expense		-9,656		-16,522		-11,111		-25,087

Net income from continuing operations		17,038		16,609		16,542		41,842

Net income from discontinued operations		2,570		0		2,570		0

Net income		19,608		16,609		19,112		41,842
Net income attributable to noncontrolling interests		784		667		1,220		1,094

Net income attributable to Elster Group SE	$	18,824	$	15,942	$	17,892	$	40,748




Basic and diluted earnings per share from continuing operations	$	0.64	$	0.59	$	0.20	$	1.72
Earnings per share from discontinued operations		0.16		0.00		0.16		0.00

Basic and diluted earnings per share	$	0.80	$	0.59	$	0.36	$	1.72

Weighted average shares outstanding		16,320,750		16,320,750		16,320,750		16,320,750
Pro forma earnings per share from continuing operations		0.65				0.62
Pro forma earnings per share		0.76				0.72
Pro forma weighted average shares outstanding		24,854,656				24,854,656

See accompanying notes to consolidated interim financial statements.

F-47

ELSTER GROUP SE

CONSOLIDATED BALANCE SHEETS

(in thousands of US Dollar ($))


	June 30,		December 31,
	2010		2009
	(unaudited)

Assets
Current assets
Cash and cash equivalents	$	99,006	$	75,392
Accounts receivable (net of allowance for doubtful accounts of $8,494 and $7,337, respectively)		284,436		265,652
Receivables from related parties		12,722		8,615
Inventories		147,087		147,791
Prepaid expenses		28,203		24,656
Other current assets		32,535		40,252
Income tax refunds		23,042		35,518
Deferred tax assets		23,841		18,531

Total current assets	$	650,872	$	616,407

Noncurrent assets
Property, plant and equipment, net	$	203,622	$	234,243
Other intangible assets, net		224,465		263,844
Goodwill		891,471		981,571
Other assets		31,157		32,605
Deferred tax assets		16,433		12,772

Total noncurrent assets	$	1,367,148	$	1,525,035

Total assets	$	2,018,020	$	2,141,442

Liabilities and Equity
Current liabilities
Pension and other long-term employee benefits, current portion	$	9,795	$	11,306
Payroll, bonuses and related accruals		50,421		57,211
Short-term debt and current portion of long-term debt		25,912		38,969
Accounts payable		190,609		195,635
Warranties		27,691		34,762
Other current liabilities		81,163		77,236
Deferred revenues		3,756		5,823
Income tax payable		8,002		6,429
Deferred tax liabilities		11,180		10,791

Total current liabilities	$	408,529	$	438,162

Noncurrent liabilities
Pension and other long-term employee benefits, less current portion	$	137,050	$	152,390
Payroll, bonuses and related accruals		1,219		1,318
Long-term debt, less current portion		893,799		971,400
Shareholder loan		5,972		6,818
Other noncurrent liabilities		36,999		43,355
Income taxes payable		16,154		16,885
Deferred tax liabilities		91,564		88,410

Total noncurrent liabilities	$	1,182,757	$	1,280,576

Total liabilities	$	1,591,286	$	1,718,738

					Pro forma
					June 30,
					2010
Equity
Preferred shares		448,554		436,465		0
Ordinary shares		20,040		20,040		31,655
Additional paid-in capital		71,548		70,132		508,487
Accumulated deficit		-131,104		-138,393		-131,104
Accumulated other comprehensive income		9,821		28,307		9,821

Total equity attributable to Elster Group SE	$	418,859	$	416,551	$	418,859

Noncontrolling interests		7,875		6,153		7,875

Total equity	$	426,734	$	422,704	$	426,734

Total liabilities and equity	$	2,018,020	$	2,141,442	$	2,018,020

See accompanying notes to consolidated interim financial statements

F-48

ELSTER GROUP SE

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(in thousands of US Dollar, except per share data)
(unaudited)


1.	Corporate information

Elster Group SE, Essen, Germany, was originally incorporated as Gold Silver S.à r.l. on October 4, 2004 as a Luxembourg corporation to serve as a vehicle for private equity funds advised by CVC Capital Partners; it acquired the Ruhrgas Industries Group from E.ON Ruhrgas AG on September 12, 2005. After being renamed Nightwatch Investments S.à r.l. and further renamed Elster Group S.à r.l. on March 15, 2006, it was legally reorganized and became Elster Group SE, Luxembourg. Elster Group SE transferred its jurisdiction of incorporation from Luxembourg to Essen, Germany, on February 23, 2010 and is now a German corporation. The name changes and legal reorganizations were transactions under common control of the owners.


