UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of

1934 for the fiscal year ended December 31, 2004

BADGER METER, INC.

4545 W. Brown Deer Road

Milwaukee, Wisconsin 53223

(414) 355-0400

A Wisconsin Corporation

IRS Employer Identification No. 39-0143280

Commission File No. 1-6706

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

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

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

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

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

      The aggregate market value of the Common Stock held by non-affiliates of the Company as of December 31, 2004 was $137,093,691. For purposes of this calculation only, (i) shares of Common Stock are deemed to have a market value of $22.13 per share, the closing price of the Common Stock as reported on the American Stock Exchange on June 30, 2004, and (ii) each of the executive officers and directors is deemed to be an affiliate of the Company.

      As of February 11, 2005, there were 6,741,785 shares of Common Stock outstanding with a par value of $1.00 per share.

      Portions of the Company’s Proxy Statement for the 2005 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the registrant’s fiscal year, are incorporated by reference from the definitive Proxy Statement into Part III.

Special Note Regarding Forward Looking Statements

      Certain statements contained in this Form 10-K and accompanying 2004 Annual Report, as well as other information provided from time to time by the Company or its employees, may contain forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “think,” “should” and “objective” or similar expressions are intended to identify forward looking statements. All such forward looking statements are based on the Company’s then current views and assumptions and involve risks and uncertainties that include, among other things:

      All of these factors are beyond the Company’s control to varying degrees. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward looking statements and are cautioned not to place undue reliance on such forward looking statements. The forward looking statements made in this document are made only as of the date of this document and the Company assumes no obligation, and disclaims any obligation, to update any such forward looking statements to reflect subsequent events or circumstances.

PART I

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

Available Information

      The Company’s Internet address is http://www.badgermeter.com. The Company makes available free of charge (other than an investor’s own Internet access charges) through its Internet website its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, on the same day they are electronically filed with, or furnished to, the Securities and Exchange Commission. The

Company is not including the information contained on or available through its website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.

Markets and Products

      Badger Meter is a leading marketer and manufacturer of products using flow measurement and control technologies developed both internally and with other technology companies. Its products are used to measure and control the flow of liquids in a variety of applications. The Company’s product lines fall into two general categories, utility and industrial. Two product lines, residential and commercial water meters (with various meter reading technology systems), are generally sold to water utilities and constitute a majority of the Company’s sales. Industrial product line sales comprise the remainder of the Company’s sales and include automotive fluid meters and systems, small precision valves, electromagnetic meters, impeller flow meters and industrial process meters (all with related accessories and instrumentation).

      Residential and commercial water meters and related systems are classified as local (or manual) read meters or automatic meter reading (AMR) products. Local read meters consist of a water meter and a register. With AMR meters, the register digitally encodes the mechanical reading and its radio frequency transmitter communicates the data to a computerized system that collects the data and sends it to specific utility computerized programs. Net sales and the corresponding net earnings depend on unit volume and mix of products, with the Company generally earning higher margins on AMR products. There is a base level of annual business for these products driven by replacement units and, to a lesser extent, housing starts. Sales above the base level depend on conversions to AMR. The Company believes that conversion from local read meters to AMR products can accelerate replacements of meters and result in growth, because it is estimated that only 15% of the water meter market has been converted to AMR. Badger Meter’s strategy is to solve customers’ metering needs with its proprietary meter reading systems or other systems available through alliances within the marketplace.

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

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

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

Competition

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

Backlog

      The dollar amount of the Company’s total backlog of unshipped orders at December 31, 2004 and 2003 was $24,100,000 and $24,800,000, respectively. The backlog is comprised of firm orders and signed contractual

commitments, or portions of such commitments, that call for shipment within twelve months. Backlog can be significantly affected by the timing of orders for large utility projects.

Raw Materials

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

Research and Development

      Expenditures for research and development activities relating to the development of new products, the improvement of existing products and manufacturing process improvements were $4,572,000 in 2004, compared to $6,070,000 in 2003, and $5,658,000 during 2002. Research and development activities are primarily sponsored by the Company. The Company also engages in some joint research and development with other companies.

Intangible Assets

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

Environmental Protection

      The Company is subject to contingencies relative to compliance with federal, state and local provisions and regulations relating to the protection of the environment. Currently, the Company is in the process of resolving issues relative to two landfill sites. The Company does not believe the ultimate resolution of these issues will have a material adverse effect on the Company’s financial position or results of operations, either from a cash flow perspective or on the financial statements as a whole. Expenditures during 2004, 2003 and 2002 for compliance with environmental control provisions and regulations were not material and the Company does not anticipate any material future expenditures.

