<PAGE>

                       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                              Commission File Number
     September 30, 2002                                       0-15045

                            BHA Group Holdings, Inc.
      --------------------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

          Delaware                                     43-1416730
---------------------------------         --------------------------------------
 (State or other jurisdiction of           (I.R.S. Employer Identification No.)
  incorporation or organization)


8800 East 63rd Street, Kansas City, Missouri                         64133
--------------------------------------------------------------------------------
  (Address of principal executive offices)                         (Zip Code)

Registrant's telephone number, including area code:       (816) 356-8400
                                                   -----------------------------

Securities registered pursuant to Section 12(b) of the Act:

                                                  Name of Each Exchange
   Title of each class                             on Which Registered
   -------------------                            ----------------------
           None                                         - - - - -

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, $.01 par value per share
        ----------------------------------------------------------------
                                (Title of class)

Indicate by checkmark 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 checkmark 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 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. [X]

As of October 25, 2002, the number of shares outstanding of the Registrant's
Common Stock was 6,127,807 shares.

The aggregate market value of the voting stock held by non-affiliates* of the
Registrant's Common Stock was $48,790,000, computed by reference to the closing
price of $17.25 as reported to Registrant at which such stock was quoted by the
NASDAQ National Market on October 25, 2002.

The Registrant's definitive proxy statement for the annual meeting of
stockholders to be held on February 18, 2003 (which will be filed within 120
days after the end of the fiscal year covered by the Form 10-K) is incorporated
to Part III, items 10, 11, 12 and 13, by reference.

*Excludes value of shares held by present officers, directors and principal
stockholders of the Registrant. The determination of "affiliate" status for
purposes of this Annual Report on Form 10-K shall not be deemed a determination
as to whether a person is an affiliate of the Registrant for any other purpose.


                                      -1-
<PAGE>

The statements contained in this Report on Form 10-K that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements are
included in the "Factors Affecting Earnings and Stock Price" section,
"Management's Discussion and Analysis," and may be included in other sections
throughout the report. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or those anticipated. The words "should," "believe,"
"anticipate," "expect," "see," and other expressions that indicate future events
and trends identify forward-looking statements. Actual future results and trends
may differ materially from historical results or those anticipated depending on
a variety of factors, including, but not limited to, the performance of newly
established domestic and international operations, demand and price for the
Company's products and services, and other factors. Certain of these factors are
discussed throughout this report on Form 10-K.

PART I

ITEM 1 - BUSINESS

BHA Group Holdings, Inc. (together with its domestic and international
subsidiaries, the "Company" or "BHA") is a global filtration company. Its
principal business is the design, manufacture and sale of replacement parts and
the performance of rehabilitation conversion services for the types of
industrial air pollution control ("APC") equipment known as "baghouses" and
"electrostatic precipitators" ("ESPs"). This equipment is used to eliminate
particulate from the air by passing particulate laden gases through fabric
filters (filter bags) or pleated media filter elements, in the case of
baghouses, and between electrically charged collector plates, in the case of
electrostatic precipitators. The Company's business also includes the
maintenance, conversion and rebuilding of this equipment through a network of
employees and independent contractors. The Company's products and services are
marketed throughout North America, South America, Europe, the Middle East, the
Near East, the Pacific Rim and China. While definitive industry statistics are
not available, based upon Dun & Bradstreet reports and other financial
information available to it, the Company believes it is a leader in worldwide
sales of air pollution control replacement parts and services.

The Company has also established BHA Technologies, Inc. ("BHA Technologies") as
a wholly-owned subsidiary that supplies expanded polytetrafluoroethylene
("ePTFE") membrane products for use in its APC product lines. Through BHA
Technologies, the Company is also supplying ePTFE membrane products to a new
base of customers for consumer and industrial outerwear products, HEPA
filtration, and a variety of other industrial applications.

DOMESTIC BUSINESS AND CORPORATE STRUCTURE

The following outlines a chronology relating to the establishment of the
Company's various domestic business units. The Company's international business
units are described below in the section entitled "International Business."

The Company was organized as an unincorporated division of Standard Havens, Inc.
("Standard Havens") in 1975 and was incorporated in Delaware as a wholly-owned
subsidiary of Standard Havens in 1986. The Company became publicly-owned when it
completed its

                                      -2-
<PAGE>

initial public offering of common stock in November 1986. Net proceeds from this
public offering amounted to approximately $3.6 million, which was applied to
outstanding bank debt. The Company completed a second public offering of common
stock in February 1989. Net proceeds from that public offering (approximately
$8.3 million) were used for working capital purposes and to finance several
acquisitions.

In April 1989, the Company formed PrecipTech, Inc. ("PrecipTech"), a Delaware
corporation, as a wholly-owned subsidiary. PrecipTech, which had previously been
a division of BHA, was formed for the purpose of conducting and expanding the
Company's business as it relates to replacement parts, accessories and services
for electrostatic precipitators.

During 1989, BHA and PrecipTech completed several acquisitions in efforts to
expand their product lines and services. In June 1989, BHA acquired the business
of developing and manufacturing acoustic horns for use in both baghouses and
electrostatic precipitators from Saracco Acoustic Sciences Corporation. Also in
1989, PrecipTech completed three acquisitions of privately held companies or
their operating assets. Such acquisitions included ESP Specialties, Inc., a
company that manufactured and sold replacement parts for electrostatic
precipitators; Kinetic Controls, Inc., a company that manufactured and sold
automatic voltage controllers for electrostatic precipitators; and Midwest Power
Corporation, a company that manufactured and sold replacement parts and
accessories and provided services for electrostatic precipitators.

During 1994, the Company established BHA Technologies as a Delaware Corporation.
This wholly-owned subsidiary was formed for the purpose of developing ePTFE
membranes. BHA Technologies successfully developed its own ePTFE membrane, which
it manufactures and markets for various applications both within and outside the
Company's traditional air pollution control equipment markets. In the air
pollution control market, the Company uses a thermal process to laminate ePTFE
membrane to a fabric substrate, which is then converted into a replacement
filter and marketed under the trade name BHA-TEX(R). The benefits of this
product line to the customer include improved collection efficiency, increased
throughput and lower operating costs. The ePTFE membranes are widely used
outside of air pollution control applications. These applications include, but
are not limited to, wet filtration, industrial, electrical insulation, medical
and apparel. Some of the products and processes in these applications are
currently under patent protection. In addition to supplying the Company's air
pollution control business with ePTFE membranes for use on filter elements, BHA
Technologies has also identified other market niches and product opportunities.
Products currently being sold include membrane fabrics for use in high
performance outerwear marketed under the eVENT(R) trade name, high efficiency
(HEPA) filter media used in household appliances and industrial applications,
cleanroom garments, military outerwear, and allergy relief products.

In November 1996, the Board of Directors approved certain changes to the
Company's corporate structure. The Board determined that servicing the domestic
APC customers of its corporate business through one company, instead of through
various subsidiaries, would yield the greatest sales, marketing and operational
efficiencies. To achieve this objective, three wholly-owned subsidiaries of the
Company that were involved in various air pollution control businesses were
merged into PrecipTech to form one company. On February 18, 1997, the
shareholders of the Company approved an amendment to the Certificate of
Incorporation of the Company to change PrecipTech's name to BHA Group, Inc. and
the Company's name to BHA Group Holdings, Inc.

                                      -3-
<PAGE>


The Company has been doing business internationally since 1982 and has expanded
its presence throughout the world as illustrated in the chart below:

<TABLE>
<CAPTION>
Date                                            Company Name (1)                                                   Location
----                                            ----------------                                                   --------
<S>                                  <C>                                                        <C>
September 1982                                   BHA Group GmbH                                              Ahlen, Germany
August 1994                                       BHA Group AG                                      Muemliswil, Switzerland
March 1997                            BHA Environmental Technology Co. Ltd.                                 Shanghai, China
April 1997                            BHA Group International Pvt. Ltd. (2)                                     Pune, India
August 1997                                     BHA U.K. Limited                                 Birmingham, United Kingdom
November 1997                                  BHA Purfilter S.L.                                          Barcelona, Spain
March 1998                                     BHA Technologies AG                                  Muemliswil, Switzerland
August 1998                           BHA Group International Holdings B.V.                          Amsterdam, Netherlands
November 1998                                  BHA do Brazil Ltda.                                        Sao Paulo, Brazil
December 1998                            BHA Group Philippines, Inc. (2)                                Manila, Philippines
June 1999                                     BHA Technologies K.K.                                            Tokyo, Japan
January 2002                            BHA Group de Mexico S.A. de C.V.                             Aguascalientes, Mexico
</TABLE>

1)   Each company is a wholly-owned subsidiary of BHA Group Holdings, Inc. or
     one of its subsidiaries.
2)   The Company's presence in the Philippines originated in 1997 and in India
     in 1994 as Representative and Liaison offices, respectively.

INTERNATIONAL BUSINESSES

The Company sells products and services in several geographical areas.
Operations of the domestic business are based in the United States (U.S.). The
domestic business provides products and services to the U.S. markets and exports
to Canada, Latin America, the Near East, the Pacific Rim and People's Republic
of China ("China"). The European business operations manufacture and sell
products and services in Europe, the Middle East, and North Africa. The
financial data for the Company's domestic and foreign businesses is disclosed in
note 9 to the consolidated financial statements. Each of the entities identified
below is 100% owned, either directly or indirectly, by the Company.

EUROPE

BHA GROUP GMBH
BHA Group GmbH ("GmbH"), formerly Filtra GmbH, is a German corporation that
operates from Ahlen, Germany as an air pollution control replacement parts
marketer, selling products throughout Europe, the Middle East, and Northern
Africa. Until September 1999, GmbH manufactured APC parts, however, such
operations are now consolidated into the BHA Purfilter S.L. facility in
Barcelona, Spain.

BHA GROUP AG
BHA Group AG, formerly SF Air Filtration AG, is a Swiss corporation that designs
and produces high efficiency replacement cartridge filter elements. This
wholly-owned subsidiary manufactures the pleated media filter elements in
Muemliswil, Switzerland and sells these products throughout Europe.

BHA UK LIMITED
BHA UK Limited sells industrial air pollution control parts and services to
customers throughout the United Kingdom and supports product sales from the
Company's manufacturing operations in Spain and Switzerland.

                                      -4-
<PAGE>

BHA PURFILTER S.L.
BHA Purfilter S.L. ("Purfilter") is a Spanish corporation that manufactures and
sells replacement filters for industrial air pollution equipment. Purfilter
manufactures air pollution control replacement parts in Barcelona, Spain for the
European market and provides a sales presence in Southern Europe.

BHA TECHNOLOGIES AG
BHA Technologies AG, a Swiss corporation, is a wholly-owned subsidiary of BHA
Technologies that markets ePTFE membrane products for a wide variety of
applications both within and outside of the air pollution control industry. BHA
Technologies AG sells ePTFE membrane products throughout Europe and Asia.

BHA GROUP INTERNATIONAL HOLDINGS B.V.
BHA Group International Holdings B.V. is a holding corporation for the Company's
international businesses. It is based in the Netherlands, which maintains an
extensive tax treaty network throughout the world.

LATIN AMERICA

BHA DO BRAZIL LTDA.
BHA do Brazil Ltda. ("BHA Brazil") is a Brazilian corporation that warehouses
and markets industrial air pollution control parts and services. BHA Brazil
stores the air pollution control parts in Sao Paulo, Brazil and sells them to
customers in Brazil and surrounding countries.

BHA GROUP DE MEXICO S.A. DE C.V.
BHA Group de Mexico S.A. de C.V. ("BHA Mexico") is a Mexican corporation. BHA
Mexico is currently a start-up operation which is expected to manufacture
replacement filters for industrial air pollution equipment in Aguascalientes,
Mexico, primarily for distribution in Latin America. It is anticipated that BHA
Mexico will also provide additional manufacturing capacity for the Company's
U.S. operations.

In addition to the manufacturing facility in Mexico and the sales office in
Brazil, the Company supports the Latin American operations through telemarketing
and support services managed from its Kansas City, Missouri headquarters.

ASIA

BHA GROUP PHILIPPINES, INC.
BHA Group Philippines, Inc. ("BHA Philippines") is located in Manila,
Philippines and operates as BHA's Asia-Pacific regional sales office to support
the export sales from the United States to customers in the Pacific Rim and
Australia.

BHA ENVIRONMENTAL TECHNOLOGY COMPANY, LTD.
BHA Environmental Technology Company, Ltd. ("BHA China") is a corporation
established in China. BHA China assembles and sells APC products and provides
after-sale services and relevant technical support to customers throughout China
and surrounding regions.

BHA GROUP INTERNATIONAL PRIVATE LIMITED
BHA Group International Private Limited ("BHA India") is an Indian corporation
that provides sales and service assistance to customers in India including
support for products exported from the Company's manufacturing units in the
United States.

                                      -5-
<PAGE>

BHA TECHNOLOGIES K.K.
BHA Technologies K.K. ("BHA Technologies Japan"), a Japanese corporation, is a
wholly-owned subsidiary of BHA Technologies, Inc. that markets ePTFE membrane
products for a wide variety of applications both within and outside the air
pollution control industry. BHA Technologies Japan also provides support for
BHA's non-ePTFE APC business in Japan.

COMPETITION

Based upon Dun & Bradstreet reports and other publicly available financial
information, the Company believes that it is a global leader in the APC
equipment aftermarket. A number of regional offices have been established by the
Company in Asia and Latin America. As a result of this movement into the
international market, the Company is facing increased competition from
competitors in those specific markets, as well as existing competitors from the
U.S. and Europe. Several of the Company's competitors are, or are part of, large
integrated companies, which have greater resources than the Company. The
competition also includes several dozen small to mid-size filter bag
manufacturers that compete in local and regional geographic markets. Generally,
original equipment manufacturers in the U.S. have not effectively competed in
the aftermarket for baghouses, but have been a significant factor in the
aftermarket for electrostatic precipitators.

The domestic market for electrostatic precipitators has been competitive in
recent years due largely to the utility industry, which has been restructuring
in response to deregulation. Over the past two years, tight energy supplies, the
general aging of ESP equipment, and concern over pollution regulations have led
to a surge in replacement parts and service business for ESPs. An ESP is the
prevalent piece of air pollution control equipment on coal-fired boilers for the
U.S. electrical utility industry. The electric utilities are attempting to
reduce downtime and improve efficiency of their coal-fired generating capacity.
The company believes that it is well positioned in this market and is benefiting
from opportunities to work with these electric utility customers. Outside of the
U.S., it is important to note that electrostatic precipitators are currently
more prevalent than baghouses for use in air pollution control systems. The
Company continues to position itself for additional growth in the international
marketplace.

The market in which BHA Technologies competes is much less fragmented than the
APC business. The primary competitors in the ePTFE membrane market include the
industry leader, W. L. Gore and Associates, Inc., which developed the process
for ePTFE in 1958. Other competitors include Tetratec Corporation and Nitto
Denko Corporation. Competition is based upon brand name, quality, innovation and
pricing.

FACTORS AFFECTING EARNINGS AND STOCK PRICE

General Business Conditions

The current business environment around the world is challenging. Planning has
become more complex as the uncertainties and threats associated with war,
terrorist activities and a global recession must be considered. The Company is
not immune from these significant external factors and a serious business
downturn resulting from any of those factors would have a material adverse
impact on its operating results.

The Company continues to monitor the global business environment very closely
and its potential impact on BHA's business. While the current environment poses
a serious threat to near term operating results, the Company believes it is well
positioned in its markets to

                                      -6-
<PAGE>

generate positive earnings and consistent cash flows during a period of slower
business. The Company will use its free cash flows to invest in its business to
strengthen its competitive position. The following briefly summarizes a few of
the Company's key strategies and competitive advantages:

o    The Company is a global leader in the APC replacement parts and service
     market and is looking to expand market share through its ability to deliver
     value to its customers.
o    The Company has a stronger financial position than many of its competitors
     and will use its free cash flow to invest in its personnel, new products,
     technology and its common stock repurchase program.
o    The Company is a world leader in the supply of innovative filtration
     products. Its business includes a diverse product line across numerous
     filtration applications. The business is also diverse from a geographic and
     industry perspective.
o    The Company is working to expand these and other competitive advantages
     during this period of economic uncertainty.

The Company has previously defined its financial goals. These include the
increase in compounded earnings per diluted share at a 12% to 15% annual rate
and the increase in the return on average equity to 15% by fiscal 2004 and to
20% over the long-term. Although the Company has confidence in its strategies
and business plans, it is important to note that there are a number of risk
factors that could have a material adverse impact on the Company's ability to
achieve its financial goals. These factors are discussed in more detail below.