2.	Basis of presentation

These condensed consolidated interim financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) to the extent applicable to interim financial statements. The condensed consolidated interim financial statements reflect all adjustments which are of a normal recurring nature that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Certain information and disclosures have been condensed or omitted in these condensed consolidated interim financial statements which should be read in conjunction with the consolidated financial statements for the year ended December 31, 2009 and accompanying notes thereto which are included herein.

Operating results and cash flows for interim periods are not indicative of the results and cash flows that may be achieved for the years ending December 31.

Subsequent events

Management has evaluated events occurring subsequent to June 30, 2010 through August 3, 2010, the date these condensed consolidated interim financial statements were available to be issued, for their effect on these condensed consolidated interim financial statements.

Use of estimates and judgments

Estimates and underlying assumptions are reviewed on an ongoing basis.

F-50

ELSTER GROUP SE

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS —(Continued)

Basis of consolidation

The accompanying consolidated financial statements include the accounts of Elster Group SE, Essen, Germany, and its subsidiaries.

Elster Group uses the equity method of accounting for its investment in entities if it has significant influence on their operating and financial policies, but no control.

All intercompany balances and transactions have been eliminated.

Foreign currency translation

The consolidated financial statements are presented in thousands of US Dollars (“USD” or “$”) which is the reporting currency of Elster Group, except for per share amounts.

Gains and losses from foreign currency transactions are included in other operating income (expenses). The net foreign exchange gain (loss) in the three months ended June 30, 2010 and 2009 was $-1,202 and $16,387, and $-627 and $17,681 in the six months ended June 30, 2010 and 2009.

Derivative financial instruments

Elster Group enters into forward foreign currency contracts and interest rate swap agreements. In general, Elster Group has not designated derivatives as hedging instruments and records all changes in fair value in income.

However, Elster Group has designated certain foreign currency forward contracts as a hedge of foreign currency denominated cash flows. The effective portion of the change in fair value of those foreign currency derivatives designated in a cash flow hedge is initially recognized in other comprehensive income and the ineffective portion is recognized in operating income; the balance recorded in other comprehensive income is subsequently recognized in income in the same period as the hedged item affects income.

Share-based payments

The obligation of the parent related to the MEP arrangement is accounted for as a cash-settled plan and remeasured through the date of settlement. Elster Group recognizes compensation expenses for the MEP and a corresponding contribution by the parent in additional paid-in capital within equity because the Company will not make or fund any payments under the MEP.

The amount recognized in general and administrative expenses and in equity is $675 and $4,000 for the three months ended June 30, 2010 and 2009 and $1,416 and $-10,550 for the six months ended June 30, 2010 and 2009. Rembrandt will not obtain a tax benefit from payments made to the Company’s executives under the terms of the MEP.

Warranty provisions

F-51

ELSTER GROUP SE

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS —(Continued)

warranty accrual may be recorded when a failure event is probable and the cost can be reasonably estimated. Management continually evaluates the sufficiency of the warranty provisions and makes adjustments when necessary.

The changes in the carrying amount of the warranty provision as for the three and six months ended June 30, 2010 and 2009 are as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009

Beginning balance	$	31,394	$	31,005	$	34,762	$	32,458
Warranties issued		1,072		958		1,779		2,115
Changes in estimates and transfers		-3,520		-1,081		-6,432		-2,816
Foreign exchange fluctuation		-1,255		1,249		-2,418		374

Ending Balance	$	27,691	$	32,131	$	27,691	$	32,131

Thereof
Current		27,691		32,131		27,691		32,131
Noncurrent		0		0		0		0

The increase in utilizations in 2010 primarily relates to a specific warranty case involving units of a product of our gas segment for a single customer.

Revenue recognition

In September 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13 “Multiple-Deliverable Revenue Arrangements” (ASU 2009-13) which sets forth requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered, and ASU 2009-14, “Certain Revenue Arrangements that Include Software Elements” which addresses the accounting for revenue arrangements that contain both hardware and software elements. These ASUs which expand the scope and supersede certain guidance in ASC 605-25, “Revenue Recognition—Multiple-Element Arrangements” may be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted, or it may be applied retrospectively to all comparable periods presented. These amendments eliminate the requirement that vendor specific objective evidence (VSOE) be available for all undelivered elements when software is involved or VSOE or third-party evidence be available in multiple-element transactions not involving software. An entity must adopt both ASU 2009-13 and 2009-14 in the same period using the same transition method. The application of these amendments may significantly affect the timing or amount of revenue recognized in multiple element transactions.