Employees

      The Company and its subsidiaries employed 1,073 persons at December 31, 2004, 229 of whom are covered by a collective bargaining agreement with District 10 of the International Association of Machinists. The Company is currently operating under a four-year contract with the union, which expires October 31, 2008. The Company believes it has good relations with the union and all of its employees.

Foreign Operations and Export Sales

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

      Information about the Company’s foreign operations and export sales is included in Note 10 “Industry Segment and Geographic Areas” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2004 Annual Report on Form 10-K.

Financial Information about Industry Segments

      The Company operates in one industry segment as a marketer and manufacturer of flow measurement and control products as described in Note 10 “Industry Segment and Geographic Areas” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2004 Annual Report on Form 10-K.

ITEM 2.     PROPERTIES

      The principal facilities utilized by the Company at December 31, 2004 are listed below. Except as indicated, the Company owns all of such facilities in fee simple. The Company believes that its facilities are generally well maintained and have sufficient capacity for its current needs.

ITEM 3.     LEGAL PROCEEDINGS

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

      The Company is a defendant in a number of multi-party asbestos lawsuits pending in various state courts. These lawsuits assert claims alleging that certain industrial products were manufactured by the defendants and were the cause of injury and harm. The Company is vigorously defending itself against these alleged claims. Although it is not possible to predict the ultimate outcome of these matters, the Company does not believe the ultimate resolution of these issues will have a material adverse effect on the Company’s financial position or results of operations, either from a cash flow perspective or on the financial statements as a whole.

      The Company is subject to contingencies relative to the protection of the environment. Information about the Company’s compliance with environmental regulations is included in Part I, Item 1 of this 2004 Annual Report on Form 10-K under the heading “Environmental Protection.”

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

      No matters were submitted to a vote of the Company’s shareholders during the quarter ended December 31, 2004.

Executive Officers of the Company

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

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

      Mr. Meeusen was elected Chairman, President and Chief Executive Officer in April 2004. Mr. Meeusen served as President and Chief Executive Officer from April 2002 to April 2004, as President from November 2001 to April 2002, and as Executive Vice President — Administration from February 2001 to November 2001. Prior to February 2001, Mr. Meeusen served as Vice President — Finance, Chief Financial Officer and Treasurer.

      Mr. Bullis was elected Vice President — Manufacturing in February 2001. Prior to that date, Mr. Bullis served as Vice President — Operations.

      Mr. Dix was elected Senior Vice President — Administration/ Human Resources in May 2003 and Secretary in August 2003. Mr. Dix served as Vice President — Administration and Human Resources from November 2001 to May 2003, and as Vice President — Human Resources from February 2001 to November 2001. Prior to that date, Mr. Dix served as Vice President — Administration and Human Resources.

      Mr. Gras was elected Vice President — International Operations in November 2001. Prior to that date, Mr. Gras served as Vice President — Badger Meter Europe.

      Mr. Johnson was elected Senior Vice President — Finance, Chief Financial Officer and Treasurer in May 2003. Mr. Johnson served as Vice President — Finance, Chief Financial Officer and Treasurer from February 2001 to May 2003. Prior to joining the Company, Mr. Johnson served as Director of Business Support for the Energy Delivery Business of Wisconsin Electric Power Company from 1999 to December 2000.

      Ms. Smiley has served as Vice President — Controller for more than five years.

      Mr. Smith was elected Vice President — Sales and Marketing in November 2001. Mr. Smith served as Vice President — Industrial Products and International from November 2000 to November 2001. Mr. Smith served as Vice President — Industrial and Commercial Products from January 2000 to November 2000.

      Mr. Webb was elected Vice President — Engineering in November 2001. Mr. Webb served as Vice President — Customer Solutions from April 2000 to November 2001, and as Vice President — Engineering and Quality from November 1999 to April 2000.

      Mr. Zandron was elected Vice President — Business Development in November 2001. Mr. Zandron served as Vice President — Utility Products from November 2000 to November 2001, and as Vice President — Commercial and Industrial Products, and a number of similar capacities, from January 2000 to November 2000.

PART II

      Information required by this Item is set forth in Part II, Item 8 of this 2004 Annual Report on Form 10-K under the heading “Financial Statements and Supplementary Data” under Note 11 “Unaudited: Quarterly Results of Operations, Common Stock Price and Dividends” in the Notes to Consolidated Financial Statements.

