BADGER METER INC - 10-K Annual Report

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

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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

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BADGER METER, INC.

4545 W. BROWN DEER ROAD
MILWAUKEE, WISCONSIN 53223
(414) 355-0400
A WISCONSIN CORPORATION
IRS EMPLOYER IDENTIFICATION NO. 39-0143280
COMMISSION FILE NO. 1-6706

The company has the following classes of securities registered pursuant to
Section 12(b) of the Act:

Name of each exchange
Title of class: on which registered:
Common Stock American Stock Exchange
Common Share Purchase Rights American Stock Exchange

The company does not have any securities registered pursuant to Section
12(g) of the Act.

The company has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
has been subject to such filing requirements for the past 90 days.

The company includes a disclosure of delinquent filers pursuant to Item 405
of Regulation S-K in the definitive Proxy Statement incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.

The company is an accelerated filer (as defined in Rule 12b-2 of the Act).

The aggregate market value of the Common Stock held by non-affiliates of
the company as of February 28, 2003 was approximately $79,604,415. For purposes
of this calculation only, (i) shares of Common Stock are deemed to have a market
value of $27.50 per share, the closing price of the Common Stock as reported on
the American Stock Exchange on June 28, 2002, and (ii) each of the executive
officers and directors is deemed to be an affiliate.

As of February 28, 2003, there were 3,234,711 shares of Common Stock
outstanding.

Portions of the company's Proxy Statement for the Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission
under Regulation 14A within 120 days after the end of the registrant's fiscal
year, are incorporated by reference from the definitive Proxy Statement.

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PART I

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

Certain statements contained in this document, as well as other information
provided from time to time by the company or its employees, may contain forward
looking statements that involve risks and uncertainties that could cause actual
results to differ materially from those in the forward looking statements. The
words "anticipate," "believe," "estimate," "expect," "think," "should" and
"objective" or similar expressions are intended to identify forward looking
statements. The forward looking statements are based on the company's current
views and assumptions and involve risks and uncertainties that include, among
other things:

- the success or failure of new product offerings and acquisitions

- the actions and financial condition of competitors and alliance partners

- changes in competitive pricing and bids in the marketplace

- changes in domestic conditions, including housing starts

- changes in foreign economic conditions, including currency fluctuations

- changes in laws and regulations

- changes in customer demand and fluctuations in the prices of and
availability of purchased raw materials and parts.

Some or all of these factors are beyond the company's control.
Shareholders, potential investors and other readers are urged to consider these
factors carefully in evaluating the forward looking statements and are cautioned
not to place undue reliance on such forward looking statements. The forward
looking statements made herein are made only as of the date of this document and
the company undertakes no obligation to publicly update such forward looking
statements to reflect subsequent events or circumstances.

ITEM 1. BUSINESS

Badger Meter, Inc. (the "company") is a leading marketer and manufacturer
of products, and a provider of services, using flow measurement and control
technologies serving markets worldwide. The company was incorporated in 1905.

AVAILABLE INFORMATION

The company's Internet address is http://www.badgermeter.com. The company
makes available free of charge (other than an investor's own Internet access
charges) through its Internet website its Annual Report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports, on the same day they are electronically filed with, or furnished to,
the Securities and Exchange Commission. The company is not including the
information contained on or available through its website as a part of, or
incorporating such information by reference into, this Annual Report on Form
10-K.

MARKETS AND PRODUCTS

Badger Meter is a leading marketer and manufacturer of products using flow
measurement and control technologies developed both internally and with other
technology companies. Its products are used to measure and control the flow of
liquids in a variety of applications. The company has five primary worldwide
product lines. Two product lines, residential and commercial water meters (with
various meter reading technology systems), are generally sold to water
utilities. The other three lines are called industrial products and include
automotive fluid meters and systems, small precision valves and industrial
process meters (with related accessories and instrumentation).

Water meters and related systems provide the majority of the company's
sales. A "water meter system" generally consists of a water meter, a register
(some with a digital interface technology for communicating the

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reading), packaging and the monitoring or computerized management system used to
collect and relay the reading. Badger Meter's strategy is to solve customers'
metering needs with its proprietary meter reading systems or other systems
available through alliances within the marketplace. In both alternatives, the
company provides the meter that generates a mechanical signal and the device
that converts the signal into a digital form. That signal may then be read by
either a proprietary meter reading system or systems developed by other
technology companies.

The company's products are primarily manufactured and assembled in the
company's Milwaukee, Wisconsin; Tulsa, Oklahoma; Rio Rico, Arizona;
Mattapoisett, Massachusetts and Brno, Czech Republic facilities. Products are
also assembled in the company's Nogales, Mexico; Stuttgart, Germany and Nancy,
France facilities.

The company's products are sold throughout the world through various
distribution channels including direct sales representatives, distributors and
independent sales representatives. There is a moderate seasonal impact on sales,
primarily relating to slightly higher sales of certain utility products during
the spring and summer months. No single customer accounts for more than 10% of
the company's sales.

COMPETITION

There are several competitors in each of the markets in which the company
sells its products, and the competition varies from moderate to intense. Major
competitors include Invensys, Inc., Neptune Technology Group, Inc. and AMCO
Water Metering Systems (formerly ABB-Kent Meters, Inc.). A number of the
company's competitors in certain markets have greater financial resources. The
company believes it currently provides the leading technology in certain types
of automated and automatic water meter systems and small, high-precision valves.
As a result of significant research and development activities, the company
enjoys favorable patent positions for several of its products.

BACKLOG

The dollar amount of the company's total backlog of unshipped orders at
December 31, 2002 and 2001 was $21,200,000 and $18,100,000, respectively.
Backlog is comprised of firm orders and signed contractual commitments. The
company expects to ship nearly all of the December 31, 2002 backlog in 2003.

RAW MATERIALS

Raw materials used in the manufacture of the company's products include
metal or alloys (such as bronze, aluminum, stainless steel, cast iron, brass and
stellite), plastic resins, glass, microprocessors and other electronic
subassemblies and components. There are multiple sources for these raw
materials, but the company purchases some bronze castings and certain electronic
subassemblies from single suppliers. The company believes these items would be
available from other sources, but that the loss of its current suppliers would
result in higher cost of materials, delivery delays, short-term increases in
inventory and higher quality control costs. The company carries business
interruption insurance on key suppliers. Prices may also be affected by world
commodity markets.

RESEARCH AND DEVELOPMENT

Expenditures for research and development activities relating to the
development of new products, the improvement of existing products and
manufacturing process improvements were $5,658,000 in 2002, compared to
$5,422,000 during 2001, and $6,562,000 during 2000. Research and development
activities are primarily sponsored by the company. The company also engages in
some joint research and development with other companies.

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INTANGIBLE ASSETS

The company owns or controls many patents, trademarks, trade names and
license agreements in the United States and other countries that relate to its
products and technologies. No single patent, trademark, trade name or license is
material to the company's business as a whole.

ENVIRONMENTAL PROTECTION

The company is subject to contingencies relative to compliance with
federal, state and local provisions and regulations relating to the protection
of the environment. Currently, the company is in the process of resolving an
issue relative to a landfill site. The company does not believe the ultimate
resolution of this issue will have a material adverse effect on the company's
financial position or results of operations, either from a cash flow perspective
or on the financial statements as a whole. Expenditures during 2002 and 2001 for
compliance with environmental control provisions and regulations were not
material and the company does not anticipate any material future expenditures.

