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, 2003

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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 29, 2004 was $77,809,908. For purposes of this
calculation only, (i) shares of Common Stock are deemed to have a market value
of $25.75 per share, the closing price of the Common Stock as reported on the
American Stock Exchange on June 30, 2003, and (ii) each of the executive
officers and directors is deemed to be an affiliate.

As of February 29, 2004, there were 3,300,823 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 into
Part III.

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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

Certain statements contained in this Form 10-K and accompanying 2003 Annual
Report, 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 then current views and assumptions and involve risks and
uncertainties that include, among other things:

- the continued shift in the Company's business from lower cost, local-read
meters towards more expensive, value-added automatic meter reading (AMR)
systems;

- the success or failure of new Company products, including the Orion radio
frequency drive-by AMR meter, the advanced digital encoder (ADE) and the
proposed Galaxy fixed base AMR system;

- changes in competitive pricing and bids in the marketplace, and
particularly continued intense price competition on government bid
contracts for lower cost, local read meters;

- the actions (or lack thereof) of the Company's competitors;

- the Company's relationships with its alliance partners, particularly its
alliance partners that provide AMR connectivity solutions;

- the general health of the United States economy, particularly including
housing starts and the overall industrial activity;

- changes in foreign economic conditions, including currency fluctuations
such as the recent increase in the euro versus the United States dollar;

- changes in laws and regulations, particularly laws dealing with the use
of lead (which can be used in the manufacture of certain meters
incorporating brass housings) and Federal Communications Commission rules
affecting the use and/or licensing of radio frequencies necessary for AMR
products; and

- increases in the cost and/or availability of needed raw materials and
parts, including recent increases in the cost of brass housings as a
result of increases in the commodity prices for copper and zinc at the
supplier level.

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 in this document 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.

PART I

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

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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's product lines fall into two
general categories, utility and industrial. Two product lines, residential and
commercial water meters (with various meter reading technology systems), are
generally sold to water utilities. Industrial sales comprise the remainder of
the sales and include automotive fluid meters and systems, small precision
valves, electromagnetic meters, impeller flow meters and industrial process
meters (all with related accessories and instrumentation).

Residential and commercial water meters and related systems provide the
majority of the Company's sales. Sales are classified as local (or manual) read
meters or automatic meter reading (AMR) products. Local read meters consist of a
water meter and a register. If the device is automatic, the register digitally
encodes the mechanical reading and has a radio frequency transmitter
communicating to a computerized system that collects the data, which in turn is
sent to specific utility computerized programs. Net sales and the corresponding
net income depend on unit volume and mix of products, with generally higher
margins on AMR products. There is a base level of annual business driven by
replacement units, and to a lesser extent, housing starts. It is the Company's
belief that conversion from local read meters to AMR products can accelerate
replacements of meters and result in growth. 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.

The industrial products generally serve niche markets and have in the past
utilized technology derived from utility products to serve industrial uses. As
these markets evolve, these products are becoming more specialized to meet
industrial flow measurement and communication protocol requirements. Serving
these markets allows the Company to expand its technologies into other areas of
flow measurement and control, as well as utilizing existing capacity and
spreading fixed costs over a larger sales base.

The Company's products are primarily manufactured and assembled in the
Company's Milwaukee, Wisconsin; Tulsa, Oklahoma; Rio Rico, Arizona; Nogales,
Mexico and Brno, Czech Republic facilities. Products are also assembled in the
Company's 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 Sensus Metering Systems, Inc. (formerly Invensys, Inc.),
Neptune Technologies (formerly 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 water meters and
associated automatic meter reading systems for water utilities. 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, 2003 and 2002 was $24,800,000 and $21,200,000, respectively. At
December 31, 2003, backlog is comprised of firm orders and signed contractual
commitments, or portions of such commitments, that call for shipment in 2004.
Backlog can be significantly affected by the timing of orders for large utility
projects.

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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 in the short term. 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 $6,070,000 in 2003, compared to
$5,658,000 during 2002, and $5,422,000 during 2001. Research and development
activities are primarily sponsored by the Company. The Company also engages in
some joint research and development with other companies.

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 2003, 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 directed 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 1,065 persons at December 31,
2003, of which 226 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 and
Singapore; a manufacturing facility in Nogales, Mexico; a manufacturing and
sales 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; and Rio Rico, Arizona.

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 this 2003 Annual Report
on Form 10-K.
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FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The Company operates in one industry segment as a marketer and manufacturer
of 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 this 2003 Annual Report on Form 10-K.

ITEM 2. PROPERTIES

The principal facilities utilized by the Company at December 31, 2003 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, 2006.

(2) Leased facility. Lease term expired February 28, 2004 and the facility was
closed.

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

ITEM 3. LEGAL PROCEEDINGS

There are currently no material legal proceedings pending with respect to
the Company. The more significant legal proceedings are discussed below.

The Company is a defendant in several multi-party asbestos suits generally
as a result of its membership in certain trade organizations. The cases are
pending in state courts in Mississippi, Texas and Illinois. 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.

The Company is subject to contingencies relative to the protection of the
environment. Information about the Company's compliance with environmental
regulations is included in Part I, Item 1 under the heading "Environmental
Protection."

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, 2003.

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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.

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.
From November 1995 until February 2001, Mr. Meeusen served as Vice President --
Finance, Chief Financial Officer and Treasurer.