      The Company has undertaken stock repurchases from time to time to offset dilution created by shares issued for stock options and other corporate purposes, as well as to repurchase shares when market conditions are favorable. For the quarter ended December 31, 2004, the Company repurchased 30,007 shares of Common Stock for $794,000. As of the end of the fourth quarter of 2004, the Company has remaining availability to repurchase up to an additional 471,555 shares in Common Stock (which is valued at $14.1 million at the December 31, 2004 stock price) pursuant to the Board of Directors’ authorizations. The purchase of Common Stock is at the Company’s discretion, subject to prevailing financial and market conditions.

      The following chart discloses information regarding the shares of the Company’s Common Stock repurchased during the quarter ended December 31, 2004, all of which were purchased pursuant to the Board of Directors’ authorizations:

BADGER METER, INC.

Ten Year Summary of Selected Consolidated Financial Data

Business Description and Overview

      Badger Meter is a leading marketer and manufacturer of products using flow measurement and control technologies developed both internally and with other technology companies. Its products are used to measure and control the flow of liquids in a variety of applications. The Company’s product lines fall into two general categories, utility and industrial. Two product lines, residential and commercial water meters (with various meter reading technology systems), are generally sold to water utilities and constitute a majority of the Company’s sales. Industrial product line sales comprise the remainder of the Company’s sales and include automotive fluid meters and systems, small precision valves, electromagnetic meters, impeller flow meters and industrial process meters (all with related accessories and instrumentation).

      Residential and commercial water meters and related systems are classified as local (or manual) read meters or automatic meter reading (AMR) products. Local read meters consist of a water meter and a register. With AMR meters, the register digitally encodes the mechanical reading and its radio frequency transmitter

communicates the data to a computerized system that collects the data and sends it to specific utility computerized programs. Net sales and the corresponding net earnings depend on unit volume and mix of products, with the Company generally earning higher margins on AMR products. There is a base level of annual business for these products driven by replacement units and, to a lesser extent, housing starts. Sales above the base level depend on conversions to AMR. The Company believes that conversion from local read meters to AMR products can accelerate replacements of meters and result in growth, because it is estimated that only 15% of the water meter market has been converted to AMR. Badger Meter’s strategy is to solve customers’ metering needs with its proprietary meter reading systems or other systems available through alliances within the marketplace.

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

Results of Operations

      In the second quarter of 2002, the Company completed two acquisitions, Data Industrial Corporation (DIC) and MecaPlus Equipements SA (MPE). Through the acquisition of DIC, the Company acquired an impeller flow meter allowing it to serve a market not previously served. The acquisition of MPE allowed the Company to expand into the lubrication system market in France while continuing to have a market for its automotive fluid meters. These acquisitions were accounted for under the purchase accounting method, and as a result, some of the variances shown since December 31, 2002 were attributable to having a full year’s results in 2003. The acquisitions are further discussed in Part II, Item 8 of this 2004 Annual Report on Form 10-K under the heading “Financial Statements and Supplementary Data” under Note 3 B “Acquisitions” of the Notes to Consolidated Financial Statements.

Net Sales

      Badger Meter’s net sales of $205.0 million increased $21.0 million, or 11.4%, for 2004 compared to 2003. The increase was the result of sales increases in each of the Company’s product lines as further discussed below.

      Water meter sales are influenced by a continued industry movement away from manual-read meters to AMR technologies, the lengthening of the sales cycle and the financial budget conditions of the various water utilities served. AMR revenues include sales of third party technologies, as well as the Company’s proprietary Orion technology.

      Customers include independent distributors, large cities, private water companies and numerous smaller municipal water utilities. One group of the Company’s sales representatives focuses on distributors, another on large accounts (public and private), and a third group focuses on the remaining customers.

      Residential and commercial water meter net sales represented 73.2% of total net sales in 2004 compared with 72.3% in 2003. These sales increased $17.0 million in 2004 to $150.1 million from $133.1 million in 2003. Unit volume increased in meters utilizing AMR technologies offset by a slight decline in local (or manual) read meters. AMR technologies carry a higher price, which also contributed to the increase in net sales. In addition, net sales included a significant increase over 2003 levels for the sales volumes of Orion, the Company’s proprietary AMR system introduced in 2002.

      Industrial sales are affected by economic conditions, domestically and internationally, in each of the markets served by the various product lines. In 2004, these markets slowly began to improve. In total, the industrial products represented 26.8% of total net sales in 2004 compared to 27.7% in 2003. Industrial product sales increased $4.0 to $54.9 million in 2004 compared with $50.8 million in 2003. All of the product lines showed growth over the 2003 levels, partially due to the effects of the strengthening euro.