To ensure compliance with environmental regulations at company sites, the
Board of Directors has chartered the Audit and Compliance Committee to monitor
the company's compliance with various regulatory authorities with regard to
environmental matters, among other things.

EMPLOYEES

The company and its subsidiaries employed 1,025 persons at December 31,
2002, of which 231 employees are covered by a collective bargaining agreement
with District 10 of the International Association of Machinists. The company is
currently operating under a four-year contract with the union, which expires
October 31, 2004. The company believes it has good relations with the union and
all of its employees.

FOREIGN OPERATIONS AND EXPORT SALES

The company has distributors and sales representatives throughout the
world. Additionally, the company has a sales, assembly and distribution facility
in Stuttgart, Germany, sales and customer service offices in Mexico City and
Singapore, an assembly facility in Nogales, Mexico, a manufacturing facility in
Brno, Czech Republic, and a sales and assembly facility in Nancy, France. The
company exports products from the United States that are manufactured in
Milwaukee, Wisconsin; Tulsa, Oklahoma; Rio Rico, Arizona and Mattapoisett,
Massachusetts.

Information about the company's foreign operations and export sales is
included in Note 10 "Industry Segment and Geographic Areas" in the Notes to
Consolidated Financial Statements in Part II, Item 8 of the company's 2002
Annual Report on Form 10-K.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The company operates in one industry segment as a marketer and manufacturer
of various flow measurement and control products as described in Note 10
"Industry Segment and Geographic Areas" in the Notes to Consolidated Financial
Statements in Part II, Item 8 of the company's 2002 Annual Report on Form 10-K.

ITEM 2. PROPERTIES

The principal facilities utilized by the company at December 31, 2002, are
listed below. Except as indicated, the company owns all of such facilities in
fee simple. The company believes that its facilities are generally well
maintained and have sufficient capacity for its current needs.

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(1) Leased facility. Lease term expires January 31, 2004.

(2) Leased facility. Lease term expires February 28, 2004.

(3) Leased facility. Lease term expires December 31, 2005.

ITEM 3. LEGAL PROCEEDINGS

There are currently no material legal proceedings pending with relation to
the company, except as discussed below.

The company is a defendant in five multi-party asbestos suits as a result
of its membership in certain trade organizations. The cases are pending in state
court in Mississippi. The company does not believe the ultimate resolution of
these claims will have a material adverse effect on the company's financial
position or results of operations, either from a cash flow perspective or on the
financial statements as a whole.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the company's shareholders during
the quarter ended December 31, 2002.

EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth certain information regarding the executive
officers of the company.

There are no family relationships between any of the executive officers.
All of the officers are elected annually at the first meeting of the Board of
Directors held after each annual meeting of the shareholders. Each officer holds
office until his successor has been elected or until his death, resignation or
removal. There is no arrangement or understanding between any executive officer
and any other person pursuant to which he was elected as an officer.

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Mr. Forbes was elected Chairman in April 2002. Mr. Forbes served as
Chairman and Chief Executive Officer from November 2001 to April 2002, as
Chairman, President and Chief Executive officer from February 2001 to November
2001, and as Chairman and Chief Executive Officer from April 1999 to February
2001. Prior to that date, Mr. Forbes served as President and Chief Executive
Officer for more than five years.

Mr. Meeusen was elected President and Chief Executive Officer in April
2002. Mr. Meeusen served as President from November 2001 to April 2002, and as
Executive Vice President -- Administration from February 2001 to November 2001.
In addition, Mr. Meeusen served as Vice President -- Finance and Chief Financial
Officer from November 1995 to February 2001, as well as Treasurer from January
1996 to February 2001.

Mr. Bullis was elected Vice President -- Manufacturing in February 2001. He
served as Vice President -- Operations from November 1999 to February 2001.
Prior to that date, Mr. Bullis served as Vice President -- Operations -- Utility
for more than five years.

Mr. Dix was elected Vice President -- Administration and Human Resources in
November 2001. Mr. Dix served as Vice President -- Human Resources from February
2001 to November 2001. Prior to that date, Mr. Dix served as Vice
President -- Administration and Human Resources for more than five years.

Ms. Elliott has served as Vice President -- Corporate Counsel and Secretary
for more than five years.

Mr. Gras was elected Vice President -- International Operations in November
2001. Prior to that date, Mr. Gras served as Vice President -- Badger Meter
Europe for more than five years.

Mr. Johnson joined the company and was elected Vice President -- Finance,
Chief Financial Officer and Treasurer in February 2001. Prior to joining the
company, Mr. Johnson served as Director of Business Support for the Energy
Delivery Business of Wisconsin Electric Power Company from 1999 to December
2000. From 1996 to 1999, Mr. Johnson served as the Director of Business Support
for the Distribution Operations of Wisconsin Electric Power Company.

Ms. Smiley was elected Vice President -- Corporate Controller in November
1999. Ms. Smiley served as Corporate Controller from April 1997 to November
1999.

Mr. Smith was elected Vice President -- Sales and Marketing in November
2001. Mr. Smith served as Vice President -- Industrial Products and
International from November 2000 to November 2001. Mr. Smith served as Vice
President -- Industrial and Commercial Products from January 2000 to November
2000. Prior to joining the company in January 2000, Mr. Smith served as
President of Peek Measurement Group for more than five years.

Mr. Webb was elected Vice President -- Engineering in November 2001. Mr.
Webb served as Vice President -- Customer Solutions from April 2000 to November
2001, and as Vice President -- Engineering and Quality from November 1999 to
April 2000. Prior to that date, Mr. Webb served as Vice President -- Engineering
and Quality -- Utility for more than five years.

Mr. Zandron was elected Vice President -- Business Development in November
2001. Mr. Zandron served as Vice President -- Utility Products from November
2000 to November 2001, and as Vice President -- Commercial and Industrial
Products, and a number of similar capacities, from January 2000 to November
2000. From May 1999 to January 2000, Mr. Zandron served as Vice
President -- Commercial and Industrial Products -- Utility. Prior to that date,
Mr. Zandron served as Vice President -- Commercial and Industrial and Marketing
for more than five years.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS

Information required by this Item is set forth on page 30 in Part II, Item
8 under the heading "Financial Statements and Supplementary Data" of the
company's 2002 Annual Report on Form 10-K.

ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

BUSINESS DESCRIPTION

Badger Meter is a leading marketer and manufacturer of products using flow
measurement and control technologies developed both internally and with other
technology companies. Its products are used to measure and control the flow of
liquids in a variety of applications. The company has five primary worldwide
product lines. Two product lines, residential and commercial water meters (with
various meter reading technology systems), are generally sold to water
utilities. The other three lines are called industrial products and include
automotive fluid meters and systems, small precision valves and industrial
process meters (with related accessories and instrumentation).

Water meters and related systems provide the majority of the company's
sales. A "water meter system" generally consists of a water meter, a register
(some with a digital interface technology for communicating the reading),
packaging and the monitoring or computerized management system used to collect
and relay the reading. Badger Meter's strategy is to solve customers' metering
needs with its proprietary meter reading systems or other systems available
through alliances within the marketplace. In both alternatives, the company
provides the meter that generates a mechanical signal and the device that
converts the signal into a digital form. That signal may then be read by either
a proprietary meter reading system or systems developed by other technology
companies.