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 Senior Vice President -- Administration/Human Resources
in May 2003 and Secretary in August 2003. Mr. Dix served as Vice
President -- Administration and Human Resources from November 2001 to May 2003,
and 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.

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 was elected Senior Vice President -- Finance, Chief Financial
Officer and Treasurer in May 2003. Mr. Johnson served as Vice
President -- Finance, Chief Financial Officer and Treasurer from February 2001
to May 2003. 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.

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

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.

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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.

PART II

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

Information required by this Item is set forth in Part II, Item 8 under the
heading "Financial Statements and Supplementary Data" of this 2003 Annual Report
on Form 10-K, under Note 11 "Unaudited: Quarterly Results of Operations, Common
Stock Price and Dividends" of the Notes to Consolidated Financial Statements.

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ITEM 6. SELECTED FINANCIAL DATA

BADGER METER, INC.

TEN YEAR SUMMARY OF SELECTED DATA

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

BUSINESS DESCRIPTION AND OVERVIEW
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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's product lines fall into two
general categories, utility and industrial. Two product lines, residential and
commercial water meters (with various meter reading technology systems), are
generally sold to water utilities. Industrial sales comprise the remainder of
the sales and include automotive fluid meters and systems, small precision
valves, electromagnetic meters, impeller flow meters and industrial process
meters (all with related accessories and instrumentation).

Residential and commercial water meters and related systems provide the
majority of the Company's sales. Sales are classified as local (or manual) read
meters or automatic meter reading (AMR) products. Local read meters consist of a
water meter and a register. If the device is automatic, the register digitally
encodes the mechanical reading and has a radio frequency transmitter
communicating to a computerized system that collects
7

the data, which in turn is sent to specific utility computerized programs. Net
sales and the corresponding net income depend on unit volume and mix of
products, with generally higher margins on AMR products. There is a base level
of annual business driven by replacement units, and to a lesser extent, housing
starts. It is the Company's belief that conversion from local read meters to AMR
products can accelerate replacements of meters and result in growth. 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.

The industrial products generally serve niche markets and have in the past
utilized technology derived from utility products to serve industrial uses. As
these markets evolve, these products are becoming more specialized to meet
industrial flow measurement and communication protocol requirements. Serving
these markets allows the Company to expand its technologies into other areas of
flow measurement and control, as well as utilizing existing capacity and
spreading fixed costs over a larger sales base.

RESULTS OF OPERATIONS
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In the second quarter of 2002, the Company completed two acquisitions, Data
Industrial Corporation (DIC) and MecaPlus Equipements SA (MPE). Through the
acquisition of DIC, the Company acquired an impeller flow meter allowing it to
serve a market not previously served. The acquisition of MPE allowed the Company
to expand into the lubrication system market in France while continuing to have
a market for its automotive fluid meters. These acquisitions were accounted for
under the purchase accounting method, and as a result, some of the variances
shown since December 31, 2002 were attributable to having a full year's results
in 2003 versus a partial year in 2002. The acquisitions are further discussed in
Part II, Item 8 under the heading "Financial Statements and Supplementary Data"
of this 2003 Annual Report on Form 10-K, under Note 3 B "Acquisitions" of the
Notes to Consolidated Financial Statements.

NET SALES

Badger Meter's net sales increased nearly $16.7 million, or 10.0%, for 2003
compared to 2002. The increase was the net result of the acquisitions and
increases in net sales of the Company's products as further discussed below.

Net sales in 2003 included $21.7 million of sales related to the acquired
companies compared to $11.0 million in 2002, with the latter amount representing
sales only from the dates of the acquisitions. Without the acquisitions, net
sales increased $6.0 million, or 3.9%, over 2002 net sales. Overall, Company
sales trends are primarily affected by water meter demand by municipalities
(both residential and commercial), new product introduction and general market
conditions.

Water meter sales are influenced by a continued industry movement away from
manual-read meters to automatic meter reading technologies, the lengthening of
the sales cycle and financial budget conditions of the various water utilities
served. Customers include independent distributors, large cities, private water
companies and numerous smaller municipal water utilities. One group of the
Company's sales representatives focuses on distributors, another on large
accounts (public and private), and a third group focuses on the remaining
customers.

Residential and commercial water meter net sales represented 72.3% of total
sales in 2003 compared with 77.1% in 2002. These sales increased $4.1 million in
2003 to $133.1 million compared to $129.0 million in 2002. While the number of
units utilizing the Company's principal automatic meter reading technologies
increased, overall unit volume declined due to lower volumes of local (or
manual) read water meters. The automatic meter reading technologies carry a
higher price, which contributed to the increase in net sales. In addition, the
increase in net sales included sales of the newly introduced Orion AMR system.
Sales for the year were negatively influenced by longer sales cycles,
particularly early in 2003 as water utilities evaluated the requirements and
costs of increased security resulting from concerns over the war in Iraq and
terrorism.

Industrial sales are affected by economic conditions, domestically and
internationally, in each of the markets served by the various product lines. In
total, the industrial products represented 27.7% of total net sales in 2003
compared with 22.9% in 2002. Industrial product sales increased 32.7% to $50.9
million in 2003 compared with $38.3 million in 2002. Much of this increase is
attributable to the two acquisitions completed in the second
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quarter of 2002 and to the effect of the stronger euro on sales in Europe.
Without the acquisitions, the net change would be an increase of $1.9 million,
or 7.0%, primarily due to the strengthening of the euro resulting in higher
sales of automotive fluid meters and 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 prior year acquisition,
increased 5.0% to $11.2 million from $10.6 million in 2002 due to increased
sales into Latin America.