      International sales are comprised primarily of sales of small valves and automotive fluid meters and systems in Europe, sales of water meters and related technologies in Latin America, and sales of valves and other

metering products throughout the world. In Europe, sales are made in both U.S. dollars and euros. Most other international sales are made in U.S. dollars. The Company was able to partially hedge its euro exposure by holding euro-denominated debt. International sales increased 9.3% to $34.1 million in 2004 from $31.2 million in 2003 due principally to the effects of the strengthening euro. Without the effects from foreign exchange, sales increased 1.9% due to higher sales in Mexico offset somewhat by lower European sales.

      Net sales in 2004 and 2003 included $23.1 million and $21.7 million of sales, respectively, related to the acquired companies compared to $11.0 million in 2002, with the latter amount representing sales only from the dates of the acquisitions. Without the acquisitions, net sales for 2003 increased $6.0 million, or 3.9%, over 2002 net sales.

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

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

      International sales, excluding the effects of the 2002 acquisitions, increased 5.0% to $11.2 million from $10.6 million in 2002 due to increased sales into Latin America.

Gross Margins

      Gross margins were 32.9%, 32.9% and 33.5% for 2004, 2003 and 2002, respectively. Gross margins were flat between 2004 and 2003 as a result of a higher mix of AMR sales and better plant capacity utilization offset by increased obsolete inventory reserves and higher metal and resin commodity prices. The decrease between 2003 and 2002 was primarily due to lower unit volumes resulting in higher absorbed factory costs, the inability to increase prices for higher incurred costs due to market conditions, and to a lesser extent, the acquisition of MPE which has lower margins as an assembly operation.

Operating Expenses

      Selling, engineering and administration costs increased 1.9% in 2004 over 2003 levels. Overall, inflationary increases were mitigated somewhat by cost savings generated by the consolidation of two of the Company’s domestic facilities and a continuing emphasis on cost control. Selling, engineering and administration costs increased 8.4% in 2003 over 2002 levels. Some of the increase was attributable to the full year effects in 2003 of the prior year acquisitions, and severance costs for headcount reductions at MPE to better position it in the market. Without the effects of the acquisitions and the headcount reduction costs, these expenses increased 1.4% primarily due to increased health care expenses offset somewhat by continuing cost control efforts.

Interest Expense

      Interest expense decreased $130,000 in 2004 compared to 2003 due to higher cost long-term debt being replaced with lower cost short-term debt. The Company sold commercial paper at favorable interest rates resulting in overall lower interest costs. Interest expense decreased $112,000 in 2003 compared to 2002 primarily

due to continuing favorable interest rates on the commercial paper the Company used to finance its operations in 2003, as well as the reduction in overall debt from prior year levels.

Other Expense (Income), Net

      Other expense (income), net in 2004 was an expense of $0.6 million versus income of $1.0 million in 2003. The 2004 amount included $0.4 million of foreign exchange loss compared to an exchange gain of $0.8 million in 2003. The 2004 exchange loss was due to the strengthening of the euro against the U.S. dollar and its effects on the company’s foreign subsidiaries. The 2003 gain related to the Company’s euro-based receivables on its corporate ledger from its foreign subsidiaries, for which translation gain was recognized through the income statement while the offsetting translation loss on the corresponding subsidiary’s debt was recognized as a component of other comprehensive income (loss). The significant strengthening of the euro in 2003 resulted in the translation gain. During the second quarter of 2003, the Company borrowed euro-based debt domestically to hedge that euro-based receivable exposure.

Income Taxes

      Income taxes as a percentage of earnings before income taxes were 46.4%, 43.2% and 36.4% for 2004, 2003 and 2002, respectively. The increase in 2004 from 2003 was primarily due to increased federal and state tax rates applied to the increased net earnings, and an increased valuation reserve on the operating losses of the Company’s French subsidiary, as further described below. The increase in 2003 from 2002 was primarily due to an increased valuation reserve on the operating losses of certain of the Company’s foreign subsidiaries.

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

      In 2004 and 2003, the valuation reserves were increased to $2,392,000 and $1,225,000, respectively, due to continued realization uncertainties for foreign net operating loss carryforwards in France. The increases in the reserves were recorded as additional tax expense, which significantly increased the Company’s effective rate for both 2004 and 2003.

      At December 31, 2004, the Company had foreign net operating loss carryforwards at certain European subsidiaries totaling $9.2 million. The carryforwards have unlimited carryforward periods, which can be used to offset future taxable income at these locations.

