BRADY CORP - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 JULY 31, 2004

COMMISSION FILE NUMBER 1-14959

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BRADY CORPORATION
(Exact name of registrant as specified in charter)

WISCONSIN 39-0178960
(State of Incorporation) (IRS Employer Identification No.)

6555 WEST GOOD HOPE ROAD
MILWAUKEE, WI 53223
(Address of Principal Executive Offices and Zip Code)

(414) 358-6600
(Registrant's Telephone Number)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

CLASS A NONVOTING COMMON STOCK, PAR VALUE $.01 PER SHARE, NEW YORK STOCK
EXCHANGE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

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

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

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

The aggregate market value of the non-voting common stock held by
non-affiliates of the entity as of January 30, 2004 was approximately
$691,007,793, (based on closing sale price of $37.87 per share on that date as
reported for the New York Stock Exchange). As of September 1, 2004, there were
outstanding 22,399,849 shares of Class A Nonvoting Common Stock (the "Class A
Common Stock"), and 1,769,314 shares of Class B Common Stock. The Class B Common
Stock, all of which is held by affiliates of the registrant, is the only voting
stock.

INDEX

PART I

Brady Corporation and Subsidiaries are referred to herein as the "Company,"
"Brady," or "we".

ITEM 1. BUSINESS

(A) GENERAL DEVELOPMENT OF BUSINESS

The Company, a Wisconsin corporation founded in 1914, currently operates 32
manufacturing facilities worldwide. Ten are located in the United States, three
each in Brazil, China, Germany, and Singapore, two each in Australia and the
United Kingdom and one each in Belgium, Canada, France, Italy, Malaysia and
Mexico. The Company sells through subsidiaries or sales offices in Australia,
Belgium, Brazil, Canada, China, France, Germany, Hong Kong, Hungary, Italy,
Japan, Korea, Malaysia, Mexico, the Philippines, Singapore, Spain, Sweden,
Taiwan, Thailand, the United Kingdom and the United States through a dedicated
team of international sales representatives. The Company further markets its
products to parts of Eastern Europe and the Middle East. The Company's corporate
headquarters are located at 6555 West Good Hope Road, Milwaukee, Wisconsin
53223, and the telephone number is (414) 358-6600. The Company's Internet
address is http://www.bradycorp.com.

(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The information required by this Item is provided in Note 7 of the Notes to
Consolidated Financial Statements contained in Item 8 -- Financial Statements
and Supplementary Data.

(C) NARRATIVE DESCRIPTION OF BUSINESS

OVERVIEW

Brady is an international manufacturer and marketer of identification
solutions and specialty materials which help customers increase safety,
security, productivity and performance. Its products include high-performance
labels and signs, printing systems and software, label-application and
data-collection systems, safety devices and precision die-cut materials. Founded
in 1914, the Company serves customers in electronics, telecommunications,
manufacturing, electrical, construction, laboratory, education, governmental,
public utility, computer, transportation and a variety of other industries. The
Company believes that its reputation for innovation, commitment to quality and
service, and dedicated employees have made it a world leader in its markets.

Brady's major product categories focus primarily on facility
identification, safety and complimentary products for the Maintenance, Repair
and Operations ("MRO") market, which comprises approximately two-thirds of the
Company's products; wire identification for telecommunications and electrical
industries; high-performance identification for electronics and industrial
manufacturers; and precision die-cut products for use in hard-disk drives,
cellular phones, pagers and other personal communication products. The need for
the Company's products is driven by the specification of customer engineering
departments, by regulatory compliance requirements imposed by agencies such as
the Occupational Safety & Health Administration ("OSHA") and the Environmental
Protection Agency ("EPA"), or by the need to identify and track assets or to
direct, warn, inform, train and protect people. The Company manufactures and
sells products domestically and internationally through multiple channels,
including direct sales, distributor sales, mail-order catalogs, telemarketing
and electronic access through the Internet. The Company has a broad customer
base, with the largest customer representing just over 5% of net sales. Sales
from international operations represented 55.2%, 52.3%, and 48.5% of sales
during the years ended July 31, 2004, 2003, and 2002 respectively.

BUSINESS STRATEGY

Brady's vision is to be either the number one or two market leader in our
markets of Facility Identification, Safety and Complementary Products, Wire
Identification, High Performance Identification and Precision Die Cut parts. The
Company's goal is to accomplish this vision through a world-class workforce

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dedicated to delivering differentiated product solutions to loyal customers.
Underlying this goal is a commitment to achieving top-tier growth and
profitability and, ultimately, enhancing shareholder value. The Company's
employees participate in an incentive plan that has components focused upon
growth and profitability. This incentive plan serves to motivate employees,
foster a team-oriented work environment and maximize the utilization of assets.

Key elements of the Company's business strategy include:

Focus on customers -- The Company seeks to provide "seamless" customer
service and to offer rapid response to customer orders and inquiries. To meet
this goal, the Company has streamlined its manufacturing processes to shorten
lead-times and has increased investment in telecommunications and management
information systems worldwide.

World Class People -- The Company strives to employ a world-class team of
people throughout all of its operations globally. It believes that the Company
can differentiate itself through its people and it strives to hire the best team
members. All of its employees are trained in its Ethics Policy and are held to
high standards of honesty and integrity. Additionally, the Company highlights
leadership as an important initiative to its values and growth strategy. Its
leadership principles include: customer focus, high-performance expectations,
boldness, decisiveness and accountability.

Innovative Differentiated Solutions -- The Company strives to provide
innovative differentiated solutions in niche markets that allow the Company to
leverage its capabilities in specialty materials, die cutting, software and
printing systems. By focusing on specific markets and value-added product
applications, the Company has established leading positions in the electrical,
laboratory and safety markets with certain products such as wire markers, pipe
markers, labels, safety signs and printing systems. It also is a leader in high
performance work-in-process labels and precision die-cut materials.

Materials and Customer Application Expertise -- The Company continually
seeks to develop innovative pressure sensitive materials and other
differentiated products to satisfy customers' requirements and expectations.
Additionally, the Company strives to use its materials expertise to develop
unique products to meet the demands of customers in new faster growing markets
adjacent to its traditional markets. Brady's commitment to product innovation is
reflected in research and development efforts that include approximately 165
employees primarily dedicated to research and development activities in the
United States, Belgium, Singapore and China.

Operational Excellence -- Brady is committed to excellence within its
operations and is utilizing six-sigma problem solving to improve operational
performance. These activities are focused on working capital, yield, purchasing,
customer service and margin improvements.

Global Presence -- Sales from Brady's international operations have
increased from $50,707,000 or 26.5% of net sales in fiscal 1990 to $370,700,000
or 55.2% of net sales in fiscal 2004. The Company's global presence is a benefit
to many of its customers who want to work with one supplier to meet its global
supply needs.

Premier Channels -- Brady's products are sold through several channels
including selected premier distribution companies, direct sales, mail-order
catalogs, telemarketing and electronic access through the Internet. The Company
offers this wide range of channels of distribution to meet the varying needs of
its very large and diverse customer base.

KEY INITIATIVES

The Company's key initiatives include:

Core Business Growth -- The Company seeks to increase market share in its
markets through existing channels and through strong sales and marketing
strategies. To achieve this objective, the Company is aligning more closely with
distributors, fine tuning its direct marketing strategies and capitalizing on
its global selling capabilities. Over the last year, the Company has combined
its divisional sales forces and expanded its geographic reach. The Company
believes that international markets continue to represent a significant growth

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opportunity. The Company is actively seeking to increase penetration in market
segments in the Americas, Europe and Asia/Pacific.

Differentiated Solutions -- The Company, through strong product innovation
and development activities, seeks to continually introduce new technology and
proprietary products and explore additional applications for products in
existing and new markets. It seeks to provide products in its portfolio that
offer customers differentiated solutions. Through a regular portfolio review
process, the Company reviews the products and markets currently in its
portfolio, examines new opportunities, fully understands the broad needs of each
of its major market segments and those adjacent to its major segments, and
determines a strategy to meet those needs.

Acquisitions -- While the Company intends to continue pursuing internal
growth through the above strategies, it also intends, where practical, to
accomplish its goal of becoming number one or two in its key markets through
strategic acquisitions. Brady seeks to acquire companies that are financially
sound and can add to shareholder value within predetermined guidelines.

Productivity and Operational Excellence -- Productivity and operational
excellence are two initiatives that the Company uses to increase the quality of
its earnings each year. Brady's initiatives work to improve margins and working
capital and best utilize its selling, general and administrative expenses.

PRODUCTS

The Company is vertically integrated; designing, developing, coating and
producing most of its identification signs, labels and printing systems. Brady
labels are manufactured out of a variety of films, predominantly coated by
Brady, for applications in the following markets: electronic, industrial,
electrical, laboratory and security. Brady also manufactures specialty tapes and
related products that are characterized by high-performance adhesives, most of
which are formulated by the Company, to meet high-tolerance requirements of the
industries in which they are used.

The Company's products consist of over 100,000 stock as well as custom
items including complete identification systems that are used by the Company's
customers to create a safer work environment, improve production and operating
efficiencies and increase the utilization of assets through tracking and
inventory process controls. Major product categories include: facility and
safety signs and identification tags and markers, pipe and valve markers, asset
identification tags, lockout/tagout products, security and traffic control
products, and printing systems and software for creating safety and regulatory
software; wire and cable markers, high-performance labels, laboratory
identification products, stand-alone printing systems, bar-code and other
software, automatic identification and data collection systems; and precision
die-cut solutions.

Some of the Company's stock products were originally designed, developed
and manufactured as custom products for a specific customer. However, such
products have frequently created wide industry acceptance and become stock items
offered by the Company through mail order and distributor sales. The Company's
most significant types of products are described below.

FACILITY IDENTIFICATION AND SAFETY SIGNS

The Company manufactures safety and informational signs and printers for
use in a broad range of industrial, commercial, governmental and institutional
applications. These signs are either self-adhesive or mechanically mounted, are
designed for both indoor and outdoor use and are manufactured to meet standards
issued by the National Safety Council, OSHA and a variety of industry
associations in the United States and abroad. The Company's sign products are
categorized by material type and type of message to be conveyed, including
admittance, directional and exit signs; electrical hazard warnings; energy
conservation messages; fire protection and fire equipment signs; hazardous waste
labels; hazardous and toxic material warning signs; personal hazard warnings;
housekeeping and operational warnings; pictograms; radiation and laser signs;
safety practices signs and regulatory markings. The Company also produces
self-adhesive and self-aligning die-cut numbers and letters, labels, and tags
used to mark warehouse locations and identify inventory. Warehouse

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products are primarily used by industrial companies in storage facilities such
as warehouses, factories, stockrooms and other facilities.

PIPE AND VALVE MARKERS

The Company manufactures both self-adhesive and mechanically applied stock
and custom-designed pipe markers, and plastic and metal valve tags for the
identification of pipes and control valves in the mechanical contractor and
process industry markets. These products are designed to help identify and
provide information as to the contents, direction of flow and special hazardous
properties of materials contained in piping systems, and to facilitate repair or
maintenance of the systems.

LOCKOUT/TAGOUT PRODUCTS

Brady offers a wide variety of lockout/tagout products. Under OSHA
regulations, all energy sources must be "locked out" while machines are being
serviced or maintained to prevent accidental engagement and injury. The
Company's products allow its customers to comply with these regulations and to
ensure worker safety for a wide variety of energy- and fluid-transmission
systems and operating machinery.

SECURITY AND TRAFFIC CONTROL PRODUCTS

The Company offers identification and security products including a variety
of self-expiring badges, security seals, parking permits and wristbands designed
for visitor control in financial, governmental, educational and commercial
facilities including meeting and convention sites. Some of these products make
use of migratory ink technology, which, upon activation, starts a timed process
resulting in an altered message, color or design to indicate expiration. The
Company also offers a wide variety of traffic control devices including traffic
signs, directional and warning signs, parking tags and permits, barriers, cones
and other products including barricading, visual warning systems, floor-marking
products, safety badges, photo-identification kits, and first aid cabinets/kits,
among others.

ASSET AND BRAND PROTECTION IDENTIFICATION

Brady offers a wide range of asset-identification products that are an
important part of an effective asset management program in a wide variety of
markets. These include self-adhesive or mechanically mounted labels or tags made
of aluminum, brass, stainless steel, polycarbonate, vinyl, polyester, mylar and
paper. These products are also offered in tamper-evident varieties, and can be
custom designed to ensure brand protection from counterfeiting.

WIRE AND CABLE MARKERS

Brady manufactures a broad range of wire- and cable-marking products. These
products help mark and identify wires, cables and their termination points. Such
products may be used in virtually every industrial, power and communication
market to specify the origination and/or destination of wiring and to facilitate
manufacturing, construction, repair or maintenance of equipment, and data
communication and electrical wiring systems.

HIGH PERFORMANCE LABELS AND TAPES

Brady produces a complete line of label materials to meet customers' needs
for identification requirements for product ID and bar coding that perform under
harsh or demanding conditions. Brady prints stock and custom labels and also
sells unprinted materials to enable customers to print their own labels on site,
on demand, using thermal-transfer, laser, dot matrix and inkjet printers.

SOFTWARE AND PRINTING SYSTEMS

The Company designs and produces various computer software packages,
industrial thermal-transfer and dot matrix printers and other electromechanical
devices to serve the growing and specialized needs of

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customers in a wide variety of markets. Industrial labeling systems, software,
tapes, ribbons and label stocks provide customers with the resources and
flexibility to produce signs and labels on demand at their site.

PRECISION DIE-CUT SOLUTIONS

The Company develops customized precision die-cut solutions that are used
to seal, insulate, protect, shield or provide other mechanical performance
properties in the assembly of electronic, telecommunications and other
equipment, including cellular phones, personal data assistants, computer hard
drives, computers and other devices. Solutions not only include the materials
and converting, but also automatic placement and other value-added services. The
Company also provides converting services to the medical market for materials
used in in-vitro diagnostic kits and patient monitoring.

AUTOMATIC IDENTIFICATION AND DATA-COLLECTION SYSTEMS

Brady's automatic identification and data collection solutions include
bar-code-label-generating software and bar-code tags and labels to enable
accurate tracking of manufacturing, warehousing, receiving and shipping data.
The Company's software applications, fixed station terminals, high-speed
printers and associated customized consumable products allow its customers, in a
wide variety of markets, to have a higher degree of knowledge and control over
production, asset management and all phases of inventory control, including
receiving, warehousing, work-in-process, finished goods and shipping.

PRINTING SYSTEMS FOR EDUCATION

Brady serves the identification and information needs of various
non-industrial markets with a variety of easy-to-use printing systems and
consumable supplies. It provides lettering and labeling systems, poster
printers, laminators and supplies to education and training markets.

OTHER PRODUCTS

The Company also sells a variety of other products, none of which currently
individually accounts for a material portion of its sales, including: hospital
and clinical labels, packing and shipping goods, name plates, and quality and
production control products, among others.

MARKETING AND SALES

The Company's products are sold in a wide variety of markets, including
electrical, electronic, telecommunications, governmental, public utility,
commercial office, computer disk drive, construction, general manufacturing,
laboratory, transportation equipment and education. The telecommunication and
disk drive markets are concentrated with a small number of customers and subject
to more volatility than Brady's other more diverse markets. Neither of these
markets constitutes more than 5% of the Company's total sales. No material part
of the Company's business is dependent upon a single customer or group or
customers. In fiscal 2004 Brady's largest customer accounted for just over 5% of
the Company's net sales.

Brady seeks to offer the right product with rapid response times and
superior service so that it can provide solutions to the customer that are
better, faster and more economical than those available from the Company's
competitors. The Company markets and sells its products domestically and
internationally through multiple channels including direct sales, distributor,
mail-order-catalog marketing and electronic access through the Internet. The
Company has thousands of established relationships with a broad range of
electrical, safety, industrial and other domestic and international
distributors. The Company's sales force seeks to establish and foster ongoing
relationships with the end-users and distributors by providing technical support
and product-application expertise.

The Company direct markets certain products and those of other
manufacturers by catalog sales in both domestic and international markets. Such
products include industrial and facility identification products, safety and
regulatory-compliance products and original equipment manufacturer component
products, among

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others. Catalog operations are conducted through offices in the U.S.A.,
Australia, Brazil, Canada, England, France, Germany and Italy, and include
foreign-language catalogs.