RESULTS OF OPERATIONS

In the second quarter of 2002, the company completed two acquisitions, Data
Industrial Corporation (DIC) and MecaPlus Equipements SA (MPE). These
acquisitions were accounted for under the purchase accounting method, and as a
result, some of the variances shown since December 31, 2001, were attributable
to the results of operations since the date of acquisition. The acquisitions are
further discussed in Part II, Item 8, in the Notes to Consolidated Financial
Statements under the heading Note 3 B "Acquisitions" in the company's 2002
Annual Report on Form 10-K.

NET SALES

Badger Meter's net sales increased nearly $28.8 million or 20.8% for 2002
compared to 2001. The increase is the net result of the acquisitions, increases
in net sales of residential and commercial water meters and decreases in net
sales of certain industrial products, all further discussed below.

The 2002 net sales amounts include $11.0 million or 6.6% related to the
acquired companies. Without the acquisitions, net sales would have increased
$17.8 million or 14.2% over sales in 2001. In addition, the results for 2001
included approximately $1.4 million of net sales from product lines that were
discontinued. Net sales trends are primarily affected by new product sales,
water meter sales to municipalities and general market conditions. Residential
water meter sales are influenced by both privatizations of water services and a
continued industry movement away from manual-read meters to automated meter
reading technologies.

Residential and commercial water meter net sales increased nearly $20.6
million over 2001. The net sales increase was driven by increased volumes in
both plastic and bronze local-read meters as well as increased sales of
automated meter reading technologies, the latter of which carries a higher
price. A portion of the net sales increase, although not quantifiable, is also
due in part to the reorganization of the sales force. Prior to 2001, sales
representatives were assigned geographic areas. Late in 2001, a change was made
to focus less on geography and more on the type of customer. Customers include
independent distributors, large cities, private water companies and numerous
smaller municipal water utilities. One group of the company's sales
representatives focused on the distributors, another on large accounts (public
and private) and the third group focused on the remaining customers, while the
company maintained approximately the same number of sales employees. As a
result, the third group covers larger geographic areas. Because of the
additional focus on customer groups, there was an increase in sales to
distributors in 2002. Many smaller utilities purchased water meters through
distributors, and

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the company believes that the increased attention to the distributor network
caused the distributors to make an increased effort to sell Badger Meter
products.

Industrial net sales declined $1.4 million or 4.9% in 2002 from 2001. The
main cause of this decrease was poor market conditions in the niche market for
automotive fluid meters. Somewhat offsetting the decline was increased volumes
of electromagnetic flow meters.

International net sales are comprised primarily of sales of automotive
fluid meters and small valves in Europe, sales of water meters and related
technologies in Latin America, and sales of valves and other metering products
throughout the world. In Europe, sales are made in both U.S. dollars and euros.
Most other international sales are made in U.S. dollars. The company is able to
partially hedge its euro exposure by holding euro-denominated debt.
International sales, excluding the effects of the MPE acquisition, increased
4.1% over 2001 due to plastic meter sales into the Latin American market.

In 2001, net sales decreased nearly $7.9 million or 5.4% compared to 2000.
A significant factor in the decline was the discontinuance of certain product
lines. Net sales related to those lines were $1.4 million in 2001 compared with
$5.6 million in 2000, which accounts for nearly $4.2 million of the decline. The
remaining $3.7 million was due to a sales decrease in residential and commercial
water meters of approximately $1.8 million, and a decrease in industrial sales
of $1.9 million. The decrease in residential and commercial water meter sales
was primarily due to lower sales of automated meter reading systems, offset
somewhat by volume increases in lower price local (or manual) read systems. The
automotive fluid products, small precision valves and other industrial products
also saw volume decline, offset slightly by higher prices.

GROSS MARGINS

Gross margins were 33.5%, 32.1% and 36.2% for 2002, 2001 and 2000,
respectively. The increase in gross margin between 2002 and 2001 is due to
increased sales volumes, which absorbed factory capacity costs, as well as
continuing efforts to reduce product costs. Margins were also affected by higher
sales of automated meter reading products, which have higher margins than manual
(or local) read meters. Margins declined in 2001 from those levels in 2000 when
actual sales did not meet expected levels to absorb the cost of factory
capacity. Also, the lack of significant price increases in recent years has
reduced margins.

OPERATING EXPENSES

Selling, engineering and administration costs increased 11.4% in 2002 over
2001 levels. Much of this increase is attributable to the newly acquired
companies, as well as increased incentive compensation as a result of meeting
sales and earnings targets. Without the acquisitions and increased incentive
costs, these expenses would have decreased 3.8% due to continuing cost control
efforts and the elimination of costs associated with discontinued product lines.
Selling, engineering and administration costs decreased 8.5% in 2001 compared to
2000 due to lower incentive accruals and cost controls, as well as cost
reductions associated with discontinued product lines, offsetting personnel and
expense increases.

INTEREST EXPENSE

Interest expense increased $468,000 in 2002 compared to 2001. The increase
was due primarily to the increased borrowing needs as a result of the company's
acquisition of two new companies and the payment of $9.4 million into the
company's pension plan in 2002. These factors were offset somewhat by a decrease
in interest rates during the year. The company continues to use commercial paper
at very favorable interest rates to finance its operations.

Interest expense decreased $825,000 in 2001 compared to 2000. This decrease
was a result of significantly lower interest rates and the company's repayment
in 2001 of a term loan that had a higher interest rate than available commercial
paper borrowings.

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OTHER INCOME, NET

Other income, net in 2002 and 2001 relates primarily to foreign exchange
gains. Other income, net for 2000 included $2,230,000 of proceeds from business
interruption insurance, which offset lost sales and margins associated with a
fire at the facility of one of the company's principal vendors during 1999.
Without these proceeds, other income, net for 2000 would have been an expense of
$316,000.

INCOME TAXES

Income taxes as a percentage of earnings before income taxes was 36.4%,
32.9% and 35.3% for 2002, 2001 and 2000, respectively. The increase in 2002 from
2001 was due primarily to a higher level of pre-tax earnings compared to 2001
that reduced the percentage effects of certain permanent items on book-tax
differences. The decrease in 2001 from 2000 was due to lower state and foreign
taxes on lower pre-tax income and to the increased percentage effects of certain
permanent items on book-tax differences.

In 2002, the company determined that there were excess reserves for prior
year taxes, and accordingly reduced tax expense by $675,000. At the same time,
the company concluded that it was not certain that net operating loss
carryforwards for foreign subsidiaries would be realized through future profits
and as such a $475,000 valuation reserve was created by increasing the tax
expense.

NET EARNINGS AND EARNINGS PER SHARE

As a result of the above-mentioned items, net earnings were $7,271,000,
$3,364,000 and $6,941,000 in 2002, 2001 and 2000, respectively. On a diluted
basis, earnings per share were $2.20, $1.03 and $2.00, respectively, for the
same periods.

LIQUIDITY AND CAPITAL RESOURCES

The main sources of liquidity for the company are cash from operations and
borrowing capacity. Cash provided by operations increased $3.6 million or 42.4%
for 2002 compared to 2001 primarily as a result of increased earnings, deferral
of income taxes, current liabilities, and lower accounts receivable (net of
acquired companies). Offsetting these items somewhat was a $9.4 million payment
to the company's pension plan to maintain full funding status. Cash provided by
operations decreased 35.2% in 2001 compared to 2000 primarily as a result of
lower earnings, increased inventories and a $4.4 million payment to the
company's pension plan, offset partially by increased payables.