Elster Group elected to early adopt these accounting standards prospectively as of January 1, 2010 for all new and materially modified contracts with customers that combine multiple deliverables such as products to be delivered and services to be rendered and involve software. Under the new accounting standards for revenue recognition, the Company allocates the total consideration for all elements to each separable element based upon the estimated relative selling price of each element. The selling price for a deliverable is based on its VSOE, if available, third party evidence or estimated selling price, if neither VSOE nor third party evidence are available. The company recognizes revenue for delivered elements that have stand-alone value to the customer in accordance with its revenue recognition policies for such products or services and defers revenue for undelivered elements until

F-52

ELSTER GROUP SE

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS —(Continued)

delivery of an element. The amount of revenue recognized is limited to the amount that is not contingent upon future shipments of products or rendering of services or performance obligations.

As a result of this change in accounting policies for revenue recognition, revenues for the three and six months ended June 30, 2010 were approximately $3,885 higher than revenues would have been using the previous accounting policies for revenue recognition. The increase in revenue results from shipments of products, mainly electricity meters, in those interim periods of 2010 that relate to contracts with customers containing undelivered elements for which Elster Group was unable to establish VSOE under the previous standards.


3.	Discontinued operations

In 2006, Elster Group had sold its heat treatment business in accordance with the decision of Elster Group’s management to focus on the Group’s key competence as a metering solutions provider. Elster Group agreed to indemnify the buyer for certain contingent losses that originated prior to the sale of the business and recorded a liability for an expected purchase price adjustment resulting from such indemnification. In the three months period ended June 30, 2010, Elster Group obtained evidence that the issue underlying the indemnification had been resolved and released the accrued liability. The gain arising from this release of a liability for expected purchase price adjustment was recorded as income from discontinued operations.


4.	Employee termination and exit costs

The charges for employee termination and exit activities were recognized in the statements of operations for the three and six months ended June 30:


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009

Involuntary termination costs	$	732	$	2,495	$	1,467	$	3,450
Outsourcing and relocation costs		310		852		589		1,597

	$	1,042	$	3,347	$	2,056	$	5,047

The following summary presents employee termination and exit costs by segment for the three and six months ended June 30:


	Gas				Electricity				Water
Three Months Ended June 30,	2010		2009		2010		2009		2010		2009

Employee termination and exit costs	$	448	$	2,355	$	-11	$	—	$	605	$	992


	Total segments				Corporate				Total
	2010		2009		2010		2009		2010		2009

Employee termination and exit costs	$	1,042	$	3,347	$	0	$	0	$	1,042	$	3,347

F-53

ELSTER GROUP SE

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS —(Continued)


	Gas				Electricity				Water
Six Months Ended June 30,	2010		2009		2010		2009		2010		2009

Employee termination and exit costs	$	904	$	3,110	$	233	$	—	$	919	$	1,937


	Total segments				Corporate				Total
	2010		2009		2010		2009		2010		2009

Employee termination and exit costs	$	2,056	$	5,047	$	0	$	0	$	2,056	$	5,047

The following table reflects the changes in three and six months recorded for the accrued liability at June 30, 2010 and June 30, 2009:


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009

Beginning balance	$	6,995	$	1,872	$	10,768	$	2,219
Accrued		848		1,228		1,120		1,344
Payments made		-3,182		-967		-6,596		-1,328
Releases		-427		0		-628		0
Foreign exchange fluctuation		-441		136		-871		34

Ending Balance	$	3,793	$	2,269	$	3,793	$	2,269

Thereof
Current		3,140		2,146		3,140		2,146
Noncurrent		653		123		653		123

The additions to the liability for employee termination and exit costs in the three and six months until June 30, 2010 are mainly related to existing restructuring plans in Germany.


5.	Earnings per share

The following table summarizes the information used to compute earnings per share for the three and six months ended June 30:


					Six Months Ended
	Three Months Ended June 30,				June 30,
	2010		2009		2010		2009

Historical earnings per share
Numerator
Net income from continuing operations attributable to Elster Group SE	$	16,254	$	15,942	$	15,322	$	40,748
Accretion of dividends on preferred shares		-5,802		-6,393		-12,087		-12,715
Net income from continuing operations attributable to ordinary shares	$	10,452	$	9,549	$	3,235	$	28,033

Net income from discontinued operations attributable to ordinary shares	$	2,570	$	—	$	2,570	$	—

Denominator
Weighted average number of ordinary shares outstanding		16,320,750		16,320,750		16,320,750		16,320,750

F-54

ELSTER GROUP SE

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS —(Continued)


					Six Months Ended
	Three Months Ended June 30,				June 30,
	2010		2009		2010		2009