Domestic Air Pollution Control (APC) Segment


U.S. Fabric Filter
The Company is the leader in the supply of replacement parts and service to U.S.
operators of fabric filter dust collectors. During the Company's fiscal year
ended September 30, 2002 ("fiscal 2002"), its sales were $74 million in this
market, representing a 14% decrease from the prior year and an 18% decrease from
its peak sales for the year ending September 30, 2000 ("fiscal 2000"). Industry
data indicates that the U.S. market for these products contracted as much as 25%
to 30% during this two-year period. Factors contributing to the market decline
include customer efforts to reduce on-hand inventories, delays in spending for
major equipment upgrades and reduced plant utilization. For its fiscal year
ending September 30, 2003 ("fiscal 2003"), the Company will be focused on
further expanding its share in this market. Although the Company believes it
will be successful in expanding its market presence, a severe and protracted
downturn in the U.S. economy would have a material adverse impact on the
Company's near-term operating results due to the cyclical nature of many of the
industries its customers operate in. Such continued weakness in the U.S. market
could result in a further decline in sales and gross margins due to competitive
pressures in the marketplace.

U.S. Electrostatic Precipitator (ESP)
The fiscal 2002 results in this area were very strong as sales of $39 million
represented a 9% increase over the prior year and a 41% increase over the fiscal
2000 sales. The electric utility industry represents the primary industry group
serviced by this portion of the Company's business. The Company believes it is a
leader in this market. ESP's are the primary air pollution control technology
utilized on coal-fired boilers at electric utilities. The Company's internal
project tracking system indicates that in the near-term there appear to be good
opportunities for large project work. Demand for the Company's products and
services are influenced in part by the price of coal relative to natural gas and
other alternatives. Demand is

                                      -7-
<PAGE>

also influenced by regulatory pressure. As of September 30, 2002, the Company
has a record ESP backlog which indicates that sales in this product line should
remain strong through fiscal 2003. Beyond 2003, it is possible that the
Company's ESP business could be adversely impacted by instability in the utility
industry together with an uncertain regulatory environment. A substantial
portion of the sales derived in this area is fixed price work on major field
installations that carry their own sets of risks. Any substantial project cost
overruns on fixed-price work would have a material adverse impact on the
Company's short-term operating results.

U.S. Exports to Latin America and Asia
The Company exports fabric filter and ESP replacement parts and service to
customers in Latin America and Asia. During fiscal 2002, sales in these regions
were $18 million, down 14% from the prior year. Although the Company does not
have a substantial investment in property, plant and equipment in either of
these regions, the uncertainty associated with world events holds additional
risks for this portion of the business. Specifically, the economies of many of
the countries BHA sells to in Latin America follow closely the U.S. economy. A
severe and protracted downturn in the U.S. economy would negatively impact many
of the countries the Company serves throughout Latin America. Political and
economic turmoil has also had an adverse impact in some of the Company's key
export markets within Latin America. With respect to Asia, the primary concerns
relate to a decline in business that could occur if tensions and conflict in the
region continue to escalate. In the event that business conditions remain
uncertain in Latin America or Asia for an extended period of time, the large
project portion of exports to these markets could decline. Such a decline, would
have a material adverse impact on the Company's operating results.

Europe APC Segment

The Company's Europe APC Segment posted a substantial turnaround in operating
results during fiscal 2001 and 2002 as compared to fiscal 2000. Sales for this
segment were $22 million in each of fiscal 2002 and 2001. Moving into fiscal
2003, a significant risk factor relates to the potential softening of the market
in Europe as part of an overall deterioration of the global economy.
Approximately 15% of Europe's fiscal 2002 sales relate to project work,
primarily in the ESP market. A substantial portion of this work is for customers
in North Africa and the Middle East and could be negatively impacted by world
events. Any one or a combination of the above noted factors could have a
material adverse impact on the Company's operating results.

BHA Technologies Segment

Through BHA Technologies, the Company has established a business to supply ePTFE
membrane products for use in applications outside of air pollution control, as
well as for use in its APC product lines. BHA Technologies improved its
operating results dramatically over the past year, generating pre-tax earnings
of $1.0 million in fiscal 2002 compared to a pre-tax loss of $0.2 million in
fiscal 2001. In fiscal 2002, sales by BHA Technologies to non-affiliates were
$12.3 million, up from $10.8 million in fiscal 2001. The Company is focused on
establishing BHA Technologies as a business segment that produces high
technology products and generates long-term growth for the Company.

                                      -8-
<PAGE>

Approximately 70% of the sales to non-affiliates generated by BHA Technologies
during fiscal 2002 were to three customers. This factor, combined with a
competitive environment that has resulted in pressure on gross margins related
to the sale of inter-company and third party APC roll goods, create risks
relative to the ongoing profitability of this business segment.

Success in this segment beyond fiscal 2003 will require the establishment of
several new sales channels and the expansion of sales through relationships that
have been established over the past two years. The Company expects to achieve
this goal and generate incremental earnings for this segment in fiscal 2003.
Because the BHA Technologies segment relies heavily on sales to a limited number
of customers, there can be no assurance that it will reach its sales and
profitability targets.

The Company believes that its core competency with respect to third party sales
for ePTFE membrane products outside of air pollution control will be in the
areas of new product development and manufacturing. The Company believes that a
substantial portion of its future business will be transacted through supply
agreements with third parties. The Company will be responsible for the product
and manufacturing issues. Its customers will incorporate the Company's products
into other product offerings that will then be sold to third parties. BHA
Technologies' success in this regard is also tied in part to its customers'
success in delivering product through their supply chains. The nature of this
business will be to work with fewer customers on larger supply agreements. The
Company's future success in this segment is dependent upon its ability to
continue to develop, establish and maintain its existing and targeted new supply
arrangements. Failure to execute this strategy or the termination of a major
supply contract could have a material adverse impact on the Company's operating
results. Failure to execute its strategy could also impact the carrying value of
the Company's investment in BHA Technologies' property, plant and equipment.

Accounts Receivable and Credit Risk

The majority of the Company's sales are made on open account, generally with
payment terms of net 30 days. The Company's customer base operates in numerous
industries in the U.S. and internationally. Many of these industries such as
steel, textile and utilities have been adversely impacted by the economic
environment. The Company's operating results could be adversely impacted by an
increase in bad debt expense in the event that one or more major customers are
unable to meet their financial obligations.

Impact of Risk Factors on the Company's Outlook

The Company believes that its expectations for the first quarter of fiscal 2003
included in the "Outlook" section of "Management's Discussion and Analysis" of
this Annual Report on Form 10-K are reasonable. Achievement of those targets is
subject to certain risks and uncertainties including the above noted risk
factors and other risks described elsewhere in this report. Any of such risks
could cause the Company to fall short of its financial targets.

In such event, the Company may re-evaluate its longer-term strategies with
respect to certain product and market opportunities. In these instances, it may
be necessary to reduce expenses and take other steps to rationalize the costs of
these areas to make them profitable. These actions could result in restructuring
expenses that would impact future results.

                                      -9-
<PAGE>

PRODUCTS AND SERVICES

The Company believes it has the broadest product line in the air pollution
control equipment aftermarket. This, combined with its proprietary telemarketing
system and database of customer equipment specifications, enables it to respond
promptly to customer requests, thus providing it with a competitive advantage.

The Company manufactures and sells a wide variety of filter bags, replacement
parts and accessories for the industrial air pollution control equipment
aftermarket. Filter bags are manufactured by the Company from fabric purchased
in bulk from fabric manufacturers. The Company manufactures industry standard
bags, as well as bags for customer specific applications. Most filter bags are
produced from fiberglass, polyester, aramid, acrylic, and polypropylene fabrics.
A market shift towards higher efficiency filtration has led to increased usage
of filters that have ePTFE membrane applied to the fabric and other more
specialized materials. The Company's wholly-owned subsidiary, BHA Technologies,
manufactures the ePTFE membrane (BHA-TEX(R)) used on its filter bags and
elements. The Company is one of the few filter bag suppliers that manufactures
its own ePTFE membrane (see "Business"), which the Company believes provides it
a competitive advantage as it is able to control availability, raw material
costs, quality and product development. Baghouse replacement parts include
support cages for the filter bags, clamps, spring tensioning systems, continuous
particulate monitoring systems and gaskets. Electrostatic precipitator
replacement parts include collecting plates, wires, discharge electrodes,
transformer/rectifiers, rappers and electronic controls.

In addition to standard replacement parts, the Company continues to aggressively
introduce new products and accessories that enhance the performance of a dust
collection system. These new products include continued enhancements to the
Company's electrical products for both baghouses and precipitators and the
introduction of pleated media filter elements and evaporative gas cooling
product lines. The Company is also uniquely positioned for potentially
significant revenues from conversions of precipitators to baghouses or cartridge
collectors. With expertise in each type of air pollution control equipment, BHA
can work with its customers to maximize the efficiency of their air pollution
control to meet regulatory standards or to increase plant operating
efficiencies. Internal product development continues to be supplemented with
strategic acquisitions such as the Drayton Corporation's sound-off acoustic
cleaner product line acquired in January 1999. By combining the Drayton horn
line with the Company's other acoustic products, BHA now has the most
comprehensive line of acoustic horns in the industry.

Product profitability varies considerably over different product groups, with
standard products typically providing a lower profit margin than replacement
parts and accessories.

The Company's business also includes the maintenance, conversion and rebuilding
of industrial air pollution control equipment through a network of independent
contractors and its own service crews. A comprehensive safety program enables
both the Company and customer to control costs from a risk management
perspective. Conversion and rebuilding services involve retrofitting a partial
or entire baghouse or electrostatic precipitator to restore it to original
operating parameters or improve overall performance. BHA is capable of supplying
a variety of other services specifically fitted to its customers' requirements,
including preventive maintenance, system/equipment analysis, inspections,
supervision of customer personnel and training. Information gathered during
preventive maintenance, analysis and inspections is stored in the Company's
database for future reference, and thus is a valuable

                                      -10-
<PAGE>

source of important customer information. In addition, knowledge gained in
solving one customer's problems is stored in the Company's database and made
available on-line to the Company's salespeople to enable them to respond
promptly to similar problems encountered by other customers. BHA believes it is
one of the world leaders in providing these services.

BHA Technologies provides BHA-TEX fabrics to BHA Group and to other air
pollution control companies for use in fabric filter bags and pleated media
filter elements. Additionally, BHA Technologies has developed numerous other
applications for its ePTFE membrane. These include outerwear and footwear for
consumers, as well as for military and industrial users. Other product
applications include High Efficiency Particulate Air filtration (HEPA) rated
vacuum cleaner filters, clean room apparel, allergen barriers such as mattress
encasings and other industrial applications.

CUSTOMER BASE

The Company's APC customer base is diverse both industrially and geographically,
and includes customers in virtually all sectors of the industrial economy.
International markets include Canada, Europe, Latin America, the Near East, the
Pacific Rim and China. The Company's products and services are used in major
industrial environments such as cement kilns, asphalt plants, steel and iron
foundries, aluminum and copper smelters, rock and gypsum dryers, chemical
plants, grain and food processing plants, refuse to energy plants, waste and
hazardous waste incinerators and electric utilities, as well as many other
areas. In recent years, there has been an emergence of multinational companies
expanding their worldwide presence in BHA's traditional target industries.
Management believes that over the longer term, this trend could have a positive
impact on its international business.

The vast majority of the Company's baghouse sales represent small transactions
with numerous customers. Precipitator replacement parts sales frequently
accompany conversion or rebuild services. No customer accounted for more than
10% of the Company's annual sales during any of its last three fiscal years. The
Company does not believe that it is dependent upon any single customer or group
of customers and has no unusual geographical or industry concentrations of
business or credit risk.

The Company established its APC business with a strategy of marketing and
selling directly to the end user of the product. By contrast, BHA Technologies
does not sell to the end user of the product. Strategic alliances have been
formed with major companies in several markets. Under these relationships, BHA
Technologies is the exclusive supplier of ePTFE membrane goods to its partners.
These partners incorporate the membrane into their products which are then sold
to a third party. The Company's strategic alliance partners include Mitsui & Co.
Ltd. for consumer apparel and Tiong Liong Industrial Co. Ltd. for footwear.
Strategic alliance partners for military and industrial apparel and other
industrial products include Brookwood Companies, Inc. and Stedfast, Inc.

SALES AND MARKETING

One of the Company's principal competitive advantages in the APC market is its
proprietary telesales system, the core of which is a computer database
containing detailed information on over 142,000 pieces of pollution control
equipment (baghouses and electrostatic precipitators) at over 69,000 accounts.
Because of the large number of different original equipment

                                      -11-
<PAGE>

manufacturers and varying maintenance procedures, many pieces of customer
equipment have unique features. Included in the Company's database is
information on the location of the equipment; a phone contact for the
individuals responsible for maintaining the equipment; the type of equipment (by
manufacturer, design and unique attributes); date of installation; fabric type,
size and design of filter bags used; when the bags were last serviced;
additional accessories that were installed; application and temperature
requirements; as well as other detailed pieces of useful information about the
equipment and the customer. This information has been gathered since the Company
was established in 1975, and is continually updated following customer calls,
site inspections and maintenance jobs.

The ongoing development of the customer database is an important part of the
Company's sales strategy. In recent years, a substantial portion of the growth
in the customer database relates to the international marketplace and segments
of the U.S. market where the Company's newer fine filtration products have
application.

The Company keeps information in a central computer database that is accessed
on-line by its telesales representatives. The computer tracks customer calls and
pending orders, which helps make efficient use of the representative's time.
Each day, a list of the most important customer calls is provided to the
representative. This list includes contracts and orders in negotiation, as well
as reminders for calls to customers that have not been serviced for some time.
Once an order is taken, the information is routed electronically to the
operations department where invoices and contracts are generated. Invoice and
technical data about the filter bags, cages, precipitator replacement parts and
accessories is sent via computer connection to the Company's manufacturing
facilities. There the bags are sewn, the support cages and precipitator
replacement parts are manufactured, and the accessories are consolidated for
shipment. The order is packaged and sent to the customer according to a priority
schedule.

Each telesales representative is furnished with data to evaluate their
performance and enable them to focus on high opportunity sales calls. Historical
sales data is made available to each telesales representative showing (i)
performance by the month and year toward targeted goals (broken down by product
category) for sales volume and profit margin, (ii) the sales history for each
customer, as well as the sales potential for such customer, and (iii) a summary
of each contact with each customer and its results, including notes of any
useful information for further follow-up opportunities. The Company believes
that the system provides effective feedback to telesales personnel to meet their
sales goals.

In addition to its use on a customer-by-customer basis, the Company's telesales
system and database is used to develop industry statistics and analyze market
trends. Information is also extracted for marketing and advertising campaigns
and new product evaluations.

The Company supplements its telesales efforts with training seminars, web
enabled teleconferences, equipment inspections, and on-site sales presentations.

GOVERNMENT REGULATION AND INITIATIVES

The Company is not subject to direct environmental protection regulation with
respect to the manufacture or sale of its products other than regulations
applicable to manufacturers generally. The Company's customers are required to
meet national primary and secondary ambient air quality standards for specific
pollutants, including particulate matter, which have been promulgated under the
Clean Air Act, as amended (the "Act"). Title V, the cornerstone of

                                      -12-
<PAGE>

the Act, establishes a national operating permit program. Title V requires
appropriate and sufficient record keeping, monitoring and reporting requirements
to assure compliance with the standards established by the permitting
authorities. Also included in the Act is the Maximum Achievable Control
Technology ("MACT") program. Under MACT, the EPA develops hazardous air
pollutant emissions limitations for various categories of pollutants that
sharply reduce allowable emissions. The states have primary responsibility for
implementing these standards, and in some cases, have adopted standards which
are more stringent than those adopted by the Environmental Protection Agency
("EPA") under the Act. Revisions to the Act have expanded the type of emissions
monitored and provided the regulatory agencies more authority to enforce permits
and issue fines. These regulations will impact producers of cement, aluminum,
chemicals, steel and other industries. It is anticipated that efforts by
industry to comply with MACT standards may increase demand for the Company's
fine filtration and emissions monitoring products.

In November 1996, the EPA announced its intentions to promulgate new National
Ambient Air Quality Standards (NAAQS) for the control of particulate matter
("PM"), which includes lead, ground-level ozone, sulfur dioxide, nitrogen
dioxide, carbon monoxide and other fine particulate matter. Currently, the
states do not monitor for small particulate (less than 2.5 microns), therefore
very little data has been collected to determine which areas meet or do not meet
the revised PM-fine standards. On December 1, 1996, the EPA proposed new and
more stringent monitoring requirements for PM-2.5 in conjunction with the
proposed NAAQS for fine particles. On July 18, 1997, the EPA further revised
these standards and since that time, PM-2.5 monitoring networks are being
installed and each state will have to prepare a State Implementation Plan that
documents its approach to meeting the new NAAQS. The network of required
monitors will be phased in over an additional three to four year period. When
considering the proposed regulations, the industries most likely to be impacted
by the changing air quality standards are the utility, automotive, chemical,
petroleum and manufacturing industries. The Company believes that the growing
awareness of the importance for better air quality and the adoption of the
proposed regulations are positive long-term indicators of the Company's growth
potential. Further, the Company is not aware of any likely statutory changes
that may have a negative impact on its business.