Receivables and inventories increased 18.4% and 17.2%, respectively,
between December 31, 2001 and 2002. Increases in both of these accounts are
primarily due to the receivables and inventories acquired as a result of the
acquisitions. Capital expenditures totaled $5.9 million in 2002, up from $5.0
million in 2001, but lower than $6.4 million in 2000. These amounts vary due to
the timing of capital expenditures. The company believes it will be able to
increase production with minimal additional capital expenditures.

Prepaid pension increased nearly $8.5 million at the end of 2002 compared
to the same date in 2001. This is primarily the result of making a $9.4 million
contribution to the pension plan, offset by pension expenses during 2002.
Payment to the company's pension plan was made to maintain proper funding levels
as of the September 30, 2002 measurement date. Goodwill increased $5.2 million
from 2001 to 2002 due to the acquisitions of MPE and DIC.

The increase in payables between years is primarily the result of the
assumed payables of the acquired companies as well as the timing of purchases.

Short-term debt increased $15.2 million. This increase is due to the use of
short-term debt to finance the two acquisitions and the $9.4 million payment
into the company's pension plan, offset somewhat by increased cash generated
from operations. In addition, the company made a prepayment on a portion of its
long-term debt to take advantage of lower commercial paper interest rates.
Accrued compensation and employee benefits increased nearly $3 million due to
increased incentive costs associated with improved sales and earnings levels.

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Income and other taxes increased nearly $1.4 million as a result of
increased earnings during 2002. Net deferred income taxes changed $1.7 million
from 2001 due to increased earnings and the timing of tax payments. The
principal timing difference related to the deductibility of the payment to the
company's pension plan, most of which is shown as a prepaid on the company's
balance sheet.

Total outstanding long-term debt (both the current and long-term portions)
decreased $4.6 million as a result of regular debt payments and the $4 million
prepayment allowed under terms of the loan agreement. Common stock and capital
in excess of par value both increased during 2002 due to stock issued in
connection with the exercise of stock options and ESSOP transactions. Employee
benefit stock decreased by $365,000 due to shares released as a result of
payments made on the ESSOP loan. Treasury stock increased due to shares
repurchased during the year.

Badger Meter's financial condition remains strong. The company believes
that its operating cash flows, available borrowing capacity and ability to raise
capital provide adequate resources to fund ongoing operating requirements and
future capital expenditures related to expansion of capacity and development of
new products.

CONTRACTUAL OBLIGATIONS

The company guarantees the outstanding debt of the Badger Meter Employee
Savings and Stock Ownership Plan (ESSOP) that is recorded in long-term debt,
offset by a similar amount in shareholders' equity. The loan amount is
collateralized by shares of the company's Common Stock. Payments of $365,000 and
$400,000 in 2002 and 2001, respectively, reduced the loan to $1.5 million at
December 31, 2002.

The company also guarantees the present and future debt of the Badger Meter
Officers Voting Trust (BMOVT), from which officers obtained loans from a bank in
order to purchase shares of the company's Common Stock. The officers' loan
amounts are collateralized by the company's shares that were purchased with the
loans' proceeds. There have been no loans made to officers by the BMOVT since
July 2002 due to restrictions as a result of new legislation. The amount that
the company guaranteed was $2,380,000 and $2,167,000 at December 31, 2002 and
2001, respectively. The current loan expires in April 2003 when it will likely
be renewed. The fair market value of this guarantee at December 31, 2002 was
zero because the collateral value of the shares exceeded the loan amount.

The following table includes the company's contractual obligations. There
are no other undisclosed guarantees or off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

The preparation of the financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The company's critical accounting policies
and estimates relate primarily to several judgmental reserves: allowance for
doubtful accounts, allowance for obsolete inventories, warranty and after-sale
costs reserve, and the health care reserve. Each of these judgmental reserves is
evaluated quarterly and is reviewed with the company's Disclosure Committee and
the Audit and Compliance Committee of the Board of Directors. The basis for the
reserve amounts is determined by analyzing the minimum and maximum amount of
anticipated exposure for each account, and then selecting the most appropriate
amount within the range based upon historical experience and on

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various other assumptions that are believed to be reasonable under the
circumstances. This method has been used for all years in the presented
financials and has been used consistently throughout each year. Actual results
may differ from these estimates under different assumptions or conditions.

The criteria used for calculating each of the reserve amounts varies by
type of reserve. For the allowance for doubtful accounts reserve, significant
past due and foreign account balances are reviewed in conjunction with applying
historical write-off ratios to the remaining balances. The calculation for the
allowance for obsolete inventories reserve is determined by analyzing the
relationship between the last time items were used with an analysis of estimated
usage to determine if excess quantities exist. The calculation for warranty and
after-sale costs reserve uses criteria that includes known potential problems on
past sales as well as historical claims ratios for current sales. The health
care reserve is determined by using medical cost trend analyses, reviewing
subsequent payments made and estimating unbilled amounts. The changes in the
balances of these judgmental reserves at December 31, 2002, compared to the
prior year were primarily due to the previously mentioned acquisitions.

OTHER MATTERS

The company believes it is in compliance with the various environmental
statutes and regulations to which the company's domestic and international
operations are subject. Currently, the company is in the process of resolving an
issue relative to a landfill site. Provision has been made for all known
settlement costs.

The company is also a defendant in five multi-party asbestos suits as a
result of its membership in certain trade organizations. The cases are pending
in state court in Mississippi. The company does not believe the ultimate
resolution of these issues will have a material adverse effect on the company's
financial position or results of operations, either from a cash flow perspective
or on the financial statements as a whole.

MARKET RISKS

In the ordinary course of business, the company is exposed to various
market risks, including commodity prices, foreign currency rates and interest
rates. The company typically does not hold or issue derivative instruments and
has a policy specifically prohibiting the use of such instruments for trading
purposes.

Commodity risk is managed by keeping abreast of economic conditions and
locking in purchase prices for quantities that correspond to the company's
forecasted usage.

The company's foreign currency risk relates to the sales of products to
foreign customers, specifically European customers, as most other foreign sales
are made in U.S. dollars. The company uses lines of credit with European banks
to offset currency exposure related to European receivables and other monetary
assets. As of December 31, 2002 and 2001, the company's foreign currency net
monetary assets were substantially offset by comparable debt, resulting in no
material exposure.

The company's short-term debt on December 31, 2002, was floating rate debt
with market values approximating carrying value. Fixed rate debt was principally
a term loan with a 6.73% interest rate. For the floating rate debt, future
annual interest costs will fluctuate based upon short-term interest rates. For
the short-term debt on hand on December 31, 2002, the effect of a 1% change in
interest rates is approximately $204,000 before income tax.

ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK

Information required by this Item is set forth on page 11 in Part II, Item
7 "Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Market Risk" in the company's 2002 Annual Report
on Form 10-K.

11

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

BADGER METER, INC.

REPORT OF INDEPENDENT AUDITORS

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Badger Meter, Inc.

We have audited the accompanying consolidated balance sheets of Badger
Meter, Inc. as of December 31, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2002. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Badger Meter,
Inc. at December 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.

As discussed in Note 1 to the Consolidated Financial Statements, effective
January 1, 2002, the company changed its method of accounting for goodwill.

Ernst & Young LLP

Milwaukee, Wisconsin
January 31, 2003

12

BADGER METER, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes.

13

BADGER METER, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes.

14

BADGER METER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

15

BADGER METER, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

See accompanying notes.