Net Earnings and Earnings Per Share

      As a result of the above-mentioned items, net earnings were $9,633,000, $7,577,000 and $7,271,000 in 2004, 2003 and 2002, respectively. On a diluted basis, adjusted for the 2-for-1 stock split paid December 10, 2004, earnings per share were $1.42, $1.15 and $1.10, respectively, for the same periods.

Liquidity and Capital Resources

      The main sources of liquidity for the Company are cash from operations and borrowing capacity. Cash provided by operations in 2004 was $5.5 million, a decrease of $8.6 million, or 61.0%, compared to 2003. The decrease was the net result of a $2.0 million payment to the pension plan, increases in receivables and inventory levels, and reduced payables, offset somewhat by increased net earnings. Cash provided by operations in 2003 increased $1.9 million, or 15.1%, compared to 2002 primarily as a result of increased earnings and no required payment to the pension plan, offset by increases in receivables and inventories.

      Receivables increased 2.2% between December 31, 2003 and 2004 due primarily to slightly higher fourth quarter sales and also to a slight increase in the number of days sales outstanding. Inventories increased 20.2% due primarily to the introduction of several new products in 2004, as well as longer lead-times on certain

electronic components associated with the increased sales of AMR products. The increases in both receivables and inventories were affected to a lesser extent by the strength of the euro on foreign subsidiaries’ balances.

      Capital expenditures totaled $5.6 million in 2004, $7.1 million in 2003 and $5.9 million in 2002. These amounts vary due to the timing of capital expenditures. The Company believes capacity exists to increase production levels with minimal additional capital expenditures.

      Prepaid pension increased $1.1 million at the end of 2004 compared to the same period in 2003. This was the result of pension expense of $0.9 million and a payment of $2.0 million during 2004. Assumptions for determining pension liability, expected return on assets and annual expense are reviewed and, if appropriate, adjusted annually. The impacts of hypothetical changes in certain assumptions is difficult to determine as economic factors can often impact multiple assumptions and inputs at the same time. The Company believes its current assumptions are reasonable. At December 31, 2004, the market value of the assets in the Company’s pension plan was $45.7 million. Included in the Company’s December 31, 2004 prepaid pension balance was $18.6 million of unrecognized net actuarial losses.

      The amount of net goodwill recorded at December 31, 2004 and 2003 was $7,104,000 and $7,089,000, respectively. The net increase of $15,000 was due to the strengthening of the euro, offset by a reduction in goodwill of $263,000 due to the reversal of the remaining amount of unused severance costs related to the termination of several MPE employees originally recorded in connection with the MPE acquisition.

      Short-term debt increased $14.0 million in 2004 due to the use of commercial paper to replace long-term debt as payments were required and to support normal operating needs. Commercial paper was obtained at interest rates lower than the long-term debt rates. The decrease in payables between years is primarily the result of the timing of purchases and a significant inflow of inventory in December 2003. Accrued compensation and employee benefits increased $0.3 million due to increased incentive costs associated with improved sales and earnings levels. Income and other taxes decreased $1.6 million as a result of the timing of tax payments.

      Total outstanding long-term debt (both the current and long-term portions) decreased $9.9 million as a result of required payments and the Company taking advantage of lower short-term rates to replace higher cost long-term debt. None of the Company’s debt carries financial covenants or is collateralized.

      Common Stock and capital in excess of par value both increased during 2004 due to stock issued in connection with the exercise of stock options and treasury stock issuances. Employee benefit stock decreased by $220,000 due to shares released as a result of payments made on the ESSOP loan. Treasury stock increased due to shares repurchased during the year.

      Badger Meter’s financial condition remains strong. The Company believes that its operating cash flows, available borrowing capacity including $25,785,000 of unused credit lines, and its ability to raise capital provide adequate resources to fund ongoing operating requirements, future capital expenditures and development of new products. The Company continues to take advantage of its local commercial paper market and from time to time will convert short-term debt into long-term debt.

Off-Balance Sheet Arrangements

      The Company guarantees the debt of the Badger Meter Officers’ Voting Trust (BMOVT), from which the trust obtained loans from a bank on behalf of the officers of the Company in order to purchase shares of the Company’s Common Stock. The officers’ loan amounts are collateralized by the Company’s shares that were purchased with the loans’ proceeds. There have been no loans made to officers by the BMOVT since July 2002. The Company has guaranteed $1,593,000 and $1,754,000 of the trust’s debt at December 31, 2004 and 2003, respectively. The current loan matures in April 2005, at which time it is expected to be renewed. The fair market value of this guarantee at December 31, 2004 continues to be insignificant because the collateral value of the shares exceeds the loan amount. The Company has no other off-balance sheet arrangements.