Additionally, the Company manufactures and sells its products in Europe, Latin
America, Canada, the Near East, the Pacific Rim and China. The Company's
domestic and international customers are required to operate in compliance with
certain standards established and promulgated by their respective permitting
authorities.

BACKLOG

On September 30, 2002, the Company's backlog of orders was $57.8 million
compared to $46.4 million at September 30, 2001 and $52.7 million at September
30, 2000. Approximately 95% of the September 30, 2002 backlog is expected to
ship within the next 12 months. In connection with the implementation of its new
ERP system, the Company has made the decision to report its backlog to include
only scheduled orders as opposed to the previous practice of reporting all
customer commitments in its backlog. Historically, 20% to 25% of the reported
consolidated backlog included customer commitments under "blanket agreements"
that did not include firm quantities and ship dates. These orders are not
included in the September 30, 2002 backlog and will not be included in future
backlog reports, as they do not drive production requirements within ERP.

                                      -13-
<PAGE>

The backlog increased, despite the aforementioned change, due to a significant
increase for the domestic ESP group. The Company believes that the backlog for
fabric filter parts and services in the U.S. is approximately the same as the
September 30, 2001 level when measured in a comparable manner. The backlog in
Europe was essentially unchanged. BHA Technologies experienced a modest increase
in its backlog due to the continued growth of its business.

EMPLOYEES

As of September 30, 2002, the Company employed approximately 1,020 persons, none
of whom are represented by labor unions. The Company restricts access to its
database and customarily requires its employees having access to proprietary
systems and information to execute confidentiality agreements and covenants not
to compete. The Company believes that its relations with its employees are good.

PATENTS, TRADEMARKS, COPYRIGHTS, AND PROPRIETARY INFORMATION

The Company owns patents, trademarks, copyrights, and proprietary information
and has pending applications for patents and trademarks for parts, accessories,
and electrical controls for industrial air pollution control equipment and
non-air pollution control markets. The Company considers such patents,
trademarks, copyrights, and proprietary information and applications for patents
and trademarks to be important. The business of the Company, however, is not
dependent on such patents, trademarks, copyrights, and proprietary information.
Patents owned by the Company expire at various dates from 2003 through 2016.


                                      -14-
<PAGE>

ITEM 2 - PROPERTIES

CORPORATE HEADQUARTERS
The Company owns the facility in Kansas City, Missouri, which serves as its
Corporate Headquarters (approximately 66,000 square feet).

The table below provides certain information with respect to the domestic and
foreign properties owned and leased by the company.

<TABLE>
<CAPTION>
Location                                               Use                       Owned/Leased            Square Feet
--------                                               ---                       ------------            -----------
<S>                                     <C>                                     <C>                     <C>
Kansas City, Missouri                         Corporate Headquarters                Owned                    66,000
Lee's Summit, Missouri (7)                     Production/Warehouse                 Leased                   37,500
Slater, Missouri (1)                                Production                      Owned                   150,000
Slater, Missouri (7)                                Production                    Owned (8)                  30,500
Slater, Missouri (1)                                Warehouse                     Owned (8)                  10,000
Slater, Missouri (2)                            Leased to Supplier                  Owned                    54,000
Salisbury, Missouri (1)                             Production                      Owned                    20,000
Salisbury, Missouri (1)                             Production                      Owned                    65,000
Folkston, Georgia (3)                               Production                      Owned                   105,000
Newport News, Virginia (4)                          Production                      Leased                   21,000
Covington, Kentucky (5)                             Warehouse                       Leased                    8,000
Germany (6)                                      Office/Warehouse                   Owned                    30,000
Switzerland (1)                                 Office/Production                   Leased                   35,000
Philippines (6)                                    Office Space                     Leased                    1,000
China (6)                                    Office/Product Assembly                Leased                   17,000
India (6)                                          Office Space                     Leased                    3,000
Mexico (1)                                      Office/Production                   Leased                   25,000
Brazil (6)                                       Office/Warehouse                   Leased                    5,100
Spain (1)                                       Office/Production                   Leased                   26,300
Japan (6)                                          Office Space                     Leased                    1,000
</TABLE>

1)   Operations include the manufacture of traditional and pleated filter
     elements, spot welding of metal cages, and warehouse and assembly
     operations.
2)   Leased to a raw material supplier of the Company.
3)   Operations include the manufacture of parts and accessories for
     electrostatic precipitators.
4)   Operations include the manufacture and assembly of computer based voltage
     control systems for electrostatic precipitators.
5)   Warehouse and office space for the Company's field service crews.
6)   Warehouse and office space for sales and service support in certain
     international markets.
7)   Operations include the manufacture of ePTFE membranes. The Lee's Summit
     facility is subject to a capital lease related to an industrial revenue
     bond obligation. The Slater facility is owned by the Company.
8)   The Company owns the building and improvements and leases the land at a
     nominal cost pursuant to a long-term ground lease.

The facilities and office space owned and leased by the Company are considered
adequate for its present needs and, with modest ongoing capital expenditures,
are suitable for any foreseeable expansion.

ITEM 3 - LEGAL PROCEEDINGS

The Company is involved in no legal proceedings other than ordinary litigation
incidental to the Company's business.

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

No matters were submitted during the fourth quarter of fiscal year ended
September 30, 2002 to a vote of security holders through the solicitation of
proxies or otherwise.

                                      -15-
<PAGE>

PART II

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS

The Company's common stock is traded on the NASDAQ National Market ("NASDAQ")
under the symbol "BHAG".

The information set forth in response to Item 201 of Regulation S-K is included
in this Form 10-K in Part II Item 8, Financial Statement, and Supplementary Data
as Note 10, Quarterly Financial Data (Unaudited) ("Note 10"), and is
incorporated by reference in partial response to this Item 5. The prices set
forth in Note 10 do not include commissions and do not necessarily represent
actual transactions. The closing price of the Company's common stock on the
NASDAQ on October 25, 2002 was $17.25.

HOLDERS
As of October 25, 2002, there were 8,885,550 shares issued and 2,757,743 shares
in treasury. At October 25, 2002, the Company had 6,127,807 shares outstanding
that were owned by approximately 2,500 beneficial owners.

DIVIDENDS
During the years ended September 30, 2000 and 2001, the Company declared and
paid quarterly dividends each year aggregating $.12 per share to shareholders
for each such year. During fiscal 2002, the Company declared and paid a dividend
of $.03 for the first quarter of its fiscal year. In January 2002, the Company
announced a change to its dividend payment policy. Instead of paying quarterly
dividends, the Company intends to pay a single annual dividend, the amount of
which (if any) would be announced in January of each year. The Company indicated
in its January 2002 press release that the dividend for calendar 2002 (payable
in January 2003) would likely be in the range of $.12. This change is intended
to streamline the dividend payment process and lower administrative expenses.

Future determinations concerning dividends will be made, at the discretion of
the Board of Directors, based upon the Company's earnings, its capital
requirements, its financial condition, restrictions placed against payment of
dividends under any financing agreements and such other factors as the Board of
Directors, at its discretion, may from time to time deem relevant.

TREASURY STOCK
The Company has periodically repurchased shares of BHA Common Stock since an
initial stock repurchase plan was authorized by the Board of Directors in 1994.
In the aggregate, the Company has repurchased 2,548,689 shares out of a total of
3,500,000 shares authorized by the Board of Directors. During fiscal 2002,
68,358 shares were repurchased at an average price of $15.25.

                                      -16-
<PAGE>

EQUITY COMPENSATION PLAN INFORMATION
The Company has an incentive stock plan for key employees, officers, and
directors, which was approved by the Company's shareholders. All equity
compensation provided by the Company has been issued in accordance with this
plan. The following table sets forth information with respect to the Company's
incentive stock plan as of September 30, 2002.

<TABLE>
<CAPTION>
                                                                                               NO. OF SECURITIES
                                                                                            REMAINING AVAILABLE FOR
                                  NO. OF SECURITIES TO BE     WEIGHTED AVERAGE EXERCISE      FUTURE ISSUANCE UNDER
                                  ISSUED UPON EXERCISE OF       PRICE OF OUTSTANDING       EQUITY COMPENSATION PLANS
                                   OUTSTANDING OPTIONS,         OPTIONS, WARRANTS AND        (EXCLUDING SECURITIES
                                    WARRANTS AND RIGHTS                RIGHTS              REFLECTED IN COLUMN (a))
        PLAN CATEGORY                       (a)                          (b)                          (c)
<S>                              <C>                           <C>                         <C>
Equity compensation plans
approved by security holders               1,118,464                $   12.08                       504,709

Equity compensation plans not
approved by security holders                     N/A                      N/A                           N/A
                                  ------------------                ---------                ---------------

     Total                                 1,118,464                $   12.08                       504,709
                                  ==================                =========                ===============
</TABLE>

                                      -17-
<PAGE>

ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data set forth in the table below have been
derived from the consolidated financial statements of the Company and related
notes thereto. The selected income statement data for the years ended September
30, 2000, 2001, and 2002, and the selected balance sheet data as of September
30, 2001 and 2002, are derived from the consolidated financial statements of the
Company and the related notes thereto, which have been audited by KPMG LLP,
independent auditors and which are included in Item 8 in this Form 10-K. This
data should be read in conjunction with and is qualified by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 in this Form 10-K and the Company's audited
consolidated financial statements, including the related notes and the
independent auditors' report thereon and the other financial information
included in Item 8 in this Form 10-K.

<TABLE>
<CAPTION>
                                                                         Years Ended September 30,
                                                          2002         2001         2000       1999(a)       1998
                                                          ----         ----         ----       -------       ----
                                                                   (In Thousands, Except per Share Data)
<S>                                                     <C>         <C>          <C>          <C>          <C>
Selected Income Statement Data
   Net Sales                                            $165,606     $174,923    $164,550      $159,047     $145,494
   Gross Margin                                           52,282       52,688      49,351        41,940       44,033
   Operating Expenses                                     39,944       40,173      37,894        38,297       31,853
   Interest Expense, Net                                     571        1,614       1,951         1,984        1,423
   Earnings Before Income Taxes and the
        Cumulative Effect of Accounting Change            11,767       10,901       9,506         1,659       10,757
   Income Before Cumulative Effect of Accounting
        Change                                             7,842        7,223       6,016         1,084        7,332
   Cumulative Effect of Accounting Change, Net of
        Income Tax (b)                                    (1,215)          --          --            --           --
   Net Earnings                                            6,627     $  7,223    $  6,016     $   1,084    $   7,332
   Earnings per Common Share
        Basic
             Income Before Cumulative Effect of
                  Accounting Change                     $   1.28     $   1.17    $    .91     $     .15    $    1.02
             Net Income                                 $   1.09     $   1.17    $    .91     $     .15    $    1.02
        Diluted
             Income Before Cumulative Effect of
                  Accounting Change                     $   1.23     $   1.11    $    .90     $     .15    $     .97
             Net Income                                 $   1.04     $   1.11    $    .90     $     .15    $     .97
   Weighted Average Shares Outstanding--Basic              6,106        6,199       6,601         7,028        7,171
   Weighted Average Shares Outstanding--Diluted            6,399        6,482       6,672         7,134        7,552

Selected Balance Sheet Data
   Working Capital                                      $ 46,556    $  45,236    $ 42,275     $  43,285    $  42,223
   Total Assets                                          113,461      111,162     112,232       108,148      107,574
   Current Portion of Long-Term Debt and Capital Lease
     Obligations                                           2,479        2,499       2,669         2,922        3,988
   Long-Term Debt (Less Current Portion)                  11,687       17,769      17,638        20,345       23,029
   Capital Lease Obligations (Less Current Portion)        6,088        6,637       7,200         7,600           --
   Shareholders' Equity                                   67,441       61,134      59,807        58,892       61,953
   Cash Dividends Declared per Common Share             $    .03    $     .12    $    .12     $     .12    $     .12
</TABLE>

(a)   Operating expenses for the year ended September 30, 1999 include
      $2,167,000 of restructuring charges ($1,408,000 after taxes or $0.20 per
      share). Additionally, cost of goods sold for the year ended September 30,
      1999 includes unusual charges of $4,200,000 ($2,730,000 after taxes or
      $0.38 per share).

(b)  During fiscal 2002, the Company adopted Statement of Financial Accounting
     Standard (SFAS) No. 142 "Accounting for Goodwill and Other Intangible
     Assets." As a result, the Company recognized a charge of $1.2 million to
     write-off the goodwill of its Europe segment. See Note 2 to Consolidated
     Financial Statements.

                                      -18-
<PAGE>

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

GENERAL

For purposes of this "Management's Discussion and Analysis" as well as the
segment reporting information included in Note 9 to the Audited Financial
Statements, the Domestic Air Pollution Control ("Domestic APC") segment
represents all APC business for which the products or services are sold or
managed from the United States. Generally, this includes revenues to customers
in the U.S. and exports to customers in Canada, Latin America, and Asia. The
Europe APC segment represents all business for which the products or services
are sold or managed primarily from Europe. Such revenues are typically generated
in Europe and Northern Africa. BHA Technologies, a subsidiary engaged in the
production and sale of ePTFE membrane for both APC and non-APC applications,
represents BHA's third business segment.

The following table summarizes the Company's revenues by segment and, within the
Domestic APC segment, by sales group. Amounts are in thousands.

<TABLE>
<CAPTION>
                                                         2002               2001                 2000
                                                         ----               ----                 ----
<S>                                                   <C>                <C>                  <C>
Domestic APC Segment:
     U.S. Fabric Filter                               $  73,903          $  85,594            $  90,261
     U.S. Electrostatic Precipitator (ESP)               39,377             36,059               27,970
     Export Sales                                        17,822             20,768               19,709
                                                    ---------------    ----------------    -----------------
         Total Domestic APC Segment                     131,102            142,421              137,940
Europe APC Segment                                       22,217             21,693               20,056
BHA Technologies Segment                                 12,287             10,809                6,554
                                                    ---------------    ----------------    -----------------
Total Revenues                                         $165,606           $174,923             $164,550
                                                    ===============    ================    =================
</TABLE>

FISCAL 2002 COMPARED TO FISCAL 2001

NET SALES
Consolidated net sales during the year ended September 30, 2002 ("fiscal 2002")
were $165.6 million compared to $174.9 million during the year ended September
30, 2001 ("fiscal 2001"), a decrease of 5%. Sales in the Domestic APC segment
decreased 8% from $142.4 million to $131.1 million. Sales in the Europe APC
segment increased 2% from $21.7 million to $22.2 million. The BHA Technologies
business segment generated fiscal 2002 third party sales of $12.3 million
compared to prior year sales of $10.8 million, a 14% increase.

Within the Domestic APC segment, fabric filter replacement parts and service
sales to customers in the U.S. declined 14% to $73.9 million. The decline
represented the second consecutive year of lower sales in these product lines
and was the result of the economic contraction in the industrial and
manufacturing sectors of the U.S. economy and the decision by many customers to
defer expenditures for capital improvements and increases in production
capacity. The Company's domestic ESP sales increased 9% from $36.0 million to
$39.4 million as this portion of the business benefited from the aging of air
pollution control equipment for coal-fired boilers in the U.S. electric utility
market. Export sales decreased 14% to $17.8 million as shipments into the
Pacific Rim and Latin America declined due to the worsening economy in these
markets. Such declines were partially offset by sales growth in China.

                                      -19-
<PAGE>

The Europe APC segment's sales increased 2%. The modest sales growth was
generated despite a slowing economic environment as this business segment
supplemented its day-to-day sales of replacement parts and services with several
larger projects for ESP rebuilds and ESP to fabric filter equipment conversions.

Shipments of ePTFE membrane from BHA Technologies to third party customers
increased by 14% to $12.3 million. The increase was attributable to incremental
business in non-consumer apparel for military and firefighting garments,
together with improved sales of HEPA and APC filtration products.

GROSS MARGIN
Consolidated gross margin was 31.6% of sales in fiscal 2002 compared to 30.1% in
fiscal 2001. In the Domestic APC segment, margins improved modestly as the
Company reduced its overheads to reflect the declining volumes. Additionally,
this segment benefited from a favorable mix of business and a substantial
improvement in warranty cost. The lower warranty cost was due to improved
quality assurance and increased field testing prior to new product
introductions. Gross margins improved in the Europe APC segment due to improved
plant utilization and emphasis on higher margin parts sales. Gross margins also
improved in the BHA Technologies segment due to the increased manufacturing
utilization resulting from higher sales volumes.