16

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Profile

Badger Meter is a leading marketer and manufacturer of products using flow
measurement and control technologies developed both internally and with other
technology companies. Its products are used to measure and control the flow of
liquids in a variety of applications. The company has five primary worldwide
product lines. Two product lines, residential and commercial water meters (with
various meter reading technology systems), are generally sold to water
utilities. The other three lines are called industrial products and include
automotive fluid meters and systems, small precision valves and industrial
process meters (with related accessories and instrumentation).

Consolidation

The consolidated financial statements include the accounts of the company
and its wholly owned subsidiaries.

Accounts Receivable

Accounts receivable consists primarily of trade receivables. The company
estimates and records provisions for an allowance for doubtful receivables. The
balance of this allowance was $1,016,000 and $632,000 at December 31, 2002 and
2001, respectively. In 2002, the allowance increased $191,000 related to the
acquisition of Data Industrial Corporation (DIC) and MecaPlus Equipements SA
(MPE). Refer to Note 3 B "Acquisitions" for a description of the acquisitions.

Inventories

Inventories are valued at the lower of cost (first-in, first-out method) or
market. The company estimates and records provisions for an obsolete inventories
reserve. The balance of this reserve was $1,003,000 and $757,000 at December 31,
2002 and 2001, respectively. In 2002, the reserve increased $324,000 related to
the acquisition of DIC and MPE. Refer to Note 3 B "Acquisitions" for a
description of the acquisitions.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is provided
over the estimated useful lives of the respective assets, principally by the
straight-line method. The estimated useful lives of assets are: for land
improvements, 15 years; for buildings and improvements, 10 - 39 years; and, for
machinery and equipment, 3 - 20 years.

Long-Lived Assets

The company evaluates the recoverability of its long-lived assets in
accordance with Financial Accounting Standards Board Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The company
annually evaluates whether the sum of the estimated undiscounted future cash
flows attributable to assets held and used are less than their carrying amounts.

Intangible Assets

Costs of purchased patents are amortized over the lives of the patents in
accordance with Financial Accounting Standards Board Statement No. 142,
"Goodwill and Other Intangible Assets." Other intangible assets are amortized
over their estimated useful lives. Accumulated amortization at December 31, 2002
and 2001, was $226,000 and $128,000, respectively.

17

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

Goodwill

Financial Accounting Standards Board Statement No. 142, "Goodwill and Other
Intangible Assets," became effective for the company on January 1, 2002. This
statement required companies to stop amortizing goodwill and to test for
impairment. Prior to 2002, goodwill was amortized in a straight-line basis.
Goodwill amortization expense for 2001 and 2000 was $79,000 and $70,000,
respectively. An evaluation performed in December 2002 determined that goodwill
had not become impaired. The amount of net goodwill recorded at December 31,
2002 and 2001, was $5,697,000 and $546,000, respectively. The increase was due
to the acquisitions of DIC and MPE, which are described in Note 3 B
"Acquisitions," as well as the translation effect resulting from changes in the
euro exchange rate.

Revenue Recognition

Revenues are recognized upon shipment of product, which corresponds with
the transfer of title. The costs of shipping are billed to the customer upon
shipment and are included in cost of sales.

Warranty and After-Sale Costs

The company estimates and records provisions for warranties and other
after-sale costs in the period the sale is reported. After-sale costs represent
a variety of activities outside of the written warranty policy, such as
investigation of unanticipated problems after the customer has installed the
product, or analysis of water quality issues. Changes in the company's warranty
and after-sale costs reserve are as follows:

- ---------------

(a) In 2002, the reserve increased $30,000 and $195,000 related to the
acquisition of DIC and MPE, respectively. Refer to Note 3 B "Acquisitions"
for a description of the acquisitions.

Research and Development

Research and development costs are charged to expense as incurred and
amounted to $5,658,000, $5,422,000, and $6,562,000 in 2002, 2001 and 2000,
respectively.

Other Income, Net

Included in other income, net was foreign currency gains and losses, which
are recognized as incurred. The company's functional currency for all of its
foreign subsidiaries is the U.S. dollar, with the exception of Badger Meter
France (the French parent holding company of MPE) and MPE, whose functional
currency is the euro. Other income, net for 2000 included $2,230,000 of business
interruption insurance proceeds related to lost sales and margins as a result of
a fire at a vendor's facility in 1999.

Stock Option Plans

The company has five stock option plans which provide for the issuance of
options to key employees and directors of the company. Refer to Note 5 "Stock
Option Plans" for a description of the plans.

18

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

As allowed by Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), and Statement No. 148,
"Accounting for Stock-based Compensation -- Transition and Disclosure" (SFAS
148), the company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), in
accounting for its stock option plans. Under APB 25, the company does not
recognize compensation expense upon the issuance of its stock options because
the option terms are fixed and the exercise price equals the market price of the
underlying stock on the grant date. The company has determined the pro forma
information as if the company had accounted for stock options granted since
January 1, 1995, under the fair value method of SFAS 123. The Black-Scholes
option pricing model was used with the following weighted-average assumptions
for options issued in each year:

The weighted-average fair values of options granted in 2002, 2001 and 2000,
were $4.79, $6.28 and $10.12 per share, respectively. The following tables
illustrate the effect on net income and earnings per share if the company had
applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation. These pro forma calculations only include the effects of
options granted since January 1, 1995. As such, the impacts are not necessarily
indicative of the effects on net income of future years.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

Reclassifications

Certain reclassifications have been made to the 2001 and 2000 consolidated
financial statements to conform to the 2002 presentation.

19

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

NOTE 2 COMMON STOCK

The company has Common Stock, and also a Shareholder Rights Plan, which
grants certain rights to existing holders of Common Stock. Subject to certain
conditions, the rights are redeemable by the company and are exchangeable for
shares of Common Stock. The rights have no voting power and expire on May 26,
2008.

NOTE 3 AFFILIATED COMPANY AND ACQUISITIONS

A. AFFILIATED COMPANY

The company carries its 15% interest in a Mexican company, Medidores
Azteca, S.A. (Azteca) at cost ($75,000). During 2002, 2001 and 2000, the company
sold $1,201,000, $689,000 and $654,000, respectively, of product to Azteca.
Trade receivables from Azteca at December 31, 2002 and 2001, were $621,000 and
$750,000, respectively.

B. ACQUISITIONS

On May 1, 2002, the company acquired 100% of the outstanding common stock
of Data Industrial Corporation (DIC) of Mattapoisett, Massachusetts, for $5.1
million net of cash acquired. This amount included direct acquisition costs. DIC
manufactures and markets a line of insertion flow meters that are sold to
commercial and industrial markets.

On June 1, 2002, the company acquired 100% of the outstanding common stock
of MecaPlus Equipements SA (MPE) of Nancy, France, for $3.5 million net of cash
acquired. This amount included direct acquisition costs. MPE purchases
lubrication meters, oil tanks, hoses, reels and other equipment for assembly
into lubrication systems for use in measuring and dispensing automotive fluids
such as oil, grease and transmission fluid. The acquisition of MPE brings the
company closer to its European automotive customers by offering a full line of
lubrication systems in addition to the current metering products.

The company has not finalized the allocation of the purchase price of DIC
and MPE as of December 31, 2002. Changes to date from the preliminary purchase
price allocations were primarily attributable to accounts receivable,
inventories and warranty reserves. These amounts were adjusted as additional
information became available. Total adjustments to date were not material. The
following table shows the preliminary purchase price allocation for each
acquisition.