BRANDS

The Company goes to market under a variety of well-respected brand names.
The Brady brand includes high-performance labels, printers, software, die-cut
precision parts and specialty material products; other high-performance label
products are also marketed under the Etimark brand and other die-cut materials
are marketed as Brandon or ID Technology products; safety and facility
identification products are marketed under the Signmark brand, with some
lockout/tagout products offered under the Prinzing brand; poster printers for
education and government markets are offered under the Varitronic name brand;
direct marketing safety and facility identification products are offered under
the Seton, EMED, Champion and Signals names; security and identification badges
and systems are included in the Temtec and B.I.G brands; hand-held regulatory
documentation systems are available under the Tiscor name; and automatic
identification and data collection software is offered under the Teklynx brand.

MANUFACTURING PROCESS AND RAW MATERIALS

The Company manufactures the majority of the products it sells, while
purchasing certain items from other manufacturers. Products manufactured by the
Company generally require a high degree of precision and the application of
adhesives with chemical and physical properties suited for specific uses. The
Company's manufacturing processes include compounding, coating, converting,
software development and printer design and assembly. The compounding process
involves the mixing of chemical batches for primers, top coatings and adhesives,
in solvent or water-based materials. The coatings and adhesives are applied to a
wide variety of materials including polyester, polyimide, cloth, paper, metal
and metal foil. The converting process may include embossing, perforating,
laminating, die cutting, slitting, and printing or marking the materials as
required.

The Company seeks to optimize the performance, quality and durability of
its products, while continually improving manufacturing processes, shortening
lead times and lowering manufacturing costs. The Company produces the majority
of the adhesive stocks and top-coated materials through an integrated
manufacturing process. These integrated manufacturing processes permit greater
flexibility to meet customer needs in product design and manufacture, and an
improved ability to provide specialized products designed to meet the needs of
specific applications. Brady's "cellular" manufacturing processes and
"just-in-time" inventory control are designed to attain profitability in small
orders by emphasizing flexibility and the maximization of assets through quick
turnaround and delivery. Most of the Company's manufacturing facilities have
received ISO 9001 or 9002 certification.

The materials used in the products manufactured by the Company consist
primarily of plastic sheets and films, paper, metal and metal foil, cloth,
fiberglass, inks, dyes, adhesives, pigments, natural and synthetic rubber,
organic chemicals, polymers, solvents and electronic components and
subassemblies. In addition the Company purchases finished products for resale.
The Company purchases raw materials, components and finished products from many
suppliers. Generally the Company is not dependent upon any single supplier for
most critical base materials or components. In some cases the Company has chosen
to sole source materials, components or finished items for design or cost
reasons. In these cases, disruptions in supply could have an impact on results
for a period of time. In most cases these disruptions would simply require
qualification of new suppliers and the disruption would be modest. In a few
cases the qualification process could be more costly or take a longer period of
time. In the most dramatic of cases, such as a global shortage of a critical
material or component, the financial impact could be significant.

TECHNOLOGY AND PRODUCT DEVELOPMENT

The Company focuses its research and development efforts on material
development, printing systems design and software development. Material
development involves the application of surface chemistry concepts for top
coatings and adhesives applied to a variety of base materials. Systems design
integrates

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materials, embedded software and a variety of printing technologies to form a
complete solution for customer applications or the Company's own production
requirements. The Company's research and development team of engineers also
supports production and marketing efforts by providing application and technical
expertise.

The Company possesses patents covering various aspects of adhesive
chemistry, electronic circuitry, computer-generated wire markers, systems for
aligning letters and patterns, and visually changing paper. Although the Company
believes that its patents are a significant factor in maintaining market
position for certain products, technology in the areas covered by many of the
patents is evolving rapidly and may limit the value of such patents. The
Company's business is not dependent on any single patent or group of patents.

The Company conducts much of its technology and development activities at
the Frederic S. Tobey Research and Innovation Center (approximately 39,600 sq.
ft.) in Milwaukee, Wisconsin. The Company spent approximately $23,000,000,
$18,900,000, and $17,300,000, in fiscal 2004, 2003, and 2002, respectively, on
its research and development activities. In fiscal 2004, approximately 165
employees were engaged in research and development activities for the Company.
Additional research projects were conducted under contract with universities,
other institutions and consultants.

The Company's name and its registered trademarks are important to each of
its business segments. In addition, the Company owns other important trademarks
applicable to only certain of its products.

INTERNATIONAL OPERATIONS

In fiscal 2004, 2003, and 2002, sales from international operations
accounted for 55.2%, 52.3%, and 48.5%, respectively, of the Company's sales. The
Company's global infrastructure includes subsidiaries in Australia, Belgium,
Brazil, Canada, China, England, France, Germany, Hungary, Italy, Japan,
Malaysia, Mexico, Singapore, and Sweden and sales offices in Hong Kong, Korea,
Netherlands, Philippines, Spain and Taiwan. The Company further markets its
products to parts of Eastern Europe and the Middle East. Several of these
locations manufacture or have the capability to manufacture certain of the
products they sell.

COMPETITION

The markets for most of the Company's products are competitive. The Company
believes that it is one of the leading domestic producers of self-adhesive wire
markers, safety signs, pipe markers, precision die-cut materials and
bar-code-label-generating software. The Company competes for business
principally on the basis of product quality, performance, service, range of
products offered and to a lesser extent, on price. Product quality is determined
by factors such as suitability of component materials for various applications,
adhesive properties, graphics quality, durability, product consistency and
workmanship. Competition in many of the Company's product markets is highly
fragmented, ranging from smaller companies offering only one or a few types of
products, to some of the world's major adhesive and electrical product companies
offering some competing products as part of their overall product lines. A
number of the Company's competitors are larger than the Company and have greater
resources. Notwithstanding the resources of these competitors, management
believes that the Company provides a broader range of identification solutions
than any of its competitors.

BACKLOG

As of July 31, 2004, the amount of the Company's backlog orders believed to
be firm was approximately $23,205,000. This compares with approximately
$16,300,000 and $22,300,000 of backlog orders as of July 31, 2003 and 2002,
respectively. Average delivery time for the Company's orders varies from one day
to one month, depending on the type of product, and whether the product is stock
or custom designed and manufactured.

ENVIRONMENT

At present, the manufacturing processes for the Company's adhesive-based
products utilize certain evaporative solvents, which, unless controlled, would
be vented into the atmosphere. Emissions of these

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substances are regulated at the federal, state and local levels. The Company has
implemented a number of procedures to reduce atmospheric emissions and/or to
recover solvents. Management believes the Company is substantially in compliance
with all environmental regulations.

EMPLOYEES

As of July 31, 2004, the Company employed approximately 3,900 individuals.
The Company has never experienced a material work stoppage due to a labor
dispute, is not a party to any negotiated labor contracts, and considers its
relations with employees to be excellent.

ACQUISITIONS

Information about the Company's acquisitions is provided in Note 2 of the
Notes to Consolidated Financial Statements contained in Item 8 -- Financial
Statements and Supplementary Data.

(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

The information required by this Item is provided in Note 7 of the Notes to
Consolidated Financial Statements contained in Item 8 -- Financial Statements
and Supplementary Data.

(E) INFORMATION AVAILABLE ON THE INTERNET

The Company's Corporate Internet address is http://www.bradycorp.com. The
Company makes available, and has made available since June 2003, free of charge,
on or through its Internet website copies of its Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 reports
filed by the Company's insiders, and amendments to all such reports as soon as
reasonably practicable after such reports are electronically filed with or
furnished to the SEC.

ITEM 2. PROPERTIES

The Company currently operates 32 manufacturing facilities. Ten are located
in the United States, three each in Brazil, China, Germany and Singapore, two
each in Australia and the United Kingdom, and one each in Belgium, Canada,
France, Italy, Malaysia and Mexico. The Company's present operating facilities
contain a total of approximately 1,800,000 square feet of space, of which
approximately 850,000 square feet is leased. The Company believes that its
equipment and facilities are modern, well maintained and adequate for present
needs.

ITEM 3. LEGAL PROCEEDINGS

The Company is, and may in the future be, party to litigation arising in
the course of business. The Company is not currently a party to any material
pending legal proceedings.

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

None

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

(A) MARKET INFORMATION

Brady Corporation Class A Nonvoting Common Stock trades on the New York
Stock Exchange under the symbol BRC and is quoted on the Berlin Stock Exchange
under the number 900104. The quarterly stock price history on the New York Stock
Exchange is as follows:

There is no trading market for the Company's Class B Voting Common Stock.

(B) HOLDERS

As of September 1, 2004, there were 296 Class A Common Stock shareholders
of record and approximately 4,000 beneficial shareholders. There are three Class
B Common Stock shareholders.

(C) ISSUER PURCHASES OF EQUITY SECURITIES

The Company did not repurchase any of its equity securities in the fourth
quarter of fiscal 2004.

(D) DIVIDENDS

The Company has followed a practice of paying quarterly dividends on
outstanding common stock. Before any dividend may be paid on the Class B Common
Stock, holders of the Class A Common Stock are entitled to receive an annual,
noncumulative cash dividend of $.0333 per share (subject to adjustment in the
event of future stock splits, stock dividends or similar events involving shares
of Class A Common Stock). Thereafter, any further dividend in that fiscal year
must be paid on all shares of Class A Common Stock and Class B Common Stock on
an equal basis. The Company's revolving credit agreement restricts the amount of
certain types of payments, including dividends, which can be made annually to
$25 million plus 50% of the consolidated net income for the prior year. The
Company believes that based on its historic dividend policy, this restriction
will not impede it in following a similar dividend policy in the future.

During the two most recent fiscal years and for the first quarter of the
current fiscal year, the Company declared the following dividends per share on
its Class A and Class B Common Stock for the years ended July 31:

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ITEM 6. SELECTED FINANCIAL DATA

CONSOLIDATED STATEMENTS OF INCOME AND SELECTED FINANCIAL DATA
YEARS ENDED JULY 31, 2000 THROUGH 2004

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

OVERVIEW

In fiscal 2004, a rebound in its core markets coupled with a general
strengthening in the global economy resulted in accelerated sales growth for the
Company. The broad success of Company initiatives and cost control efforts
resulted in exceptional growth in the bottom line.

The Company undertook significant efforts to reverse the decline in net
income of recent years, including the largest reorganization in Company history.
This reorganization, which included shifting from a product-based group
structure to a geographic region-based structure, simplified and streamlined
both the organization's cost

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structure and the Company's manner of offering products to customers. This new
"one face" of Brady also proved to be one of the catalysts for re-igniting sales
growth at less cost in all regions.

Strategic initiatives including acquisitions, new product development, and
global expansion also played key roles in the Company's growth in fiscal 2004.
Brady acquired four companies, including Emed Co., Inc. ("EMED") the largest
acquisition in Brady's history; invested 3.4 percent of sales in research and
development, resulting in the successful launch of a number of proprietary
products; and opened new manufacturing facilities in China and Mexico.

Sales for fiscal 2004 were $671.2 million, up 21 percent from fiscal 2003
sales of $554.9 million. Base sales grew 5 percent. Acquisitions added 10
percent and foreign currency added 6 percent to total sales results. Americas
sales increased 14.5 percent, European sales rose 25.2 percent, and sales from
the Asia Pacific operations increased 40.4 percent.

Net income for fiscal 2004 rose 137 percent to $50.9 million or $2.13 per
diluted share of Class A Common Stock, compared to $21.4 million or $0.91 per
diluted share of Class A Common Stock in fiscal 2003. Fiscal 2003 results
included a restructuring charge of $9.6 million before tax ($6.3 million after
tax). Fiscal 2004 net income included a $3 million tax benefit from resolution
of a tax audit, and charges of $2.2 million after tax related to the
restructuring begun in fiscal 2003.

In conjunction with the EMED acquisition, the Company renegotiated its
revolving credit facility and incurred its first fixed rate long-term debt.
Brady remains a strong company, with fiscal 2004 cash flow from operations at a
record $85 million, up 53 percent from the prior year. The Company also
increased its dividend payments to investors for the 19th straight year.

Management believes that the changes it has made in the past year have put
the Company back on track for increased competitiveness, continued growth and
increased shareholder value. Due to a continued positive trend in growth in the
Company's base business and the recent acquisition of ID Technologies, the
Company has increased its guidance for fiscal 2005 to between $770,000,000 and
$790,000,000 in sales and net income between $59,000,000 and $62,000,000 for the
full fiscal year. Looking long term, the Company intends to continue with its
growth strategies of developing proprietary products; making acquisitions that
expand its product range, technical expertise or market penetration; and further
improving processes to best serve customers.

RESULTS OF OPERATIONS

YEAR ENDED JULY 31, 2004, COMPARED TO YEAR ENDED JULY 31, 2003

Sales for fiscal 2004 increased by $116,353,000 or 21.0% from fiscal 2003.
Base sales increased $28,319,000 or 5.1% for the same period. The acquisitions
of Cleere Advantage Ltd. (February 2003), Aztech Ltd. (August 2003), and B.I.G
(November 2003) in the UK; Etimark GmbH (April 2003) in Germany; and TISCOR Inc.
(January 2003), Brandon International (September 2003), Prinzing Enterprises,
Inc. (October 2003), and EMED (May 2004) in the United States increased sales by
$53,747,000 or 9.7% in fiscal 2004 compared to fiscal 2003. The increase in
sales was also aided by the positive effect of fluctuations in the exchange
rates used to translate financial results into the United States Dollar, which
increased sales by $34,287,000 or 6.2% for the period.

The gross margin as a percentage of sales increased from 50.5% in fiscal
2003 to 51.6% in fiscal 2004. The increase was primarily due to restructuring
cost savings from consolidation of facilities and workforce reductions.
Additionally, operating costs improved as a percent of sales.

Research and development expenses as a percentage of sales were unchanged
at 3.4%. Research and development spending increases of 22% were offset by a 21%
increase in sales. Research and development spending was higher in fiscal 2004
compared to fiscal 2003 due to the timing of large projects. Forecasted expenses
for fiscal 2005 include an increase in research and development costs to fund
development of new products at a more rapid rate.

II-3

Selling, general and administrative expenses as a percentage of sales
decreased to 36.9% in fiscal 2004 from 39.6% in fiscal 2003. The decrease was
due primarily to the use of existing resources to service greater sales volume.
Additionally, the regionally structured sales force in place in fiscal 2004 was
more efficient than the product-specific sales force that existed in fiscal
2003. Due to cost reduction efforts, more visibility was given to selling,
general and administrative costs in fiscal 2004.

Fiscal 2004 expenses included a before tax net restructuring charge of
$3,181,000. Approximately $2,900,000 of the charge related to severance costs
for employees. The remaining amount was due to asset impairment at facilities,
primarily in North America and Europe. The Company does not anticipate any
significant restructuring charges in fiscal 2005.

Fiscal 2003 expenses included a before tax net restructuring charge of
$9,589,000, which included a $10,215,000 charge relating primarily to
consolidation of sales and marketing resources in North America and Europe,
consolidating operating facilities in the United States and Europe, and a
workforce reduction. The $10,215,000 charge was partially offset by a $626,000
adjustment to the fiscal 2002 and 2001 restructuring accruals related to
favorable settlement of leases upon termination.

Operating income increased $39,973,000 to $72,122,000 in fiscal 2004. The
majority of the increase was due to sales growth, strong cost control, and
savings realized from the 2003 restructuring activities. The 2003 operating
income included $9,589,000 of restructuring costs.

Investment and other income decreased $991,000 in fiscal 2004 from the
prior year, primarily due to the net effect of foreign exchange rates.

Interest expense increased $1,110,000 in fiscal 2004 due to the interest on
the debt related to the acquisition of EMED.

Income before income taxes was $70,327,000, an increase of 116.7% from
fiscal 2003. The increase was due to increased sales volume and lower
restructuring costs in fiscal 2004 as noted in the operating income section
above.

The Company's effective tax rate decreased from 34.0% for fiscal 2003 to
27.7% for fiscal 2004 (31.9% before a $3,000,000 reduction in tax expense
related to the completion of the federal income tax audit of fiscal years 2000
through 2002). The improvement in the effective rate was due to a shift in the
Company's pre-tax income to lower tax countries. An effective rate of 32% is
expected for fiscal 2005.

Net income was $50,871,000 for fiscal 2004, compared to $21,420,000 for
fiscal 2003. Net income included after-tax net restructuring charges of
$2,160,000 in fiscal 2004 and $6,329,000 in fiscal 2003.