OPERATING EXPENSES
Selling and advertising expenses were $20.7 million (12.5% of sales) in fiscal
2002 compared to $20.8 million (11.9% of sales) in fiscal 2001. The Company
reduced its personnel levels during fiscal 2002 sufficiently to offset modest
increases in per person salaries and benefit costs. The declining sales levels
resulted in an increase in selling expenses as a percentage of sales. General
and administrative expenses were $19.2 million (11.6% of sales) in fiscal 2002
compared to $19.4 million (11.1% of sales) in fiscal 2001. This decline in
spending reflects a decrease of $0.6 million in amortization of intangible
assets due to the adoption of SFAS No. 142 during fiscal 2002 (see Note 2 to the
Audited Financial Statements) together with lower self-insured health care
expenses as a result of fewer large claims. These savings were offset, in part,
by foreign exchange losses of $0.4 million in fiscal 2002 as compared to foreign
exchange gains of $0.1 million in fiscal 2001 and the impact of higher insurance
premiums reflecting the tightening market for liability and property loss
policies.

INTEREST EXPENSE
Interest expense for fiscal 2002 was $0.7 million compared to $1.8 million in
fiscal 2001. The decline was the result of a decrease in average borrowings from
$30.0 million to $23.3 million together with lower average interest rates which
were approximately 4.2% annually in fiscal 2002 compared to 5.8% in fiscal 2001.

EARNINGS BEFORE INCOME TAXES
Pre-tax earnings for the Domestic APC segment were $10.2 million (7.8% of sales)
in fiscal 2002 compared to $10.4 million (7.3% of sales) in fiscal 2001. Profits
fell only slightly despite an 8% decline in sales due to a reduction in warranty
expense, lower manufacturing overheads, a favorable sales mix and reduced
spending on sales and administrative personnel. Lower amortization of
intangibles as a result of the implementation of SFAS No. 142 also favorably
impacted pre-tax earnings for this segment by approximately $0.6 million.

                                      -20-
<PAGE>

The Europe APC segment generated pre-tax earnings in fiscal 2002 of $0.5 million
compared to pre-tax earnings of $0.7 million in fiscal 2001. The decline was the
result of foreign exchange as the Company incurred net exchange rate losses in
Europe of $0.2 million in fiscal 2002 compared to exchange rate gains in fiscal
2001 of $0.2 million. The impact of foreign exchange rate changes was partially
offset by higher gross margins which were generated due to improved plant
utilization and sales mix.

BHA Technologies generated pre-tax earnings of $1.0 million in fiscal 2002
compared to a pre-tax loss of $0.2 million in fiscal 2001. The increase in third
party sales to $12.3 million from $10.8 million, combined with an improved sales
mix resulted in a significant increase in the volume of ePTFE membrane produced.
The increased production combined with operating improvements relative to scrap
rates reduced the per unit cost of production which more than offset the impact
of $0.5 million in charges related to the write-down of certain equipment to its
net realizable value.

CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE
During the first quarter of fiscal 2002, the Company adopted SFAS No. 142,
"Accounting for Goodwill and Other Intangible Assets." In accordance with SFAS
No. 142, a loss was recognized relative to the impairment of goodwill of the
Company's Europe APC segment. This loss, in the amount of $1.2 million, was
accounted for as the cumulative effect of a change in accounting policy.

INCOME TAXES
The effective income tax rate was 33.4% in fiscal 2002 compared to 33.7% in
fiscal 2001. The effective tax rate in each year was lower than the statutory
rate due to credits for research and development, tax benefits on export sales
and net operating loss carry-forwards utilized by certain foreign subsidiaries.

NET EARNINGS
Net earnings were $6.6 million ($1.04 per diluted share) in fiscal 2002 compared
to $7.2 million ($1.11 per diluted share) in fiscal 2001. Exclusive of the
cumulative effect of the accounting change, net earnings were $7.8 million
($1.23 per diluted share) which represents an 11% improvement in per share
earnings. The improved earnings were the result of the profitability of the
Company's BHA Technologies segment combined with reductions in amortization of
intangible assets and interest expense. Weighted average common and common
equivalent shares outstanding decreased from 6.5 million shares to 6.4 million
shares due to common stock repurchases.

FISCAL 2001 COMPARED TO FISCAL 2000

NET SALES
Consolidated net sales during fiscal 2001 were $174.9 million compared to $164.6
million during the year ended September 30, 2000 ("fiscal 2000"), an increase of
6%. Sales in the Domestic APC segment increased 3% from $137.9 million to $142.4
million. Sales in the Europe APC segment increased 8% from $20.1 million to
$21.7 million. The BHA Technologies business segment generated fiscal 2001 third
party sales of $10.8 million compared to prior year sales of $6.6 million.

Within the Domestic APC segment, fabric filter replacement parts and service
sales to customers in the U.S. declined 5% to $85.6 million. The decline in
these product lines was the

                                      -21-
<PAGE>

result of the economic contraction in the industrial and manufacturing sectors
of the U.S. economy and the decision by many customers to defer expenditures for
capital improvements and increases in production capacity. The Company's
domestic ESP sales increased 29% from $28.0 million to $36.1 million as this
portion of the business benefited from favorable business conditions within the
U.S. electric utility market for operators of coal-fired boilers. Export sales
increased 5% to $21.7 million as shipments into Asia and the Pacific Rim more
than offset a modest decline in shipments to Latin America which resulted from
lack of major project work in that region.

The Europe APC segment's sales increased 8% when expressed in U.S. dollars.
Sales for the year rose 20% on a local currency basis. The sales growth
primarily reflects work completed on two large ESP projects during the current
fiscal year together with modestly higher shipments of the Company's fabric
filter products.

Shipments of ePTFE membrane from BHA Technologies to third party customers
increased by 65% to $10.8 million. The increase reflects higher shipments of
HEPA rated filters to a major consumer products manufacturer under a contract
which commenced in the third quarter of fiscal 2000. Additional increases relate
to sales of membrane for apparel to be sold under the eVENT(R) brand name as
well as membrane sold for use in non-consumer apparel applications and clean
room products.

GROSS MARGIN
Consolidated gross margin was 30.1% in fiscal 2001 compared to 30.0% in fiscal
2000. In the Domestic APC segment, margins declined slightly. Despite the
adjustments made by the Company to its cost structure in the fabric filter
production facilities, the lower production volumes resulted in higher per unit
costs for these products. Gross margins improved in the Europe APC segment due
to the improved plant utilization. In the BHA Technologies segment, gross
margins declined slightly as a result of higher costs related to a second
manufacturing facility that was brought on line during the year and which was
not fully utilized.

OPERATING EXPENSES
Selling and advertising expenses were $20.8 million (11.9% of sales) in fiscal
2001 compared to $19.7 million (12.0% of sales) in fiscal 2000. General and
administrative expenses were $19.4 million (11.1% of sales) in fiscal 2001
compared to $18.2 million (11.0% of sales) in fiscal 2000. In total, operating
expenses increased 6.0% from $37.9 million to $40.2 million. Although the
personnel levels in fiscal 2001 were slightly lower than the prior year, there
were increases in operating expenses relative to per person salaries and health
care costs. Additionally, the Company incurred higher costs in its information
technology department including approximately $0.5 million related to training
and consulting for the enterprise resource planning software which was installed
in fiscal 2002. The provision for bad debt expense was increased by $0.3 million
in fiscal 2001 as compared to the prior year as a result of the higher sales
together with the potential impact of the weakening U.S. economy on the
Company's industrial customers' ability to pay.

INTEREST EXPENSE
Interest expense for fiscal 2001 was $1.8 million compared to $2.0 million in
fiscal 2000. The decline was the result of a decrease in average borrowings from
$32.7 million to $30.0 million together with lower average interest rates which
were approximately 6.2% annually in fiscal 2000 compared to 5.8% in fiscal 2001.

                                      -22-
<PAGE>

EARNINGS BEFORE INCOME TAXES
Pre-tax earnings for the Domestic APC segment were $10.4 million (7.3% of sales)
in fiscal 2001 compared to $10.9 million (7.9% of sales) in fiscal 2000. The
decline in profitability for this segment was the result of lower profits in the
domestic fabric filter business resulting from the 5% decline in sales. This was
partially offset by improved profits from ESP and export sales.

The Europe APC segment generated pre-tax earnings in fiscal 2001 of $0.7 million
compared to a pre-tax loss of $0.8 million in fiscal 2000. Of the improvement,
approximately $0.6 million was the result of foreign exchange rate changes as
the Company incurred exchange rate gains in fiscal 2001 of approximately $0.2
million and exchange rate losses of approximately $0.4 million in fiscal 2000.
The balance of the improvement was the result of the 20% increase in sales,
expressed in local currencies, which were generated with substantially the same
overhead structure.

BHA Technologies' pre-tax loss was $0.2 million in fiscal 2001 compared to a
pre-tax loss of $0.6 million in fiscal 2000. During fiscal 2001, sales increased
to $10.8 million from $6.6 million in the prior year. The cost structure also
increased as a second manufacturing facility was brought on line during the
year.

INCOME TAXES
The effective income tax rate was 33.7% in fiscal 2001 compared to 36.7% in
fiscal 2000. The effective tax rate in 2001 was lower than the statutory rate
due to credits for research and development, tax benefits on export sales and
net operating loss carry-forwards utilized by certain foreign subsidiaries. The
fiscal 2000 rate was higher than the Company's historical rate due to losses on
certain foreign subsidiaries for which the Company did not recognize any tax
benefits.

NET EARNINGS
Net earnings were $7.2 million ($1.11 per diluted share) in fiscal 2001 compared
to $6.0 million ($0.90 per diluted share) in fiscal 2000. The improved earnings
were the result of the turn-around in Europe and lower losses in BHA
Technologies combined with reduced interest expense. Improved earnings per share
were also partially the result of fewer average shares outstanding. Weighted
average common and common equivalent shares outstanding decreased from 6.7
million shares to 6.5 million shares due common stock repurchases.

OTHER

The U.S. inflation rate grew at a moderate pace during fiscal 2002. BHA believes
that its business is not affected by inflation except to the extent the economy
in general is affected.

LIQUIDITY AND CAPITAL RESOURCES

Net working capital was $46.6 million at September 30, 2002 compared to $45.2
million at September 30, 2001. The current ratio was 2.8 at September 30, 2002
compared to a current ratio of 3.0 at September 30, 2001. Cash provided by
operating activities was $17.1 million in fiscal 2002 compared to $16.5 million
in fiscal 2001. The cash flow provided by operating activities in fiscal 2002
reflects earnings before cumulative effect of accounting change of $7.8 million
combined with depreciation and amortization of $5.5 million. Additionally,
increases in accounts payable and accrued liabilities generated cash from
operations.

                                      -23-
<PAGE>

Investing activities have resulted in a net use of cash during each of the past
three years. Capital expenditures were $4.6 million, $4.4 million, and $4.5
million in fiscal 2002, 2001, and 2000, respectively. Capital expenditures over
the past three years have been used to invest in improved information systems,
expand capacity for ePTFE membrane, and develop new products and increased
manufacturing capacity for BHA's APC products. In fiscal 2002, the Company
invested $0.6 million to acquire certain assets of a fabric filter manufacturer
in Mexico. In fiscal 2000, the Company received $1.1 million from the sale of
assets relative to the allergydirect.com division of BHA Technologies.

During fiscal 2002, the Company used $7.3 million for financing activities
including the repurchase of $1.0 million of BHA common stock and the repayment
of $6.7 million of borrowings. In fiscal 2001, the Company used $7.4 million for
financing activities including $6.6 million to repurchase BHA common stock and
$0.7 million for the payment of cash dividends. The Company also repaid $0.6
million in borrowings, net. During fiscal 2000, the company used $7.8 million
for financing activities including $3.6 million to repurchase BHA common stock
and $0.8 million for the payment of cash dividends. The Company also repaid $3.4
million in borrowings, net.

Cash balances, including short-term investments increased from $9.5 million at
September 30, 2001 to $13.8 million at September 30, 2002.

At September 30, 2002, BHA had unused lines of credit of $19.8 million. The debt
structure includes commitments for: an $18.0 million revolving credit facility
maturing on April 30, 2004; $9.4 million under an amortizing term loan with a
final maturity in 2006; a European revolving credit facility of $6.0 million
with a maturity on April 30, 2004; and a capital lease related to an industrial
revenue bond transaction for $6.6 million with annual sinking fund payments and
a final maturity in 2018.

The domestic term loans and revolving credit facility include financial
covenants regarding minimum net worth, minimum fixed charge coverage ratios, and
maximum borrowing to EBITDA ratios. The Company was in compliance with all such
covenants at September 30, 2002. With the exception of the capital lease
transaction, no assets of the Company are pledged to secure any indebtedness.
BHA Group Holdings, Inc. and its primary U. S. affiliates have guaranteed the
European revolving credit facility. The company believes that cash flows from
operations and available credit lines will be sufficient to meet its capital
needs for the foreseeable future.

DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The Company has obligations to make future payments under existing agreements as
follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                 PAYMENTS DUE BY FISCAL YEAR
                                         ----------------------------------------------------------------------------
                                                           2004-            2006-
                                            2003            2005             2007         THEREAFTER        TOTAL
                                            ----            ----             ----         ----------        -----
<S>                                        <C>           <C>                <C>          <C>               <C>
Long-Term Debt                             $1,967        $  9,187           $2,500       $      --         $13,654
Capital Lease Obligations                     512           1,001              973           5,036           7,522
Operating Lease Obligations                 1,381           1,379              589              --           3,349
Other Long-Term Obligations                    --              --               --              --              --
                                         -----------     -----------      -----------    -------------    -----------
Total Contractual Cash Obligations:        $3,860         $11,567           $4,062          $5,036         $24,525
                                         ===========     ===========      ===========    =============    ===========
</TABLE>

                                      -24-
<PAGE>

MANAGEMENT JUDGMENTS AND ESTIMATES
In preparing the financial statements, a number of assumptions and estimates are
determined, that in the judgment of management, are proper in light of existing
general economic and Company-specific circumstances. Examples of areas in which
judgments and estimates are required include the collectibility of receivables,
the value of certain inventories and the evaluation of certain contingent
liabilities, including product warranties and claims arising in the ordinary
course of business. While the Company has taken reasonable care in preparing
these estimates and making these judgments, actual results could and probably
will differ from the estimates. Management believes that any difference in the
actual results from the estimates will not have a material effect upon the
Company's financial position or results of operations.

CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies include inventory valuation,
estimates related to collectibility of receivables and estimation of potential
warranty claims.

In some instances, the Company enters into arrangements with customers that
involve execution of projects over a period of several months or that involve
multiple elements which are delivered at different points in time. In such
cases, management reviews the specific transactions and considers the relevant
accounting pronouncements in determining the appropriate timing for recognition
of revenues.

The Company values its inventories on the first-in, first-out (FIFO) accounting
method using standard costs and provides reserves for estimated losses for slow
moving or obsolete items. The reserve requirement is estimated based upon a
review of specific inventory items that are identified as slow moving and
consideration of potential salvage value and carrying costs.

Accounts receivables are reported net of reserves for uncollectible accounts.
The Company estimates the amount of the reserve requirement based upon a review
of delinquent accounts, the Company's historical loss experience and the current
economic factors impacting its customers.

The Company provides warranties on the products and services it sells which vary
in length and terms based upon the nature of such products and services, as well
as the customer's industry. A reserve has been established for potential
warranty claims. The Company estimates its reserve requirement based upon
specific product failures identified, as well as historical loss experiences.

OUTLOOK

The Company is focused on achieving consistent earnings growth and increasing
returns to its shareholders. Its specific longer-term financial goals are as
follows:

     o   Increase compounded earnings per diluted share at a 12% to 15% annual
         rate over time.

     o   Increase return on average equity to 15% by fiscal 2004. Moving beyond
         fiscal 2004, the longer-term goal is a 20% return on average equity.

The Company continues to remain cautious about the near-term results of its U.S.
and export fabric filter businesses. Of specific concern is continued weakness
in the worldwide manufacturing and industrial sector. Based on historical
trending, the Company continues to believe that improvement in its market for
the sale of fabric filter replacement parts and

                                      -25-
<PAGE>

services will likely trail an improvement in overall manufacturing conditions by
as much as six months. The Company has not seen any improvement in business
conditions and expects that competition will remain intense and pricing will
continue to come under pressure. The Company is committed to maintaining and
expanding its position as the premier supplier of APC replacement parts and
service during this challenging economic period.

Although cautious about the near-term prospects for the fabric filter
replacement parts and service business, the Company expects that its earnings
for the first quarter of Fiscal 2003 will be sequentially stronger than the
fourth quarter of fiscal 2002. This expectation is premised on the substantial
increase in backlog relating to ESP rebuild work for electric utility customers
that will start to ship during the first quarter of fiscal 2003.

FIRST QUARTER OF FISCAL 2003

o    For the first quarter of fiscal 2003, the Company anticipates that
     consolidated net sales will increase by at least 10% from the same quarter
     in the prior year. Gross margins as a percentage of sales are expected to
     be lower due to the product mix.

o    Earnings for the first quarter of the upcoming fiscal year are expected to
     be in the range of $.28 to $.33 per diluted share. Earnings per diluted
     share for the first quarter of fiscal 2002 was $.26 per diluted share
     exclusive of the $1.2 million ($.19 per diluted share) one-time non-cash
     charge relating to a change in accounting principle. Including the impact
     of the one-time charge, earnings for the first quarter of the prior fiscal
     year were $.07 per diluted share.