Contractual Obligations

      The Company guarantees the outstanding debt of the Badger Meter Employee Savings and Stock Ownership Plan (ESSOP) that is recorded in long-term debt, offset by a similar amount of unearned compensation that has been recorded as a reduction of shareholders’ equity. The loan amount is collateralized by shares of the Company’s Common Stock. Payments of $220,000 and $250,000 in 2004 and 2003, respectively, reduced the loan to $1,065,000 at December 31, 2004. The terms of the loan allow variable payments of principal with the final principal and interest payment due in April 2006, at which time it is expected to be renewed.

      The following table includes the Company’s significant contractual obligations as of December 31, 2004. There are no other undisclosed guarantees.

      As of December 31, 2004, the Company had no material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant and equipment, which generally have terms of less than 90 days. The Company also has long-term obligations related to its pension and postretirement plans which are discussed in detail in Note 7 “Employee Benefit Plans” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2004 Annual Report on Form 10-K. As of the most recent actuarial measurement date, no pension plan contributions are anticipated in 2005 and postretirement medical claims are paid as they are submitted. Postretirement medical claims are anticipated to be $688,000 in 2005; however, these amounts can vary significantly from year to year because the Company is self-insured.

Critical Accounting Policies and Use of Estimates

      The Company’s accounting policies are more fully described in Note 1 “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2004 Annual Report on Form 10-K. As discussed in Note 1, the preparation of financial statements in conformity with U.S. generally accepted accounting principles generally requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company’s more significant estimates relate primarily to several judgmental reserves: allowance for doubtful accounts, allowance for obsolete inventories, warranty and after-sale costs reserve, and the health care reserve. Each of these judgmental reserves is evaluated quarterly and is reviewed with the Company’s Disclosure Committee and the Audit and Compliance Committee of the Board of Directors. The basis for the reserve amounts is determined by analyzing the minimum and maximum amount of anticipated exposure for each account, and then selecting the most appropriate amount within the range based upon historical experience and various other considerations that are believed to be reasonable under the circumstances. This method has been used for all years in the presented financials and has been used consistently throughout each year. Actual results may differ from these estimates under different assumptions or conditions.

      The criteria used for calculating each of the reserve amounts varies by type of reserve. For the allowance for doubtful accounts reserve, significant past due balances are reviewed in conjunction with applying historical

write-off ratios to the remaining balances. The calculation for the allowance for obsolete inventories reserve is determined by analyzing the relationship between the age and quantity of items on hand versus estimated usage to determine if excess quantities exist. The calculation for warranty and after-sale costs reserve uses criteria that includes known potential problems on past sales as well as historical claims ratios for current sales and current warranty trends. The health care reserve is determined by using medical cost trend analyses, reviewing subsequent payments made and estimating unbilled amounts. The changes in the balances of these reserves at December 31, 2004 compared to the prior year were due to normal business conditions and are not deemed to be significant. While the Company continually tries to improve its estimates, no significant changes in the underlying processes are expected in future periods.

Other Matters

      The Company believes it is in compliance with the various environmental statutes and regulations to which the Company’s domestic and international operations are subject. Currently, the Company is in the process of resolving issues relative to two landfill sites. Provision has been made for all known settlement costs, which are not material.

      The Company is also a defendant in a number of multi-party asbestos lawsuits pending in various state courts. These lawsuits assert claims alleging that certain industrial products were manufactured by the defendants and were the cause of injury and harm. The Company is vigorously defending itself against these alleged claims. Although it is not possible to predict the ultimate outcome of these matters, the Company does not believe the ultimate resolution of these issues will have a material adverse effect on the Company’s financial position or results of operations, either from a cash flow perspective or on the financial statements as a whole.

Market Risks

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

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

      The Company’s foreign currency risk relates to the sales of products to foreign customers, specifically European customers, as most other foreign sales are made in U.S. dollars. The Company uses lines of credit with U.S. and European banks to offset currency exposure related to European receivables and other monetary assets. As of December 31, 2004 and 2003, the Company’s foreign currency net monetary assets were substantially offset by comparable debt resulting in no material exposure.

      The Company’s short-term debt on December 31, 2004 was floating rate debt with market values approximating carrying value. Fixed rate debt was principally a U.S. dollar term loan with a 4.8% interest rate and a euro dollar revolving term loan with a 3.35% interest rate. For the short-term floating rate debt, future annual interest costs will fluctuate based upon short-term interest rates. For the short-term debt on hand on December 31, 2004, the effect of a 1% change in interest rates is approximately $175,000 before income taxes.