YEAR ENDED JULY 31, 2003, COMPARED TO YEAR ENDED JULY 31, 2002

Sales for fiscal 2003 increased by $37,904,000 or 7.3% from fiscal 2002.
Base sales decreased $3,452,000 or 0.7% for the same period. The acquisitions of
Safety Signs Service in Australia (November 2001), Cleere Advantage in the
United Kingdom (February 2003), Etimark GmbH in Germany (April 2003), and
Strandware, Inc. (November 2001), Temtec, Inc (April 2002), and TISCOR, Inc.
(January 2003) in the United States increased sales by $14,812,000 or 2.9% in
fiscal 2003 compared to fiscal 2002. The increase in sales was also aided by the
positive effect of fluctuations in the exchange rates used to translate
financial results into the United States Dollar, which increased sales by
$26,544,000 or 5.1% for the period.

The gross margin as a percentage of sales increased from 50.4% to 50.5% in
fiscal 2003. The increase was due to the net effect of higher initial production
costs of the Company's Globalmark and Visimate products and the temporary
disruption of customer service levels in our North American Direct Marketing
operations as the Company implemented a new business system during the year.
These factors were more than offset by higher relative growth within the
Company's higher margin graphics and workplace solutions product area and
savings from restructuring activities performed in fiscal 2002 and 2003.

Research and development expense as a percentage of sales was 3.4%, up from
3.3% in fiscal 2002.

II-4

Selling, general and administrative expenses as a percentage of sales
increased to 39.6% in fiscal 2003 from 38.5% in fiscal 2002. The increase was
due to higher administrative expenses from acquisitions, higher expenses
associated with a system implementation in the Company's direct marketing
operations in North America, additional spending in European direct marketing
businesses and general cost increases, including pay and benefit cost increases,
offset by cost reductions from restructuring activities.

Fiscal 2003 expenses included a before tax net restructuring charge of
$9,589,000, which included a $10,215,000 charge relating primarily to
consolidation of sales and marketing resources in North America and Europe,
consolidating operating facilities in the United States and Europe, and a
workforce reduction. The $10,215,000 charge was partially offset by a $626,000
adjustment to the fiscal 2002 and 2001 restructuring accruals related to
favorable settlement of leases upon termination.

Fiscal 2002 expenses included a before tax net restructuring charge of
$2,720,000, consisting of a $3,030,000 charge relating primarily to the
consolidation of facilities in Asia/Pacific, United States and Europe and a
workforce reduction of approximately 3 percent, partially offset by a $310,000
adjustment to the fiscal 2001 severance accrual.

Operating income decreased from $41,503,000 to $32,149,000 in fiscal 2003.
The majority of the decrease was due to an increase in net charges associated
with restructuring activities from $2,720,000 in fiscal 2002 to $9,589,000 in
fiscal 2003. The remaining decrease was a result of higher selling, general and
administrative expenses as discussed above.

Investment and other income decreased $1,287,000 from the prior year
primarily due to the net effect of foreign exchange rates, primarily on
intercompany transactions.

Income before income taxes was $32,455,000, a decrease of 24.8% from fiscal
2002. The higher expenses associated with restructuring activities in fiscal
2003 versus fiscal 2002 accounted for 15.9% of the decrease.

The Company's effective tax rate decreased from 34.5% for fiscal 2002 to
34.0% for fiscal 2003.

Net income was $21,420,000 for fiscal 2003, compared to $28,253,000 for
fiscal 2002. Net income included after-tax net restructuring charges of
$6,329,000 in fiscal 2003 and a $1,782,000 charge in fiscal 2002.

II-5

BUSINESS SEGMENT OPERATING RESULTS

Effective August 1, 2003, the Company's organization was restructured from
a product focused organization to geographic regions. Management of the Company
now evaluates results based on the following geographic regions: Americas,
Europe, and Asia. The Company has restated corresponding segment information
from its previous group-based structure in prior years.

II-6

The Company evaluates performance and allocates resources based on segment
profit or loss. Segment profit or loss does not include certain administrative
costs, interest, foreign exchange gain or loss, restructuring charges, other
expenses not allocated to a segment and income taxes.

AMERICAS

Sales in the Americas region increased 14.5% from fiscal 2003 to fiscal
2004, following a decrease of 0.4% from fiscal 2002 to fiscal 2003. Base sales
in local currency increased 1.9% from 2003 to 2004 after decreasing 3.0% from
2002 to 2003. The base sales increase in 2004 was aided by strong improvement in
the industrial OEM and electronics markets, while the non-residential
construction market remained soft. The base sales increase can also be
attributed to the addition of several new products including the IDXPERT(TM)
labeling system. The acquisitions of TISCOR, Inc., Brandon International,
Prinzing Enterprises Inc., and EMED added 11.4% to fiscal 2004 sales. The
positive effect of fluctuations in the exchange rates used to translate
financial results into U.S. currency increased sales in the region by 1.2% in
fiscal 2004 and decreased sales by 0.4% in 2003.

In the Americas region, segment profit as a percentage of sales increased
to 17.9% in 2004 from 14.5% in 2003 driven by the increase in sales volume,
profit from acquisitions, combination of sales forces, and continuing
productivity and cost savings initiatives. Comparing fiscal 2003 to 2002,
segment profit as a percentage of sales decreased from 17.2% to 14.5%, due to
the decline in sales and the related impact of our fixed costs over a lower
sales volume.

EUROPE

Sales in the European region increased 25.2% in fiscal 2004 from fiscal
2003 and 20.9% from fiscal 2002 to 2003. Base sales increased 2.5% in fiscal
2004 and 2.6% in fiscal 2003. Foreign currency translation increased the
region's sales by 12.7% from fiscal 2003 to 2004 compared to a 15.1% increase
from fiscal 2002 to 2003. The acquisitions of Etimark GmbH in Germany, and
Cleere Advantage Ltd. and B.I.G in the United Kingdom added 10.0% to the
region's sales in fiscal 2004. The acquisitions of Eset and Etimark GmbH in
Germany and Cleere Advantage Ltd. in the United Kingdom added 3.2% to the
region's sales in fiscal 2003.

Segment profit as a percentage of sales increased to 26.7% in fiscal 2004
from 23.9% in fiscal 2003 and from 22.5% in fiscal 2002 to 23.9% in fiscal 2003
due to continued operational improvements that offset normal operating expense
increases.

ASIA

Asia sales increased 40.4% in fiscal 2004 from fiscal 2003 and 8.9% from
fiscal 2002 to 2003. Base sales increased 30.8% in fiscal 2004 and 2.5% in
fiscal 2003. Foreign currency translation increased the region's sales by 9.6%
from fiscal 2003 to 2004 compared to a 5.6% increase from fiscal 2002 to 2003.
The acquisition of Safety Signs Services in Australia added 0.8% to the region's
sales in fiscal 2003. Of the 30.8% increase in Base sales, 74.7% was driven by
the growth in China.

Segment profit as a percentage of sales increased to 28.1% in fiscal 2004
from 24.5% in fiscal 2003 and decreased from 27.3% in fiscal 2002 to 24.5% in
fiscal 2003. The growth in profit in fiscal 2004 is a direct result of the sales
growth. Additionally, continued investment in the region has begun to yield
results. The Company expects continued strong growth in Asia in fiscal 2005,
fueled by new initiatives for both geographic and vertical market expansion. The
Company continues to add resources to support both market development and new
product development targeted at filling the needs of its key markets.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $70,368,000 at July 31, 2004, compared to
$76,088,000 at July 31, 2003 and $75,969,000 at July 31, 2002. Working capital
increased $7,828,000 during fiscal 2004 to $131,706,000. Accounts receivable
balances increased $25,160,000 from July 31, 2003 to July 31, 2004. The increase
in accounts receivable was due primarily to increased sales volume, foreign
currency translation and accounts

II-7

receivable balances added from acquisitions completed during fiscal 2004.
Inventories increased $16,367,000 from July 31, 2003 to July 31, 2004 due to
foreign currency translation and acquisitions. Current liabilities increased
$28,938,000 due to higher accounts payable associated with increased sales
volume and related inventory purchases, higher incentive accrual, and increased
operating liabilities associated with acquisitions completed during fiscal 2004.

The Company has maintained significant cash balances due in large part to
its strong operating cash flow, which totaled $84,771,000 for fiscal 2004,
$55,249,000 for fiscal 2003 and $54,251,000 for fiscal 2002. The increase in
operating cash flows from fiscal 2003 to 2004 was primarily due to a $29,451,000
increase in net income.

Capital expenditures were $14,892,000 in fiscal 2004, $14,438,000 in fiscal
2003 and $13,095,000 in fiscal 2002. Capital expenditures in 2004 included plant
additions/expansions in China and facility improvement costs. Capital
expenditures in 2003 included further investment in software related to our
Eclipse initiative (SAP system implementation), plant additions/expansions in
Asia and tooling for additional new products. Capital expenditures in 2002
included tooling for two new products, continued investment in software related
to our Eclipse initiative, computers and building improvements in Europe.

Financing activities provided $147,475,000 of cash in fiscal 2004 and used
$16,833,000 in fiscal 2003 and $13,385,000 in fiscal 2002. Cash used for
dividends to shareholders was $19,805,000 in fiscal 2004, $17,936,000 in fiscal
2003 and $17,358,000 in fiscal 2002. Cash received from the exercise of stock
options was $19,422,000 in fiscal 2004, $4,662,000 in fiscal 2003, and
$5,720,000 in fiscal 2002. The Company also redeemed all of the outstanding
preferred stock during fiscal 2003 for $3,026,000, which included a required
$171,000 premium paid for the redemption.

On March 31, 2004, the Company entered into an unsecured $215,000,000
multi-currency revolving loan agreement with a group of five banks. The
$215,000,000 was divided between a 5-year credit facility for $125,000,000 and a
364-day credit facility for $90,000,000. On July 6, 2004, the Company
permanently reduced the borrowings on the 364-day facility to $0 and closed the
facility. Under the 5-year agreement, which has a final maturity date of March
31, 2009, the Company has the option to have interest rates determined based
upon the prime rate at Bank of America plus margin or at LIBOR rate plus margin.
A commitment fee is payable on the unused amount of credit. The agreement
requires the Company to maintain certain financial covenants during 2004. As of
July 31, 2004, the Company was in compliance with the covenants of the
agreement. The agreement restricts the amount of certain types of payments,
including dividends, which can be made annually to $25,000,000 plus 50% of the
consolidated net income for the prior year. The Company believes that based on
historic dividend policy, this restriction would not impede in following a
similar dividend policy in the future. As of July 31, 2004, there were no
outstanding borrowings on the 5-year revolving loan agreement.

On June 30, 2004, the Company finalized a debt offering of $150,000,000 of
5.14% unsecured senior notes due in 2014 in an offering exempt from the
registration requirements of the Securities Act of 1933. The debt offering was
in conjunction with the Company's acquisition of EMED. The requirement of the
notes will be amortized over seven years beginning in 2008, with interest
payable on the notes being due semiannually on June 28 and December 28,
beginning in December 2004. The Company used the proceeds of the offering to
reduce outstanding indebtedness under the Company's revolving credit facilities
used to initially fund the EMED acquisition. The debt has certain prepayment
penalties for paying off the debt prior to its maturity date.

Long-term obligations as a percentage of long-term obligations plus
stockholders' investment were 27.1% at July 31, 2004 and 0.2% at July 31, 2003.
As mentioned above, the Company borrowed $150,000,000 of long-term debt in
conjunction with the purchase of EMED in May 2004.

The Company believes that its continued strong cash flows and existing
borrowing capacity will enable it to execute its long-term strategic plan. This
strategic plan includes investments, which expand our current market share, open
new markets and geographies, develop new products and distribution channels and
continue to improve our processes. This strategic plan also includes executing
key acquisitions.

II-8

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have material off-balance sheet arrangements or
related party transactions. The Company is not aware of factors that are
reasonably likely to adversely affect liquidity trends, other than the risks
discussed in this filing and presented in other Company filings. However, the
following additional information is provided to assist financial statement
users.

Operating Leases -- These leases generally are entered into only for
non-strategic investments (e.g., warehouses, office buildings, computer
equipment) for which the economic profile is favorable.

Purchase Commitments -- The Company has purchase commitments for materials,
supplies, services, and property, plant and equipment as part of the ordinary
conduct of business. Such commitments are not in excess of current market
prices. Due to the proprietary nature of many of the Company's materials and
processes, certain supply contracts contain penalty provisions for early
termination. The Company does not believe a material amount of penalties will be
incurred under these contracts based upon historical experience and current
expectations.

Other Contractual Obligations -- The Company does not have material
financial guarantees or other contractual commitments that are reasonably likely
to adversely affect liquidity.

Related Party Transactions -- The Company does not have any related party
transactions that affect the results of operations, cash flow or financial
condition.

PAYMENTS DUE UNDER CONTRACTUAL OBLIGATIONS

The Company's future commitments at July 31, 2004 for long-term debt,
interest expense, operating lease obligations and purchase commitments are as
follows (dollars in thousands):

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

(1) Purchase commitments represent all open purchase orders in the Company's SAP
system as of September 22, 2004. The Company believes this is a reasonable
estimate of total purchase commitments at July 31, 2004. The Company
currently has approximately 73% of its consolidated revenues on SAP.

INFLATION AND CHANGING PRICES

Essentially all of the Company's revenue is derived from the sale of its
products in competitive markets. Because prices are influenced by market
conditions, it is not always possible to fully recover cost increases through
pricing. Changes in product mix from year to year and timing differences in
instituting price changes and the large amount of part numbers make it virtually
impossible to accurately define the impact of inflation on profit margins.

CRITICAL ACCOUNTING POLICIES

REVENUE RECOGNITION

The Company recognizes revenue when title and risk of loss have
transferred, there is evidence of an arrangement and collection of the sales
proceeds is reasonably assured, all of which generally occur upon

II-9

shipment of goods to customers. The vast majority of the Company's revenue
relates to the sale of inventory to customers, and revenue is recognized when
title and the risks and rewards of ownership pass to the customer. Given the
nature of the Company's business and the applicable rules guiding revenue
recognition, the Company's revenue recognition practices do not contain
estimates that materially affect results of operations.

RESTRUCTURING

Restructuring charges relate to the restructuring activities in fiscal
2004, 2003 and 2002. The Company provides forward-looking information about the
restructuring activities, including estimated costs and savings. Such
disclosures represent management's best estimate, but do require significant
estimates that may change over time. However, the specific reserves recorded in
each year under the restructuring activities are not considered highly
uncertain, as discussed in more detail in Note 10 of the Notes to the
Consolidated Financial Statements contained in Item 8 -- Financial Statements
and Supplementary Data.

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities. Changes in existing regulatory tax laws and rates
may affect the Company's ability to successfully manage regulatory matters
around the world, and future business results may affect the amount of deferred
tax liabilities or the valuation of deferred tax assets over time. The Company's
accounting for deferred tax consequences represents management's best estimate
of future events that can be appropriately reflected in the accounting
estimates. Although certain changes cannot be reasonably assumed in the
Company's current estimates, management does not believe such changes would
result in a material period-to-period impact on the results of operations or
financial condition.

GOODWILL AND INTANGIBLE ASSETS

The allocation of purchase price for business combinations requires
management estimates and judgment as to expectations for future cash flows of
the acquired business and allocation of those cash flows to identifiable
intangible assets in determining the estimated fair value for purchase price
allocation purposes. If the actual results differ from the estimates and
judgments used in these estimates, the amounts recorded in the financial
statements could result in a possible impairment of the intangible assets and
goodwill or require acceleration in the amortization expense of finite-lived
intangible assets. In addition, SFAS No. 142, "Goodwill and Other Intangible
Assets," requires that goodwill and other indefinite-lived intangible assets be
tested annually for impairment. Changes in management's estimates or judgments
could result in an impairment charge, and such a charge could have an adverse
effect on the Company's financial condition and results of operations.

RESERVES AND ALLOWANCES

The Company has recorded reserves or allowances for inventory obsolescence,
credit memos, allowances for doubtful accounts, incurred but not reported
medical claims, pension liabilities, warranty claims, compensated absences,
incentive compensation and income tax contingencies. These reserves require the
use of estimates and judgment. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. The Company believes that such estimates are made with
consistent and appropriate methods. Actual results may differ from these
estimates under different assumptions or conditions.