Earnings per ordinary share
Basic and diluted net income from continuing operations per ordinary share	$	0.64	$	0.59	$	0.20	$	1.72
Net income from discontinued operations per ordinary share	$	0.16	$	—	$	0.16	$	—

Basic and diluted net income per ordinary share	$	0.80	$	0.59	$	0.36	$	1.72
Pro forma earnings per share
Numerator
Net income used to compute pro forma earnings from continuing operations per share	$	16,254	$	15,942	$	15,322	$	40,748

Denominator
Weighted average number of ordinary shares outstanding		16,320,750		16,320,750		16,320,750		16,320,750
Pro forma adjusted to reflect weighted average effect of conversion of preferred shares into ordinary shares (see note 15)		8,533,906				8,533,906

Weighted average number of ordinary shares outstanding, used to compute pro forma loss per ordinary share (see note 15)		24,854,656				24,854,656

Pro forma basic and diluted net income from continuing operations per ordinary share		0.65				0.62

Pro forma basic and diluted net income per ordinary share		0.76				0.72


6.	Inventories

Inventories consist of the following:


	June 30,		December 31,
	2010		2009

Raw materials	$	103,604	$	101,589
Work in progress		15,425		14,989
Finished goods		36,092		32,216

		155,121		148,794

Reserves		-8,034		-1,003

Inventories	$	147,087	$	147,791

The increase in reserves is mainly caused by the termination of a contract with a foreign distributor that holds consigned inventory of the Company. Management does not expect to recover the entire carrying amount of that inventory.

F-55

ELSTER GROUP SE

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS —(Continued)


7.	Property, plant and equipment

Property, plant and equipment, including assets under capital lease, consist of the following as of June 30, 2010 and December 31, 2009:


			Accumulated
June 30, 2010	Cost		Depreciation		Net

Land	$	31,084	$	497	$	30,587
Buildings		48,560		3,813		44,747
Plant and machinery		141,719		42,598		99,121
Other equipment		22,138		1,840		20,298
Construction in process		9,268		399		8,869

Property, plant and equipment	$	252,769	$	49,147	$	203,622


			Accumulated
December 31, 2009	Cost		Depreciation		Net

Land	$	35,678	$	427	$	35,251
Buildings		63,930		10,915		53,015
Plant and machinery		161,264		46,081		115,183
Other equipment		25,942		2,299		23,643
Construction in process		7,671		520		7,151

Property, plant and equipment	$	294,485	$	60,242	$	234,243

Depreciation expense for the three months ended June 30, 2010 and 2009 was $9,950 and $10,521 and for the six months ended June 30, 2010 and 2009 $20,021 and $20,734, respectively.


8.	Goodwill and other intangible assets

Intangible assets consist of the following:


			Accumulated
June 30, 2010	Cost		Amortization		Net

Trade names and brands	$	25,707	$	7,585	$	18,122
Customer related assets		207,943		84,897		123,046
Contract-based intangible assets		51,734		38,998		12,736
Technology-related intangible assets		140,024		69,463		70,561

Other intangible assets	$	425,408	$	200,943	$	224,465

Goodwill	$	891,471	$	0	$	891,471


			Accumulated
December 31, 2009	Cost		Amortization		Net

Trade names and brands	$	28,584	$	7,982	$	20,602
Customer related assets		223,071		78,667		144,404
Contract-based intangible assets		47,795		36,460		11,335
Technology-related intangible assets		161,954		74,451		87,503

Other intangible assets	$	461,404	$	197,560	$	263,844

Goodwill	$	981,571	$	0	$	981,571

F-56

ELSTER GROUP SE

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS —(Continued)

Amortization expense for the three months ended June 30, 2010 and 2009 was $10,909 and $10,710 and for the six months ended June 30, 2010 and 2009 $22,529 and $21,241, respectively.

Changes in goodwill resulted from foreign exchange rate changes.


9.	Pension and other long-term employee benefits

The components of net periodic benefit costs for pension benefit plans for the three and six months ended June 30, 2010 and 2009 are:


					Six Months
	Three Months Ended June 30,				Ended June 30,
German plans	2010		2009		2010		2009

Service cost	$	278	$	270	$	582	$	530
Interest cost		1,144		1,179		2,398		2,310
Amortization of net gain		-29		-124		-61		-243

Net periodic benefit cost	$	1,393	$	1,325	$	2,919	$	2,597


					Six Months
	Three Months Ended June 30,				Ended June 30,
Foreign plans	2010		2009		2010		2009