The 2002 net sales included $11.0 million, or 6.6%, related to the acquired
companies. Without the acquisitions, net sales increased $17.8 million, or
14.2%, over sales in 2001. In addition, the sales for 2001 included
approximately $1.4 million of net sales from product lines that were
discontinued. Residential and commercial water meter sales increased nearly
$20.6 million over 2001 due to increased volumes of both plastic and bronze
local-read meters as well as increased sales of AMR technologies.

GROSS MARGINS

Gross margins were 32.9%, 33.5% and 32.1% for 2003, 2002 and 2001,
respectively. The decrease between 2003 and 2002 was primarily due to lower unit
volumes resulting in higher absorbed factory costs, the inability to increase
prices for higher incurred costs due to market conditions, and to a lesser
extent, the addition of MPE which has lower margins as an assembly operation.
Somewhat offsetting these decreased volumes were increased volumes of AMR
products, which carry higher margins. The increase in gross margin between 2002
and 2001 was due to increased sales volumes, which absorbed factory capacity
costs, as well as continuing efforts to reduce product costs. Margins in 2002
were also affected by higher sales of automatic meter reading products.

OPERATING EXPENSES

Selling, engineering and administration costs increased 8.4% in 2003 over
2002 levels. Some of the increase was attributable to the full year effects in
2003 of the prior year acquisitions, and to the severance costs of headcount
reductions at MPE to better position it in the market. Without the effects of
the acquisitions and the headcount reduction costs, these expenses increased
1.4% primarily due to increased health care expenses offset somewhat by
continuing cost control efforts. Selling, engineering and administration costs
increased 11.4% in 2002 over 2001 levels. Much of this increase was attributable
to the newly acquired companies, as well as increased incentive compensation as
a result of meeting sales and earnings targets.

INTEREST EXPENSE

Interest expense decreased $112,000 in 2003 compared to 2002. This was
primarily due to continuing favorable rates on the commercial paper the Company
used to finance its operations in 2003, as well as the reduction in overall
debt. Interest expense increased $468,000 in 2002 compared to 2001. This
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 2002.

OTHER INCOME, NET

Other income, net in 2003, 2002 and 2001 related primarily to foreign
exchange gains, particularly in 2003 due to the strengthening of the euro
against the U.S. dollar. The Company has euro-based receivables on its corporate
ledger that relate to its foreign subsidiaries, for which translation gain was
recognized through the income statement while the offsetting translation loss on
the corresponding subsidiary's debt was recognized as a component of other
comprehensive income (loss). The significant strengthening of the euro in 2003
resulted in a translation gain of $781,000. During the second quarter, the
Company borrowed euro-based debt domestically to hedge the euro-based receivable
exposure.

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INCOME TAXES

Income taxes as a percentage of earnings before income taxes was 43.2%,
36.4% and 32.9% for 2003, 2002 and 2001, respectively. The increase in 2003 from
2002 was primarily due to recording a valuation reserve on the operating losses
of certain of the Company's foreign subsidiaries, as further described below.
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.

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 certain foreign subsidiaries would be realized through future
profits, and as such a $475,000 valuation reserve was created by increasing the
tax expense. The net result of these transactions did not significantly affect
the effective tax rate for 2002.

In 2003, the valuation reserve was further increased to $1,225,000 due to
continued realization uncertainties for foreign net operating loss
carryforwards. The increase in the reserve was recorded as additional tax
expense, which significantly increased the Company's effective rate for 2003. At
December 31, 2003, the Company had foreign net operating loss carryforwards at
certain European subsidiaries totaling $6.2 million. The carryforwards have
unlimited carryforward periods, which can be used to offset future taxable
income at these locations.

NET EARNINGS AND EARNINGS PER SHARE

As a result of the above-mentioned items, net earnings were $7,577,000,
$7,271,000 and $3,364,000 in 2003, 2002 and 2001, respectively. On a diluted
basis, earnings per share were $2.30, $2.20 and $1.03, respectively, for the
same periods.

LIQUIDITY AND CAPITAL RESOURCES
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The main sources of liquidity for the Company are cash from operations and
borrowing capacity. Cash provided by operations in 2003 increased $1.9 million,
or 15.2%, compared to 2002 primarily as a result of increased earnings and no
required payment to the pension plan, offset by increases in receivables and
inventories. Cash provided by operations increased $3.6 million, or 42.5%, for
2002 compared to 2001 primarily as a result of increased earnings, deferral of
income taxes, higher current liabilities, and lower receivables (net of acquired
companies). Offsetting these items somewhat in 2002 was a $9.4 million payment
to the Company's pension plan to maintain full funding status.