II-10

NEW ACCOUNTING STANDARDS

In July 2000, the Emerging Issues Task Force (EITF) of the FASB reached
final consensus on EITF Issue 00-14, "Accounting for Certain Sales Incentives."
EITF Issue 00-14 addresses the recognition, measurement, and income statement
classification for sales incentives offered to customers. Sales incentives
include discounts, coupons, and generally any other offers that entitle a
customer to receive a reduction in the price of a product by submitting a claim
for a refund or rebate. Under EITF Issue 00-14, the reduction in or refund of
the selling price of the product resulting from any sales incentives should be
classified as a reduction of revenue. In July 2001, the EITF reached final
consensus on EITF No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products" (EITF 00-25). EITF
00-25 generally requires that consideration, including equity instruments, given
to a customer be classified in a vendor's financial statements not as an
expense, but as an offset to revenue up to the amount of cumulative revenue
recognized or to be recognized. In November 2001, the EITF reached consensus on
EITF No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or
Reseller of the Vendor's Products" (EITF 01-09). EITF 01-09 clarifies and
modifies certain items discussed in EITF 00-14 and EITF 00-25. The
implementation of EITF 00-14, EITF 00-25, EITF 01-09, and the accompanying
interpretive guidance did not have an impact on the Company's financial
position, results of operations, or cash flows.

On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act introduced a
prescription drug benefit program under Medicare as well as a federal subsidy to
sponsors of retiree health care benefit plans. Certain accounting issues raised
by the Act, such as how to account for the federal subsidy, are not explicitly
addressed by SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." The Financial Accounting Standards Board issued FASB Staff
Position No. FAS 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003" ("FSP No.
106-2"), which allows sponsors to elect to defer recognition of the effects of
the Act if it has not been concluded whether the benefits under the sponsor's
plan are actuarially equivalent to Medicare Part D. In accordance with FSP No.
106-2, the Company's measures of the accumulated postretirement benefit
obligation and the net periodic postretirement benefit cost do not reflect the
effects of the subsidy, because it has not yet been concluded whether the
benefits under the Company's plan are actuarially equivalent to Medicare Part D.
FSP No. 106-2 will be effective beginning in the first quarter of fiscal 2005.

FORWARD-LOOKING STATEMENTS

Except for historical information, the Company's reports to the Securities
and Exchange Commission on Form 10-K and Form 10-Q and periodic press releases,
as well as other public documents and statements, may contain "forward-looking
statements," as defined in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are often identified by words such as "intend,"
"anticipate," "assume," "believe," "estimate," "expect," "plan," "project,"
"will," and other expressions, which refer to future events and trends.

The ability of the Company to attain management's goals and objectives is
materially dependent on numerous factors, including those set forth herein.

ECONOMIC CONDITIONS

Operating results are significantly influenced by general economic
conditions and growth or contraction of the principal economies in which we
operate, including the United States, Canada, Europe, Latin America and the
Asia-Pacific region. This is especially true with respect to growth or
contraction of the industrial and technology sectors of those economies. All
economies in which we operate are cyclical and the rates of growth or
contraction can vary substantially. Because we have few long-term contracts, we
generally ship products within a short period of time from receiving orders and
thus maintain only a small backlog. The extent to which we can rapidly adjust
our cost structure and output to changing economic conditions may have a
significant effect on our future profitability.

II-11

CURRENCY FLUCTUATIONS

Approximately half of our sales are in foreign currencies, which fluctuate
in relationship to one another and to the United States dollar. Fluctuations in
currencies can cause transaction, translation and other losses. These
fluctuations can have an adverse effect on our reported sales and net income.
The Company mitigates the transaction exposure by following a hedge policy where
50% of the intercompany transactions and material trade transactions are hedged
via forward contracts.

COST OF RAW MATERIALS

As a manufacturer, our sales and profitability are also dependent upon
availability and cost of raw materials and the ability to control or pass on
costs of raw materials and labor. Inflationary and other increases in the costs
of raw materials and labor have occurred in the past and are expected to recur.
Our ability to reflect these costs in increased selling prices for our products,
increasing our productivity, and focusing on higher profit businesses, will
significantly influence our ability to maintain our margins. Past performance
may or may not be replicable in the future.

RELIANCE ON SUPPLIERS

Our manufacturing operations depend on our suppliers' ability to deliver
quality components and products in time for us to meet critical manufacturing
and distribution schedules. If shortages or delays occur, our operating results
could suffer until other sources can be developed.

NEW PRODUCTS

A significant portion of the revenues in each of our recent fiscal years
has been represented by sales of products we have introduced within three years
prior to the period. Our ability to develop and successfully market new products
and to develop, acquire and retain necessary intellectual property rights is
therefore, essential to maintaining our growth, which ability cannot be assured.

ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES

Part of our historic growth has come through acquisitions. We may also
engage in strategic alliances, joint ventures and divestitures. Our ability to
effectively evaluate potential acquisition, strategic alliance, joint venture or
divestiture transactions and to effectuate such transactions at a reasonable
price can affect our profitability. In addition, acquisitions, strategic
alliances and joint ventures may require us to integrate with a different
company culture, management team and business infrastructure. We may also have
to develop, manufacture and market products with our products in a way that
enhances the performance of the combined business or product line. Depending on
the size and complexity of an acquisition, our successful integration of the
entity depends on a variety of factors, including:

- The hiring and retention of key employees,

- Management of facilities and employees in separate geographic areas,

- The integration or coordination of different research and development and
product manufacturing facilities, and

- Systems integration and implementation.

All of these efforts require varying levels of management resources, which
may divert our attention from other business operations.

INTELLECTUAL PROPERTY

We generally rely upon patent, copyright, trademark and trade secret laws
in the U.S.A. and in certain other countries, and agreements with our employees
and customers to establish and maintain our property rights in our technology
and products. However, any of our intellectual property rights could be
challenged,

II-12

invalidated or circumvented. Third parties may claim that we are infringing upon
their intellectual property. Even if we do not believe that our products are
infringing upon third parties' intellectual property rights, the claims can be
time-consuming and costly to defend and divert management's attention and
resources away from our business. Claims of intellectual property infringement
might also require us to enter into costly royalty or license agreements. If we
cannot or do not license the infringed technology or substitute similar
technology from another source, our business could suffer.

ENVIRONMENTAL

Some of our operations use substances regulated under various federal,
state and foreign laws governing the environment. It is our policy to apply
strict standards for environmental protection to sites inside and outside the
U.S.A., even when not subject to local government regulations. However, a
failure to comply with applicable standards or the accidental emission of or
exposure to hazardous materials could give rise to significant monetary
liability. Also, the imposition of new governmental standards or requirements
could materially increase our cost of operation.

New environmental legislation will be implemented in parts of Europe and
parts of Asia within the next two years. The first is commonly referred to as
the Waste Electrical and Electronic Equipment ("WEEE") Directive, which provides
that certain banned substances not be used in electrical and electronic
equipment sold by us, and that we have a recycling scheme in place to deal with
the disposal of that equipment at its end-of-life. The second of these is
commonly referred to as the Restrictions on the Use of Hazardous Substances
("RoHS") Directive, which defines the restricted substances referenced by the
WEEE regulation. Some of our products may be governed by these new regulations
in the regulated countries in which such products are sold. In addition, some of
our products may be sold to customers for inclusion in electrical and electronic
equipment products that are regulated under these new regulations. These
customers may require that our products meet certain requirements that pertain
to their products. It is our policy to meet all applicable requirements. We are
currently in the process of testing our products and re-designing them as
required to meet these new regulations. We do not believe that the costs of
compliance will be material at this time. The imposition of additional
compliance requirements could significantly increase our cost of compliance.
Failure to comply with this type of regulation could result in a material
limitation on the sale of the affected products in regulated countries.

EFFECT OF INTERNATIONAL CONDITIONS

Our international operations may be significantly influenced by political,
economic, regulatory, and environmental/health conditions (including tariffs) in
the countries in which we conduct our operations.

OTHER

Other factors include costs and other effects of computer viruses,
availability of electricity, natural gas and other sources of power, interest
rate increases; legal and administrative cases and proceedings, settlements,
judgments and investigations, claims, and changes in those items; adoption of
new or revised accounting policies and practices and the application of such
policies and practices; the continued successful implementation of an
enterprise-resource-planning system in portions of the business; business
reorganizations or combinations; loss of significant contracts or customers; the
ability and willingness of purchasers to substitute other products for the
products that we distribute; and pricing, purchasing, financing and promotional
decisions by intermediaries in the distribution channel.

The factors identified in this statement are believed to be important
factors (but not necessarily all of the important factors) that could cause
actual results to be materially different from those that may be expressed or
implied in any forward-looking statement made by, or on behalf of, the Company.
Other factors not discussed in this statement could also have material adverse
effects concerning forward-looking objectives or estimates. The Company assumes
no obligation to update the information included in this statement.

II-13

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's business operations give rise to market risk exposure due to
changes in foreign exchange rates. To manage that risk effectively, the Company
enters into hedging transactions, according to established guidelines and
policies, that enable it to mitigate the adverse effects of this financial
market risk.

The global nature of the Company's business requires active participation
in the foreign exchange markets. As a result of investments, production
facilities and other operations on a global scale, the Company has assets,
liabilities and cash flows in currencies other than the U.S. Dollar. The primary
objective of the Company's foreign-exchange risk management is to minimize the
impact of currency movements on intercompany transactions and foreign
raw-material imports. To achieve this objective, the Company hedges a portion of
known exposures using forward contracts. Main exposures are related to
transactions denominated in the British Pound, the Euro, Canadian Dollar,
Japanese Yen and Australian Dollar. The risk of these hedging instruments is not
material.

The Company could be exposed to interest rate risk through its corporate
borrowing activities. The objective of the Company's interest rate risk
management activities is to manage the levels of the Company's fixed and
floating interest rate exposure to be consistent with the Company's preferred
mix. The interest rate risk management program consists of entering into
approved interest rate derivatives when there is a desire to modify the
Company's exposure to interest rates.

II-14

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

BRADY CORPORATION & SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

II-15

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
of Brady Corporation:
Milwaukee, Wisconsin

We have audited the accompanying consolidated balance sheets of Brady
Corporation and subsidiaries (the "Company") as of July 31, 2004 and 2003, and
the related consolidated statements of income, stockholders' investment and cash
flows for each of the three years in the period ended July 31, 2004. Our audits
also included the financial statement schedule listed in Item 15. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at July 31, 2004
and 2003, and the results of its operations and its cash flows for each of the
three years in the period ended July 31, 2004 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

September 7, 2004
Milwaukee, Wisconsin

II-16

BRADY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JULY 31, 2004 AND 2003

See notes to consolidated financial statements.
II-17

BRADY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JULY 31, 2004, 2003 AND 2002

See notes to consolidated financial statements.
II-18

BRADY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
YEARS ENDED JULY 31, 2004, 2003 AND 2002

See notes to consolidated financial statements.
II-19

BRADY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 2004, 2003 AND 2002

See notes to consolidated financial statements.
II-20

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 2004, 2003 AND 2002

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of Brady Corporation and its subsidiaries (the
"Company"), all of which are wholly-owned. All significant intercompany accounts
and transactions have been eliminated in consolidation.

Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Fair Value of Financial Instruments -- The Company believes the carrying
amount of its financial instruments (cash and cash equivalents, accounts
receivable and accounts payable) is a reasonable estimate of the fair value of
these instruments due to their short-term nature.

Cash Equivalents -- The Company considers all highly liquid investments
with maturities of three months or less when acquired to be cash equivalents.

Inventories -- Inventories are stated at the lower of cost or market. Cost
has been determined using the last-in, first-out ("LIFO") method for certain
inventories (approximately 36% of total inventories at July 31, 2004 and 2003)
and the first-in, first-out ("FIFO") method for other inventories. The carrying
value of domestic inventories stated at FIFO cost exceeded the value of such
inventories stated at LIFO cost by $7,452,000 and $7,494,000 at July 31, 2004
and 2003, respectively.

Depreciation -- The cost of buildings and improvements and machinery and
equipment is being depreciated over their estimated useful lives using the
straight-line method for financial reporting purposes. The estimated useful
lives range from 3 to 33 years.

Intangible Assets -- The cost of intangible assets with determinable useful
lives is amortized to reflect the pattern of economic benefits consumed,
principally on a straight-line basis, over the estimated periods benefited.
Goodwill is evaluated annually for impairment based on valuation models that
incorporate expected future cash flows and profitability projections.

Changes in the carrying amount of goodwill for the years ended July 31,
2004 and 2003, are as follows:

Goodwill increased by $145,230,000 during the year ended July 31, 2004,
including an increase of $4,284,000 attributable to the effects of foreign
currency translation and other. The acquisitions of Brandon

II-21

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

International, Inc., Prinzing Enterprises, Inc., B.I.G. and Emed Co, Inc.
("EMED") resulted in $6,624,000, $12,065,000, $8,353,000 and $113,904,000 of
additional goodwill, respectively.

Goodwill increased by $22,614,000 during the year ended July 31, 2003,
including an increase of $4,986,000 attributable to the effects of foreign
currency translation and other. The acquisitions of TISCOR Inc. ("TISCOR"),
Cleere Advantage Ltd., Etimark GmbH and Aztech Systems resulted in $8,191,000,
$2,169,000, $4,132,000 and $580,000 of additional goodwill, respectively. An
additional payment of $2,000,000 related to the fiscal 2002 Temtec, Inc.
acquisition was earned and paid during fiscal 2003, resulting in additional
goodwill of $2,000,000. Lastly, a holdback payment and a purchase accounting
adjustment related to the fiscal 2002 acquisitions of Strandware, Inc. and
Temtec, Inc., respectively, resulted in additional goodwill of $556,000.

Other intangible assets include patents, trademarks, non-compete agreements
and other intangible assets with finite lives being amortized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." The net book value of these assets was as follows:

The increase of trademarks and other in 2004 relates mainly to the
acquisitions of EMED and B.I.G., which added $13,900,000 and $473,000,
respectively.

The increase in customer relationships in 2004 relates mainly to the
acquisition of EMED and B.I.G., which added $21,100,000 and $2,300,000,
respectively. In 2003 the acquisition of TISCOR added $2,900,000.

Amortization expense of intangible assets during fiscal 2004 and 2003 was
$2,965,000 and $1,539,000, respectively. The amortization over each of the next
five fiscal years is projected to be $5,314,000, $5,036,000, $4,868,000,
$4,568,000 and $4,441,000 for 2005, 2006, 2007, 2008 and 2009, respectively.

Impairment of Long-Lived Assets -- The Company evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life of
long-lived assets may warrant revision or that the remaining balance of an asset
may not be recoverable. The measurement of possible impairment is based on fair
value of the assets generally estimated by the ability to recover the balance of
assets from expected future operating cash flows on an undiscounted basis.

Impairment of Goodwill -- The Company evaluates goodwill under SFAS No.
142, which addresses the financial accounting and reporting standards for the
acquisition of intangible assets outside of a business combination and for
goodwill and other intangible assets subsequent to their acquisition. This
accounting standard requires that goodwill be separately disclosed from other
intangible assets in the consolidated balance sheet, and no longer be amortized,
but tested for impairment on at least an annual basis.

The Company performed its annual assessments in the fourth quarter of each
year. The assessments included comparing the carrying amount of net assets,
including goodwill, of each reporting unit to their respective fair value as of
the date of the assessment. Fair value was estimated based upon discounted cash

II-22

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

flow analyses. Because the estimated fair value of each of the Company's
reporting units exceeded their carrying amount, management believes that no
impairment existed as of the date of the latest assessment. No indications of
impairment have been identified between the date of the latest assessment and
July 31, 2004.

Catalog Costs -- Catalog costs are initially capitalized and amortized over
the estimated useful lives of the publications (generally eight months). At July
31, 2004 and 2003, $11,167,000 and $8,507,000, respectively of prepaid catalog
costs were included in prepaid expenses and other current assets.

Revenue Recognition -- The Company recognizes revenue when title and risk
of loss have transferred, there is evidence of an arrangement and collection of
the sales proceeds is reasonably assured, all of which generally occur upon
shipment of goods to customers. The vast majority of the Company's revenue
relates to sale of inventory to customers, and revenue is recognized when title
and the risks and rewards of ownership pass to the customer. Given the nature of
the Company's business and the applicable rules guiding revenue recognition, the
Company's revenue recognition practices do not contain estimates that materially
affect results of operations.

Sales Incentives -- In accordance with the Financial Accounting Standard
Board's ("FASB's") Emerging Issues Task Force Issue No. 01-9, "Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Product," we account for cash consideration (such as sales incentives and cash
discounts) that we give to our customers or resellers as a reduction of revenue
rather than as an operating expense.