Visibility with respect to future results beyond 90 days remains a challenge.
For more information, you should refer to "Factors Affecting Earnings and Share
Price" and other information included in this Annual Report on Form 10-K.

ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 142. "Accounting for
Goodwill and Other Intangible Assets" was issued in July 2001 and has been
adopted by the Company effective October 1, 2001. SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead, such assets must be tested for impairment at least
annually in accordance with provisions of SFAS No. 142. This statement also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.

                                      -26-
<PAGE>

Prior to the adoption of SFAS No. 142, the Company evaluated the recoverability
of goodwill based upon undiscounted estimated future cash flows. In connection
with the SFAS No. 142 transitional goodwill impairment evaluation, the Statement
required that the Company perform an assessment of whether there was an
indication that goodwill was impaired as of the date of adoption, using a fair
value model. To accomplish this, the Company was required to identify its
reporting units and to determine the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of October 1, 2001. Based upon a
discounted cash flow analysis, the Company concluded that the carrying value of
its Europe APC reporting unit exceeded its fair value and as such the related
goodwill was impaired. As a result, the Company recognized a charge of
$1,215,000 during the quarter ending December 31, 2001, to write-off the
goodwill of its Europe segment in its entirety. This write-off has been
recognized as the cumulative effect of a change in accounting principle.

The goodwill affected by this write-off related to two transactions, both of
which were acquisitions of the common stock of the target companies. As such,
there was no adjustment in the tax basis of the assets of such companies at the
time of the acquisitions. Accordingly, no tax benefit can be recorded as a
result of the write-off of the related goodwill.

FORWARD LOOKING INFORMATION
This report contains forward-looking statements that reflect BHA's current views
with respect to future events and financial performance. The statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical results or those anticipated. The words
"should," "believe," "anticipate," "expect," and other expressions that indicate
future events and trends identify forward-looking statements. Actual future
results and trends may differ materially from historical results or those
anticipated depending on a variety of factors, including, but not limited to,
competition, the performance of newly established domestic and international
operations, demand and price for BHA's products and services, general U.S. and
international business conditions and other factors. You should consult the
section entitled "Factors Affecting Earnings and Stock Price." The Company
cautions that the foregoing lists of important factors is not exclusive.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATES
All of the Company's indebtedness is at variable rates of interest. The Company
has not used derivative financial instruments to hedge its exposure to interest
rate changes. Based upon borrowings outstanding at September 30, 2002, a 1%
fluctuation in market rates would impact interest expense by approximately
$200,000 annually.

EXCHANGE RATES
The Company views its equity investment in a foreign subsidiary as a long-term
commitment and does not hedge the translation exposures relative to such equity
investments.

In addition to its equity investment, the Company from time-to-time has U. S.
dollar denominated trade payables and advances due from its international
affiliates. Such amounts are subject to translation exposure. At September 30,
2002, the amount of such unhedged exposures was less than $0.5 million.

                                      -27-
<PAGE>

FORWARD EXCHANGE CONTRACTS
BHA periodically enters into forward exchange contracts with commercial banks in
order to fix the currency exchange rate related to intercompany transactions
with its foreign subsidiaries. Changes in the value of these instruments due to
currency movements offset the foreign exchange gains and losses of the
corresponding intercompany transactions. At September 30, 2002, the aggregate
amount of such forward exchange contracts was approximately $1.4 million, and
the market value of these contracts was $108,000 lower than their face value.

ACCOUNTS RECEIVABLE
The Company's customer base operates in numerous industries in the U.S. and
internationally. With the weakness in the global manufacturing economy, the
Company is seeing an increasing level of customer bankruptcies and slow payment
problems that management believes have been appropriately reserved for. Although
there is no significant concentration of sales in any one industry or with any
individual customer, certain of the Company's customers operate in industries
such as steel, textile, and foundry, which have been severely impacted by the
current economic environment. Additionally, the Company executes significant
projects and fulfills membrane supply contracts that can result in open
receivables from individual customers that at times exceed $1 million. It is
considered unlikely that the failure of one or more customers would have a
material adverse effect on the Company's financial condition. However, if the
current economic environment persists or deteriorates further, near term
operating results could be adversely impacted by a further increase in bad debt
expense.




                                      -28-
<PAGE>

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

The Board of Directors of BHA Group Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of BHA Group
Holdings, Inc. and subsidiaries as of September 30, 2002 and 2001, and the
related consolidated statements of earnings, shareholders' equity, comprehensive
income and cash flows for each of the years in the three-year period ended
September 30, 2002. These consolidated financial statements are the
responsibility of BHA's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BHA Group Holdings,
Inc. and subsidiaries at September 30, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2002 in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, effective
October 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which
resulted in a change in the Company's method of accounting for goodwill and
other intangible assets.

                                                        /s/ KPMG LLP

November 1, 2002
Kansas City, Missouri

                                      -29-
<PAGE>

                            BHA GROUP HOLDINGS, INC.
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                SEPTEMBER 30,
                                                                                           2002               2001
                                                                                           ----               ----
<S>                                                                                     <C>              <C>
ASSETS

Current assets:

    Cash and cash equivalents                                                           $    13,778      $       9,471
    Accounts receivable, less allowance for doubtful
       receivables of $1,619 in 2002 and $1,385 in 2001                                      28,637             29,803
    Inventories (note 1)                                                                     24,241             22,845
    Income taxes receivable                                                                     287                379
    Prepaid expenses                                                                          1,998              2,187
    Deferred income taxes (note 6)                                                            3,179              2,655
                                                                                      ---------------    ---------------
           TOTAL CURRENT ASSETS                                                              72,120             67,340
                                                                                      ---------------    ---------------

Property, plant and equipment, at cost:
    Land and improvements                                                                     1,083              1,044
    Buildings and improvements                                                               18,467             18,416
    Machinery and equipment                                                                  42,090             40,976
    Office furniture, fixtures and equipment                                                  4,122              3,886
                                                                                      ---------------    ---------------
                                                                                             65,762             64,322
    Less accumulated depreciation and amortization                                           38,013             36,043
                                                                                      ---------------    ---------------
           NET PROPERTY, PLANT AND EQUIPMENT                                                 27,749             28,279
                                                                                      ---------------    ---------------

Property held under capital leases, net (note 1)                                              5,358              5,830
Intangible and other assets, less accumulated amortization (note 2)                           4,230              4,551
Excess of cost over net assets of businesses acquired (note 2)                                4,004              5,162
                                                                                      ---------------    ---------------
                                                                                           $113,461           $111,162
                                                                                      ===============    ===============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      -30-
<PAGE>

                            BHA GROUP HOLDINGS, INC.
                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                SEPTEMBER 30,
                                                                                           2002               2001
                                                                                           ----               ----
<S>                                                                                     <C>                <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

    Current installments of long-term debt (note 4)                                     $     1,967        $     1,936
    Current lease obligations (note 5)                                                         512                 563
    Accounts payable                                                                         9,516               8,240
    Accrued compensation and employee benefit costs                                          4,309               4,436
    Accrued expenses and other current liabilities                                           2,799               3,356
    Reserve for warranty and product service                                                 2,888               2,867
    Customer deposits                                                                        3,573                 706
                                                                                      ---------------    ----------------
           TOTAL CURRENT LIABILITIES                                                        25,564              22,104
                                                                                      ---------------    ----------------

Deferred income taxes (note 6)                                                               1,940               1,984

Long-term debt, excluding current installments (note 4)                                     11,687              17,769
Long-term lease obligations, excluding current installments (note 5)                         6,088               6,637

Other long-term liabilities                                                                    741               1,534

Shareholders' equity:
    Common stock $.01 par value, authorized 20,000,000 shares:
          Issued 8,885,550 and 8,814,492 shares, respectively                                   89                  88
    Additional paid-in capital                                                              63,169              62,536
    Retained earnings                                                                       41,360              34,916
    Accumulated other comprehensive income                                                    (625)               (856)
    Less cost of 2,757,743 and 2,706,417 shares, respectively,
       of common stock in treasury                                                         (36,552)            (35,550)
                                                                                      ---------------    ----------------
           TOTAL SHAREHOLDERS' EQUITY                                                       67,441              61,134
                                                                                      ---------------    ----------------

Commitments and contingent liabilities (notes 5 and 8)                                  $   113,461      $     111,162
                                                                                      ===============    ================

</TABLE>

See accompanying notes to consolidated financial statements.

                                      -31-
<PAGE>

                            BHA GROUP HOLDINGS, INC.
                       CONSOLIDATED STATEMENTS OF EARNINGS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                    FOR THE YEARS ENDED SEPTEMBER 30,
                                                              2002                 2001                 2000
                                                              ----                 ----                 ----
<S>                                                       <C>                  <C>                  <C>
Net sales                                                 $   165,606          $   174,923          $   164,550
Cost of sales                                                 113,324              122,235              115,199
                                                        -----------------    -----------------    -----------------
    GROSS MARGIN                                               52,282               52,688               49,351
                                                        -----------------    -----------------    -----------------

Operating expenses:
    Selling and advertising expense                            20,714               20,807               19,721
    General and administrative expense                         19,230               19,366               18,173
                                                        -----------------    -----------------    -----------------
           TOTAL OPERATING EXPENSES                            39,944               40,173               37,894
                                                        -----------------    -----------------    -----------------

           OPERATING INCOME                                    12,338               12,515               11,457

Interest expense                                                 (732)              (1,753)              (2,022)
Other income, net                                                 161                  139                   71
                                                        -----------------    -----------------    -----------------

           EARNINGS BEFORE INCOME TAXES
                AND THE CUMULATIVE EFFECT OF
                ACCOUNTING CHANGE                              11,767               10,901                9,506
                                                        -----------------    -----------------    -----------------

Income taxes (note 6):
    Current                                                     3,564                4,001                3,977
    Deferred                                                      361                 (323)                (487)
                                                        -----------------    -----------------    -----------------
           TOTAL INCOME TAXES                                   3,925                3,678                3,490
                                                        -----------------    -----------------    -----------------

Income before cumulative effect of
    accounting change                                           7,842                7,223                6,016
Cumulative effect of accounting change,
    net of income tax benefit of $0 (note 2)                   (1,215)                  --                   --
                                                        -----------------    -----------------    -----------------

           NET EARNINGS                                   $     6,627          $     7,223          $     6,016
                                                        =================    =================    =================

Earnings per common share
    Basic
       Income before cumulative effect of
           accounting change                              $      1.28          $      1.17          $     0.91
       Net income                                         $      1.09          $      1.17          $     0.91
    Diluted
       Income before cumulative effect of
           accounting change                              $      1.23          $      1.11          $     0.90
       Net income                                         $      1.04          $      1.11          $     0.90
</TABLE>

See accompanying notes to consolidated financial statements.

                                      -32-
<PAGE>

                            BHA GROUP HOLDINGS, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                   FOR THE YEARS ENDED SEPTEMBER 30,
                                                                2002             2001              2000
                                                                ----             ----              ----
<S>                                                           <C>              <C>               <C>
COMMON STOCK:
    Balance at beginning of year                              $        88      $        87       $      87
    Issuance of 71,058 shares of common stock in 2002,
       61,597 shares of common stock in 2001,
       and 6,915 shares in 2000                                         1                1              --
                                                            -------------    --------------    -------------
    BALANCE AT END OF YEAR                                             89               88              87
                                                            -------------    --------------    -------------
ADDITIONAL PAID-IN CAPITAL:
    Balance at beginning of year                                   62,536           61,854          61,792
    Excess over par value of common stock issued                      785              618              62
    Stock issued from treasury for stock option exercises            (299)            (194)             --
    Income tax benefit from stock option exercises                    147              258              --
                                                            -------------    --------------    -------------
    BALANCE AT END OF YEAR                                         63,169           62,536          61,854
                                                            -------------    --------------    -------------
RETAINED EARNINGS:
    Balance at beginning of year                                   34,916           28,440          23,219
    Net earnings                                                    6,627            7,223           6,016
    Payment of cash dividends on common stock                        (183)            (747)           (795)
                                                            -------------    --------------    -------------
    BALANCE AT END OF YEAR                                         41,360           34,916          28,440
                                                            -------------    --------------    -------------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
    Balance at beginning of year                                     (856)          (1,634)           (899)
    Equity adjustment from foreign currency
       translation and derivative instruments                         231              778            (735)
                                                            -------------    --------------    -------------
    BALANCE AT END OF YEAR                                           (625)            (856)         (1,634)
                                                            -------------    --------------    -------------

TREASURY STOCK:
    Balance at beginning of year                                  (35,550)         (28,940)        (25,303)
    Acquisition of 68,358, 485,287, and 398,084 shares in
       2002, 2001 and 2000, respectively                           (1,043)          (6,590)         (3,637)
    Issuance of 17,032 shares in 2002 and 15,422 shares
       in 2001 for stock option exercises, net                         41              (20)             --
                                                            -------------    --------------    -------------
    BALANCE AT END OF YEAR                                        (36,552)         (35,550)        (28,940)
                                                            -------------    --------------    -------------
           TOTAL SHAREHOLDERS' EQUITY                         $    67,441      $    61,134       $  59,807
                                                            =============    ==============    =============
</TABLE>

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  FOR THE YEARS ENDED SEPTEMBER 30,
                                                               2002              2001             2000
                                                               ----              ----             ----
<S>                                                          <C>               <C>              <C>
Net earnings                                                 $    6,627        $    7,223       $   6,016
Other comprehensive income:
    Foreign currency translation adjustments                        203               914            (735)
    Foreign exchange gains deferred on
       implementation of FAS 133                                     --               144              --
    Net change in foreign exchange gains (losses)
       deferred in accordance with FAS 133                           28              (280)             --
                                                           -------------     -------------    -------------
Comprehensive income                                         $    6,858        $    8,001       $   5,281
                                                           =============     =============    =============
</TABLE>


See accompanying notes to consolidated financial statements.

                                      -33-
<PAGE>

                            BHA GROUP HOLDINGS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                        2002           2001            2000
                                                                        ----           ----            ----
<S>                                                                    <C>           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net earnings                                                       $ 6,627       $ 7,223        $   6,016
    Adjustments to reconcile net earnings to net cash
       provided by operating activities:
           Depreciation and amortization                                 5,509         5,846            5,576
           Cumulative effect of an accounting change                     1,215            --               --
           Provision for deferred income taxes                            (568)         (257)             231
           Issuance of common stock to directors, officers
               and employees                                                90            88               62
           Reserve for loss on long-lived assets                           550            --               --

    Changes in assets and liabilities:
           Accounts receivable                                           1,166         1,766           (3,213)
           Inventories                                                  (1,094)        3,512            1,686
           Prepaid expenses                                                189            64             (506)
           Income taxes                                                     92          (619)             559
           Accounts payable                                              1,276        (1,411)           1,476
           Accrued expenses and other current liabilities                2,054           256            3,412
                                                                      ----------    -----------     -----------
       NET CASH PROVIDED BY OPERATING ACTIVITIES                        17,106        16,468           15,299
                                                                      ----------    -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Additions to property, plant and equipment                          (4,603)       (4,439)          (4,531)
    Net assets of businesses acquired                                     (622)           --               --
    Assets sold                                                             --            --            1,100
    Change in other assets and liabilities                                (513)           15             (341)
                                                                      ----------    -----------     -----------
       NET CASH USED IN INVESTING ACTIVITIES                            (5,738)       (4,424)          (3,772)
                                                                      ----------    -----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from issuance of common stock                                 696           531               --
    Payment of cash dividends on common stock                             (183)         (747)            (795)
    Purchase of treasury stock                                          (1,043)       (6,590)          (3,637)
    Stock option exercise - net payments                                  (111)           44               --
    Repayments of long-term obligations                                 (3,100)       (2,900)          (3,525)
    Borrowings (repayments) on lines of credit, net                     (3,551)        2,298              165
                                                                      ----------    -----------     -----------
       NET CASH USED IN FINANCING ACTIVITIES                            (7,292)       (7,364)          (7,792)
                                                                      ----------    -----------     -----------

Equity adjustment from foreign currency translation                        231           914             (735)
                                                                      ----------    -----------     -----------
    Net increase in cash and cash equivalents                            4,307         5,594            3,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                           9,471         3,877              877
                                                                      ----------    -----------     -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR                               $13,778      $  9,471         $  3,877
                                                                      ==========    ===========     ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
    Interest                                                           $   478       $ 1,764         $  2,105
    Income taxes                                                       $ 4,401       $ 4,554         $  2,699
</TABLE>

See accompanying notes to consolidated financial statements.

                                      -34-
<PAGE>

                            BHA GROUP HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     PRESENTATION
     The consolidated financial statements include the accounts of BHA Group
     Holdings, Inc. (BHA) and its wholly-owned foreign and domestic
     subsidiaries. All significant intercompany balances and transactions have
     been eliminated in consolidation.