Service cost	$	118	$	94	$	242	$	184
Interest cost		955		1,013		1,925		2,004
Expected return on plan assets		-839		-733		-1,688		-1,450
Amortization of net loss		16		23		32		45

Net periodic benefit cost	$	250	$	397	$	511	$	783

The components of net periodic benefit costs for other employee benefit plans for the three and six months ended June 30, 2010 and 2009 are:


	Three Months Ended June 30,				Six Months Ended June 30,
German plans	2010		2009		2010		2009

Service cost	$	439	$	316	$	918	$	636
Interest cost		92		113		191		220

Net periodic benefit cost	$	531	$	429	$	1,109	$	856


	Three Months Ended June 30,				Six Months Ended June 30,
Foreign plans	2010		2009		2010		2009

Service cost	$	107	$	104	$	214	$	210
Interest cost		368		410		734		819
Amortization of prior service cost		-305		-313		-609		-627
Amortization of net gain		-139		-135		-278		-269

Net periodic benefit cost	$	31	$	66	$	61	$	133

Elster expects to pay $5,261 in contributions to defined benefit plans in 2010. As of June 30, 2010 Elster made contributions of $939.

F-57

ELSTER GROUP SE

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS —(Continued)


	2010						2009
	Total Equity						Total Equity
	attributable		Noncon-				attributable		Noncon-
	to Elster		trolling		Total		to Elster		trolling		Total
Six Months Ended June 30,	Group SE		interests		equity		Group SE		interests		equity

Beginning balance	$	416,551	$	6,153	$	422,704	$	412,884	$	5,933	$	418,817

Share-based compensation arrangement		1,416		0		1,416		-10,550		0		-10,550
Dividends paid to noncontrolling interests		0						0		-1,841		-1,841
Changes in actuarial gains and past service costs, net of tax effect of $174 and $196 in 2010 and 2009, respectively		-566		0		-566		-707		0		-707
Foreign currency translation adjustments		-17,223		502		-16,721		-15,207		204		-15,003
Change in fair value of cash flow hedges, net of tax of $306 and $269 respectively		-697		0		-697		-710		0		-710
Net income		17,892		1,220		19,112		40,748		1,094		41,842

Total comprehensive income		822		1,722		2,544		13,574		1,298		13,031

Change in scope of consolidated companies		1,486		0		1,486		0		0		0

Ending balance	$	418,859	$	7,875	$	426,734	$	426,458	$	5,390	$	431,848


11.	Derivative financial instruments

The notional amount of freestanding foreign exchange currency forwards was $26,709 and $8,286 as of June 30, 2010 and December 31, 2009. The change in fair value of all foreign currency derivatives amounted to an decrease of $187 and an increase of $520 during the three months ended June 30, 2010 and 2009 and to an decrease of $149 and an increase of $312 during the six months ended June 30, 2010 and 2009, respectively, and was recognized in operating income. As of June 30, 2010, certain forward exchange rate contracts, with a notional amount of $21,741 were designated in a cash flow hedge. The amount recognized in other comprehensive income totals $-697 net of tax of $306. As of December 31, 2009 no forward exchange rate contracts were designated in a hedge accounting relationship.

Elster Group expects to reclassify gains of $240 and losses of $1,243 through income within the next twelve months. The cash flow hedges expire no later than January 2011.

F-59

ELSTER GROUP SE

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS —(Continued)

Elster Group subsidiaries, mainly in the Euro zone, in the United Kingdom and in the United States of America, are also exposed to interest rate risks; the variable interest rate exposure is predominantly represented by the senior facility agreement. Elster Group recognizes on its balance sheet a number of interest rate swap agreements used as economic hedges with regard to the senior credit facilities agreement. However, these interest rate swaps are not designated as hedging instruments. The changes in fair value are recognized within interest expenses. The aggregated notional amount of the interest rate swaps is $680,759. The change in fair value of all interest rate swaps amounted to a decrease of $3,292 and a decrease of $170 during the three months ended June 30, 2010 and 2009 and to a decrease of $10,099 and an increase of $1,086 during the six months ended June 30, 2010 and 2009, respectively, and was recognized in interest expense, net.


12.	Fair value measurements

Fair value measurements are categorized according to a three-tier hierarchy, which prioritizes the inputs used in estimating fair values:


	(i)	Level 1 is defined as observable input, such as quoted prices in active markets;

	(ii)	Level 2 is defined as inputs other than quoted prices in active markets, that are directly or indirectly observable; and

	(iii)	Level 3 is defined as unobservable inputs for which little or no market data exists, and therefore, requires an entity to develop its own assumptions.