Shipping and Handling Fees and Costs -- The Company accounts for shipping
and handling fees and costs in accordance with Emerging Issues Task Force
("EITF") Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs."
Under EITF No. 00-10 amounts billed to a customer in a sale transaction related
to shipping costs are reported as net sales and the related costs incurred for
shipping are reported as cost of goods sold.

Advertising Costs -- Advertising costs are expensed as incurred.
Advertising expense for the years ended July 31, 2004, 2003 and 2002 were
$46,143,000, $43,833,000 and $42,197,000, respectively.

Stock Based Compensation -- SFAS No. 123, "Accounting for Stock-Based
Compensation," establishes a fair value based method of accounting for
stock-based compensation; however, it allows entities to continue accounting for
employee stock-based compensation under the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company accounts for its stock based compensation plans using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS No. 123 as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation," requires
certain disclosures, including pro forma net income and net income per share as
if the fair value based accounting method had been used for employee stock-based
compensation cost. The Company has adopted SFAS No. 123 through disclosure with
respect to employee stock-based compensation.

If the Company had elected to recognize compensation cost for the Stock
Option Plans based on the fair value at the grant dates for awards under those
plans, consistent with the method prescribed by

II-23

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SFAS No. 123, net income and net income per common share would have been changed
to the pro forma amounts indicated below:

The fair value of stock options used to compute pro-forma net income and
net income per common share disclosure is the estimated present value at grant
date using the Black-Scholes option-pricing model with weighted average
assumptions and the resulting estimated fair value for fiscal years 2004, 2003
and 2002 as follows:

Research and Development -- Amounts expended for research and development
are expensed as incurred.

Foreign Currency Translation -- Foreign currency assets and liabilities are
translated into United States dollars at end of period rates of exchange, and
income and expense accounts are translated at the weighted

II-24

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

average rates of exchange for the period. Resulting translation adjustments are
included in other comprehensive income.

Income Taxes -- The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes," which requires an asset and
liability approach to financial accounting and reporting for income taxes.
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.

Risk Management Activities -- The Company is exposed to market risk, such
as changes in interest rates and currency exchange rates. The Company does not
hold or issue derivative financial instruments for trading purposes.

Currency Rate Hedging -- The primary objectives of the foreign exchange
risk management activities are to understand and mitigate the impact of
potential foreign exchange fluctuations on the Company's financial results and
its economic well-being. While the Company's risk management objectives and
strategies will be driven from an economic perspective, the Company will
attempt, where possible and practical, to ensure that the hedging strategies it
engages in can be treated as "hedges" from an accounting perspective or
otherwise result in accounting treatment where the earnings effect of the
hedging instrument provides substantial offset (in the same period) to the
earnings effect of the hedged item. Generally, these risk management
transactions will involve the use of foreign currency derivatives to protect
against exposure resulting from intercompany sales and identified inventory or
other asset purchases.

The Company primarily utilizes forward exchange contracts with maturities
of less than 12 months, which qualify as cash flow hedges. These are intended to
offset the effect of exchange rate fluctuations on forecasted sales, inventory
purchases and intercompany charges. The fair value of these instruments at July
31, 2004 and 2003 was not material.

Hedge effectiveness is determined by how closely the changes in the fair
value of the hedging instrument offset the changes in the fair value or cash
flows of the hedged item. Hedge accounting is permitted only if the hedging
relationship is expected to be highly effective at the inception of the hedge
and on an on-going basis. Any ineffective portions are to be recognized in
earnings immediately.

New Accounting Standards -- On December 8, 2003, the Medicare Prescription
Drug Improvement and Modernization Act of 2003 (the "Act") was signed into law.
The Act introduced a prescription drug benefit program under Medicare as well as
a federal subsidy to sponsors of retiree health care benefit plans. Certain
accounting issues raised by the Act, such as how to account for the federal
subsidy, are not explicitly addressed by SFAS Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The Financial
Accounting Standards Board issued FASB Staff Position ("FSP") No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug Improvement and Modernization Act of 2003" ("FSP No. 106-2"), which allows
sponsors to elect to defer recognition of the effects of the Act if it has not
been concluded whether the benefits under the sponsor's plan are actuarially
equivalent to Medicare Part D. In accordance with FSP No. 106-2, the Company's
measures of the accumulated postretirement benefit obligation and the net
periodic postretirement benefit cost do not reflect the effects of the subsidy,
because it has not yet been concluded whether the benefits under the Company's
plan are actuarially equivalent to Medicare Part D. FSP No. 106-2 will be
effective beginning in the first quarter of fiscal 2005.

II-25

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. ACQUISITIONS OF BUSINESSES

In November 2001, the Company acquired Strandware, Inc., located in Eau
Claire, Wisconsin, a bar-code, label-design, and data-collection software
developer. Also in November 2001, the Company acquired Safety Signs Service,
located in Perth, Australia, a manufacturer and supplier of safety products. In
April 2002, the Company acquired Temtec, located in Suffern, New York, a
printing Company that develops and markets products for security applications.
The combined purchase price of these acquisitions was approximately $13,600,000.
Each of the acquisitions was for cash. The agreements include provisions for
contingent payments up to a maximum of $4,000,000 based on the earnings of the
acquired entities in calendar years 2002 and 2003, $2,000,000 of which was paid
during fiscal 2003. Approximately $8,900,000 was assigned to goodwill and
approximately $2,000,000 was assigned to patents, which will be amortized over a
weighted average life of nine years.

In January 2003, the Company acquired TISCOR, Inc., located in Poway,
California, an innovator in mobile workforce automation solutions, and an
industry leader in designing hand-held computer software for technicians
performing site and equipment inspections. The purchase price was approximately
$13,500,000 in cash. The agreement includes provisions for contingent payments
up to a maximum of $3,000,000 based on the earnings of the acquired entity in
calendar years 2003 and 2004. No payments have been made to date. The results of
its operations have been included since the respective date of acquisition in
the accompanying condensed consolidated financial statements. The purchase price
resulted in the allocation to intangible assets as follows: $8,200,000 to
goodwill, $2,900,000 to customer relationships and $2,100,000 to software.

In February 2003, the Company acquired Cleere Advantage Ltd., a small
printing system distributor located in the United Kingdom. In April 2003, the
Company acquired Etimark GmbH, located in Bad Nauheim, Germany, a leading
provider of complete barcode solutions including labels, printers, applicators
and software for the German market. In July 2003, the Company acquired Aztech
Systems, an industrial labeling and signmaking system distributor, located in
Yorkshire, England. The combined purchase price for these acquisitions was
approximately $8,100,000 in cash. The allocation of the purchase price resulted
in the allocation to intangible assets as follows: $6,900,000 to goodwill,
$1,300,000 to customer lists, $400,000 to patents and $300,000 to non-compete
agreements.

In September 2003, the Company acquired Brandon International, Inc.
("Brandon") headquartered in Baldwin Park, California, with international
operations in Mexico and Singapore. Brandon is a manufacturer of die-cut
products. In October 2003, the Company acquired Prinzing Enterprises, Inc.
("Prinzing") located in Warrenville, Illinois. Prinzing is a manufacturer of
lockout/tagout products, signs and other safety devices. In November 2003, the
Company acquired B.I.G, headquartered in the United Kingdom, a provider of
badging and business card solutions. The combined purchase price for these
acquisitions was approximately $30,700,000 in cash and $1,000,000 to be paid in
February 2005. The Prinzing acquisition agreement included provisions for
contingent payments up to a maximum $1,500,000 based on certain performance
criteria during fiscal year 2004. As of May 2004, these criteria were met and
the entire amount was paid to the sellers. The allocation of the purchase price
resulted in the allocation to intangible assets as follows: $27,000,000 to
goodwill, $500,000 to trademarks, $300,000 to patents, $200,000 to non-compete
agreements and $2,900,000 to customer lists.

On May 20, 2004, the Company completed its acquisition of all of the
outstanding securities of EMED for a purchase price of $191,800,000, net of cash
acquired. EMED is a direct marketer and manufacturer of identification, safety
and facility management products headquartered in Buffalo, New York. The funds
used to finance the purchase price came from borrowings on the Company's
revolving credit facility and from working capital.

On May 18, 2004 the Company borrowed $160,000,000 to finance the purchase
of EMED. Of the borrowed funds, $90 million was drawn from its 364-day credit
facility and $70 million was drawn from its

II-26

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5-year credit facility. On June 30, 2004, the Company completed its offering of
$150,000,000 in fixed rate 5.14% 10-year debt. The proceeds from this debt,
along with $10,000,000 of internally generated funds, were used to pay off the
$160,000,000 originally borrowed against the revolving credit facilities.

The purchase price allocation for EMED has not yet been finalized, but the
Company does not expect significant changes from the preliminary allocation set
forth below. The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of acquisition. The
difference between the purchase price of $191,800,000 and the net assets
acquired value of $193,800,000 relates to transaction costs.

Current Assets.............................................. $ 40,000,000
Property, Plant & Equipment................................. 6,800,000
Intangibles................................................. 35,300,000
Goodwill.................................................... 113,900,000
------------
Total Assets Acquired....................................... 196,000,000
Current Liabilities......................................... 2,200,000
------------
Net Assets Acquired......................................... $193,800,000
============

The following unaudited pro-forma combined information, assuming the EMED
acquisition was completed on August 1, 2002, is provided for illustrative
purposes only and should not be relied upon as necessarily being indicative of
the historical results that would have been obtained if this acquisition had
actually occurred during those periods, or the results that may be obtained in
the future.

Of the $35,300,000 of acquired intangible assets, $13,900,000 was assigned
to trademarks that are not subject to amortization, $21,100,000 was assigned to
customer relationships and is being amortized over 7 years and $300,000 was
assigned to non-compete agreements, which are amortized over 2 years. Goodwill
of $107,000,000 is expected to be deductible for tax purposes over a ten-year
period.

In August 2004 the Company acquired ID Technologies, a Singapore based
manufacturer and supplier of pressure sensitive die-cut components and labeling
products with annual sales of approximately $24,000,000.

II-27

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The results of the operations of the acquired businesses have been included
since their respective dates of acquisition in the accompanying condensed
consolidated financial statements.

3. EMPLOYEE BENEFIT PLANS

The Company provides postretirement medical, dental and vision benefits
(the "Plan") for all regular full and part-time domestic employees (including
spouses) who retire on or after attainment of age 55 with 15 years of credited
service. Credited service begins accruing at the later of age 40 or date of
hire. All active employees first eligible to retire after July 31, 1992, are
covered by an unfunded, contributory postretirement healthcare plan where
employer contributions will not exceed a defined dollar benefit amount,
regardless of the cost of the program. Employer contributions to the plan are
based on the employee's age and service at retirement.

The Company accounts for postretirement benefits other than pensions in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions." The Company funds benefit costs on a pay-as-you-go basis.

During fiscal 2004 there was a change in the Plan relating to deductibles
and co-payment amounts and is reported under plan amendments. The change reduced
the accumulated benefits obligation by $552,000 during the year ended July 31,
2004.

The following table provides a reconciliation of the changes in the Plan's
accumulated benefit obligations during the years ended July 31, 2004, and 2003:

The following table shows the unfunded status of the Plan as of July 31,
2004 and 2003:

II-28

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table provides the components of net periodic benefit cost
for the Plan for fiscal years 2004, 2003 and 2002:

The expected future benefit payments are $690,800 in 2005, $789,900 in
2006, $890,300 in 2007, $1,008,000 in 2008, $1,125,300 in 2009 and $38,233,000
in 2010 and beyond.

The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation at July 31, 2004 was 12.0% trending down 1.0%
per year reaching 6.0% at July 31, 2010 and then dropping to 5.5% in 2011 and
after. The assumed health care cost trend rates used in measuring the
accumulated postretirement benefit obligation at July 31, 2003 was 9.0% trending
down 0.5% per year reaching 6.0% at July 31, 2010 and then dropping to 5.5% in
2011 and after.

The weighted average discount rates used in determining the accumulated
postretirement benefit obligation was 6.0% for both 2004 and 2003.

If the health care cost trend rate assumptions were increased by 1% or
decreased by 1%, the accumulated postretirement benefit obligation as of July
31, 2004 would be increased by $236,600 and decreased by $279,300, respectively.
The effect of a 1% increase or decrease in the health care cost trend rate
assumption on the sum of the service cost and interest cost would be increased
by $61,100 and decreased by $70,400, respectively. If the health care cost trend
rate assumptions were increased by 1% or decreased by 1%, the accumulated
postretirement benefit obligation as of July 31, 2003 would be increased by
$214,200 and decreased by $214,200, respectively. The effect of a 1% increase or
decrease in the health care cost trend rate assumption on the sum of the service
cost and interest cost would be increased by $53,300 and decreased by $53,300,
respectively.

The Company has retirement and profit-sharing plans covering substantially
all full-time domestic employees and certain of its foreign subsidiaries.
Contributions to the plans are determined annually or quarterly, according to
the respective plans, based on earnings of the respective companies and employee
contributions. At July 31, 2004 and 2003, $4,701,000 and $3,497,000,
respectively, of accrued profit-sharing contributions were included in other
current liabilities.

The Company also has deferred compensation plans for directors, officers
and key executives. At July 31, 2004 and 2003, $5,883,000 and $5,462,000,
respectively, of deferred compensation was included in current and other
long-term liabilities.

During fiscal 1998, the Company adopted a new deferred compensation plan
that invests solely in shares of the Company's Class A Nonvoting Common Stock.
Participants in the old phantom stock plan were allowed to convert their
balances in the old plan to this new plan. The new plan was funded initially by
the issuance of 372,728 shares of Class A Nonvoting Common Stock to a Rabbi
Trust. All deferrals into the new plan result in purchases of Class A Nonvoting
Common Stock by the Rabbi Trust. No deferrals are allowed

II-29

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

into the old plan. Shares held by the Rabbi Trust are distributed to
participants upon separation from the Company as defined in the plan agreement.

During fiscal 2002, the Company adopted a new deferred compensation plan
that allows future contributions to be invested in shares of the Company's Class
A Nonvoting Common Stock or in certain other investment vehicles. Prior deferred
compensation deferrals must remain in the Company's Class A Nonvoting Common
Stock. All deferrals into the new plan result in purchases of Class A Nonvoting
Common Stock or certain other investment vehicles by the Rabbi Trust. Balances
held by the Rabbi Trust are distributed to participants upon separation from the
Company as defined in the plan agreement.

The amounts charged to expense for the retirement, profit sharing and
deferred compensation plans described above were $10,870,000, $8,506,000, and
$8,918,000 during the years ended July 31, 2004, 2003 and 2002, respectively.

Previously the Company had a voluntary employee benefit trust for the
purpose of funding employee medical benefits and certain other employee
benefits. At July 31, 2003 and 2002, $2,428,000, and $4,142,000, respectively,
of payments to the trust to fund such benefits was included in prepaid expenses
and other current assets.

4. INCOME TAXES

Income taxes consist of the following:

Deferred income taxes result from temporary differences in the recognition
of revenues and expenses for financial statement and income tax purposes.

Pre-tax income consists of the following:

II-30

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The approximate tax effects of temporary differences are as follows:

II-31

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The change in the valuation allowance was ($740,000), $1,627,000, and
$930,000 in fiscal 2004, 2003 and 2002, respectively.

A reconciliation of the tax computed by applying the statutory U.S. Federal
income tax rate to income before income taxes to the total income tax provision
is as follows:

The Company's policy is to remit earnings from foreign subsidiaries only to
the extent any resultant foreign income taxes are creditable in the United
States. Accordingly, the Company does not currently provide for the additional
United States and foreign income taxes which would become payable upon remission
of undistributed earnings of foreign subsidiaries.

The cumulative undistributed earnings of such companies at July 31, 2004
amounted to approximately $140,332,000. If all such undistributed earnings were
remitted, an additional provision for foreign income taxes of $15,968,000 would
be required.