Receivables increased 18.8% between December 31, 2002 and 2003 due
primarily to higher fourth quarter sales in 2003 versus 2002. Inventories
increased 17.8% due primarily to the introduction of several new products in
2003 as well as longer lead-time on certain electronic components associated
with the increased sales of AMR products. The increases in both receivables and
inventories were also affected to a lesser extent by the strength of the euro on
foreign subsidiaries' balances. Capital expenditures totaled $7.1 million in
2003, $5.9 million in 2002 and $5.0 million in 2001. 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 decreased $1.2 million at the end of 2003 compared to the
same date in 2002. This was the result of pension expense during 2003 and a
partial refund from prior year's overfunding. Assumptions for determining
pension liability, expected return on assets and annual expense are reviewed
and, if appropriate, adjusted annually. The impacts of hypothetical changes in
certain assumptions is difficult to determine as economic factors can often
impact multiple assumptions and inputs at the same time. The Company believes
its current assumptions are reasonable. At December 31, 2003, the market value
of the assets in the Company's pension plan was $43.9 million. Included in the
Company's December 31, 2003 prepaid pension balance was $17 million of
unrecognized net actuarial losses.

The amount of net goodwill recorded at December 31, 2003 and 2002 was
$7,089,000 and $5,697,000, respectively. The increase included $635,000 due to
the translation effect resulting from changes in the euro exchange rate for two
of the Company's subsidiaries with euro based functional currency. In addition,
the increase included $757,000 for the amount of severance costs related to the
termination of several MPE
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employees in connection with management's initial assessment at the date of
acquisition. The amount of the severance cost was not estimable until the first
quarter of 2003. As of December 31, 2003, $277,000 associated with the severance
remains accrued on the balance sheet.

Short-term debt decreased $16.8 million in 2003. This decrease was offset
by proceeds from long-term debt obtained at year end, the proceeds of which were
used to repay much of the existing short- and long-term debt. The increase in
payables between years is primarily the result of the timing of purchases.
Accrued compensation and employee benefits increased $0.6 million due to
increased incentive costs associated with improved sales and earnings levels.
Income and other taxes increased $1.0 million as a result of increased earnings
during 2003 and the timing of tax payments.

Total outstanding long-term debt (both the current and long-term portions)
increased $11.1 million, which was the net result of new long-term instruments
obtained in late 2003, offset by regular debt payments. None of the Company's
debt carries financial covenants or is collateralized.

Common Stock and capital in excess of par value both increased during 2003
due to stock issued in connection with the exercise of stock options and
treasury stock issuances. Employee benefit stock decreased by $250,000 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 including
$33,166,000 of unused credit lines, and its ability to raise capital provide
adequate resources to fund ongoing operating requirements, future capital and
development of new products.

OFF-BALANCE SHEET ARRANGEMENTS
- ------------------------------

The Company guarantees the debt of the Badger Meter Officers' Voting Trust
(BMOVT), from which the trust obtained loans from a bank on behalf of the
officers of the Company 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. The amount of such debt that the Company
guaranteed was $1,754,000 and $2,380,000 at December 31, 2003 and 2002,
respectively. The current loan was renewed in April 2003 with an expiration date
of April 2004, at which time it is expected to be renewed. The fair market value
of this guarantee at December 31, 2003 continues to be insignificant because the
collateral value of the shares exceeds the loan amount. The Company has no other
undisclosed off-balance sheet arrangements.

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 of unearned compensation that has been recorded as a
reduction of shareholders' equity. The loan amount is collateralized by shares
of the Company's Common Stock. Payments of $250,000 and $365,000 in 2003 and
2002, respectively, reduced the loan to $1,285,000 at December 31, 2003. The
terms of the loan allow variable payments of principal with the final principal
and interest payment due in June 2004, at which time it is expected to be
renewed.

11

The following table includes the Company's significant contractual
obligations as of December 31, 2003. There are no other undisclosed guarantees.

As of December 31, 2003, the Company had no material purchase obligations
other than those created in the ordinary course of business related to inventory
and property, plant and equipment, which generally have terms of less than 90
days. The Company also has long-term obligations related to its pension and
postretirement plans which are discussed in detail in Note 7 of the Notes to
Consolidated Financial Statements. As of the most recent actuarial measurement
date, no pension plan contributions are anticipated in 2004 and postretirement
medical claims are paid as they are submitted. Postretirement medical claims are
anticipated to be $1,276,000 in 2004.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
- -------------------------------------------------

The Company's accounting policies are more fully described in Note 1 of the
Notes to Consolidated Financial Statements. As discussed in Note 1, 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. The Company's more significant estimates relate primarily to
several judgmental reserves: allowance for doubtful accounts, allowance for
obsolete inventories, warranty 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 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 receivable 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 age and quantity of items on hand versus 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 reserves at December 31, 2003 compared to the prior year were
not material.

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
12

resolving an issue relative to a landfill site. Provision has been made for all
known settlement costs, which are not material.

The Company is also a defendant in several multi-party asbestos suits
generally as a result of its membership in certain trade organizations. The
cases are pending in state courts in Mississippi, Texas and Illinois. 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.

On January 1, 2003, the Company changed the functional currency of one of
its European subsidiaries to the euro from the U.S. dollar as a result of being
sold by a subsidiary whose functional currency is the U.S. dollar to another
subsidiary of the Company where the majority of their activities are euro-based.
This change resulted in a credit of $479,000 to other comprehensive income,
offset by a similar amount to the subsidiary's inventory and property, plant and
equipment balances. The impact to the Company in the long-term is not expected
to be significant.