     REVENUE RECOGNITION
     Sales of products are recognized when goods are shipped "free on board"
     (F.O.B.) from their shipping point and when all obligations of the Company
     have been met.

     The Company recognizes sales and gross profits on its services using the
     percentage of completion method based on total costs incurred as compared
     to the total estimated cost of the service contract. Substantially all
     projects are completed in less than 60 days from the date of commencement
     and the Company does not engage in any long-term contracts.

     In some instances, arrangements with customers involve multiple elements
     which are delivered at different points in time. These situations typically
     arise when the Company has delivered parts, but is also obligated to
     perform installation services or in instances where delivery of
     manufactured parts pursuant to an order are delivered over time, rather
     than at a single point in time. In determining the appropriate amount of
     revenue to be recognized, the Company evaluates whether the delivered
     elements have standalone value to the customer, whether the fair value of
     the undelivered elements is reliably determinable, whether delivery of the
     remaining elements is probable and within the Company's control. In
     instances where all of these conditions are satisfied, the Company
     recognizes revenue for the elements that have been delivered to the
     customer. In instances where one or more of these conditions have not been
     satisfied, the Company defers the recognition of revenue until all these
     conditions are satisfied or all elements have been delivered.

     The Company's service revenues generally result in gross margins as a
     percentage of sales that are lower than the consolidated gross margins by
     approximately 5% to 7%. Such revenues often represent the installation of
     the products that are also sold by the Company. Revenues generated by
     products and services were as follows (in thousands):

                          2002                  2001                 2000
                          ----                  ----                 ----
     Products            $137,394              $141,197              $137,958
     Services              28,212                33,726                26,592
                    -----------------     -----------------     ----------------
          Total          $165,606              $174,923              $164,550
                    =================     =================     ================

     SHIPPING AND HANDLING
     The Company has recognized, in the accompanying financial statements,
     freight which has been paid by the Company and invoiced to the customer
     ("prepay and add freight") as revenue and cost of sales. Previously, prepay
     and add freight billed to customers was netted with cost of sales. During
     the years ended September 30, 2002, 2001 and 2000, prepay and add freight
     billed by the Company was $3.4 million, $3.7 million

                                      -35-
<PAGE>

     and $3.5 million, respectively. In order to present the financial
     statements on a consistent basis, revenues and cost of sales were each
     increased for fiscal 2000 in the amount of $3.5 million.

     USES 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.

     INVENTORIES
     BHA values its inventory at the lower of cost or market. Cost is determined
     using the first-in, first-out (FIFO) method. Components of inventories at
     September 30, 2002 and 2001 were as follows:

          ($ IN THOUSANDS)           2002                2001
                               -----------------    ----------------
          Raw materials           $  13,203             $  15,593
          Work-in-process             1,720                   946
          Finished goods              9,318                 6,306
                               -----------------    ----------------
          TOTAL                   $  24,241             $  22,845
                               =================    ================

     PROPERTY, PLANT AND EQUIPMENT
     Property, plant and equipment are carried at cost. Major renewals and
     betterments are charged to the property accounts; replacements, maintenance
     and repairs that do not improve or extend the life of the respective assets
     are charged to expense as incurred.

     During fiscal 2002, the Company implemented an enterprise resource planning
     system. The Company accounted for the costs associated with this project in
     accordance with the AICPA Statement of Position 98-1.

     PROPERTY HELD UNDER CAPITAL LEASES
     The Company's BHA Technologies' facility in Lee's Summit, Missouri is
     subject to a capital lease related to an industrial revenue bond
     obligation. The assets held under this lease at September 30, 2002 and 2001
     were as follows (in thousands):

                                                       2002        2001
                                                    ---------   ---------
         Land                                       $     300   $     300
         Building                                       4,714       4,712
         Equipment                                      1,830       1,883
         Less accumulated amortization                 (1,486)     (1,065)
                                                    ---------   ---------
         PROPERTY HELD UNDER CAPITAL LEASES, NET    $   5,358   $   5,830
                                                    =========   =========

                                      -36-
<PAGE>

     DEPRECIATION AND AMORTIZATION
     Depreciation and amortization of property, plant and equipment are computed
     using the straight-line method with estimated useful lives by major asset
     class as follows:

          Buildings and improvements                            30 years
          Machinery and equipment                               4-8 years
          Office furniture, fixtures and equipment              3-10 years

     During fiscal 2002 and 2001, the Company recognized the retirement of $2.7
     million and $5.1 million in fully depreciated assets.

     INCOME TAXES
     Deferred tax assets and liabilities are recognized for the future tax
     consequences attributable to differences between the financial statement
     carrying amounts of existing assets and liabilities and their respective
     tax bases. Deferred tax assets and liabilities are measured using enacted
     tax rates expected to be recovered or settled. The effect on deferred tax
     assets and liabilities of a change in tax rates is recognized in earnings
     in the period that includes the enactment date.

     No provision is made for income taxes on undistributed earnings of the
     foreign subsidiaries because such earnings are considered permanently
     invested in the foreign subsidiaries.

     WARRANTY AND PRODUCT SERVICE
     BHA provides a reserve for estimated warranty and product service claims
     based on historical experience and consideration of changes in products,
     technology and warranty terms.

     FOREIGN CURRENCY TRANSLATION
     Financial statements of BHA's foreign subsidiaries are translated into U.S.
     dollars at current and average exchange rates. Translation gains and losses
     are included in other comprehensive income. Transaction gains and losses
     resulting from fluctuations in exchange rates between the functional
     currency (U.S. dollars) and the currency in which a foreign currency
     transaction is denominated are included in net earnings. Transaction gains
     (losses) included in the consolidated statements of earnings for 2002,
     2001, and 2000 amounted to ($362,000), $124,000, and ($354,000),
     respectively.

     ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
     The company has entered into forward exchange contracts with commercial
     banks in order to fix the currency exchange rate related to intercompany
     transactions with its foreign subsidiaries. Changes in the value of these
     instruments due to currency movements offset the foreign exchange gains and
     losses of the corresponding intercompany transactions which primarily
     relate to the purchases by the Company's European subsidiaries of inventory
     from their U. S. affiliates. In accordance with Statement of Financial
     Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments
     and Hedging Activities," these transactions have been determined to be
     effective hedges. The fair value of these contracts has been recognized in
     accrued liabilities in the consolidated balance sheet. The related gains
     and losses are deferred in shareowners' equity (as a component of
     comprehensive income). These deferred gains and losses are recognized in
     income in the period in which the related purchases being

                                      -37-
<PAGE>

     hedged are acquired. The notional amount of such contracts at September 30,
     2002 and 2001 was $1.4 million and $2.6 million, respectively, and the
     market value of these contracts was $108,000 and $136,000 lower than the
     face value at such dates. All of the deferred gains or losses under these
     contracts will be reclassified into net earnings within the next twelve
     months.

     COMPREHENSIVE INCOME
     Comprehensive income consists of net income, foreign currency translation
     adjustments, and changes in deferred gains and losses on foreign exchange
     contracts, and is presented in the Statement of Comprehensive Income.

     TREASURY STOCK
     The Board of Directors of BHA has periodically approved the purchase of
     shares of the Company's common stock. The total shares authorized for
     purchase is 3,500,000 of which approximately 2,549,000 have been purchased.
     The purchases of common stock are recorded at cost on the date of purchase.
     Issuance of common stock from the treasury is recorded at the average cost
     of common stock held in the treasury.

     EARNINGS PER COMMON SHARE
     Basic earnings per share is computed by dividing net earnings available to
     common shareholders by the weighted average number of common shares
     outstanding for the period. Diluted earnings per share is computed based
     upon the weighted average number of common shares and dilutive common
     equivalent shares outstanding. Stock options, which are common stock
     equivalents, that have an exercise price less than the average market price
     of the common shares, have a dilutive effect on earnings per share in all
     periods presented and are therefore included in the computation of diluted
     earnings per share. Stock options are described in Note 7. A reconciliation
     of the numerators and the denominators of the basic and diluted earnings
     per-share computations is as follows:

<TABLE>
<CAPTION>
                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA.)

                                       2002                            2001                             2000
                          ---------------------------------   ----------------------------------  ---------------------------------
                          Net Earnings   Shares   Per-Share   Net Earnings    Shares   Per-Share  Net Earnings   Shares   Per-Share
                           (Numerator)  (Denom.)    Amt.       (Numerator)   (Denom.)     Amt.     (Numerator)  (Denom.)     Amt.
                           -----------  --------    ----       -----------   --------     ----     -----------  --------     ----
<S>                          <C>          <C>      <C>            <C>          <C>        <C>         <C>         <C>        <C>
Basic earnings per share:
Earnings available to
common shareholders          $6,627       6,106    $1.09          $7,223       6,199      $1.17       $6,016      6,601      $0.91

Effect of dilutive
securities--stock options        --         293                       --         283                      --         71

Diluted earnings per
share:  Earnings
available to common
shareholders and assumed
conversion                   $6,627       6,399    $1.04          $7,223       6,482      $1.11       $6,016      6,672      $0.90
                          =================================   ==================================  =================================
</TABLE>

     Options to purchase 139,500 shares of common stock at prices ranging from
     $16.61 to $18.23 per share were outstanding at the end of 2002, but were
     not included in the computation of diluted earnings per share because the
     options' exercise price was greater than the average market price of the
     common shares. In 2001 and 2000, options to purchase 211,590 shares and
     849,252 shares, respectively, were similarly excluded from the calculation.

     IMPAIRMENT OF LONG-LIVED ASSETS
     Long-lived assets and certain identifiable intangibles are reviewed for
     impairment whenever events or changes in circumstances indicate that the
     carrying amount may not be recoverable. Recoverability of assets to be held
     and used is measured by comparison of the carrying amount of the asset to
     future net cash flows expected to be generated by the

                                      -38-
<PAGE>

     asset. If such assets are considered to be impaired, the impairment to be
     recognized is measured by the amount by which the carrying amount of the
     assets exceed the fair value of the assets. Assets to be disposed of are
     reported at the lower of the carrying amount or fair value less costs to
     sell. The Company's BHA Technologies segment has certain equipment that has
     been taken out of service. The Company is pursuing efforts to sell these
     assets. Based upon discussions with equipment dealers and the original
     vendors of such equipment, the Company has recorded these assets at their
     estimated net realizable value which was $740,000 at September 30, 2002.
     During fiscal 2002, the Company recognized $550,000 of expense to write
     such equipment down to its estimated net realizable value.

     STATEMENTS OF CASH FLOWS
     For purposes of the consolidated statements of cash flows, BHA considers
     overnight invested cash and investments in marketable securities, with
     maturities of three months or less to be cash equivalents.

     FAIR VALUE OF FINANCIAL INSTRUMENTS
     The carrying amounts of cash, accounts receivable and accounts payable
     approximate fair value because of the short maturities of these
     instruments. The fair value of long-term obligations are estimated by
     discounting future cash flows using current market rates. The carrying
     amounts of long-term debt and lease obligations approximate fair value at
     September 30, 2002.

2.   ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
     Statement of Financial Accounting Standard (SFAS) No. 142. "Accounting for
     Goodwill and Other Intangible Assets" was issued in July 2001 and has been
     adopted by the Company effective October 1, 2001. SFAS No. 142 requires
     that goodwill and intangible assets with indefinite useful lives no longer
     be amortized, but instead, such assets must be tested for impairment at
     least annually in accordance with the provisions of SFAS No. 142. This
     statement also requires that intangible assets with estimable useful lives
     be amortized over their respective estimated useful lives and reviewed for
     impairment in accordance with SFAS No. 144, Accounting for the Impairment
     or Disposal of Long-Lived Assets.

     Prior to the adoption of SFAS 142, the Company evaluated the recoverability
     of goodwill based upon undiscounted estimated future cash flows. In
     connection with the SFAS 142 transitional goodwill impairment evaluation,
     the Statement required that the Company perform an assessment of whether
     there was an indication that goodwill was impaired as of the date of
     adoption, using a fair value model. To accomplish this, the Company was
     required to identify its reporting units and to determine the carrying
     value of each reporting unit by assigning the assets and liabilities,
     including the existing goodwill and intangible assets, to those reporting
     units as of October 1, 2001. Based upon a discounted cash flow analysis,
     the Company concluded that the carrying value of its Europe APC reporting
     unit exceeded its fair value and as such the related goodwill was impaired.
     As a result, the Company recognized a charge of $1,215,000 during the
     quarter ending December 31, 2001, to write-off the goodwill of its Europe
     segment in its entirety. This write-off has been recognized as the
     cumulative effect of a change in accounting principle.

                                      -39-
<PAGE>

     The goodwill affected by this write-off related to two transactions, both
     of which were acquisitions of the common stock of the target companies. As
     such, there was no adjustment in the tax basis of the assets of such
     companies at the time of the acquisitions. Accordingly, no tax benefit can
     be recorded as a result of the write-off of the related goodwill.

     The remaining acquired intangible assets and goodwill of the Company as of
     September 30, 2002 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                        GROSS                   ACCUMULATED
                                                                   CARRYING AMOUNT              AMORTIZATION
                                                                   ---------------              ------------
<S>                                                                   <C>                       <C>
      Amortized Intangible Assets:
             Non-compete agreements                                   $    786                  $     354
             Patent rights                                               2,026                      1,518
             Customer lists and other                                      175                         29
                                                               ------------------------      -------------------
      Total                                                           $  2,987                  $   1,901
                                                               ========================      ===================

      Unamortized Intangible Assets:
             Trademark and Product Rights                             $  1,282
                                                               ========================

      Goodwill                                                        $  4,004
                                                               ========================
</TABLE>


     There were no changes in the carrying value of goodwill during fiscal 2002
     other than the impairment loss recognized upon implementation of SFAS No.
     142. All of the goodwill recorded on the balance sheet of the Company at
     September 30, 2002 relates to the Domestic APC segment.

     Amortization expense relative to acquired intangibles was $239,000 in
     fiscal 2002. Amortization of purchased intangibles with estimatable useful
     lives for each of the next five years is estimated as follows: 2003 -
     $230,000, 2004 - $223,000, 2005 - $223,000, 2006 - $223,000, and 2007 -
     $66,000.

     The following table presents net income for each period exclusive of
     amortization expense recognized in such periods related to goodwill and
     other intangible assets which will no longer be amortized. Also excluded is
     the loss reported as a cumulative effect of an accounting change resulting
     from the implementation of SFAS No. 142. Amounts are in thousands except
     per share information:

                                      -40-
<PAGE>

<TABLE>
<CAPTION>
                                                                     2002               2001               2000
                                                                     ----               ----               ----
<S>                                                               <C>                <C>                <C>
   PRO FORMA INFORMATION

   Net income as reported                                         $  6,627           $  7,223           $  6,016
   Add back:
        Cumulative effect of accounting change                    $  1,215                 --                 --
        Amortization of goodwill                                        --                220                220
        Amortization of trademark and product rights                    --                369                369
   Less tax effect of proforma adjustments                              --               (144)              (144)
                                                                ---------------    ---------------    ---------------
   Adjusted net income                                            $  7,842           $  7,668           $  6,461
                                                                ===============    ===============    ===============

   Diluted earnings per share:
        Net income as reported                                    $   1.04           $   1.11           $   0.90
        Cumulative effect of accounting change                         .19                 --                 --
        Amortization of goodwill, trademark and
            product rights, net of tax                                  --                .07                .07
                                                                ---------------    ---------------    ---------------
   Adjusted net income                                            $   1.23           $   1.18           $   0.97
                                                                ===============    ===============    ===============
</TABLE>


3.   ACQUISITIONS AND DISPOSITIONS OF ASSETS

     In November 2001, the Company acquired certain assets including inventory,
     equipment, customer lists, and other intangible assets of a fabric filter
     manufacturer in Mexico. The purchase price consisted of a cash payment in
     the amount of $622,000 together with the assumption of liabilities of
     approximately $150,000.

     In September 2000, BHA Technologies sold certain assets of its
     Allergydirect.com division to Salu, Inc. and simultaneously entered into a
     supply agreement through which BHA Technologies will supply bedding
     encasements with ePTFE membrane to Salu. Under the terms of the agreement,
     the Company received cash of $1.1 million together with warrants to
     purchase Salu stock and additional future consideration of up to $300,000
     contingent upon meeting volume targets. The value of the total
     consideration received in excess of net assets transferred is being
     recognized over the three-year term of the exclusive supply agreement.

     The proforma effect of these transactions are not material to the Company.