5. LONG-TERM OBLIGATIONS

On March 31, 2004, the Company entered into an unsecured $215,000,000
multicurrency revolving loan agreement with a group of five banks. The $215
million was divided between a 5-year credit facility for $125 million and a
364-day credit facility for $90 million. On July 6, 2004, the Company
permanently reduced the borrowings on the 364-day facility to $0 and closed the
facility. Under the 5-year agreement, which has a final maturity date of March
31, 2009, the Company has the option to have interest rates determined based
upon the prime rate at Bank of America plus margin or a LIBOR rate plus margin.
A commitment fee is payable on the unused amount of credit. The agreement
requires the Company to maintain certain financial covenants. The Company is in
compliance with the covenants of the agreement. The agreement restricts the
amount of certain types of payments, including dividends, which can be made
annually to $25 million plus 50% of the consolidated net income for the prior
year, totalling approximately $50 million in 2005. The Company believes that
based on historic dividend policy, this restriction will not impede it from
following a similar dividend policy in the future. As of July 31, 2004, there
were no outstanding borrowings on the 5-year revolving loan agreement.

On June 30, 2004, the Company finalized a debt offering of $150,000,000 of
5.14% unsecured senior notes due 2014 in an offering exempt from the
registration requirements of the Securities Act of 1933. The debt offering was
in conjunction with the Company's acquisition of EMED. The notes will be repaid
over 7 years beginning in 2008 with interest payable on the notes due
semiannually on June 28 and December 28 beginning in December 2004. The Company
used the proceeds of the offering to reduce outstanding indebtedness under

II-32

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Company's revolving credit facilities. The debt does have certain prepayment
penalties for paying the debt prior to its maturity date.

Long-term obligations consist of the following:

The fair value of the Company's long-term obligations approximates
$152,000,000. The fair value of the Company's long-term obligations is estimated
based on quoted market prices for the same or similar issue and on the current
rates offered for debt of the same maturities.

Maturities on long-term debt are as follows:

The company made interest payments of $506,000 in fiscal 2004.

II-33

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. STOCKHOLDERS' INVESTMENT

Information as to the Company's capital stock at July 31, 2004 and 2003 is
as follows:

On August 1, 2002, all Cumulative Preferred Stock was redeemed at a 6%
premium for approximately $3,026,000. Each share of $100 par value Cumulative
Preferred Stock was entitled to receive cumulative cash dividends and could be
redeemed, under certain circumstances, by the Company at par value plus accrued
dividends plus a premium of 6% of the par value. Such shares, which were held by
the initial holder thereof, were subject to redemption only if the holder
consented thereto.

Before any dividend may be paid on the Class B Common Stock, holders of the
Class A Common Stock are entitled to receive an annual, noncumulative cash
dividend of $.0333 per share. Thereafter, any further dividend in that fiscal
year must be paid on each share of Class A Common Stock and Class B Common Stock
on an equal basis.

Holders of the Class A Common Stock are not entitled to any vote on
corporate matters, unless, in each of the three preceding fiscal years, the
$.0333 preferential dividend described above has not been paid in full. Holders
of the Class A Common Stock are entitled to one vote per share for the entire
fiscal year immediately following the third consecutive fiscal year in which the
preferential dividend is not paid in full. Holders of Class B Common Stock are
entitled to one vote per share for the election of directors and for all other
purposes.

Upon liquidation, dissolution or winding up of the Company, and after
distribution of any amounts due to holders of Cumulative Preferred Stock,
holders of the Class A Common Stock are entitled to receive the sum of $1.67 per
share before any payment or distribution to holders of the Class B Common Stock.
Thereafter, holders of the Class B Common Stock are entitled to receive a
payment or distribution of $1.67 per share. Thereafter, holders of the Class A
Common Stock and Class B Common Stock share equally in all payments or
distributions upon liquidation, dissolution or winding up of the Company.

The preferences in dividends and liquidation rights of the Class A Common
Stock over the Class B Common Stock will terminate at any time that the voting
rights of Class A Common Stock and Class B Common Stock become equal.

II-34

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a summary of other activity in stockholders' investment
for the years ended July 31, 2002, 2003 and 2004:

There were 1,071,289, 1,505,092 and 1,418,118 options exercisable with a
weighted average exercise price of $27.88, $25.57, and $24.39 at July 31, 2004,
2003 and 2002, respectively.

The following table summarizes information about stock options outstanding
at July 31, 2004:

7. SEGMENT INFORMATION

The Company evaluates performance and allocates resources based on profit
or loss from operations before income taxes, not including administrative costs,
interest, foreign exchange gain or loss and nonrecurring items. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies.

The Company's reportable segments are geographical regions that are each
managed separately. Due to the change to a regional management structure at the
beginning of fiscal 2004, the Company has restated the corresponding segment
information from its previous group-based structure for the prior years. The
Company has three reportable segments: Americas, Europe and Asia.

II-36

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Intersegment sales and transfers are recorded at cost plus a standard
percentage markup. Intercompany profit is eliminated in consolidation. It is not
practicable to disclose enterprise-wide revenue from external customers on the
basis of product or service.

II-37

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

* Revenues are attributed based on country of origin.

** Long-lived assets consist of property, plant, and equipment, other
intangibles and goodwill.

8. NET INCOME PER COMMON SHARE

Net income per Common Share is computed by dividing net income (after
deducting the applicable Preferred Stock dividends and preferential Class A
Common Stock dividends) by the weighted average Common Shares outstanding of
23,649,227 for 2004, 23,177,741 for 2003 and 23,023,687 for 2002. The
preferential dividend on the Class A Common Stock of $.0333 per share has been
added to the net income per Class A Common Share for all years presented.

II-38

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Reconciliations of the numerator and denominator of the basic and diluted
per share computations for the Company's Class A and Class B common stock are
summarized as follows:

Options to purchase 18,000, 778,684 and 0 shares of Class A common stock
were excluded from the computations of diluted net income per share for years
ended July 31, 2004, 2003 and 2002, respectively, because the option exercise
prices were greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.

9. COMMITMENTS

The Company has entered into various noncancellable operating lease
agreements. Rental expense charged to operations was $12,583,000, $10,800,000,
and $8,955,000 for the years ended July 31, 2004, 2003

II-39

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and 2002, respectively. Future minimum lease payments required under such leases
in effect at July 31, 2004, for the years ending July 31:

2005........................................................ $ 9,723,000
2006........................................................ 5,966,000
2007........................................................ 3,806,000
2008........................................................ 2,898,000
2009........................................................ 1,790,000
Thereafter.................................................. 2,597,000
-----------
$26,780,000
===========

10. RESTRUCTURING CHARGES

During fiscal 2004 the Company recorded restructuring charges of
$3,181,000. The Company recorded a charge of $10,215,000 in fiscal 2003. This
combined total of $13,396,000 was part of the restructuring program announced in
the fourth quarter of fiscal 2003 related primarily to combining sales and
marketing resources and consolidation of facilities throughout North America and
Europe resulting in a workforce reduction of approximately 300 employees.

The 2004 restructuring charge of $3,181,000 includes a provision for
severance of approximately $2,900,000 and write-off or impairment of assets and
other of $281,000. In 2003 the $10,215,000 charge includes a provision for
severance of approximately $8,220,000 and write-off or impairment of assets and
other of $1,995,000. Total cash expenditures in connection with these actions
will approximate $12,000,000, of which approximately $2,300,000 was paid in
fiscal 2003 and $8,300,000 was paid in fiscal 2004. The restructuring charge for
2004 was $2,160,000 after tax, or $.09 per diluted Class A Common Share. The
remaining balance is sufficient to address any remaining restructuring actions
and is expected to be used in fiscal 2005.

The cost savings resulting from this restructuring began in fiscal 2003,
continued in fiscal 2004 and will continue into fiscal 2005. The $10,215,000
charge in fiscal 2003 was partially offset by a credit of $626,000 related to
adjustments in lease termination costs associated with the Company's fiscal 2002
and 2001 restructuring activities. The net restructuring charge in fiscal 2003
was $9,589,000 ($6,329,000 after tax, or $0.27 per diluted Class A Common
Share).

A reconciliation of activity with respect to the Company's 2003 and 2004
restructuring is as follows:

Beginning balance, April 30, 2003........................... $ 0
Restructuring charge...................................... 10,215,000
Non-cash asset write-offs................................. (948,000)
Cash payments............................................. (2,341,000)
-----------
Ending balance, July 31, 2003............................... $ 6,926,000
===========
Additional charges........................................ 3,181,000
Non-cash asset write-offs................................. (76,000)
Cash payments associated with severance and other......... (8,340,000)
-----------
Ending balance, July 31, 2004............................... $ 1,691,000
===========

The Company recorded a restructuring charge of $3,030,000 in fiscal 2002
related primarily to consolidation of facilities in Asia/Pacific, United States
and Europe and a workforce reduction of

II-40

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately three percent. The $3,030,000 charge includes a provision for
severance of approximately $1,720,000, a provision for lease cancellation costs
associated with the facilities consolidation of $940,000 and write-off or
impairment of assets and other of $370,000. The workforce reduction of
approximately 100 people was essentially completed in July 2002. Total cash
expenditures in connection with these actions will approximate $2,400,000, of
which approximately $800,000 was paid prior to July 31, 2002. The cost savings
resulting from this plan began in fiscal 2003. The $3,030,000 charge in fiscal
2002 was partially offset by a credit of $310,000 related to adjustments in
severance costs associated with the Company's fiscal 2001 restructuring
activities. The net restructuring charge in fiscal 2002 was $2,720,000
($1,782,000 after tax, or $0.07 per diluted Class A Common Share).

A reconciliation of activity with respect to the Company's 2002
restructuring is as follows:

Ending balance, July 31, 2002............................... $ 2,239,000
Cash payments associated with severance and other......... (1,461,000)
Non-cash asset write-offs................................. (195,000)
Adjustment to lease accrual............................... (453,000)
-----------
Ending balance, July 31, 2003............................... $ 130,000
===========
Cash payments associated with severance and other......... (130,000)
-----------
Ending balance, July 31, 2004............................... $ 0
===========

In July 2001, the Company recorded a restructuring charge of $9,560,000
($5,879,000 after tax, or $0.26 per diluted Class A Common Share) related
primarily to facilities consolidation in the United States and Europe and
workforce reductions in its operations around the world. The $9,560,000 charge
includes a provision for severance of approximately $5,700,000, write-off or
impairment of assets (primarily buildings) of approximately $2,750,000 and
$1,110,000 of other costs associated with the restructuring efforts. Other costs
primarily include lease cancellation costs associated with the facilities
consolidation. The workforce reduction of approximately 175 people was
essentially completed in August 2001. Total cash expenditures in connection with
these actions approximated $6,300,000.

A reconciliation of activity with respect to the Company's 2001
restructuring is as follows:

Ending balance, July 31, 2001............................... $ 6,937,000
Cash payments associated with severance and other......... (4,389,000)
Non-cash asset write-offs................................. (490,000)
Adjustment to lease accrual............................... (310,000)
-----------
Ending balance, July 31, 2002............................... $ 1,748,000
===========
Cash payments associated with severance and other......... (1,535,000)
Non-cash asset write-offs................................. (40,000)
Adjustment to lease accrual............................... (173,000)
-----------
Ending balance, July 31, 2003............................... $ 0
===========

II-41

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. UNAUDITED QUARTERLY FINANCIAL INFORMATION

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

* Fiscal 2004 included a net before tax restructuring charge by quarter of
$1,753,000, $67,000, $455,000 and $906,000 for a total of $3,181,000. Fiscal
2004 included a net after tax restructuring charge by quarter of $1,166,000,
$44,000, $319,000 and $637,000 for a total of $2,166,000.

The fourth quarter of 2004 includes a tax benefit of $3,000,000.

Fiscal 2003 fourth quarter includes a net before tax restructuring charge of
$9,589,000 ($6,329,000 after tax).

II-42

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to ensure
that the information the Company discloses in its filings with the Securities
and Exchange Commission is recorded, processed, summarized and reported on a
timely basis. The Company's Chief Executive Officer and Chief Financial Officer
have reviewed and evaluated the Company's disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act") as of the end of the period covered by
this report (the "Evaluation Date"). Based on such evaluation, such officers
have concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures are effective in bringing to their attention on a timely
basis material information relating to the Company required to be included in
the Company's periodic filings under the Exchange Act.

There have not been any changes in the Company's internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
that occurred during the Company's most recently completed fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

II-43

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Frank M. Jaehnert -- Mr. Jaehnert joined the Company in 1995 as Finance
Director of the Identification Solutions & Specialty Tapes Group. He served as
Chief Financial Officer from November 1996 to January 2002. He served as Senior
Vice President of the Company and President, Identification Solutions and
Specialty Tapes Group from January 2002 to March 2003. In February 2003, he was
appointed to his current position, effective April 1, 2003. Before joining the
Company, he held various financial and management positions for Robert Bosch
GmbH from 1983 to 1995.

David R. Hawke -- Mr. Hawke joined the Company in 1979. He served as
General Manager of the Industrial Products Division from 1985 to 1991. From 1991
to February 1995, he served as Managing Director -- European Operations. From
February 1995 to August 2001, he served as Vice President, Graphics Group. He
served as Vice President, Graphics and Workplace Solutions from August 2001 to
January 2002. He served as Senior Vice President of the Company and President,
Graphics and Workplace Solutions Group from January 2002 to April 2003. In April
2003, he was appointed to his present position.

David Mathieson -- Mr. Mathieson joined Brady in 2001 as European Finance
Director, based in the U.K. In August 2003, he was appointed Vice President of
Finance for North America, and named Vice President and Chief Financial Officer
in December 2003. Prior to joining Brady, he was Vice President and Chief
Financial Officer of Honeywell Europe, concluding a 20-year career with
Honeywell International, Inc., which included positions in Belgium, Denmark,
England and the United States. A native of Scotland, he is a Fellow of the
Chartered Management Accountants Institute in the United Kingdom and studied for
this qualification at Glasgow College of Commerce and Glasgow Caledonian
University.

Allan J. Klotsche -- Mr. Klotsche joined the Company in 1988. He served in
a variety of sales, marketing, technical, and management roles until 1998, when
he was appointed V.P. and General Manager of the Precision Tapes Group. He was
appointed to his current position in April 2003.

III-1

Michael O. Oliver -- Mr. Oliver joined the Company in February 1997 as Vice
President -- Human Resources. He was appointed to his present position in
January 2002. Before joining the Company, he held various human resource
positions for Unilever from 1990 to 1997.

Donald E. Rearic -- Mr. Rearic joined the Company in 1990. He served in a
variety of treasury and finance roles until 2002, when he was appointed to his
current position. Before joining Brady, he served as V.P., Treasurer and
Assistant Secretary at CSC Industries, Inc., Warren, Ohio, the holding company
for Copperweld Steel Company.

Peter C. Sephton -- Mr. Sephton joined the Company in 1997 as Managing
Director -- Seton-UK. From 2001 to 2003 he served as managing director for
Brady's Identification Solutions Business in Europe. In April 2003, he was
appointed to his current position. Before joining Brady, he served in a variety
of international managerial roles with Tate and Lyle Plc, Sutcliffe Speakman Plc
and Morgan Crucible Plc. He is a graduate in accountancy and law from The
University of Wales (UCC).

Matthew O. Williamson -- Mr. Williamson joined the Company in 1979. From
1979 to 1994 he served in a variety of sales and marketing leadership roles. In
1995, Mr. Williamson served as the V.P. and General Manager of the Specialty
Tape (now Diecut) business. From 1996 to 1998, Mr. Williamson served as the V.P.
and General Manager of the Identification Solutions and Specialty Tapes
Division. From 1998 to 2001, he served as V.P. and General Manager of the
Identification Solutions Division. From 2001 to 2003 he served as V.P. and
General Manager of High Performance Identification Business. In April 2003, he
was appointed to his current position.

Thomas J. Felmer -- Mr. Felmer joined Brady in 1989 and held several sales
and marketing positions until being named vice president and general manager of
Brady's U.S. Signmark Division in 1994. In 1999 Mr. Felmer moved to Europe where
he led the European Signmark business for two years, then gained additional
responsibility for the combined European Seton and Signmark businesses, which he
also held for two years. In 2003 Mr. Felmer returned to Milwaukee where he was
responsible for Brady's global sales and marketing processes, Brady Software
businesses, and due diligence/integration of the EMED acquisition. In June 2004,
he was promoted to vice president-Direct Marketing Americas.

Conrad G. Goodkind -- Mr. Goodkind has served as Secretary of the Company
since November 1999. He is a partner of Quarles & Brady LLP, general counsel to
the Company. He joined Quarles & Brady in 1979 and has been a member of its
Executive Committee since 1983.