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 U.S. and
European banks to offset currency exposure related to European receivables and
other monetary assets. As of December 31, 2003 and 2002, 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, 2003 was floating rate debt
with market values approximating carrying value. Fixed rate debt was principally
a U.S. dollar term loan with a 4.8% interest rate and a euro dollar revolving
term loan with a 4% 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, 2003, the effect of a 1% change in
interest rates is approximately $35,000 before income tax.

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

Information required by this Item is set forth in Part II, Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Market Risks" in this 2003 Annual Report on Form
10-K.

13

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. (the Company) as of December 31, 2003 and 2002, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2003. 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, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States.

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

/s/ Ernst & Young LLP

Milwaukee, Wisconsin
February 4, 2004

14

BADGER METER, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes.

15

BADGER METER, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes.

16

BADGER METER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

17

BADGER METER, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

See accompanying notes.

18

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001

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's product lines fall into two
general categories, utility and industrial. Two product lines, residential and
commercial water meters (with various meter reading technology systems), are
generally sold to water utilities. Industrial sales comprise the remainder of
the sales and include automotive fluid meters and systems, small precision
valves, electromagnetic meters, impeller flow meters and industrial process
meters (all with related accessories and instrumentation).

Consolidation

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

Receivables

Receivables consists primarily of trade receivables. The Company evaluates
the collectibility of its receivables based on a number of factors. An allowance
for doubtful accounts is recorded for significant past due receivable balances
based on a review of the past due items, as well as applying a historical
write-off ratio to the remaining balances. Changes in the Company's allowance
for doubtful accounts are as follows:

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

(a) In 2002, the reserve increased $41,000 and $150,000 related to the
acquisition of Data Industrial Corporation (DIC) and MecaPlus Equipements
SA (MPE), respectively. 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 obsolete inventories.
Changes to the Company's obsolete inventories reserve are as follows:

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

(a) In 2002, the reserve increased $90,000 and $234,000 related to the
acquisition of DIC and MPE, respectively. Refer to Note 3 B "Acquisitions"
for a description of the acquisitions.

19

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

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

Property, plant and equipment and identifiable intangible assets are
reviewed for impairment, in accordance with Financial Accounting Standards Board
(FASB) Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. If the sum of the expected
undiscounted cash flows is less than the carrying value of the related asset or
group of assets, a loss is recognized for the difference between the fair value
and carrying value of the asset or group of assets.

Intangible Assets

Intangible assets are amortized on a straight line basis over their
estimated useful lives ranging from 5.5 to 10 years. The Company does not have
any intangible assets deemed to have indefinite lives. Accumulated amortization
at December 31, 2003 and 2002 was $384,000 and $226,000, respectively.
Amortization expense expected to be recognized for each of the next three years
beginning with 2004 is $176,000, and $171,000 in 2007 and $117,000 in 2008. The
carrying value and accumulated amortization by major class of intangible assets
are as follows:

Goodwill

FASB 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 at least annually. During
2003 and 2002, the Company tested its goodwill balance for impairment in
accordance with FASB Statement No. 142 and no adjustments were recorded to
goodwill as a result of those reviews. Prior to 2002, goodwill was amortized on
a straight-line basis. The amount of net goodwill recorded at December 31, 2003
and 2002 was $7,089,000 and $5,697,000, respectively. The increase included
$635,000 due to the translation effect resulting from changes in the euro
exchange rate for two of the Company's subsidiaries with euro based functional
currency, and a $757,000 increase for the accrual of severance costs related to
MPE, which is further discussed in Note 3B "Acquisitions."

20

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

Revenue Recognition

Revenues are generally 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. A small portion of the
Company's sales include shipments of products combined with services, such as
meters sold with installation. The product and installation components of these
multiple deliverable arrangements are considered separate units of accounting.
The value of these separate units of accounting are determined based on their
relative fair values determined on a stand-alone basis. Revenue is recognized
when the last element is delivered, which generally corresponds with
installation.

Warranty and After-Sale Costs

The Company estimates and records provisions for warranties and other
after-sale costs in the period the sale is recorded. 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 $6,070,000, $5,658,000, and $5,422,000 in 2003, 2002 and 2001,
respectively.

Other Income, Net

Included in other income, net are 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), MPE and Badger Meter Czech
Republic, whose functional currency is the euro. Foreign currency gains of
$781,000 were reported in 2003 compared to $267,000 and $99,000 in 2002 and
2001, respectively, primarily related to the strengthening of the euro versus
the U.S. dollar.

Stock Option Plans

The Company has six 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.

As allowed by FASB Statement No. 123, "Accounting for Stock-Based
Compensation," and Statement No. 148, "Accounting for Stock-based Compensation
- -- Transition and Disclosure," the Company has elected 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. Pro forma information regarding
net earnings and earnings per

21

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

share required by FASB Statement No. 123 has been determined as if the Company
had accounted for stock options granted since January 1, 1995 under the fair
value method of that Statement. The Black-Scholes option pricing model was used
to determine the fair value of options with the following weighted-average
assumptions for options issued in each year:

The weighted-average fair values of options granted in 2003, 2002 and 2001
were $6.03, $4.79 and $6.28 per share, respectively. The following table
illustrates the effect on net earnings and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 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 earnings of future years.