      Information required by this Item is set forth in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Market Risks” in this 2004 Annual Report on Form 10-K.

BADGER METER, INC.

Management’s Annual Report on

Internal Control over Financial Reporting

      The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 using the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Company’s management believes that, as of December 31, 2004, the Company’s internal control over financial reporting was effective based on those criteria.

      The Company’s auditors, Ernst & Young LLP, have issued an attestation report on management’s assessment of the Company’s internal control over financial reporting. That attestation report is set forth immediately following this report.

BADGER METER, INC.

Report of Independent Registered Public Accounting Firm

on Internal Control over Financial Reporting

The Board of Directors and Shareholders of Badger Meter, Inc.

      We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, that Badger Meter, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Badger Meter, Inc. management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management’s assessment that Badger Meter, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Badger Meter, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Badger Meter, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2004 and our report dated February 17, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Milwaukee, Wisconsin

February 17, 2005

BADGER METER, INC.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Badger Meter, Inc.

      We have audited the accompanying consolidated balance sheets of Badger Meter, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Badger Meter, Inc. and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Badger Meter, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 17, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Milwaukee, Wisconsin

February 17, 2005

BADGER METER, INC.

Consolidated Balance Sheets

See accompanying notes.

BADGER METER, INC.

Consolidated Statements of Operations

See accompanying notes.

BADGER METER, INC.

Consolidated Statements of Cash Flows

See accompanying notes.

BADGER METER, INC.

Consolidated Statements of Shareholders’ Equity

See accompanying notes.

BADGER METER, INC.

Notes to Consolidated Financial Statements

December 31, 2004, 2003 and 2002

Note 1  Summary of Significant Accounting Policies

Profile

      Badger Meter is a leading marketer and manufacturer of products using flow measurement and control technologies developed both internally and with other technology companies. Its products are used to measure and control the flow of liquids in a variety of applications. The Company’s product lines fall into two general categories, utility and industrial. Two product lines, residential and commercial water meters (with various meter reading technology systems), are generally sold to water utilities and constitute a majority of the Company’s sales. Industrial product line sales comprise the remainder of the Company’s sales and include automotive fluid meters and systems, small precision valves, electromagnetic meters, impeller flow meters and industrial process meters (all with related accessories and instrumentation).

Consolidation

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

Receivables

      Receivables consists primarily of trade receivables. The Company does not require collateral and evaluates the collectibility of its receivables based on a number of factors. An allowance for doubtful accounts is recorded for significant past due receivable balances based on a review of the past due items, as well as applying a historical write-off ratio to the remaining balances. Changes in the Company’s allowance for doubtful accounts are as follows:

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2004, 2003 and 2002

Inventories

      Inventories are valued at the lower of cost (first-in, first-out method) or market. The Company estimates and records provisions for obsolete inventories. Changes to the Company’s obsolete inventories reserve are as follows:

Property, Plant and Equipment

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

Long-Lived Assets

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

Intangible Assets

      Intangible assets are amortized on a straight line basis over their estimated useful lives ranging from 5.5 to 10 years. The Company does not have any intangible assets deemed to have indefinite lives. Amortization expense expected to be recognized is $217,000 each in 2005 and 2006, $196,000 in 2007, and $142,000 each in 2008 and 2009. The carrying value and accumulated amortization by major class of intangible assets are as follows:

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2004, 2003 and 2002

Goodwill

      During 2004 and 2003, the Company tested its goodwill balance for impairment in accordance with FASB Statement No. 142, “Goodwill and Other Intangible Assets,” and no adjustments were recorded to goodwill as a result of those reviews. The amount of goodwill recorded at December 31, 2004 and 2003 was $7,104,000 and $7,089,000, respectively. The increase included $278,000 due to translation adjustments for goodwill denominated in foreign currencies, offset by a decrease for the reversal of the remaining unused severance accrual of $263,000 related to the termination of several employees in conjunction with the Company’s acquisition of MPE, which is further discussed in Note 3 B “Acquisitions.”

Revenue Recognition

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

Warranty and After-Sale Costs

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

Research and Development

      Research and development costs are charged to expense as incurred and amounted to $4,572,000, $6,070,000, and $5,658,000 in 2004, 2003 and 2002, respectively.