20

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

The acquisitions of DIC and MPE were accounted for under the purchase
method and the results of both have been included in the company's consolidated
results from the date of acquisition. These acquisitions are part of the
company's strategy to broaden its line of meters for commercial and niche
industrial markets.

The following pro forma information combines historical results, as if DIC
and MPE had been owned by the company for the years ended December 31, 2002 and
2001.

The pro forma amounts include the results of the stand-alone operations of
DIC and MPE, plus the impact of purchase accounting entries, which include
amortization of acquired intangibles, depreciation of the step up basis of the
fixed assets, and interest expense on debt incurred to finance the purchases.
The pro forma results are not necessarily indicative of what would have occurred
if the acquisitions had been completed as of the beginning of each fiscal period
presented, nor are they necessarily indicative of future consolidated results.

NOTE 4 SHORT-TERM DEBT AND CREDIT LINES

Short-term debt at December 31, 2002 and 2001, consisted of:

The company has $36,344,000 of short-term credit lines with domestic and
foreign banks, which includes a $25,000,000 line of credit that can also support
commercial paper. At December 31, 2002, $20,355,000 was outstanding under these
lines with a weighted-average interest rate on the outstanding balance of 2.12%
and 2.63% at December 31, 2002 and 2001, respectively.

NOTE 5 STOCK OPTION PLANS

As discussed in Note 1 "Summary of Significant Accounting Policies" under
the heading "Stock Option Plans," the company has five stock option plans which
provide for the issuance of options to key employees and directors of the
company. Each plan authorizes the issuance of options to purchase up to an
aggregate of 200,000 shares of Common Stock, with vesting periods of up to ten
years and maximum option terms of ten years. As of December 31, 2002, options to
purchase 37,663 shares are available for grant.

21

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

The following table summarizes the transactions of the company's stock
option plans for the three-year period ended December 31, 2002:

NOTE 6 COMMITMENTS AND CONTINGENCIES

A. COMMITMENTS

The company leases equipment and facilities under operating leases, some of
which contain renewal options. Total future minimum lease payments consisted of
the following at December 31, 2002:

Total rental expense charged to operations under all operating leases was
$1,318,000, $1,447,000 and $1,586,000 in 2002, 2001 and 2000, respectively.

22

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

B. CONTINGENCIES

In the normal course of business, the company is named in legal
proceedings. There are currently no material legal proceedings pending with
respect to the company, except as discussed below.

The company is subject to contingencies relative to environmental laws and
regulations. Currently, the company is in the process of resolving an issue
relative to a landfill site. Provision has been made for all known settlement
costs.

The company is also a defendant in five multi-party asbestos suits as a
result of its membership in certain trade organizations. The cases are pending
in state court in Mississippi. The company does not believe the ultimate
resolution of these issues will have a material adverse effect on the company's
financial position or results of operations, either from a cash flow perspective
or on the financial statements as a whole.

The company makes commitments in the normal course of business. At December
31, 2002, these commitments were not significant individually or in the
aggregate.

The company has evaluated its worldwide operations to determine if any
risks and uncertainties exist that could severely impact its operations in the
near term. The company does not believe that there are any significant risks.
However, the company does rely on single suppliers for certain castings and
components in several of its product lines. Although alternate sources of supply
exist for these items, loss of certain suppliers could temporarily disrupt
operations. The company attempts to mitigate these risks by working closely with
key suppliers, purchasing minimal amounts from alternative suppliers, and by
purchasing business interruption insurance where appropriate.

The company reevaluates its exposures on a periodic basis and makes
adjustments to reserves as appropriate.

NOTE 7 EMPLOYEE BENEFIT PLANS

A. PENSION PLANS

The company maintains a non-contributory defined benefit pension plan for
its employees. The following table sets forth the components of net periodic
pension expense for the years ended December 31, 2002, 2001 and 2000, based on a
September 30 measurement date:

23

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

The following table provides a reconciliation of benefit obligations, plan
assets and funded status based on a September 30 measurement date:

Actuarial assumptions used in the preparation of the above data:

The fair value of the pension plan assets was $38,815,000 at December 31,
2002 and $36,901,000 at December 31, 2001. The variation in the fair value of
the assets between September and December of each year is primarily from the
change in the market value of the underlying investments as well as a company
contribution during the fourth quarter of 2001.

The company also maintains a supplemental non-qualified unfunded pension
plan for officers and other key employees. In 2002, the company recorded an
additional minimum liability to recognize the difference between amounts
originally recorded and the accumulated benefit obligation as of the September
30, 2002 measurement date. A charge was recorded during 2002 in other
comprehensive loss, net of the tax effect, for $453,000. Pension expense for
this plan was $583,000 and $617,000 at December 31, 2002 and 2001, respectively,
and the amount accrued was $2,949,000 and $2,018,000 as of the end of the same
periods.

24

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

B. OTHER POSTRETIREMENT BENEFITS

The company has certain postretirement plans that provide medical benefits
for certain retirees and eligible dependents. The following table sets forth the
components of net periodic postretirement benefit cost for the years ended
December 31, 2002, 2001 and 2000:

The following table provides a reconciliation of benefit obligations. It is
the company's policy to fund health care benefits on a cash basis. Since there
are no plan assets, the plan is unfunded. The following table provides a
reconciliation of the benefit obligation at the company's December 31
measurement date.

The discount rate used to measure the accumulated postretirement benefit
obligation was 7.0% for 2002 and 7.5% for 2001. Because the company established
fixed company contribution amounts for retiree health care benefits, future
health care cost trends do not impact the company's accruals or provisions.

C. BADGER METER EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN

The Badger Meter Employee Savings and Stock Ownership Plan (the ESSOP) has
used proceeds from loans, guaranteed by the company, to purchase Common Stock of
the company from shares held in treasury. The company is obligated to contribute
sufficient cash to the ESSOP to enable it to repay the loan principal and
interest. The principal amount of the loan was $1,535,000 as of December 31,
2002, and $1,900,000 as of December 31, 2001. This principal amount has been
recorded as long-term debt and a like amount of unearned

25

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

compensation has been recorded as a reduction of shareholders' equity in the
accompanying Consolidated Balance Sheets.

The company made principal payments of $365,000, $400,000 and $300,000 in
2002, 2001 and 2000, respectively. These payments released shares of Common
Stock (17,749 in 2002, 19,451 in 2001 and 14,591 in 2000) for allocation to
participants in the ESSOP. The ESSOP held unreleased shares of 74,644, 92,393
and 111,844 as of December 31, 2002, 2001 and 2000, respectively. Unreleased
shares are not considered outstanding for purposes of computing earnings per
share.

The ESSOP includes a voluntary 401(k) savings plan which allows certain
employees to defer up to 20% of their income on a pretax basis. The company
matches 25% of each employee's contribution, with the match percentage applying
to a maximum of 7% of the employee's salary. The match is paid using company
stock released through the ESSOP loan payments. For ESSOP shares purchased prior
to 1993, compensation expense is recognized based on the original purchase price
of the shares released and dividends on unreleased shares are charged to
retained earnings. For shares purchased after 1992, expense is based on the
market value of the shares on the date released and dividends on unreleased
shares are accounted for as additional interest expense. At December 31, 2002,
the company committed to contribute $250,000 to the ESSOP in 2003 to be used to
pay down the existing loan. This commitment releases shares to satisfy the
401(k) match for 2002. Compensation expense of $234,000, $268,000 and $289,000
was recognized for the match for 2002, 2001 and 2000, respectively.