Comprehensive Income

Comprehensive income is comprised of net income and other comprehensive
income, which includes foreign currency translation adjustments and minimum
employee benefit liability adjustments. Total comprehensive income was
$8,918,000 and $7,210,000 for 2003 and 2002, respectively. Components of
accumulated other comprehensive income (loss) at December 31, are as follows:

The $1,390,000 increase in foreign currency translation adjustments is due
to both the strengthening of the euro versus the U.S. dollar and a $479,000
increase related to the effect of the Company's Czech Republic subsidiary
changing its functional currency from the U.S. dollar to the euro, effective
January 1, 2003.

22

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

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 2002 Notes to Consolidated
Financial Statements to conform to the 2003 presentation.

Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,"
which expands upon and strengthens existing accounting guidance concerning when
a company should include in its financial statements the assets, liabilities and
activities of another entity. A Variable Interest Entity (VIE) does not share
economic risk and reward through typical equity ownership arrangements, but by
contractual or other relationships that redistribute economic risks and rewards
among equity holders and other parties. Once an entity is determined to be a
VIE, the party with the controlling financial interest, the primary beneficiary,
is required to consolidate it. FIN 46 also requires disclosure about VIEs that a
company is not required to consolidate but in which it has a significant
variable interest. The adoption of applicable provisions of FIN 46 in 2003 did
not have an impact on the Company's financial position, results of operations or
cash flows. Further, the adoption of the remaining provisions of FIN 46 in 2004
is not anticipated to have a material impact on the Company's financial
position, results of operations or cash flows.

NOTE 2 COMMON STOCK

The Company has Common Stock, and also a Common Shares Rights Agreement,
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

In 2003, the Company sold its 15% interest in a Mexican company, Medidores
Azteca, S.A. (Azteca) for the original cost of $75,000. During 2003, 2002 and
2001, the Company sold $512,000, $1,201,000 and $689,000, respectively, of
product to Azteca. Receivables from Azteca at December 31, 2003 and 2002 were
$617,000 and $621,000, 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 impeller 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.
23

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

The Company finalized the allocation of the purchase price of DIC and MPE
during 2003. There were no adjustments recorded for DIC after the preliminary
allocations at December 31, 2002. During 2003, goodwill relating to MPE
increased $757,000 from the December 31, 2002 amount to reflect the accrual of
severances related to the termination of several MPE employees in connection
with management's initial assessment at the date of acquisition. The amount of
the severance cost was not estimable until the first quarter of 2003. As of
December 31, 2003, $277,000 associated with the severances remains reserved. The
following table shows the final purchase price allocation for each acquisition.

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 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.

In 2003, DIC was dissolved and the production of the DIC impeller flow
meter product line was transferred from the Company's facility in Mattapoisett,
Massachusetts to its facility in Tulsa, Oklahoma in order to better utilize
existing capacity. The lease on the Massachusetts facility expired in early
2004. Expenses associated with this decision included severance costs and the
disposal of leasehold improvements of $119,000 and $67,000, respectively, of
which $173,000 was expensed during 2003.

24

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

NOTE 4 SHORT-TERM DEBT AND CREDIT LINES

Short-term debt at December 31, 2003 and 2002, consisted of:

The Company has $36,709,000 of short-term credit lines with domestic and
foreign banks, which includes a $20,000,000 line of credit that can also support
the issuance of commercial paper. At December 31, 2003, $3,543,000 was
outstanding under these lines with a weighted-average interest rate on the
outstanding balance of 3.50% and 2.12% at December 31, 2003 and 2002,
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 six 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, 2003, options to
purchase 159,822 shares are available for grant.

25

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

The following table summarizes the transactions of the Company's stock
option plans for the three-year period ended December 31, 2003:

NOTE 6 COMMITMENTS AND CONTINGENCIES

A. COMMITMENTS

The Company leases equipment and facilities under non-cancelable operating
leases, some of which contain renewal options. Total future minimum lease
payments consisted of the following at December 31, 2003:

Total rental expense charged to operations under all operating leases was
$1,670,000, $1,337,000 and $1,447,000 in 2003, 2002 and 2001, respectively.

26

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

The Company makes commitments in the normal course of business. At December
31, 2003, the Company had various contractual obligations, including royalty
commitments, minimum product purchases, other distribution rights, investment,
and research and development commitments, that were $5,115,000, of which
$1,780,000 is due in 2004 and the remainder due from 2005 through 2007.

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. The more significant legal proceedings are 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, which are not material.

The Company is also a defendant in several multi-party asbestos suits
generally as a result of its membership in certain trade organizations. The
cases are pending in state courts in Mississippi, Texas and Illinois. 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 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 in the short term. 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 cost for the years ended December 31, 2003, 2002 and 2001 based on a
September 30 measurement date:

27

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

Actuarial assumptions used in the determination of the net periodic pension
cost of the above data:

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 determination of the benefit obligation
of the above data:

The fair value of the pension plan assets was $43,877,000 at December 31,
2003 and $38,815,000 at December 31, 2002. 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. The Company does not
expect to contribute funds to its pension plan in 2004.