The following table discloses the applicable hierarchy of estimates for the Company’s derivative instruments, which are the only financial instruments measured at fair value on a recurring basis:


			Fair value measurements using
	Fair value as of		fair value hierarchy
	June 30, 2010		Level 1		Level 2		Level 3

Assets
Foreign exchange currency forward contracts	$	319		0	$	319		0
Foreign currency exchange contracts designated as hedging instruments		240		0		240		0
Embedded derivatives		109		0		109		0
Liabilities
Foreign exchange currency forward contracts	$	476		0	$	476		0
Foreign currency exchange contracts designated as hedging instruments		1,324		0		1,324		0
Interest rate swaps		16,170		0		16,170		0
Embedded derivatives		147		0		147		0

F-60

ELSTER GROUP SE

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS —(Continued)


			Fair value measurements
	Fair value as of		using fair value hierarchy
	December 31, 2009		Level 1		Level 2		Level 3

Assets
Foreign exchange currency forward contracts	$	196		0	$	196		0
Embedded derivatives		85		0		85		0
Liabilities
Interest rate swaps	$	7,972		0	$	7,972		0
Embedded derivatives		635		0		635		0

The fair value of interest rate swaps is calculated by discounting the future cash flows on the basis of the market interest rates applicable for the remaining term of the contract as of the balance sheet date. To determine the fair value of foreign exchange currency forward contracts and embedded derivates as well, the forward rate is compared to the current forward rate for the remaining term of the contract as of the balance sheet date. The result is then discounted on the basis of the market interest rate prevailing at the balance sheet date for the respective currency.

The following table presents the carrying amounts and fair values of Elster Group’s financial instruments:


	June 30, 2010				December 31, 2009
	Carrying				Carrying
	amount		Fair value		amount		Fair value

Cash and cash equivalents	$	99,006	$	99,006	$	75,392	$	75,392
Financial assets recognized at cost
Accounts receivables (without customer contracts)		257,942		257,942		252,861		252,861
Other assets		4,711		4,711		3,500		3,500
Financial assets at fair value
Derivatives recognized at fair value through income		428		428		281		281
Derivatives designated as hedging instrument		240		240		0		0
Financial liabilities recognized at amortized cost
Accounts payables		190,609		190,609		195,635		195,635
Debt		914,185		914,185		1,003,846		1,003,846
Other current and non current liabilities		37,262		37,262		49,245		49,245
Financial liabilities at fair value
Derivatives recognized at fair value through income		16,793		16,793		8,607		8,607
Derivatives designated as hedging instrument		1,324		1,324		0		0

Almost all financial assets have short maturities and therefore the fair value does not differ significantly from the carrying amount.

Because of the variable interest rates for the financial debt, no significant difference between fair value and net carrying amount occurred.

F-61

ELSTER GROUP SE

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS —(Continued)


13.	Related party disclosures

Elster Group has business relationships with numerous subsidiaries outside the scope of consolidation and associates.

During the three months ended June 30, 2010 and 2009, Elster Group generated revenues with unconsolidated subsidiaries of $3,298 and $2,400 and revenues with equity method investees of $5,336 and $6,062. During the six months ended June 30, 2010 and 2009, revenues with unconsolidated subsidiaries amounted to $6,478 and $4,139 and revenues with equity method investees of $10,561 and $12,409. As of June 30, 2010 and December 31, 2009, the Company had receivables due from related companies of $8,437 and $5,374 and payables of $355 and $1,186 due to related parties.

In 2006, Elster entered into a loan agreement with Rembrandt, to fund the legal and administrative expenses Rembrandt incurs as a holding company. As of June 30, 2010 and December 31, 2009, there were approximately $2,414 and $2,485 outstanding under this agreement.


14.	Segment reporting

The following table presents revenue and operating results information regarding Elster Group’s operating segments for the three months ended June 30, 2010 and 2009.

Corporate includes activities which are not allocated to any of the operating segments, as well as the effects from consolidation.

Gas

Electricity

Water

Consolidated Statements of Operations for the Three Months Ended

Jun 2010

Jun 2009

Jun 2010

Jun 2009

Jun 2010

Jun 2009

Total revenues

223,931

232,108

115,901

110,342

99,949

89,344

thereof to external customers

222,511

231,280

111,435

108,076

99,158

87,993

thereof to other segments

1,420

828

4,466

2,266

791

1,351

Segment profit (loss)

53,791

50,219

13,366

12,687

10,721

8,447

F-62

ELSTER GROUP SE

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS —(Continued)


	Total segments				Corporate and elimination				Consolidated totals
Consolidated Statements of Operations for the Three Months Ended	Jun 2010		Jun 2009		Jun 2010		Jun 2009		Jun 2010		Jun 2009