Peter J. Lettenberger -- Mr. Lettenberger has served as a Director of the
Company since January 1977. Mr. Lettenberger is a member of the Company's
Finance and Corporate Governance Committees. He recently retired as a partner of
Quarles & Brady LLP, general counsel to the Company, which he joined in 1964.

Robert C. Buchanan -- Mr. Buchanan has been a Director of the Company since
November 1987. Mr. Buchanan is a member of the Company's Finance Committee and
chairs its Corporate Governance Committee. Mr. Buchanan is President and
Chairman of the Board of Fox Valley Corporation in Appleton, Wisconsin, having
assumed that position November 1980. He is also a trustee of The Northwestern
Mutual Life Insurance Company, Milwaukee, Wisconsin.

Roger D. Peirce -- Mr. Peirce has served as a Director of the Company since
September 1988. Mr. Peirce has been a member of the Compensation Committee of
the Company since September 1988, and its chairman from November 1996 to June
2003, and is a member of its Corporate Governance, Finance and Retirement
Committees. Mr. Peirce is a private investor and consultant and is a director of
Journal Communications, Inc. and Allete, Inc. He was the secretary/treasurer of
The Jor-Mac Company, Inc., a metal fabricator in Grafton, Wisconsin, from 1997
through 2002. He was President and CEO of Valuation Research Corporation from
April 1995 to May 1996. From September 1988 to December 1993, he was President
of Super Steel Products Corp. in Milwaukee, Wisconsin. Prior to that he was a
managing partner for Arthur Andersen LLP, independent certified public
accountants.

III-2

Richard A. Bemis -- Mr. Bemis has been a Director of the Company since
January 1990 and a member of its Compensation Committee since March 1990, and is
a member of its Technology Committee. Mr. Bemis is President and CEO of Bemis
Manufacturing Company, a manufacturer of molded plastic products in Sheboygan
Falls, Wisconsin. He is also a director of the Wisconsin Public Service
Corporation, Green Bay, Wisconsin.

Frank W. Harris -- Dr. Harris has been a Director of the Company since
November 1991, a member of its Audit Committee since May 1999, and is chair of
its Technology Committee. Dr. Harris is Professor and Director of the Maurice
Morton Institute of Polymer Science at the University of Akron, and has been on
its faculty since 1983.

Gary E. Nei -- Mr. Nei has been a Director of the Company since November
1992. Mr. Nei is a member of the Company's Governance Committee and Chair of its
Finance and Compensation Committees. Mr. Nei is Chairman of Nei-Turner Media, a
publishing company in Walworth, Wisconsin. He also serves as Chairman of the
Beverage Testing Institute, a publishing company in Chicago, Illinois and
Chairman of Tastings Imports, an importer of fine wines headquartered in
Chicago, Illinois. He is also a Director of Bone Care International, Inc., a
pharmaceutical company in Madison, Wisconsin.

Mary K. Bush -- Ms. Bush has been a Director of the Company since May 2000.
Ms. Bush is a member of the Company's Audit Committee. Ms. Bush has been
President of Bush International, a Washington DC firm that advises foreign
governments and US companies on international financial markets. Prior to
establishing Bush International, Ms. Bush held several positions in financial
institutions and served two Presidents of the United States as Alternate
Director of the International Monetary Fund and Managing Director of the Federal
Housing Finance Board. Ms. Bush also is a member of boards of directors of
Mortgage Guaranty Insurance Corporation (chairman, Audit Committee), Briggs &
Stratton Corporation, Millennium Chemicals Inc. and a trustee of the Pioneer
Funds (Chairman, Policy Administration Committee) and a member of the Advisory
Board of Washington Mutual Investors Fund.

Frank R. Jarc -- Mr. Jarc was elected to the Board of Directors in May
2000. Mr. Jarc is a consultant specializing in corporate development and
international acquisitions. From April 1999 to March 2000 he was Senior Vice
President of Corporate Development at Office Depot, an operator of office supply
superstores. Between June 1996 and March 1999, he was Executive Vice President
and Chief Financial Officer of Viking Office Products, a direct mail marketer of
office products. Prior to that, he was Executive Vice President and Chief
Financial Officer of R.R. Donnelley and Sons, a global printing company. He is
chair of Brady's Audit Committee and serves on the Compensation Committee.

Elizabeth Pungello -- Dr. Pungello is the great-granddaughter of Brady
founder William H. Brady, and a developmental psychologist at the Frank Porter
Graham Child Development Institute at the University of North Carolina at Chapel
Hill. She has served as president of the Brady Education Foundation (formerly
the W.H. Brady Foundation) since January 2001.

All directors serve until their respective successors are elected at the
next annual meeting of shareholders. Officers serve at the discretion of the
Board of Directors. None of the Company's directors or executive officers has
any family relationship with any other director or executive officer.

Audit Committee Financial Expert -- The Company's board of directors has
determined that at least one audit committee financial expert is serving on its
audit committee. Mr. Jarc, chair of the audit committee is a financial expert
and is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A
under the Exchange Act.

Director Independence -- A majority of the directors must meet the criteria
for independence established by the Board in accordance with the rules of the
New York Stock Exchange. In determining the independence of a director, the
Board must find that a director has no relationship that may interfere with the
exercise of his or her independence from management and the Company. Based on
these guidelines all directors, with the exception of Frank Jaehnert, President
and CEO, are deemed independent.

III-3

Meetings of Non-management Directors -- The non-management directors of the
Board regularly meet alone without any members of management present. Mr.
Buchanan, Chairman of the Corporate Governance Committee, is the presiding
director at these sessions. In fiscal 2004 there were five executive sessions.
Interested parties can raise concerns to be addressed at these meetings by
calling the confidential Brady hotline at 1-800-368-3613.

Audit Committee Members -- The Audit Committee is composed of Mr. Jarc
(Chairman), Mr. Harris and Ms. Bush. Each member of the Audit Committee has been
determined by the Board to be independent under the rules of the SEC and NYSE.
The charter for the Audit Committee is available on the Company's corporate
website at www.bradycorp.com.

Code of Ethics -- For a number of years, the Company has had a code of
ethics for its employees. This code of ethics applies to all of the Company's
employees, officers and Directors. The code of ethics can be viewed at the
Company's Corporate website, www.bradycorp.com, or may be obtained in print by
any shareholder by contacting Brady Corporation, Investor Relations, P.O. Box
571, Milwaukee, WI 53201. The Company intends to satisfy the disclosure
requirements under Item 5.05 of Form 8-K regarding an amendment to, or a waiver
from, a provision of its code of ethics by placing such information on its
Internet website.

Corporate Governance Guidelines -- Brady's Corporate Governance Principles
as well as the charters for the Audit Committee, Corporate Governance Committee,
and Compensation Committee, are available on the Company's Corporate website,
www.bradycorp.com. Shareholders may request printed copies of these documents
from Brady Corporation, Investor Relations, P.O. Box 571, Milwaukee, WI 53201.

Certifications -- We have attached the required certifications under
Section 302 of the Sarbanes-Oxley Act of 2002 regarding the quality of our
public disclosures as Exhibits 31.1 and 31.2 to this report. We intend to file
with the NYSE the CEO certification regarding our compliance with the NYSE's
corporate governance listing standards as required by NYSE Rule 303A.12(a) when
due.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Executive officers, directors and greater than
ten percent stockholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.

To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended July 31, 2004, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10 percent beneficial owners were complied with, except with respect to the
following:

1. On June 12, 2004 Mr. Klotsche purchased 676.69 shares of Class A Common
Stock in the Brady 401(k) plan. This transaction was reported on a Form
4 filed June 21, 2004.

2. On June 23, 2004 a trust of which Elizabeth Pungello is the beneficiary
sold 2,000 shares of Class A Common Stock. This transaction was reported
on a Form 4 filed July 22, 2004.

3. For the period August 1999 through November 2002, Mr. Hawke acquired
375.38 shares of Class A Common Stock through the Brady Corporation
dividend reinvestment program. This transaction was reported on a Form 5
filed September 10, 2004.

III-4

ITEM 11. EXECUTIVE COMPENSATION

The following table summarizes the compensation paid or accrued by the
Company during the three years ended July 31, 2004, to those persons who, as of
the end of fiscal 2004, were the Named Executive Officers.

SUMMARY COMPENSATION TABLE

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

(1) Reflects bonus earned during the listed fiscal year, which was paid during
the next fiscal year.

(2) Unless otherwise noted, any perquisites or other personal benefits received
from the Company by any of the named executives were less than the reporting
thresholds established by the Securities and Exchange Commission (the lesser
of $50,000 or 10% of the individual's cash compensation).

(3) All other compensation for fiscal 2004 for Messrs. Jaehnert, Hawke, Oliver
and Williamson, respectively, includes: (i) matching contributions to the
Company's Matched 401(k) Plan, Funded Retirement Plan and Restoration Plan
for each named executive officer of $34,191, $27,462, $22,328, and $21,082,
respectively and (ii) the cost of group term life insurance for each named
executive officer of $3,338, $4,297, $728 and $696, respectively.

All other compensation for fiscal 2004 for Mr. Sephton includes matching
contributions for the Brady Funded Retirement Plan of $41,165.

All other compensation for fiscal 2003 for Messrs. Jaehnert, Hawke, Oliver
and Williamson, respectively, includes: (i) matching contributions to the
Company's Matched 401(k) Plan, Funded Retirement Plan and Restoration Plan
for each named executive officer of $29,329, $24,485, $19,400, and $17,342
respectively and (ii) the cost of group term life insurance for each named
executive officer of $3,042, $4,259, $788 and $730 respectively.

All other compensation for fiscal 2003 for Mr. Sephton includes matching
contributions for the Brady Funded Retirement Plan of $31,644.

All other compensation for fiscal 2002 for Messrs. Jaehnert, Hawke, Oliver
and Williamson, respectively, includes: (i) matching contributions to the
Company's Matched 401(k) Plan, Funded Retirement Plan and Restoration Plan
for each named executive officer of $16,874, 18,331, $14,889, and $15,586
respectively and (ii) the cost of group term life insurance for each named
executive officer of $440, $569, $595 and $738 respectively.

III-5

All other compensation for fiscal 2002 for Mr. Sephton includes matching
contributions for the Brady Funded Retirement Plan of $30,906.

(4) In June 2003, the Company granted restricted stock awards to certain key
executives. Messrs. Hawke and Oliver were awarded 10,000 shares each of
authorized, but unissued Class A Common Stock, which shares such executive
officers continued to hold as of July 31, 2004. The value of the grants
stated in the table is based on the closing price on the date of grant.
Using the closing price of $45.20 per share for the Company's Class A Common
Stock on July 31, 2004, the holdings of Messrs. Hawke and Oliver were valued
at $452,000 each. The restricted stock awards granted to Messrs. Hawke and
Oliver vest 100% on June 18, 2005. The executives have the right to receive
any cash dividends payable on these shares.

STOCK OPTIONS

The following tables summarize option grants and exercises during fiscal
2004 to or by the executive officers named in the Summary Compensation Table
above, and the value of unexercised options held by such persons at July 31,
2004. Stock Appreciation Rights are not available under any of the Company's
plans.

OPTION GRANTS IN FISCAL 2004

INDIVIDUAL GRANTS

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

(1) The options granted August 1, 2003 equally vest upon meeting certain
financial goals in fiscal 2004, 2005 and 2006. The financial goals in 2004
have been met and one-third of the options have vested. The options have a
term of five years.

III-6

The options granted November 20, 2003, become exercisable as follows:
one-third of the shares on November 20, 2004, one-third of the shares on
November 20, 2005 and one-third of the shares on November 20, 2006. These
options have a term of ten years.

(2) The exercise price is the average of the highest and lowest sale prices of
the Company's Class A Common Stock as reported by the New York Stock
Exchange on the date of the grant.

(3) For options with a ten-year life, represents total potential appreciation of
approximately 0%, 63% and 159% for assumed annual rates of appreciation of
0%, 5% and 10%, respectively, compounded annually for ten years.

For options with a six-year life, represents total potential appreciation of
approximately 0%, 34% and 77% for assumed annual rates of appreciation of
0%, 5% and 10%, respectively, compounded annually for six years.

(4) Calculated from the $34.0250 exercise price applicable to the options
granted on August 1, 2003 and the $34.6500 exercise price applicable to the
options granted on November 20, 2003 based on the 21,879,913 shares of Class
A Common Stock outstanding on March 29, 2004.

(5) Represents potential realizable value for all options granted in fiscal 2004
compared to the increase in market value of Brady Corporation Class A Common
Stock at assumed rates of stock price appreciation.

(6) The Company disavows the ability of any valuation model to predict or
estimate the Company's future stock price or to place a reasonably accurate
present value on these options because any model depends on assumptions
about the stock's future price movement that the Company is unable to
predict.

AGGREGATED OPTION EXERCISES IN FISCAL 2004
AND VALUE OF OPTIONS AT END OF FISCAL 2004

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

(1) Represents the closing price for the Company's Class A Common Stock on July
31, 2004, of $45.2000 less the exercise price for all outstanding
exercisable and unexercisable options for which the exercise price is less
than such closing price.

III-7

COMMON STOCK PRICE PERFORMANCE GRAPH

The graph below shows a comparison of the cumulative return over the last
five fiscal years had $100 been invested at the close of business on July 31,
1999, in each of Brady Corporation Class A Common Stock, The Standard & Poor's
(S&P) 500 index, the Standard and Poor's Small Cap 600 index, and the Russell
2000 index.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
AMONG BRADY CORPORATION, THE S & P 500 INDEX,
THE S & P SMALLCAP 600 INDEX AND THE RUSSELL 2000 INDEX

[LINE GRAPH]

* $100 invested on 7/31/99 in stock or index-including reinvestment of
dividends. Fiscal year ending July 31.

Copyright (C) 2002, Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. All rights reserved. www.researchdatagroup.com/S&P.htm

COMPENSATION OF DIRECTORS

Each director who is also an employee of the Company receives no additional
compensation for service on the Board or on any committee of the Board. Prior to
August 1, 2003, directors who were not also employees of the Company received an
annual retainer of $20,000 plus $1,500 for each committee they chaired and
$1,250 plus expenses for each meeting of the Board or any committee thereof,
which they attended and were a member. Directors also received $750 for each
meeting they attended of any committee for which they were not a member.

Effective August 1, 2003, directors who are not also employees of the
Company receive an annual retainer of $25,000 plus $1,500 for each committee
they chair ($5,500 for the audit committee chair) and $1,250 plus expenses for
each meeting of the Board or any committee thereof, which they attend and are a
member or $750 for single issue telephonic committee meeting of the Board.
Directors also receive $750 for each meeting they attend of any committee for
which they are not a member.
III-8

TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS

In May 2003, the Board approved a new Change in Control Agreement for Mr.
Jaehnert. The agreement calls for payment of an amount equal to three times the
annual salary and bonus for Mr. Jaehnert in the event of termination or
resignation upon a change of control. The agreement also calls for reimbursement
of any excise taxes imposed and up to $25,000 of attorney fees to enforce the
executive's rights under the agreement. Payments under the agreement will be
spread over three years.

In January 2001, the Board approved new Change in Control Agreements for
certain of its executive officers, including Messrs. Hawke, Oliver and
Williamson. The agreements for Mr. Hawke and Oliver call for payment of an
amount equal to two times their annual salary and bonus in the event of
termination or resignation upon a change in control with payments spread over
two years. The agreement for Mr. Williamson calls for payment of an amount equal
to one times his annual salary and bonus in the event of termination or
resignation upon a change in control with payments spread over one year. All
agreements call for reimbursement of any excise taxes imposed and up to $25,000
of attorney fees to enforce the executive's rights under the agreements.

RESTRICTED STOCK

In June 2003, the Company granted restricted stock awards to certain key
executives. Mr. Hawke and Oliver were awarded 10,000 shares each of authorized,
but unissued Class A Common Stock, which shares such executive officers
continued to hold as of July 31, 2004. Using the closing price of $45.20 per
share for the Company's Class A Common Stock on July 31, 2004, the holdings of
Messrs. Hawke and Oliver were valued at $452,000 each. The restricted stock
awards granted to Messrs. Hawke and Oliver vest 100% on June 18, 2005. The
executives have the right to receive any cash dividends payable on these shares.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During fiscal 2004, the Board's Compensation Committee was composed of
Messrs. Bemis, Jarc, Nei and Peirce. Mr. Lettenberger serves as a nonvoting
advisor to the Committee. None of these persons has at any time been an employee
of the Company or any of its subsidiaries. There are no relationships among the
Company's executive officers, members of the Compensation Committee or entities
whose executives serve on the Board that require disclosure under applicable SEC
regulations.