Other Expense (Income), Net

      Included in other expense (income), net are foreign currency gains and losses, which are recognized as incurred. The Company’s functional currency for all of its foreign subsidiaries is the U.S. dollar, with the exception of Badger Meter France (the French parent holding company of MPE), MPE and Badger Meter Czech Republic, whose functional currency is the euro. A foreign currency loss of $409,000 was reported in 2004 compared to gains of $781,000 and $267,000 in 2003 and 2002, respectively, primarily related to the strengthening of the euro versus the U.S. dollar.

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2004, 2003 and 2002

Stock Option Plans

      The Company has six stock option plans which provide for the issuance of options to key employees and directors of the Company. Refer to Note 5 “Stock Option Plans” for a description of the plans.

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

      The weighted-average fair values of options granted in 2004, 2003 and 2002 were $2.91, $3.02 and $2.39 per share, respectively. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation. These pro forma calculations only include the effects of options granted since January 1, 1995. As such, the impacts are not necessarily indicative of the effects on net earnings of future years.

Comprehensive Income

      Comprehensive income is comprised of net income and other comprehensive income, which includes foreign currency translation adjustments and minimum employee benefit liability adjustments. Total comprehen-

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2004, 2003 and 2002

sive income was $10,377,000 and $8,918,000 for 2004 and 2003, respectively. Components of accumulated other comprehensive income at December 31, are as follows:

      The $717,000 increase in foreign currency translation adjustments was due primarily to the strengthening of the euro versus the U.S. dollar.

Use of Estimates

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

Reclassifications

      Certain reclassifications have been made to the 2003 and 2002 consolidated financial statements and Notes to Consolidated Financial Statements to conform to the 2004 presentation.

Accounting Pronouncements

      In December 2004, the FASB issued Statement No. 123(R) (SFAS 123(R)), “Share-Based Payment,” which changed the accounting rules relating to equity compensation programs. Effective July 1, 2005, companies that award share-based payments to employees, including stock options, must begin to recognize the expense of these awards in the financial statements at the time the employee receives the award. As allowed by SFAS 123 and SFAS 148, the Company has elected to follow APB 25 in accounting for its stock option plans until the effective date of SFAS 123(R).

      Under APB 25’s intrinsic value method, no compensation cost for employee stock options is recognized. Accordingly, the adoption of SFAS 123(R)’s fair value method will have an impact on the Company’s results of operations, although it will not have an impact on the overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, it is believed that had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net earnings and earnings per share in the discussion of “Stock Option Plans” above. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under the current literature. This requirement will reduce net cash provided by operations and increase net financing cash flows in periods after adoption. While the Company cannot estimate what these amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $877,000, $585,000, and $307,000 in 2004, 2003 and 2002, respectively.

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2004, 2003 and 2002

      On November 12, 2004, the Board of Directors declared a 2-for-1 stock split on the Company’s Common Stock effected in the form of a 100% stock dividend, payable on December 10, 2004 to shareholders of record at the close of business on November 26, 2004. In this report, all the per share amounts and numbers of shares have been restated to reflect this stock split. In addition, Common Stock and capital in excess of par value have been adjusted to reflect this split for all periods presented.

      The Board of Directors has authorized the repurchase of up to 1,200,000 shares of Badger Meter, Inc. Common Stock to December 2005. At December 31, 2004, the Company has remaining availability to repurchase up to 471,555 shares in Common Stock under this authorization.

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

     A.  Affiliated Company

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

     B.  Acquisitions

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

      On June 1, 2002, the Company acquired 100% of the outstanding common stock of MecaPlus Equipements SA (MPE) of Nancy, France, for $3.5 million net of cash acquired. This amount included direct acquisition costs. MPE purchases lubrication meters, oil tanks, hoses, reels and other equipment for assembly into lubrication systems for use in measuring and dispensing automotive fluids such as oil, grease and transmission fluid.

      The Company finalized the allocation of the purchase price of DIC and MPE during 2003. There were no adjustments recorded for DIC after the preliminary allocations at December 31, 2002. During 2003, goodwill relating to MPE increased $757,000 from the December 31, 2002 amount to reflect the accrual of severances related to the termination of several MPE employees in connection with management’s initial assessment at the date of acquisition. The amount of the severance cost was not estimable until the first quarter of 2003. As of December 31, 2003, $277,000 associated with the severances remained reserved. During 2004, the severances

BADGER METER, INC.

Notes to Consolidated Financial Statements (continued)

December 31, 2004, 2003 and 2002

were paid, and $263,000 of the unused severance accrual was reversed from goodwill and accrued liabilities. The following table shows the final purchase price allocation for each acquisition.