Total revenues		439,781		431,794		-6,677		-4,444		433,104		427,350

thereof to external customers		433,104		427,349		0		1		433,104		427,350
thereof to other segments		6,677		4,445		-6,677		-4,445		0		0

Segment profit (loss)		77,878		71,353		-4,523		-8,728		73,355		62,625

Foreign currency exchange effects										-1,202		16,387
Management Equity Program										-675		-4,000
Expenses for preparation to become a public company										-3,315		-5,961
Strategy development costs										-330		-61
Employee termination and exit costs										-1,042		-3,347
Business process reengineering and reorganisation costs										-2,058		79
IT project costs										-242		-681
Gain from sale of real estate										0		442
Reversal on termination cost										-32		0
Depreciation and amortization										-20,859		-21,231
Interest income										359		587
Interest expense										-17,265		-11,708
Income tax expense										-9,656		-16,522

Net income from continuing operations										17,038		16,609

The following table presents revenue and operating results information regarding Elster Group’s operating segments for the six months ended June 30, 2010 and 2009. Segment working capital comprises those balance sheet positions which represent the operating activities of the segment.

Gas

Electricity

Water

Consolidated Statements of Operations for the Six Months Ended

Jun 2010

Jun 2009

Jun 2010

Jun 2009

Jun 2010

Jun 2009

Total revenues

442,126

459,898

206,491

207,551

193,928

176,909

thereof to external customers

439,755

459,016

199,025

203,375

192,500

174,811

thereof to other segments

2,371

882

7,466

4,176

1,428

2,098

Segment profit (loss)

105,596

99,687

19,524

20,321

19,259

15,498

Consolidated Balance Sheets

Jun 2010

Dec 2009

Jun 2010

Dec 2009

Jun 2010

Dec 2009

Segment working capital

119,975

110,928

59,140

76,415

58,482

48,016

F-63

ELSTER GROUP SE

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS —(Continued)


Consolidated Statements of Operations for	Total segments				Corporate and elimination				Consolidated totals
the Six Months Ended	Jun 2010		Jun 2009		Jun 2010		Jun 2009		Jun 2010		Jun 2009

Total revenues		842,545		844,358		-11,265		-7,156		831,280		837,202

thereof to external customers		831,280		837,202		0		0		831,280		837,202
thereof to other segments		11,265		7,156		-11,265		-7,156		0		0

Segment profit (loss)		144,379		135,506		-13,527		-10,915		130,852		124,591

Foreign currency exchange effects										-627		17,681
Management Equity Program										-1,416		10,550
Expenses for preparation to become a public company										-6,611		-7,545
Strategy development costs										-330		-435
Employee termination and exit costs										-2,056		-5,047
Business process reengineering and reorganisation costs										-2,058		-5,412
IT project costs										-913		-981
Gain from sale of real estate										0		837
Effects of termination of distributor										-8,982		0
Reversal on termination cost										704		0
Depreciation and amortization										-42,550		-41,975
Interest income										644		1,296
Interest expense										-39,004		-26,631
Income tax expense										-11,111		-25,087

Net income from continuing operations										16,542		41,842

Consolidated Balance Sheets

Jun 2010

Dec 2009

Jun 2010

Dec 2009

Jun 2010

Dec 2009

Segment working capital

237,597

235,359

-10,349

-5,967

227,248

229,392

Accounts receivable/payable with associates

-1,064

-42,949

Advanced payments received / less paid

14,729

31,365

Current assets (other than accounts receivable and inventories)

219,350

202,964

Accounts payable

190,609

195,635

Noncurrent assets

1,367,148

1,525,035

Total assets

2,018,020

2,141,442


15.	Pro forma information for exchange of preferred shares

F-64

We are responsible for the information contained in this prospectus and in any related free-writing prospectus we prepare or authorize. We have not authorized anyone to give you any other information, and we take no responsibility for any other information that others may give you. We are offering to sell, and are seeking offers to buy, the ADSs in jurisdictions where the offer and sale of these securities is legally permitted. The information in this prospectus or in any filed free writing prospectus is accurate only as of its date, regardless of the time of delivery of this prospectus or of any sale of the ADSs.