FUNDED RETIREMENT AND 401(K) PLANS

Substantially all Brady employees in the United States and certain
expatriate employees working for its international subsidiaries are eligible to
participate in Brady Corporation's Funded Retirement Plan ("Funded Retirement
Plan") and the Brady Corporation Matched 401(k) Plan (the "Employee 401(k)
Plan"). Under these plans the Company agrees to contribute certain amounts to
both Plans. Under the Funded Retirement Plan, the Company contributes 4% of the
eligible earnings of each person covered by the Funded Retirement Plan. In
addition, participants may elect to have their annual pay reduced by up to 4%
and have the amount of this reduction contributed to the Brady Corporation
Matched 401(k) Plan and matched by an additional, equal contribution by the
Company. Participants may also elect to have up to another 8% of their eligible
earnings contributed to the Brady Corporation Matched 401(k) Plan (without an
additional matching contribution by the Company). The assets of the Brady
Corporation Matched 401(k) Plan and Brady Corporation Funded Retirement Plan
credited to each participant are invested by the trustee of the Plans as
directed in several investment funds as permitted by the Brady Corporation
Matched 401(k) Plan and Brady Corporation Funded Retirement Plan. The annual
contributions and forfeitures allocated to any participant under all defined
contribution plans may not exceed the lesser of $30,000 or 25% of the
participant's base compensation and bonuses.

Benefits are generally payable upon the death, disability, or retirement of
the participant or upon termination of employment before retirement, although
benefits may also be withdrawn from the Brady Corporation Matched 401(k) Plan
and paid to the participant if required for certain emergencies. Under certain
specified circumstances, the Brady Corporation Matched 401(k) Plan allows loans
to be drawn on a
III-9

participant's account. The participant is immediately fully vested with respect
to the contributions attributable to reductions in pay; all other contributions
become fully vested over a three-year period of continuous service for the Brady
Corporation Matched 401(k) Plan and after five years of continuous service for
the Brady Corporation Funded Retirement Plan.

DEFERRED COMPENSATION ARRANGEMENTS

During fiscal 2002, the Company adopted a deferred compensation plan under
which executive officers, corporate staff officers and certain key management
employees of the Company are permitted to defer portions of their fees, salary
and bonus into a plan account, the value of which is measured by the fair value
of the underlying investments. The assets of the Plan are held in a Rabbi Trust
and are invested by the trustee of the Plan as directed by the participant in
several investment funds as permitted by the Plan.

Upon the retirement, disability, or death of a participant, the Company is
required under the plan to pay, each year for a period of ten years, a portion
of the balance held in the participant's name by the Trust. The first payment
must be one-tenth of the balance held; the second one-ninth; and so on, with the
balance held in the Trust reduced by each payment.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Company's Compensation Committee (the "Committee") is composed entirely
of outside directors and is responsible for considering and approving
compensation arrangements for senior management of the Company, including the
Company's executive officers and the chief executive officer. It is the
philosophy of the Committee to establish a total executive compensation program
which is competitive with a broad range of companies that it considers to be of
comparable size and complexity.

The primary components of the Company's executive compensation program are
(i) base salary, (ii) annual cash incentive plan and (iii) long term incentive
compensation in the form of stock options and/or restricted stock. These are
designed to align shareholder and management interests, to balance the
achievement of annual performance targets with actions that focus on the
long-term success of the Company, and to attract, motivate and retain key
executives who are important to the continued success of the Company. The base
salary compensation and the annual cash incentive compensation plan are reviewed
and approved by the Compensation Committee.

The Committee believes that:

- The Company's pay levels are appropriately targeted to attract and retain
key executives;

- The Company's incentive plan provides strong incentives for management to
increase shareholder value; and

- The Company's total executive compensation program is a cost-effective
strategy to increase shareholder value.

In December 2003 the Committee established stock ownership guidelines for
executives. The guidelines allow executives up to five years to achieve the
required stock ownership levels.

BASE SALARY

Consistent with the Committee's philosophy, base salaries are generally
maintained at or modestly above competitive base salary levels. Competitive
salary level is defined as the median base salary for similar responsibilities
in a group of companies selected by the Committee that the Committee considers
to be of comparable size and complexity. In setting base salaries for fiscal
2004, the Committee reviewed compensation survey data and was satisfied that the
base salary levels set would achieve the Company's objectives. Specific
increases reflect the Committee's subjective evaluation of individual
performance.

III-10

ANNUAL BONUS PLAN

The annual cash incentive compensation plan (the "Bonus Plan") provides for
the annual payment of cash bonuses. When viewed together with the Company's base
salary, the purpose of the Bonus Plan is to provide a balance between fixed
compensation and variable, results-oriented compensation. The Bonus Plan is 80%
objective. It stresses maximization of Company profitability and revenue growth.

STOCK OPTIONS

In July 2003, the Company's Class B Voting Common shareholders approved the
Brady Corporation 2003 Omnibus Incentive Stock Plan under which 750,000 shares
of Class A Common Stock are available for grant. In October 2001, the Company
approved the Brady Corporation 2001 Omnibus Incentive Stock Plan under which
500,000 shares of Class A Common Stock were available for grant. In May 1997,
the Company approved the Brady Corporation 1997 Omnibus Incentive Stock Plan and
the Brady Corporation 1997 Nonqualified Stock Option Plan for Non-Employee
Directors (the "Option Plans") under which 2,000,000 shares and 125,000 shares,
respectively, of Class A Common Stock are available for grant. In 1989 the Board
approved the Brady Corporation 1989 Non-Qualified Stock Option Plan (the "Option
Plan") under which 1,500,000 shares of Class A Common Stock were available for
grant. The Option Plans assist directors, executive officers, corporate staff
officers and key management employees in becoming shareholders with an important
stake in the Company's future, aligning their personal financial interest with
that of all shareholders. Stock options are typically granted annually and have
a term of ten years. Generally, the options become one-third exercisable one
year after the date of the grant and one-third additional in each of the
succeeding two years so that at the end of three years after the date of the
grant they are fully exercisable. In August 2003 and 2004 certain executives and
key management employees were issued stock options that vest upon meeting
certain financial performance conditions in addition to the vesting schedule
described above and have a term of five years. All grants under the Option Plans
are at market price on the date of the grant.

COMPLIANCE WITH TAX REGULATIONS REGARDING EXECUTIVE COMPENSATION

Section 162(m) of the Internal Revenue Code, added by the Omnibus Budget
Reconciliation Act of 1993, generally disallows a tax deduction to public
companies for compensation over $1 million paid to the corporation's chief
executive officer and the other named executive officers. Qualifying
performance-based compensation will not be subject to the deduction limit if
certain requirements are met. The Company's executive compensation program, as
currently constructed, is not likely to generate nondeductible compensation in
excess of these limits. The Compensation Committee will continue to review these
tax regulations as they apply to the Company's executive compensation program.
It is the Compensation Committee's intent to preserve the deductibility of
executive compensation to the extent reasonably practicable and to the extent
consistent with its other compensation objectives

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER

Mr. Jaehnert received $468,270 in base salary in fiscal 2004, an increase
of 35% from the prior year's base salary. Based on the terms of the Company's
objective Bonus Plan, discussed above, Mr. Jaehnert earned a bonus attributable
to fiscal 2004 of $700,000. In 2003, Mr. Jaehnert voluntarily elected to waive
his right to his bonus, deferring the entire amount to be paid together with any
bonus earned in fiscal 2004, dependent upon certain financial performance in
fiscal 2004. Consequently, he was paid a bonus of $96,800 in fiscal 2004
attributable to this deferral. Mr. Jaehnert's compensation reflects:

(i) continued strong performance to its peers with respect to sales,
profits and stock price performance;

(ii) continued efforts to focus the Company's resources on sustainable
value-enhancing long-term growth, which includes acquisitions and new
product developments; and

(iii) continued involvement in management team development and
succession planning.

III-11

During fiscal 2004, Mr. Jaehnert was awarded options to purchase 36,000
shares of Class A Common Stock.

The Committee believes these awards are consistent with the objectives of
the various plans and with the overall compensation policy of the Board of
Directors.

******************************

The Compensation Committee believes the executive compensation programs and
practices described above are competitive. They are designed to provide
increased compensation with improved financial performance and to provide
additional opportunity for capital accumulation.

Gary E. Nei, Chairman
Richard A. Bemis
Frank R. Jarc
Roger D. Peirce

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth the current beneficial ownership of
shareholders who are known by the Company to own more than five percent (5%) of
any class of the Company's voting shares on September 1, 2004. As of that date,
nearly all of the voting stock of the Company was held by two trusts controlled
by direct descendants of the Company's founder, William H. Brady, as follows:

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

(1) The trustee is Elizabeth P. Pungello, who has sole voting and dispositive
power and who is the remainder beneficiary. Elizabeth Pungello is the
great-granddaughter of William H. Brady and currently serves on the
Company's Board of Directors. The voting shares held by this trust were
transferred on August 23, 2004 from the William H. Brady, Jr. Trust f/b/o
Elizabeth B. Lurie.

(2) An additional 10 shares are owned by a third trust with different trustees.

(3) William H. Brady III is special trustee of this trust and has sole voting
and dispositive powers with respect to these shares. William H. Brady III is
the grandson of William H. Brady. The voting shares held in this trust were
transferred on December 23, 2003 from the William H. Brady III Revocable
Trust of 2001.

(B) SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth the current beneficial ownership of each
class of equity securities of the Company by each Director or Nominee and by all
Directors and Officers of the Company as a group as of September 1, 2004. Unless
otherwise noted, the address for each of the listed persons is c/o Brady

III-12

Corporation, 6555 West Good Hope Road, Milwaukee, Wisconsin 53223. Except as
otherwise indicated, all shares are owned directly.

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

* Indicates less than one-tenth of one percent.

(1) Represents shares owned by trusts which Ms. Pungello is a trustee and has
either sole or joint dispositive and voting authority. In addition, Ms.
Pungello is the beneficiary of an unrelated trust owning 461,500 shares, as
to which she does not have voting or dispositive authority.

(2) Mr. Jaehnert's spouse owns 2,732 shares of Class A Common Stock directly.
Mr. Jaehnert owns 440 shares of Class A Common Stock in his 401(k) Plan and
holds vested options to acquire an additional 136,100 shares of Class A
Common Stock.

(3) Mr. Peirce owns 1,500 shares of Class A Common Stock directly, 1,500 shares
through his Keogh plan and holds vested options to acquire an additional
9,500 shares of Class A Common Stock.

(4) Mr. Buchanan owns 600 shares of Class A Common Stock directly, 1,500
additional shares through his Keogh plan and holds vested options to
acquire an additional 9,500 shares of Class A Common Stock.

(5) Mr. Nei owns 2,000 shares of Class A Common Stock directly (with respect to
which he shares voting and investment power with his spouse) and holds
vested options to acquire an additional 9,500 shares of Class A Common
Stock.

(6) The amount shown for all officers and directors as a group (19 persons)
includes options to acquire a total of 534,801 shares of Class A Common
Stock, which are currently exercisable or will be exercisable within 60
days of September 1, 2004. It does not include other options for Class A
Common Stock, which have been granted at later dates.

(7) In addition to the shares shown in this table, the officers and directors
as a group owned the equivalent of 252,686 shares of the Company's Class A
Common Stock in its deferred compensation plans.

(C) CHANGES IN CONTROL

No arrangements are known to the Company, which may, at a subsequent date,
result in a change in control of the Company.

III-13

(D) EQUITY COMPENSATION PLAN INFORMATION

The Company's Nonqualified Stock Option Plans allow the granting of stock
options to various officers, directors and other employees of the Company at
prices equal to fair market value at the date of grant. The Company has reserved
1,500,000, 2,125,000, 500,000 and 750,000 shares of Class A Nonvoting Common
Stock for issuance under the 1989, 1997, 2001 and 2003 Plans, respectively.
Options granted prior to 1992 become exercisable once the employees have been
continuously employed for six months after the grant date. Generally, options
granted in 1992 and thereafter will not be exercisable until one year after the
date of grant, and will be exercisable thereafter, to the extent of one-third
per year and have a maximum term of ten years. In August 2003, certain
executives and key management employees were issued stock options that vest upon
meeting certain financial performance conditions in addition to the vesting
schedule described above. All grants under the Option Plans are at market price
on the date of the grant.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Peter J. Lettenberger serves as a Director of the Company; he recently
retired as a partner of Quarles & Brady LLP, general counsel to the Company.
Conrad G. Goodkind serves as Secretary to the Company. He is also a partner of
Quarles & Brady general counsel to the Company.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table presents the aggregate fees billed for professional
services by Deloitte & Touche LLP during the years ended July 31, 2004 and 2003.
Other than as set forth below, no professional services were rendered or fees
billed by Deloitte & Touche LLP during the years ended July 31, 2004 and 2003.

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

(1) Audit fees consist of professional services rendered for the audit of the
Company's annual financial statements, reviews of the quarterly financial
statements and statutory reporting compliance.

(2) Audit related fees include fees related to due diligence, compliance with
the Sarbanes-Oxley Act and employee benefit plan audits.

(3) Tax fees consist of fees for services rendered to the Company for tax
compliance of $605,000 and $252,000 in 2004 and 2003, tax planning and
advice.

III-14

(4) All other fees include fees related to expatriate activities.

Pre-Approval Policy -- The services performed by the independent auditor in
fiscal 2004 were pre-approved in accordance with the pre-approval policy and
procedures adopted by the Audit Committee at its November 19, 2003 meeting. The
policy requires the Audit Committee to pre-approve the audit and non-audit
services performed by the independent auditor in order to assure that the
provision of such services does not impair the auditor's independence. Unless a
type of service to be performed by the independent auditor has received general
pre-approval, it will require specific pre-approval by the Audit Committee. Any
proposed services exceeding pre-approved cost levels will require specific
pre-approval by the Audit Committee.

III-15

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Item 15 (a) -- The following documents are filed as part of this report:

1) & 2) Consolidated Financial Statement Schedule --

Schedule II Valuation and Qualifying Accounts

All other schedules are omitted as they are not required, or the
required information is shown in the consolidated financial statements
or notes thereto.

3) Exhibits -- See Exhibit Index at page IV-2 of this Form 10-K.

IV-1

EXHIBIT INDEX

IV-2

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

* Management contract or compensatory plan or arrangement

(1) Incorporated by reference to Registrant's Registration Statement No.
333-04155 on Form S-3

(2) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended July 31, 1989

(4) Incorporated by reference to Registrant's Annual Report on form 10-K for
the fiscal year ended July 31, 1992

(5) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended July 31, 1994

(6) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended July 31, 1995

(7) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended April 30, 1997

(8) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended July 31, 1997

(9) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended July 31, 2000

(10) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended July 31, 2001

(11) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended January 31, 2002

(12) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended April 30, 2002

(13) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended July 31, 2002

(14) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended April 30, 2003

(15) Incorporated by reference to Registrant's 8-K/A filed August 3, 2004

(16) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended July 31, 2003

IV-3

BRADY CORPORATION AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

IV-4

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 this eighth day of
October 2004.

BRADY CORPORATION

BY /s/ DAVID MATHIESON
------------------------------------
David Mathieson
Vice President & Chief Financial
Officer
(Principal Accounting Officer)
(Principal Financial Officer)

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/ F. M. JAEHNERT President and Director October 8, 2004
- -------------------------------------- (Principal Executive Officer)
F. M. Jaehnert

/s/ P. J. LETTENBERGER Director October 8, 2004
- --------------------------------------
P. J. Lettenberger

/s/ R. A. BEMIS Director October 8, 2004
- --------------------------------------
R. A. Bemis

/s/ F. W. HARRIS Director October 8, 2004
- --------------------------------------
F. W. Harris

/s/ R. C. BUCHANAN Director October 8, 2004
- --------------------------------------
R. C. Buchanan

/s/ R. D. PEIRCE Director October 8, 2004
- --------------------------------------
R. D. Peirce

/s/ G. E. NEI Director October 8, 2004
- --------------------------------------
G. E. Nei

/s/ M. K. BUSH Director October 8, 2004
- --------------------------------------
M. K. Bush

/s/ F. R. JARC Director October 8, 2004
- --------------------------------------
F. R. Jarc

/s/ E. P. PUNGELLO Director October 8, 2004
- --------------------------------------
E. P. Pungello

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