4.   NOTES PAYABLE TO BANKS AND LONG-TERM DEBT

     A summary of notes payable to banks and long-term debt at September 30,
     2002 and 2001 are as follows:

<TABLE>
<CAPTION>
     ($ IN THOUSANDS)                                                               2002           2001
                                                                                 -----------    ------------
<S>                                                                              <C>            <C>
     Unsecured domestic line of credit with variable interest rate               $      --      $   3,028
     Foreign line of credit with variable interest rate, secured by
          guarantees of U. S. affiliates                                             4,187          4,741
     Term loan payable to a domestic bank with variable interest rate                9,375         11,875
     Other notes payable                                                                92             61
     Less current installments                                                      (1,967)        (1,936)
                                                                                 -----------    ------------
     LONG-TERM DEBT, EXCLUDING CURRENT INSTALLMENTS                                $11,687        $17,769
                                                                                 ===========    ============
</TABLE>

                                      -41-
<PAGE>

     BHA has a domestic unsecured bank line of credit of $18,000,000, including
     approximately $3,000,000 which can be borrowed in foreign currencies, for
     working capital purposes, letters of credit and other corporate matters.
     This line of credit bears interest at variable rates based on either the
     prime rate, LIBOR or Euribor and expires in April 2004. This facility is a
     revolving credit agreement on which BHA pays a 0.25% commitment fee on the
     unused portion. At September 30, 2002, there were no borrowings under this
     revolving credit facility. At September 30, 2001, borrowings under this
     revolving credit facility were Euro 3,300,000 (USD 3,028,000) at an average
     interest rate of approximately 5.3%.

     BHA's German subsidiary maintains a foreign bank line of credit for
     borrowings in local currencies up to the U. S. equivalent of $6,000,000.
     This credit facility is secured by the guarantees of BHA Group Holdings,
     Inc. This facility is a revolving credit agreement on which the Company
     pays a 0.25% commitment fee on the unused portion. At September 30, 2002,
     borrowings under this revolving credit facility were Euro 4,268,000 (USD
     4,187,000) at an average interest rate of 5.26%. At September 30, 2001,
     borrowings under this revolving credit facility were Euro 5,168,000 (USD
     4,741,000) at an average interest rate of 6.25%.

     BHA's foreign subsidiary located in Switzerland maintains a line of credit
     with a foreign bank in the amount of CHF 600,000 (approximately USD 402,000
     at September 30, 2002). As of September 30, 2002 and 2001, there were no
     borrowings outstanding under this line of credit.

     In September 1999, BHA entered into a $15 million unsecured term loan, the
     proceeds of which were used to repay existing long-term debt and provide
     for general corporate matters. This term loan has a variable interest rate
     based on LIBOR (2.67% at September 30, 2002) and matures in October 2006.
     Quarterly principal payments are required in the amount of $625,000.

     At September 30, 2002, the Company had unused commitments under its bank
     facilities totaling approximately $19.8 million. The term loans and
     domestic bank line of credit require BHA, among other things, to maintain
     minimum levels of net worth, minimum fixed charge coverage, minimum current
     ratio, and maximum debt to cash flow ratio. BHA was in compliance with all
     covenants at September 30, 2002. Under the most restrictive of these
     covenants, at September 30, 2002, $17.1 million of retained earnings were
     available for cash dividends.

     Scheduled payments on long-term debt for the next five fiscal years are as
     follows:

                            YEAR               $ IN THOUSANDS
                    ---------------------      --------------------
                            2003                   $   1,967
                            2004                       6,687
                            2005                       2,500
                            2006                       2,500
                         Thereafter                       --
                                               --------------------
                                                   $  13,654
                                               ====================

                                      -42-
<PAGE>

5.   LEASES

     In December 1998, BHA Technologies, Inc., a wholly-owned subsidiary,
     entered into a capital lease in the form of a sale-leaseback transaction
     with the City of Lee's Summit, Missouri. In connection with this lease, the
     city issued tax-exempt Industrial Development Revenue Bonds ("Bonds")
     totaling $8,000,000 and placed the proceeds in a trust to fund future
     capital expenditures at the Lee's Summit manufacturing facility. BHA
     Technologies is obligated, through its lease, for the repayment of these
     bonds over the next 20 years. Annual lease payments of $400,000 commenced
     in December 1999. The interest rate on the tax-exempt Bonds is variable
     based on a weekly published index that is approximately 67% of LIBOR (1.80%
     as of September 30, 2002). As of September 30, 2002 and 2001, BHA
     Technologies had $0.1 million and $0.7 million, respectively in restricted
     cash held in trust for the exclusive use for qualified capital expenditures
     in Lee's Summit. The restricted cash is included in Intangible and Other
     Assets in the accompanying Consolidated Balance Sheets.

     The Company also enters into operating leases from time-to-time relative to
     its facilities, office equipment and manufacturing equipment.

     At September 30, 2002, future minimum lease payments for capital leases and
     for non-cancelable, long-term operating leases for the next five fiscal
     years were as follows (amounts in thousands):

                                             MINIMUM LEASE PAYMENTS
                   YEAR               CAPITAL LEASES         OPERATING LEASES
                   ----               --------------         ----------------
                   2003                    $    512               $  1,381
                   2004                         504                    786
                   2005                         497                    593
                   2006                         490                    527
                   2007                         483                     62
                Thereafter                    5,036                     --
                                           --------               --------
Total                                         7,522               $  3,349
                                                                  ========
Less imputed interest                           922
                                           --------
Present value of capital leases               6,600
Less current portion                            512
                                           --------
Obligations under capital leases,
     less current portion                  $  6,088
                                           ========


     Total rental expense on non-cancelable, long-term operating leases amounted
     to approximately $1,427,000, $1,776,000, and $1,855,000 for the years ended
     September 30, 2002, 2001, and 2000, respectively.

6.   INCOME TAXES

     The components of total income tax expense for the years ended September
     30, 2002, 2001, and 2000 are as follows:

                                      -43-
<PAGE>

<TABLE>
<CAPTION>
($ IN THOUSANDS)                                        2002            2001             2000
                                                    -------------    ------------    --------------
<S>                                                   <C>              <C>             <C>
Current income tax expense (benefit):
     Federal                                          $ 3,030          $ 3,175         $ 3,230
     Foreign                                              184              352             269
     State and local                                      350              474             478
Deferred income tax expense (benefit):
     Federal                                              325             (272)           (428)
     State                                                 36              (51)            (59)
                                                    -------------    ------------    --------------
                                                      $ 3,925          $ 3,678         $ 3,490
                                                    =============    ============    ==============
</TABLE>
     The effective tax rate differs from the expected tax rate for the
     respective years as follows:

<TABLE>
<CAPTION>
                                                        2002             2001             2000
                                                    -------------    -------------    -------------
<S>                                                   <C>              <C>              <C>
Expected income tax expense                            34.0%            34.0%            34.0%
State income taxes, net                                 2.4              2.6              2.9
Foreign subsidiaries                                   (1.8)            (2.0)             1.9
Research and experimentation credits                   (2.4)            (2.3)            (2.6)
Other, net                                              1.2              1.4               .5
                                                    -------------    -------------    -------------
   EFFECTIVE INCOME TAX RATE                           33.4%            33.7%            36.7%
                                                    =============    =============    =============
</TABLE>

     The tax effects of temporary differences that give rise to significant
     portions of the deferred tax assets and deferred tax liabilities at
     September 30, 2002 and 2001 are presented as follows:

<TABLE>
<CAPTION>
     ($ IN THOUSANDS)                                       2002                  2001
                                                       ----------------      ----------------
<S>                                                        <C>                   <C>
     Deferred tax assets:
          Reserves and accruals not
             currently deductible                          $  2,526              $  2,242
          Inventories                                           183                   336
          Other, net                                            770                   552
                                                       ----------------      ----------------
          Total gross deferred tax assets                     3,479                 3,130
                                                       ----------------      ----------------
     Deferred tax liabilities:
          Intangible and other assets                         1,323                   468
          Property, plant and equipment                         815                 1,304
          Prepaid expenses                                       61                    63
          Other, net                                             41                   624
                                                       ----------------      ----------------
          Total gross deferred tax liabilities                2,240                 2,459
                                                       ----------------      ----------------
          NET DEFERRED TAX ASSET                           $  1,239              $    671
                                                       ================      ================
</TABLE>

     At September 30, 2002 and 2001, deferred tax assets and liabilities are
     classified in the accompanying consolidated balance sheets as follows:

<TABLE>
<CAPTION>
     ($ IN THOUSANDS)                                            2002                 2001
                                                           -----------------     ----------------
<S>                                                            <C>                   <C>
     Current deferred income tax asset                         $  3,179              $  2,655
     Non-current deferred income tax liability                    1,940                 1,984
                                                           -----------------     ----------------
     NET DEFERRED TAX ASSET                                    $  1,239              $    671
                                                           =================     ================
</TABLE>

                                      -44-
<PAGE>

     BHA has not recorded a valuation allowance relating to deferred tax assets,
     as taxable temporary differences are expected to be offset by deductible
     temporary differences and future taxable income.

     BHA has not provided deferred taxes on the cumulative undistributed
     earnings of its foreign subsidiaries, which approximated $1,298,000 at
     September 30, 2002 and $106,000 at September 30, 2001 as management
     considers these earnings to be permanently invested. Net earnings (losses)
     of these foreign subsidiaries were approximately $1,112,000, $942,000, and
     $(167,000) for the years ended September 30, 2002, 2001, and 2000,
     respectively. During fiscal 2002 and 2001, the Company utilized foreign net
     operating loss carry-forwards ("NOLs") which had the effect of reducing
     income tax expense by approximately $230,000 and $53,000, respectively as
     compared to the expense that would have been incurred without the benefit
     of such foreign NOLs. As of September 30, 2002, foreign NOLs available for
     use in future periods total $2.6 million.

7.   INCENTIVE STOCK PLAN

     BHA has an incentive stock plan for key employees, officers and directors.
     The plan provides for 1,731,761 shares of common stock available for
     issuance of stock options, restricted stock and payment to outside
     directors in lieu of cash. Stock options are granted at a price equal to
     the fair market value of BHA Common Stock at the date of grant for terms of
     up to ten years.

     BHA accounts for its stock-based employee compensation plans pursuant to
     Statement of Financial Accounting Standard No. 123, "Accounting for
     Stock-Based Compensation" (SFAS 123). SFAS 123 establishes a fair
     value-based method of accounting. BHA has chosen to adopt the pro-forma
     disclosure requirements of SFAS 123, and continue to record stock
     compensation in accordance with Accounting Principles Board Opinion No. 25,
     "Accounting for Stock Issued to Employees" (APB 25), as amended, which is
     permitted under SFAS 123. Under APB 25 compensation expense is recorded on
     the date of grant for stock options granted only if the current market
     price of the underlying stock exceeds the exercise price.


                                      -45-
<PAGE>


       A summary of transactions in the incentive stock plan is as follows:

<TABLE>
<CAPTION>
                                      2002                           2001                            2000
                                          WEIGHTED-                       WEIGHTED-                       WEIGHTED-
                             NUMBER        AVERAGE          NUMBER         AVERAGE          NUMBER         AVERAGE
                            OF SHARES  EXERCISE PRICE      OF SHARES   EXERCISE PRICE      OF SHARES   EXERCISE PRICE
                           ----------------------------  ------------------------------  ------------------------------
<S>                          <C>            <C>            <C>              <C>            <C>              <C>
Outstanding at beginning
of year                      1,112,013      $11.19         1,273,569        $11.06         1,077,150        $11.35
  Granted                      154,000       16.53            31,500         13.12           197,750          9.48
  Expired                           --       --                   --           --                 --         --
  Canceled                      (9,000)      11.20           (41,000)        12.25            (1,331)        12.77
  Exercised                   (138,549)      10.04          (152,056)        10.52                --         --
                           --------------------------------------------------------------------------------------------
Outstanding at end of
year                         1,118,464      $12.08         1,112,013        $11.19         1,273,569        $11.06
                           ----------------------------  ------------------------------  ------------------------------
Exercisable at end of year     324,174      $  8.14          456,673        $ 8.59           396,317        $ 7.82
                           ============================  ==============================  ==============================
<CAPTION>
                           OPTIONS OUTSTANDING                                         OPTIONS EXERCISABLE
 -------------------------------------------------------------------------    --------------------------------------
                          NUMBER          WEIGHTED-         WEIGHTED-              NUMBER            WEIGHTED-
 RANGE OF EXERCISE     OUTSTANDING     AVG. CONTRACTED    AVG. EXERCISE          EXERCISABLE          AVERAGE
       PRICES           AT 9/30/02       LIFE IN YRS.         PRICE              AT 9/30/02        EXERCISE PRICE
 ------------------- ----------------- ----------------- -----------------    ------------------ -------------------
<S>                       <C>                <C>               <C>                 <C>                   <C>
  $ 6.20 - $10.47         508,374            3.80              8.64                318,124               8.00
  $12.06 - $18.23         610,090            5.56             14.96                  6,050              15.23
                     -----------------
                        1,118,464
                     =================
</TABLE>

     The per share weighted-average fair value of stock options granted during
     2002, 2001, and 2000 was $7.23, $5.80, and $4.03, respectively, on the date
     of grant using the Black Scholes option-pricing model with the following
     assumptions: expected dividend yield of 0.74% for 2002, 0.80% for 2001, and
     1.24% for 2000; weighted average risk-free interest rate of 3.88% for 2002,
     4.60% for 2001, and 5.80% for 2000; expected volatility factor of 35.79%,
     34.74%, and 32.36% for 2002, 2001, and 2000, respectively; and a
     weighted-average expected life of eight years.

     Since BHA applies APB 25 in accounting for its incentive stock plan, no
     compensation expense has been recognized for stock options in net earnings.
     Stock-based compensation expense, if recorded under SFAS No. 123 utilizing
     the Black Scholes option-pricing model, would have reduced net earnings by
     $533,000 or $0.08 per diluted share in 2002, $373,000 or $0.05 per diluted
     share in 2001, and $613,000 or $.09 per diluted share in 2000.

8.   COMMITMENTS AND CONTINGENT LIABILITIES

     EMPLOYEE BENEFIT PLANS
     BHA has a noncontributory Employee Stock Ownership Plan (ESOP) and a
     non-contributory Profit Sharing Plan. These plans include substantially all
     domestic employees. BHA, with approval of its Board of Directors, makes
     discretionary contributions to the ESOP and Profit Sharing Plans. Benefits
     become vested according to years of service. Contributions charged to
     operating expense were $1,208,000, $1,166,000, and $1,330,000 for the years
     ended September 30, 2002, 2001, and 2000, respectively.

     BHA's eligible domestic employees participate in a voluntary 401(k)
     employee benefit plan (401(k) Plan). For 2002, the Company matched 150% of
     a participant's contribution subject to a maximum contribution of $900 per
     employee. BHA matching contributions become vested based on years of
     service. BHA made matching contributions of $516,000, $557,000, and
     $462,000 for the years ended September 30, 2002, 2001, and 2000,
     respectively.

                                      -46-
<PAGE>

     LETTERS OF CREDIT
     The terms of certain contracts require that BHA issue standby letters of
     credit to assure performance. Open standby letters of credit amounted to
     $66,000 and $55,000 at September 30, 2002 and 2001, respectively.

     LITIGATION
     In the normal course of business, BHA is party to certain actions arising
     out of various allegations of product or professional liability. BHA has
     insurance coverage for substantially all such actions, subject to coverage
     limitations and deductibles for each claim. In the opinion of management,
     the amount of loss, if any, from the final outcome of these actions will
     not have a material adverse impact on the consolidated financial
     statements.

9.   BUSINESS SEGMENTS

     SEGMENT REPORTING
     BHA reports its operations as three business segments, Domestic Air
     Pollution Control (Domestic APC), Europe Air Pollution Control (Europe
     APC), and BHA Technologies. Domestic APC consists of the air pollution
     control products and services sold or managed from the United States. Such
     sales include shipments and services throughout North America, Latin
     America, Asia, and the Pacific Rim as such revenues are derived from BHA's
     U.S. based management group. The Europe APC segment represents sales of
     products and services managed from BHA's European manufacturing,
     distribution, and sales offices. BHA Europe generally services customers
     throughout Europe, as well as in Northern Africa. BHA Technologies supplies
     ePTFE membrane products for APC applications, primarily to BHA, and is also
     selling such products outside of the air pollution control market.

     The accounting policies for the segments are the same as those described in
     the summary of significant accounting policies. BHA manages these segments
     as strategic business units. Europe APC represents a distinct business unit
     as it maintains its own manufacturing, sales, marketing, and project
     management resources. Sales to other international locations are included
     in the Domestic APC business segment, as most or all of the key
     manufacturing, engineering, and sales support functions are performed from
     the United States. BHA Technologies operates as a distinct entity due to
     its unique technologies, as well as the marketing of products unrelated to
     air pollution control.

                                      -47-
<PAGE>

     Reportable segment data for the years ended September 30, 2002, 2001, and
     2000 were as follows:

     NET SALES

<TABLE>
<CAPTION>
         ($ IN THOUSANDS)            2002                   2001                  2000
                               ------------------     -----------------     -----------------
<S>                                  <C>                    <C>                   <C>
     Domestic APC                    $131,102               $142,421              $137,940
     Europe APC                        22,217                 21,693                20,056
     BHA Technologies                  12,287                 10,809                 6,554
                               ------------------     ---------------------------------------
     TOTAL                           $165,606               $174,923              $164,550
                               ==================     =================     =================
</TABLE>

     Net sales represent revenues from sales to unaffiliated customers.