NOTE 8 INCOME TAX EXPENSE

Details of earnings before income taxes and the related provision for
income taxes are as follows:

26

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

The components of the net deferred taxes as of December 31, were as follows
(in thousands):

The provision for income tax differs from the amount which would be
provided by applying the statutory U.S. corporate income tax rate in each year
due to the following items:

The valuation allowance relates primarily to net operating loss
carryforwards in certain foreign entities where there is uncertainty regarding
the realization of the deferred tax benefit through future earnings.

No provision for federal income taxes was made on the earnings of foreign
subsidiaries that are considered permanently invested or that would be offset by
foreign tax credits upon distribution. Such undistributed earnings at December
31, 2002, were $825,000.

27

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

NOTE 9 LONG TERM DEBT AND FAIR VALUE OF FINANCIAL INSTRUMENTS

Long-term debt consists of the following:

Interest on the ESSOP debt may be charged at either prime rate or at LIBOR
plus 1.5%. As of December 31, 2002, the LIBOR-based loan had an interest rate of
3.3%. The terms of the loan allow variable payments of principal with the final
principal and interest payment due December 31, 2005. The interest expense on
the ESSOP debt was $31,000, $76,000 and $125,000, which was net of dividends on
unallocated ESSOP shares of $44,790, $54,000 and $57,000 for 2002, 2001 and
2000, respectively.

In July 2001, the company borrowed $1,700,000 in connection with the
construction of a new manufacturing facility in the Czech Republic, of which
$1,214,000 was outstanding at December 31, 2002. The debt bears interest at
LIBOR plus 1.75% and the rate is set daily. Payments are due in quarterly
installments through April 2005. Principal payments total $486,000 per year for
2003 and 2004, with a final principal payment of $242,000 in 2005.

At December 31, 2002, MPE held term loans totaling $2.7 million bearing
interest of 5.7% with payments extending to 2015. This debt was collateralized
by the MPE building. In the first quarter 2003, this debt was repaid in full.
For financial statement presentation, the entire amount of debt was reclassified
to the current maturities portion of long-term debt.

In January 2002, the company borrowed $20,000,000 of long-term, unsecured
debt from a local bank. The purpose of the loan was to replace short-term
borrowings. As a result of obtaining the loan, $20,000,000 of commercial paper
was reclassified to long-term debt at December 31, 2001 for financial statement
presentation. The debt bears interest at 6.73% and is due in quarterly
installments through January 2007. Principal payments are as follows: for 2003,
$2,717,000; for 2004, $2,955,000; for 2005, $3,163,000; for 2006, $3,385,000;
and $1,175,000 thereafter. A voluntary $4 million prepayment was made in
December 2002 per the terms of the loan.

Cash, receivables and payables are reflected in the financial statements at
fair value. Short-term debt is comprised of notes payable drawn against the
company's lines of credit and commercial paper. Because of the short-term nature
of these instruments, the carrying value approximates the fair value. Long-term
debt related to the company's guarantee of the ESSOP debt is offset by a similar
amount in shareholders' equity. The $1,214,000 outstanding bank debt in the
Czech Republic is a term loan with variable interest based upon daily LIBOR
rates; accordingly, carrying value approximates the fair market value. The
remaining long-term debt of $13,395,000 was obtained in January 2002 at 6.73%
and has a fair market value of $11,429,000 as of December 31, 2002.

The company also guarantees the present and future debt of the Badger Meter
Officers Voting Trust (BMOVT), from which officers obtained loans from a bank in
order to purchase shares of the company's Common Stock. The officers' loan
amounts are collateralized by the company's shares that were purchased with

28

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

the loans' proceeds. There have been no loans made to officers by the BMOVT
since July 2002 due to restrictions as a result of new legislation. The amount
that the company guaranteed was $2,380,000 and $2,167,000 at December 31, 2002
and 2001, respectively. The current loan expires in April 2003 when it will
likely be renewed. The fair market value of this guarantee at December 31, 2002
was zero because the collateral value of the shares exceeded the loan amount.

NOTE 10 INDUSTRY SEGMENT AND GEOGRAPHIC AREAS

The company is a marketer and manufacturer of flow measurement and control
instruments, which comprise one reportable segment. The company manages and
evaluates its operations as one segment primarily due to similarities in the
nature of the products, production processes, customers and methods of
distribution.

Information regarding revenues by geographic area is as follows, with
approximately $7 million of the 2002 to 2001 increase in revenues for Europe
related to the acquisition of MPE. Refer to Note 3 B "Acquisitions" for a
description of the company's acquisitions.

Information regarding assets by geographic area is as follows, with the
increases in 2002 from 2001 for Europe related primarily to the acquisition of
MPE. Refer to Note 3 B "Acquisitions" for a description of the company's
acquisitions.

29

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2002, 2001 AND 2000

NOTE 11 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED), COMMON STOCK PRICE AND
DIVIDENDS

Fourth quarter 2002 adjustments, primarily related to the determination of
the functional currency of MPE, resulted in an increase in net income and net
income per common share of $187,000, or $.06 per diluted share. These
adjustments represent reversals of amounts recorded in previous quarters.

Badger Meter, Inc. Common Stock is listed on the American Stock Exchange
under the symbol BMI. Earnings per share is computed independently for each
quarter. As such, the annual per share amount may not equal the sum of the
quarterly amounts due to rounding. Shareholders of record as of December 31,
2002 and 2001, totaled 494 and 509, respectively, for Common Stock. Voting
trusts are counted as single shareholders for this purpose.

30

PART III

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this Item with respect to directors is included
under the headings "Nomination and Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the company's definitive Proxy
Statement relating to the Annual Meeting of Shareholders to be held on May 2,
2003, and is incorporated herein by reference.

Information concerning the executive officers of the company is included in
Part I of this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item is included under the headings
"Nomination and Election of Directors -- Director Compensation" and "Executive
Compensation" in the company's definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held on May 2, 2003, and is incorporated herein by
reference; provided, however, that the subsection entitled "Executive
Compensation-Board Management Review Committee Report on Executive Compensation"
shall not be deemed to be incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this Item is included under the heading "Stock
Ownership of Management and Others" in the company's definitive Proxy Statement
relating to the Annual Meeting of Shareholders to be held on May 2, 2003, and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this Item is included under the headings
"Management Review Committee Interlocks and Insider Participation" and "Certain
Transactions" in the company's definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held on May 2, 2003, and is incorporated herein by
reference.

ITEM 14. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. In accordance with
Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange
Act"), within 90 days prior to the filing date of this Annual Report
on Form 10-K, an evaluation was carried out under the supervision and
with the participation of the company's management, including the
company's President and Chief Executive Officer and the company's
Vice President -- Finance, Chief Financial Officer and Treasurer, of
the effectiveness of the design and operation of the company's
disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Exchange Act). Based upon their evaluation of these
disclosure controls and procedures, the company's President and Chief
Executive Officer and the company's Vice President -- Finance, Chief
Financial Officer and Treasurer concluded that the company's
disclosure controls and procedures were effective as of the date of
such evaluation to ensure that material information relating to the
company, including its consolidated subsidiaries, was made known to
them by others within those entities, particularly during the period
in which this Annual Report on Form 10-K was being prepared.

(b) Changes in internal controls. There were not any significant changes
in the company's internal controls or other factors that could
significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
31

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

(a) Documents filed

3. Exhibits. See the Exhibit Index included as the last three pages of
this report which is incorporated herein by reference.