TABLE OF CONTENTS


	Page

Prospectus Summary		1
Risk Factors		14
Presentation of Financial and Other Information		42
Special Note Regarding Market Data		44
Special Note Regarding Forward-Looking Statements		45
Use of Proceeds		47
Dividend Policy		48
Exchange Rates		49
Capitalization		50
Dilution		51
Selected Financial and Other Data		53
Management’s Discussion and Analysis of Financial Condition and Results of Operations		57
Our Industry		112
Our Company		118
Regulation and Supervision		138
Management		144
Our History and Recent Corporate Transactions		156
Related Party Transactions		161
Principal and Selling Shareholders		166
Shares and ADSs Eligible For Future Sale		169
Articles of Association		171
Exchange Controls and Limitations Affecting Shareholders		176
Description of American Depositary Shares		177
Market Information		186
Taxation		187
Underwriting		193
Expenses of the Offering		200
Enforcing Civil Liabilities		201
Legal Matters		201
Experts		201
Additional Information		201
Index to Financial Statements		F-1

Until October 25, 2010 (25 days after the date of this prospectus), all dealers that buy, sell or trade the ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

ELSTER GROUP SE

16,200,000 American Depositary Shares

Representing 4,050,000 Ordinary Shares

Deutsche Bank Securities

Goldman, Sachs & Co.

J.P. Morgan

Prospectus

September 30, 2010


		180 days from the effective date of the registration statement of which this prospectus forms a part, we and they will not, without the prior written consent of each of Deutsche Bank Securities Inc., Goldman Sachs International and J.P. Morgan Securities LLC, dispose of any of our shares or ADSs or securities which are convertible or exchangeable into these securities. Deutsche Bank Securities Inc., Goldman Sachs International and J.P. Morgan Securities LLC in their sole discretion may release any of the securities subject to these lock-up agreements at any time without notice. The release of any lock-up will be considered on a case-by-case basis.

Dividend Policy:		We have not declared any cash dividends on our ordinary shares and have no present intention to pay dividends in the foreseeable future. See “Dividend Policy” for a discussion of the factors that will affect the determination by our Administrative Board to recommend dividends, as well as other matters concerning our dividend policy.

Risk Factors:		See “Risk Factors” and the other information included in this prospectus for a discussion of risks you should carefully consider before deciding to invest in our ADSs.

Proposed NYSE Symbol:		ELT

ADS CUSIP		290348 101


Year Ended December 31,	Average

2005		1.2400
2006		1.2661
2007		1.3797
2008		1.4705
2009		1.3956
Three Months Ended
March 31, 2010		1.3685
June 30, 2010		1.3170


Month of 2010
March	1.3758	1.3344
April	1.3666	1.3130
May	1.3183	1.2224
June	1.2385	1.1959
July	1.3069	1.2464
August	1.3282	1.2652
September (through September 24)	1.3476	1.2708


	•	“we,” “us,” “our company,” “our group” and “Elster” refer to Elster Group SE (formerly known as Elster Group S.A.) and, unless the context otherwise requires, to our subsidiaries;

	•	“Rembrandt” refers to Rembrandt Holdings S.A., a Luxembourg stock corporation; and

	•	“Management KG” refers to Nachtwache Metering Management Vermögensverwaltungs GmbH & Co. KG, a limited partnership organized under German law.


	•	a resolution not to give effect to existing shareholders’ preemptive rights in a capital increase;

	•	any capital decrease, merger, consolidation, spin-off, sale or other transfer of all or substantially all of our assets;

	•	a change in the corporate form or business purpose of the company; or

	•	the dissolution of our company.


Type of Expenses	Elster		Rembrandt		Management KG		Total
	(in $)

SEC registration fee		17,278		6,214		418		23,911
NYSE listing fee		80,931		29,109		1,960		112,000
FINRA fee		54,556		19,622		1,321		75,500
Printing and engraving expenses		278,201		100,062		6,738		385,000
Depositary expenses		14,802		5,198		0		20,000
Legal fees and expenses		5,061,813		1,820,600		122,588		7,005,000
Accounting fees and expenses		539,000		0		0		539,000
Reimbursement underwriter expenses		180,650		64,975		4,375		250,000
Marketing Cost		1,300,000		0		0		1,300,000
IPO Consulting Cost		4,624,640		1,663,360		112,000		6,400,000
Other		2,890,400		1,039,600		70,000		4,000,000

		15,042,272		4,748,740		319,400		20,110,411


	Page
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007		F-3
Consolidated Balance Sheets as of December 31, 2009 and 2008		F-4
Consolidated Statements of Changes in Equity and Comprehensive Income (Loss) for the years ended December 31, 2009, 2008 and 2007		F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007		F-6
Notes to the Consolidated Financial Statements		F-7
Condensed Consolidated Interim Financial Statements (unaudited)
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009		F-47
Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009		F-48
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009		F-49
Notes to the Condensed Consolidated Financial Statements		F-50