     INTEREST EXPENSE

<TABLE>
<CAPTION>
         ($ IN THOUSANDS)            2002                   2001                  2000
                               ------------------     -----------------     -----------------
<S>                                    <C>                   <C>                   <C>
     Domestic APC                      $389                  $1,196                $1,328
     Europe APC                         236                     292                   222
     BHA Technologies                   107                     265                   472
                               ------------------     ---------------------------------------
     TOTAL                             $732                  $1,753                $2,022
                               ==================     =================     =================
</TABLE>

     EARNINGS (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING
     CHANGE

<TABLE>
<CAPTION>
         ($ IN THOUSANDS)            2002                   2001                  2000
                               ------------------     -----------------     -----------------
<S>                                  <C>                    <C>                   <C>
     Domestic APC                    $10,231                $10,363               $10,893
     Europe APC                          514                    737                  (761)
     BHA Technologies                  1,022                   (199)                 (626)
                               ------------------     ---------------------------------------
     TOTAL                           $11,767                $10,901              $  9,506
                               ==================     =================     =================
</TABLE>

     The aggregate amount of all corporate expenses is allocated to the three
     business segments based upon the judgment of management.

     ASSETS

<TABLE>
<CAPTION>
         ($ IN THOUSANDS)            2002                   2001                  2000
                               ------------------     -----------------     -----------------
<S>                                <C>                    <C>                   <C>
     Domestic APC                  $  56,257              $  55,560             $  63,502
     Europe APC                       15,918                 16,759                16,673
     BHA Technologies                 17,676                 17,581                18,932
     Corporate                        23,610                 21,262                13,125
                               ------------------     ---------------------------------------
     TOTAL                          $113,461               $111,162              $112,232
                               ==================     =================     =================
</TABLE>

                                      -48-
<PAGE>

     DEPRECIATION AND AMORTIZATION

<TABLE>
<CAPTION>
         ($ IN THOUSANDS)            2002                   2001                  2000
                               ------------------     -----------------     -----------------
<S>                                   <C>                    <C>                   <C>
     Domestic APC                     $1,848                 $2,765                $2,886
     Europe APC                          605                    473                   597
     BHA Technologies                  1,228                  1,166                   783
     Corporate                         1,828                  1,442                 1,310
                               ------------------     ---------------------------------------
     TOTAL                            $5,509                 $5,846                $5,576
                               ==================     =================     =================
</TABLE>

     CAPITAL EXPENDITURES

<TABLE>
<CAPTION>
         ($ IN THOUSANDS)            2002                   2001                  2000
                               ------------------     -----------------     -----------------
<S>                                  <C>                    <C>                   <C>
     Domestic APC                    $   457                $   421               $   208
     Europe APC                          267                    182                   424
     BHA Technologies                    269                    992                 2,711
     Corporate                         3,610                  2,844                 1,188
                               ------------------     ---------------------------------------
     TOTAL                            $4,603                 $4,439                $4,531
                               ==================     =================     =================
</TABLE>

     Certain corporate assets including the corporate headquarters, computer
     equipment and certain cash balances are not allocated to specific business
     segments and are thus included in the above tables of assets, depreciation
     and amortization, and capital expenditures as "Corporate."

     GEOGRAPHIC INFORMATION BY COUNTRY

     NET SALES

     The following table presents revenues by country based on the location of
     the use of the product or service. No single country, other than the United
     States, comprised more than 10% of BHA's net sales.

<TABLE>
<CAPTION>
         ($ IN THOUSANDS)            2002                   2001                  2000
                               ------------------     -----------------     -----------------
<S>                                 <C>                    <C>                   <C>
     United States                  $120,625               $127,948              $120,551
     All Other Countries              44,981                 46,975                43,999
                               ------------------     -----------------     -----------------
     TOTAL                          $165,606               $174,923              $164,550
                               ==================     =================     =================
</TABLE>

     LONG-LIVED ASSETS

     The following table presents all non-current tangible assets by country
     based on the location of the asset. No single country, other than the
     United States, comprised more than 10% of the Company's long-lived assets.

<TABLE>
<CAPTION>
         ($ IN THOUSANDS)            2002                   2001
                               ------------------     -----------------
<S>                                  <C>                    <C>
     United States                   $30,497                $32,055
     All Other Countries               4,472                  4,066
                               ------------------     -----------------
     TOTAL                           $34,969                $36,121
                               ==================     =================
</TABLE>

                                      -49-
<PAGE>

10.  QUARTERLY FINANCIAL DATA (UNAUDITED)

     Summarized quarterly financial data are as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED                                  DEC. 31         MARCH 31          JUNE 30         SEPT. 30
                                                --------------- ------------------ --------------- ----------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                  <C>              <C>               <C>              <C>
2002
Net sales                                            $40,913          $48,560           $41,048          $35,085
Gross margin                                          12,406           14,917            12,916           12,043
Earnings before cumulative effect
     of an accounting change                           1,684            2,681             2,067            1,410
Net earnings                                             469            2,681             2,067            1,410
Diluted earnings per share
     exclusive of cumulative effect of
     accounting change                               $  0.26          $  0.42           $  0.32          $  0.22
Diluted earnings per share                           $  0.07          $  0.42           $  0.32          $  0.22

Common Stock Price Range, High                       $ 15.75          $ 18.00           $ 18.85          $ 17.50
                          Low                        $ 13.50          $ 14.95           $ 15.59          $ 12.60

2001
Net sales                                            $44,351          $49,868           $41,930          $38,774
Gross margin                                          13,272           14,134            12,629           12,653
Net earnings                                           1,933            2,169             1,671            1,450
Diluted earnings per share                           $  0.29          $  0.34           $  0.26          $  0.23

Common Stock Price Range, High                       $ 17.19          $ 18.75           $ 17.75          $ 16.49
                          Low                        $ 12.25          $ 11.38           $ 13.05          $ 12.95
</TABLE>


                                      -50-
<PAGE>

                    BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                 Charged to
                                                               Beginning         Costs and                             Ending
                                                                Balance           Expenses         Deductions          Balance
<S>                                                      <C>                             <C>               <C>   <C>
ALLOWANCE FOR DOUBTFUL RECEIVABLES:
Year ended September 30, 2002                            $          1,385                649               415   $        1,619
                                                             ==============    ===============    ==============    ==============

Year ended September 30, 2001                            $          1,039                896               550   $        1,385
                                                             ==============    ===============    ==============    ==============

Year ended September 30, 2000                            $          1,238                341               540   $        1,039
                                                             ==============    ===============    ==============    ==============

RESERVE FOR WARRANTY AND PRODUCT SERVICE:
Year ended September 30, 2002                            $          2,867              1,056             1,035   $        2,888
                                                             ==============    ===============    ==============    ==============

Year ended September 30, 2001                            $          2,553              2,020             1,706   $        2,867
                                                             ==============    ===============    ==============    ==============

Year ended September 30, 2000                            $          1,414              2,724             1,585   $        2,553
                                                             ==============    ===============    ==============    ==============
</TABLE>


                                      -51-
<PAGE>

ITEM 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There were no disagreements with the Company's principal accountants, which
require disclosure pursuant to this item.

PART III

Items 10, 11, 12 and 13 of Part III are omitted by the Company in accordance
with General Instruction G to Form 10-K. The Company intends to file with the
Commission a definitive proxy statement pursuant to Regulation 14A not later
than 120 days following the close of its fiscal year ending September 30, 2002,
which is incorporated herein by reference.

ITEM 14 - CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934, as amended) as of a date (the "Evaluation Date") within 90 days before the
filing date of this annual report, have concluded that the Company's disclosure
controls and procedures are effective in ensuring that material information
required to be disclosed is included in the report that it files with the
Securities and Exchange Commission.

CHANGES IN INTERNAL CONTROLS

There were no significant changes in the Company's internal controls or, to the
knowledge of the management of the Company, in other factors that could
significantly affect these controls subsequent to the Evaluation Date.

PART IV

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

(a) (1)  Financial Statements: See accompanying Index to Consolidated Financial
         Statements and Schedules.

(a) (2)  Financial Statement Schedules: See accompanying Index to Consolidated
         Financial Statements and Schedules. All schedules not listed have been
         omitted because they are not applicable or the information has been
         otherwise supplied in the Registrant's Financial Statements and
         Schedules.

(a) (3)  Exhibits:

         (3a)    Certificate of Incorporation, as amended (7).

         (3b)    By-Laws, as amended (6).

         (10a)   BHA Group, Inc. 1986 Stock Option Plan as amended, including
                 form of Option Agreement (2).

                                      -52-
<PAGE>

         (10b)   Second Amendment to the BHA Group, Inc. 1986 Stock Option Plan
                 (3).

         (10c)   Employee Stock Ownership Plan of BHA as amended on May 1, 2000
                 (9).

         (10d)   401(K) Plan of BHA (1).

         (10e)   Employment Agreement dated February 1, 2000 between BHA Group,
                 Inc. and Lamson Rheinfrank, Jr. (4).

         (10f)   Employment Agreement dated February 1, 2000 between BHA Group,
                 Inc. and James E. Lund (4).

         (10g)   Employment Agreement dated February 1, 2000 between BHA Group,
                 Inc. and James J. Thome (4).

         (10h)   Employment Agreement dated February 1, 2000 between BHA Group,
                 Inc. and James C. Shay (4).

         (10i)   Rights Agreement dated as of December 13, 1995, between BHA
                 Group, Inc., and Boatmen's Trust Company, including Form of
                 Rights Certificate (Exhibit A) and Summary of Rights to
                 Purchase Common Stock (Exhibit B) (5).

         (10j)   $15,000,000 Term Loan Agreement between BHA Group Holdings,
                 Inc. and Commerce Bank N.A. dated as of September 20, 1999 (8).

         (10k)   $18,000,000 Amended and Restated Credit Agreement between BHA
                 Group Holdings, Inc. and Bank of America, N.A. dated as of May
                 7, 2001 (10).

         (10l)   Amended Exhibit 4.1 (effective as of September 17, 2002), to
                 Employment Agreement between BHA Group Holdings, Inc. and
                 Lamson Rheinfrank, Jr. (11).

         (10m)   Amended Exhibit 4.1 (effective as of September 17, 2002), to
                 Employment Agreement between BHA Group Holdings, Inc. and James
                 E. Lund (11).

         (10n)   Amended Exhibit 4.1 (effective as of September 17, 2002), to
                 Employment Agreement between BHA Group Holdings, Inc. and James
                 J. Thome (11).

         (10o)   Amended Exhibit 4.1 (effective as of September 17, 2002), to
                 Employment Agreement between BHA Group Holdings, Inc. and James
                 C. Shay (11).

         (21)    Subsidiaries of the Registrant (11).

         (23)    Independent Auditors' Consent (11).

         (99.1)  Certification of Chief Executive Officer pursuant to Section
                 906 of the Sarbanes-Oxley Act of 2002 (11).

         (99.2)  Certification of Chief Financial Officer pursuant to Section
                 906 of the Sarbanes-Oxley Act of 2002 (11).

(b)      Reports on Form 8-K: No reports on Form 8-K were filed by the Company
         during the quarter ended September 30, 2002.

(c)      Exhibits: See (a) (3) above.

(d)      Financial Statement Schedules: See (a) (2) above.

                                      -53-
<PAGE>

NOTES TO INDEX

(1)      Filed as an exhibit to the Company's Registration Statement on Form
         S-1, as amended (Registration No. 33-8644) which exhibit is
         incorporated herein by reference.

(2)      Filed as an exhibit to the Company's Annual Report on Form 10-K for the
         fiscal year ended September 30, 1990, which exhibit is incorporated
         herein by reference.

(3)      Filed as an exhibit to the Company's Annual Report on Form 10-K for the
         fiscal year ended September 30, 1992, which exhibit is incorporated
         herein by reference.

(4)      Filed as an exhibit to the Company's Form 10-Q for the quarter ended
         March 31, 2000, which exhibit is incorporated herein by reference.

(5)      Filed as an exhibit to the Company Current Report on Form 8-K filed
         with the Securities and Exchange Commission on December 15, 1995, which
         exhibit is incorporated herein by reference.

(6)      Filed as an exhibit to the Company's Annual Report on Form 10-K for the
         fiscal year ended September 30, 1995, which exhibit is incorporated
         herein by reference.

(7)      Filed as an exhibit to the Company's Annual Report on Form 10-K for the
         fiscal year ended September 30, 1996, which exhibit is incorporated
         herein by reference.

(8)      Filed as an exhibit to the Company's Annual Report on Form 10-K for the
         fiscal year ended September 30, 1999, which exhibit is incorporated
         herein by reference.

(9)      Filed as an exhibit to the Company's Annual Report on Form 10-K for the
         fiscal year ended September 30, 2000, which exhibit is incorporated
         herein by reference.

(10)     Filed as an exhibit to the Company's Annual Report on Form 10-K for the
         fiscal year ended September 30, 2001, which exhibit is incorporated
         herein by reference.

(11)     Filed as an exhibit hereto.

                                      -54-
<PAGE>
                                 CERTIFICATIONS

I, James E. Lund, certify that:

1.   I have reviewed this annual report on Form 10-K of BHA Group Holdings,
     Inc.;

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

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

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

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

     b)  evaluated the effectiveness of the registrant's disclosure controls and
         procedures as of a date within 90 days prior to the filing date of this
         annual report (the "Evaluation Date"); and

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

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

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

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

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


DATED:  November 6, 2002                           /s/ James E. Lund
                                                   -----------------
                                                   James E. Lund,
                                                   President

                                      -55-
<PAGE>

I, James C. Shay, certify that:

1.   I have reviewed this annual report on Form 10-K of BHA Group Holdings,
     Inc.;

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

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

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

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

     b)  evaluated the effectiveness of the registrant's disclosure controls and
         procedures as of a date within 90 days prior to the filing date of this
         annual report (the "Evaluation Date"); and

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

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

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

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

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


DATED:  November 6, 2002                         /s/ James C. Shay
                                                 -----------------
                                                 James C. Shay,
                                                 Senior Vice President,
                                                 Finance and Administration

                                      -56-
<PAGE>

                                   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.

                            BHA GROUP HOLDINGS, INC.

Dated: November 6, 2002            By: /s/ James E. Lund
                                       -----------------------------------------
                                       James E. Lund, President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person on behalf of the Registrant and in
the capacities and on the dates indicated.

Dated: November 6, 2002            By: /s/ James E. Lund
                                       -----------------------------------------
                                       James E. Lund, President
                                       Principal Executive Officer and Director

Dated: November 6, 2002            By: /s/ Lamson Rheinfrank, Jr.
                                       -----------------------------------------
                                       Lamson Rheinfrank, Jr.
                                       Chairman of the Board

Dated: November 6, 2002            By: /s/ Don H. Alexander
                                       -----------------------------------------
                                       Don H. Alexander
                                       Director

Dated: November 6, 2002            By: /s/ Robert Freeland
                                       -----------------------------------------
                                       Robert Freeland
                                       Director

Dated: November 6, 2002            By: /s/ Thomas A. McDonnell
                                       -----------------------------------------
                                       Thomas A. McDonnell
                                       Director

Dated: November 6, 2002            By: /s/ James J. Thome
                                       -----------------------------------------
                                       James J. Thome
                                       Executive Vice President,
                                       Principal Operating Officer and Director

Dated: November 6, 2002            By: /s/ Richard C. Green, Jr.
                                       -----------------------------------------
                                       Richard C. Green, Jr.
                                       Director

Dated: November 6, 2002            By: /s/ James C. Shay
                                       -----------------------------------------
                                       James C. Shay
                                       Senior Vice President, Finance and
                                       Administration, Principal Financial &
                                       Accounting Officer

                                      -57-
<PAGE>

                            BHA GROUP HOLDINGS, INC.
                                  EXHIBIT INDEX


     EXHIBIT NO.                         DESCRIPTION

         10l            Amended Exhibit 4.1 (effective as of September 17,
                        2002), to Employment Agreement between BHA Group
                        Holdings, Inc. and Lamson Rheinfrank, Jr.

         10m            Amended Exhibit 4.1 (effective as of September 17,
                        2002), to Employment Agreement between BHA Group
                        Holdings, Inc. and James E. Lund

         10n            Amended Exhibit 4.1 (effective as of September 17,
                        2002), to Employment Agreement between BHA Group
                        Holdings, Inc. and James J. Thome

         10o            Amended Exhibit 4.1 (effective as of September 17,
                        2002), to Employment Agreement between BHA Group
                        Holdings, Inc. and James C. Shay

          21            Subsidiaries of BHA Group Holdings, Inc.

          23            Independent Auditors' Report

         99.1           Certification of Chief Executive Officer pursuant to
                        Section 906 of the Sarbanes-Oxley Act of 2002

         99.2           Certification of Chief Financial Officer pursuant to
                        Section 906 of the Sarbanes-Oxley Act of 2002


                                      -58-