(b) Reports on Form 8-K

No report on Form 8-K was filed by the registrant during the quarter
ended December 31, 2002.

32

SIGNATURE

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

BADGER METER, INC.

Dated: February 14, 2003
By /s/ RICHARD A. MEEUSEN
------------------------------------
Richard A. Meeusen
President and Chief Executive
Officer

By /s/ RICHARD E. JOHNSON
------------------------------------
Richard E. Johnson
Vice President -- Finance, Chief
Financial Officer and Treasurer

By /s/ BEVERLY L.P. SMILEY
------------------------------------
Beverly L.P. Smiley
Vice President -- Corporate
Controller

CERTIFICATION

I, Richard A. Meeusen, certify that:

1. I have reviewed this annual report on Form 10-K of Badger Meter, Inc. (the
registrant);

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 120 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the

33

equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: February 14, 2003

By /s/ RICHARD A. MEEUSEN
------------------------------------
Richard A. Meeusen
President and Chief Executive
Officer

CERTIFICATION

I, Richard E. Johnson, certify that:

1. I have reviewed this annual report on Form 10-K of Badger Meter, Inc. (the
registrant);

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 120 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

34

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: February 14, 2003

By /s/ RICHARD E. JOHNSON
------------------------------------
Richard E. Johnson
Vice President -- Finance, and Chief
Financial Officer and Treasurer

35

SIGNATURE

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:

/S/ JAMES L. FORBES /S/ ULICE PAYNE, JR.
- ------------------------------------ ------------------------------------
James L. Forbes Ulice Payne, Jr.
Chairman Director
February 14, 2003 February 14, 2003

/S/ RICHARD A. MEEUSEN /S/ ANDREW J. POLICANO
- ------------------------------------ ------------------------------------
Richard A. Meeusen Andrew J. Policano
President and Chief Executive Director
Officer and Director February 14, 2003
February 14, 2003

/S/ THOMAS J. FISCHER /S/ STEVEN J. SMITH
- ------------------------------------ ------------------------------------
Thomas J. Fischer Steven J. Smith
Director Director
February 14, 2003 February 14, 2003

/S/ KENNETH P. MANNING /S/ JOHN J. STOLLENWERK
- ------------------------------------ ------------------------------------
Kenneth P. Manning John J. Stollenwerk
Director Director
February 14, 2003 February 14, 2003

36

EXHIBIT INDEX

Exhibit
No. Exhibit Description
- ------- -------------------

(3.0) Restated Articles of Incorporation effective September 30, 1999.
[Incorporated by reference from Exhibit (3.0) (i) to the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30,
1999].

(3.1) Restated By-Laws as amended February 14, 2003.

(4.0) Loan Agreement, as amended April 30, 1988, between the Registrant and
the M&I Marshall & Ilsley Bank relating to the Registrant's revolving
credit loan. [Incorporated by reference from Exhibit (4.0) to the
Registrant's Quarterly Report on Form 10-Q for the period ended March
31, 1988].

(4.1) Loan Agreement between Firstar Bank Milwaukee, N.A. and the Badger
Meter Employee Savings and Stock Ownership Plan and Trust, dated
December 1, 1995. [Incorporated by reference from Exhibit (4.3) to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1995].

(4.2) Loan Agreement, as amended December 21, 1998, between Firstar Bank
Milwaukee, N.A. and the Badger Meter Employee Savings and Stock
Ownership Plan and Trust. [Incorporated by reference from Exhibit
(4.2) to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998].

(4.3) Rights Agreement, dated May 26, 1998, between the Registrant and
Firstar Trust Company. [Incorporated by reference to Exhibit (4.1) to
the Registrant's Registration Statement on Form 8-A (Commission File
No. 1-6706)].

(4.4) Agreement of Substitution and Amendment of Common Shares Rights
Agreement, dated August 16, 2002, between the Registrant and American
Stock Transfer and Trust Company [Incorporated by reference to Exhibit
(4.2) to the Registrant's Registration Statement on Form S-3
(Registration No. 333-102057)].

(9.1) Badger Meter Officers' Voting Trust Agreement dated December 18, 1991.
[Incorporated by reference from Exhibit (9.1) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1991].

(10.1)* Badger Meter, Inc. 1989 Stock Option Plan. [Incorporated by reference
from Exhibit (4.1) to the Registrant's Form S-8 Registration Statement
(Registration No. 33-27650)].

(10.2)* Badger Meter, Inc. 1993 Stock Option Plan. [Incorporated by reference
from Exhibit (4.3) to the Registrant's Form S-8 Registration Statement
(Registration No. 33-65618)].

(10.3)* Badger Meter, Inc. 1995 Stock Option Plan. [Incorporated by reference
from Exhibit (4.1) to the Registrant's Form S-8 Registration Statement
(Registration No. 33-62239)].

(10.4)* Badger Meter, Inc. 1997 Stock Option Plan. [Incorporated by reference
from Exhibit (4.1) to the Registrant's Form S-8 Registration Statement
(Registration No. 333-28617)].

37

(10.5)* Badger Meter, Inc. Deferred Compensation Plan. [Incorporated by
reference from Exhibit (10.5) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993].

(10.6) Badger Meter, Inc. Employee Savings and Stock Ownership Plan.
[Incorporated by reference from Exhibit (4.1) to the Registrant's Form
S-8 Registration Statement (Registration No. 33-62241)].

(10.7)* Long-Term Incentive Plan. [Incorporated by reference from Exhibit
(10.6) to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995].

(10.8)* Badger Meter, Inc. Supplemental Non-Qualified Unfunded Pension Plan.
[Incorporated by reference from Exhibit (10.7) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995].

(10.9)* Forms of the Key Executive Employment and Severance Agreements between
Badger Meter, Inc. and the applicable executive officers.
[Incorporated by reference from Exhibit (10.0) to the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30,
1999].

(10.10)* Badger Meter, Inc. 1999 Stock Option Plan. [Incorporated by reference
from Exhibit (4.1) to the Registrant's Form S-8 Registration Statement
(Registration No. 333-73228)].

(10.11)* Badger Meter, Inc. Amendment to Deferred Compensation Plan.
[Incorporated by reference from Exhibit (10.11) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000].

(10.12)* Retirement Agreement between Robert D. Belan and the Registrant, dated
January 28, 2002. [Incorporated by reference from Exhibit (10.12) to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001].

(10.13)* Dividend Reinvestment and Stock Purchase Plan. [Incorporated by
reference from the Registrant's Form S-3 Registration Statement
(Registration No. 333-102057)].

(10.14)* Badger Meter, Inc. 2002 Director Stock Grant Plan. [Incorporated by
reference from Exhibit (10.0) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002].

(21.0) Subsidiaries of the Registrant.

(23.0) Consent of Ernst & Young LLP, Independent Auditors.

(99.0) Definitive Proxy Statement for the Annual Meeting of Shareholders to
be held May 2, 2003. [To be filed with the Securities and Exchange
Commission under Regulation 14A within 120 days after the end of the
Registrant's fiscal year. With the exception of the information
incorporated by reference into Items 10, 11, 12 and 13 of this Form
10-K, the definitive Proxy Statement is not deemed filed as part of
this report].

38

(99.1) Written Statement of the Chief Executive Officer

(99.2) Written Statement of the Chief Financial Officer

__________
* A management contract or compensatory plan or arrangement.

39