The Company employs a total return investment approach whereby a mix of
equities and fixed income investments are used to maximize the long-term return
of plan assets for a prudent level of risk. Risk tolerance is established
through careful consideration of short- and long-term plan liabilities, plan
funded status and corporate financial condition. The investment portfolio
contains a diversified blend of equity and fixed-income investments.
Furthermore, equity investments are diversified across U.S. and non-U.S. stocks,
as well as growth, value, and

28

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

small and large capitalizations. Investment risk is measured and monitored on an
ongoing basis through quarterly investment portfolio reviews, annual liability
measurements and periodic asset/liability studies. The Company's pension plan
weighted-average asset allocations by asset category at December 31 are as
follows:

The pension plan has a separately determined accumulated benefit obligation
which is the actuarial present value of benefits based on service rendered and
current and past compensation levels. This differs from the projected benefit
obligation in that it includes no assumption about future compensation levels.
The accumulated benefit obligation was $39,642,000 and $38,501,000 at September
30, 2003 and 2002, respectively.

The Company also maintains a supplemental non-qualified unfunded pension
plan for certain officers and other key employees. In both 2003 and 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 measurement date. A charge was recorded in other comprehensive
income (loss), net of the tax effect, for $49,000 and $453,000 in 2003 and 2002,
respectively. Pension expense for this plan was $429,000 and $583,000 at
December 31, 2003 and 2002, respectively, and the amount accrued was $2,706,000
and $2,949,000 as of the end of the same periods.

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, 2003, 2002 and 2001:

The discount rate used to measure the accumulated postretirement benefit
cost was 7.0% for 2003 and 7.5% for 2002 and 2001. It is the Company's policy to
fund health care benefits on a cash basis. Since the plan is

29

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

unfunded, there are no plan assets. 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 6.5% for 2003 and 7.0% for 2002. Because the plan requires the
Company to establish fixed Company contribution amounts for retiree health care
benefits, future health care cost trends do not impact the Company's accruals or
provisions. The Company estimates that it will pay $1,276,000 in other
postretirement benefits in 2004.

In January 2004, the FASB issued Financial Staff Position No. FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (the Act), to address the
impact of the Act enacted in December 2003. The Act provides a prescription drug
benefit for Medicare eligible employees starting in 2006. The impact of the Act
on the Company is not yet known.

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 $1,285,000 as of December 31,
2003, and $1,535,000 as of December 31, 2002. This principal amount has been
recorded as long-term debt and a like amount of unearned compensation has been
recorded as a reduction of shareholders' equity in the accompanying Consolidated
Balance Sheets.

The Company made principal payments of $250,000, $365,000 and $400,000 in
2003, 2002 and 2001, respectively. These payments released shares of Common
Stock (12,157 in 2003, 17,749 in 2002 and 19,451 in 2001) for allocation to
participants in the ESSOP. The ESSOP held unreleased shares of 62,487, 74,644
and 92,393 as of December 31, 2003, 2002 and 2001, respectively, with the fair
value of $2,384,000, $2,396,000 and $2,072,000 as of December 31, 2003, 2002 and
2001, 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 subject to limits
on maximum amounts. 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

30

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

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, 2003, the Company intends to contribute
$220,000 to the ESSOP in 2004 to be used to pay down the existing loan. This
commitment releases shares to satisfy the 401(k) match for 2003. Compensation
expense of $231,000, $234,000 and $268,000 was recognized for the match for
2003, 2002 and 2001, respectively.

NOTE 8 INCOME TAX EXPENSE

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

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:

31

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

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

The valuation reserve 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. At December 31, 2003, the
Company had foreign net operating loss carryforwards at certain European
subsidiaries totaling $6.2 million. The carryforwards have unlimited
carryforward periods, which can be used to offset future taxable income from
these subsidiaries.

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, 2003 were $608,000.

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, 2003, the LIBOR-based loan had an interest rate of
2.7%. The terms of the loan allow variable payments of principal with the final
principal and interest payment due June 20, 2004, at which time it is expected
to be renewed. The interest expense on the ESSOP debt was $27,000, $31,000 and
$76,000, which was net of dividends on unallocated ESSOP shares of $39,000,
$45,000 and $54,000 for 2003, 2002 and 2001, respectively.

32

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

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
$734,000 and $1,214,000 was outstanding at December 31, 2003 and 2002,
respectively. The debt bears interest at LIBOR plus 1.75% and the rate is set
daily with a rate of 2.9% at December 31, 2003. Payments are due in quarterly
installments through April 2005. Principal payments total $486,000 for 2004,
with a final principal payment of $248,000 in 2005.

In December 2003, the Company obtained two long-term, unsecured loans to
replace existing short- and long-term debt. The Company secured a $16,000,000,
3-year term loan that bears interest at 4.8% with annual principal payments of
$5,071,000, $5,331,000 and $5,598,000 in 2004, 2005 and 2006, respectively. In
addition, the Company secured a $12,000,000 euro-based, revolving loan facility
that bears interest at 4% and expires in April 2007. Borrowings under this
revolving loan facility were $11,970,000 at December 31, 2003.

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. The
$734,000 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 value. The $16,000,000 term loan and $11,970,000
outstanding under the euro-based revolving loan facility were obtained in
December 2003 at current interest rates and therefore carrying value
approximates fair value.

The Company guarantees the debt of the Badger Meter Officers' Voting Trust
(BMOVT), from which the trust obtained loans on behalf of the officers of the
Company 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. The amount that the Company guaranteed was $1,754,000
and $2,380,000 at December 31, 2003 and 2002, respectively. The current loan was
renewed in April 2003 with an expiration date of April 2004, at which time it is
expected to be renewed. The fair market value of this guarantee at December 31,
2003 continues to be insignificant because the collateral value of the shares
exceeds 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.

33

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

Information regarding assets by geographic area is as follows.

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

Net sales and gross margin related to a contract for meters and
installations were recorded in the third quarter 2003 prior to the meters being
installed. Under the Company's revenue recognition policy (Note 1), net sales
and gross margins should not have been recorded until the fourth quarter 2003
when the meters were

34

BADGER METER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001

installed. This resulted in net sales and margins for the third quarter being
overstated by $488,000 and $306,000, respectively, or $ .06 per diluted share,
and the fourth quarter being understated by the same amounts. Accordingly,
amounts for the full year of 2003 were correctly recorded.

Fourth quarter 2002 adjustments, primarily related to the determination of
the functional currency of MPE, resulted in an increase in net earnings 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. The Company currently anticipates continuing
to pay cash dividends. Shareholders of record as of December 31, 2003 and 2002
totaled 535 and 494, respectively, for Common Stock. Voting trusts are counted
as single shareholders for this purpose.

35

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

None.

ITEM 9A. 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"), the Company's management evaluated, with the participation of
the Company's President and Chief Executive Officer and the Company's
Senior Vice President -- Finance, Chief Financial Officer and
Treasurer, the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule
13a-15(e) under the Exchange Act) as of the end of the year ended
December 31, 2003. Based upon their evaluation of these disclosure
controls and procedures, the Company's President and Chief Executive
Officer and the Company's Senior Vice President -- Finance, Chief
Financial Officer and Treasurer concluded that the Company's
disclosure controls and procedures were effective as of the end of
the year ended December 31, 2003 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 over financial reporting. There was no
change in the Company's internal control over financial reporting
that occurred during the quarter ended December 31, 2003 that has
materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.

PART III

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 April 23,
2004, and is incorporated herein by reference.

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

The Company has adopted the Badger Meter, Inc. Code of Conduct for
Financial Executives that applies to the Company's President and Chief Executive
Officer, the Company's Senior Vice President -- Finance, Chief Financial Officer
and Treasurer and other persons performing similar functions. A copy of the
Badger Meter, Inc. Code of Conduct for Financial Executives is posted on the
Company's website at www.badgermeter.com. The Badger Meter, Inc. Code of Conduct
for Financial Executives is also available in print to any shareholder who
requests it in writing from the Secretary of the Company. The Company intends to
satisfy the disclosure requirements under Item 10 of Form 8-K regarding
amendments to, or waivers from, the Badger Meter, Inc. Code of Conduct for
Financial Executives by posting such information on the Company's website at
www.badgermeter.com.

The Company is not including the information contained on its website as
part of, or incorporating it by reference into, this annual Report on 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 April 23, 2004, and is incorporated herein
by reference; provided, however, that the subsection entitled "Corporate
Governance Committee Report on Executive Compensation" shall not be deemed to be
incorporated herein by reference.

36

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 April 23, 2004, and
is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this Item is included under the headings "Corporate
Governance 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 April 23, 2004, and is incorporated herein
by reference.

PART IV

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this Item is included under the heading "Principal
Accounting Firm Fees" in the Company's definitive Proxy Statement relating to
the Annual Meeting of Shareholders to be held on April 23, 2004, and is
incorporated herein by reference.

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

(a) Documents filed

1. Financial Statements. See the financial statements included in Part
II, Item 8 "Financial Statements and Supplementary Data" in this
2003 Annual Report on Form 10-K, under the headings "Consolidated
Balance Sheets," "Consolidated Statements of Operations,"
"Consolidated Statements of Cash Flows" and "Consolidated Statements
of Shareholders' Equity."

2. Financial Statement Schedules. Financial statement schedules are
omitted because they are not applicable.

3. Exhibits. See the Exhibit Index included in this Form 10-K which is
incorporated herein by reference.

(b) Reports on Form 8-K

A current report was furnished on October 14, 2003 under Item 7 and 12
of Form 8-K to disclose the full contents of the Company's press release
that reported the results of the three and nine-month periods ended
September 30, 2003. A current report was also furnished on February 5,
2004 under Item 7 and 12 of Form 8-K to disclose the full contents of
the Company's press release that reported the results of the three and
twelve-month periods ended December 31, 2003.

37

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: March 1, 2004
By /s/ RICHARD A. MEEUSEN
------------------------------------
Richard A. Meeusen
President and Chief Executive
Officer

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

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

38

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
March 1, 2004 March 1, 2004

/S/ RICHARD A. MEEUSEN /S/ ANDREW J. POLICANO
- ------------------------------------ ------------------------------------
Richard A. Meeusen Andrew J. Policano
President and Chief Executive Director
Officer and Director March 1, 2004
March 1, 2004

/S/ THOMAS J. FISCHER /S/ STEVEN J. SMITH
- ------------------------------------ ------------------------------------
Thomas J. Fischer Steven J. Smith
Director Director
March 1, 2004 March 1, 2004

/S/ KENNETH P. MANNING /S/ JOHN J. STOLLENWERK
- ------------------------------------ ------------------------------------
Kenneth P. Manning John J. Stollenwerk
Director Director
March 1, 2004 March 1, 2004

39

EXHIBIT INDEX

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

* A management contract or compensatory plan or arrangement.

41