KEITHLEY INSTRUMENTS INC - 10-K Annual Report

Back to GetFilings.com

1
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 fiscal year ended, SEPTEMBER 30, 1999 Commission file number 1-9965
------------------ ---------

KEITHLEY INSTRUMENTS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

OHIO 34-0794417
- ---------------------------------------- ------------------------------------
(State of incorporation or organization) (I.R.S. Employer Identification No.)

28775 AURORA ROAD, SOLON, OHIO 44139
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (440) 248-0400
--------------

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

COMMON SHARES, WITHOUT PAR VALUE NEW YORK STOCK EXCHANGE
- ---------------------------------------- --------------------------------------
(Title of each class) (Name of exchange on which registered)

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

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

As of December 14, 1999 there were outstanding 4,354,386 Common Shares, without
par value, and 2,692,028 Class B Common Shares, without par value. At that date,
the aggregate market value of the Common Shares of the Registrant held by
non-affiliates was $71,394,046 and the aggregate market value of the Class B
Common Shares of the Registrant held by non-affiliates was $748,040 for a total
aggregate market value of all classes of Common Shares held by non-affiliates of
$72,142,086. While the Class B Common Shares are not listed for public trading
on any exchange or market system, shares of that class are convertible into
Common Shares at any time on a share-for-share basis. The market values
indicated were calculated based upon the last sale price of the Common Shares as
reported by the New York Stock Exchange on December 14, 1999, which was $17.625.
For purposes of this information, the 303,660 Common Shares and 2,649,586 Class
B Common Shares which were held by the officers and Directors of the Company
were deemed to be voting stock held by affiliates.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the registrant's Annual Meeting
to Shareholders to be held on February 12, 2000 (the "2000 Annual Meeting") are
incorporated by reference in Part III in this Annual Report on Form 10-K (this
"Annual Report") and are identified under the appropriate items in this Annual
Report.

2

KEITHLEY INSTRUMENTS, INC.

10-K ANNUAL REPORT

TABLE OF CONTENTS

PART I: PAGE
----

Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7

PART II:

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk 17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17

PART III.

Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and
Management 18
Item 13. Certain Relationships and Related Transactions 18

PART IV:

Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 19

3

PART I.

ITEM 1 - BUSINESS.
--------

General
- -------

Keithley Instruments, Inc. is a corporation that was founded in 1946
and organized under the laws of the State of Ohio on October 1, 1955. Its
principal executive offices are located at 28775 Aurora Road, Solon, Ohio 44139;
telephone (440) 248-0400. References herein to the "Company" or "Keithley" are
to Keithley Instruments, Inc. and its subsidiaries unless the context indicates
otherwise.

Keithley's business is to develop, manufacture and sell measurement
systems geared to the specialized needs of electronics manufacturers for
high-performance production testing, process monitoring, product development and
research. The Company's primary products are computer-based systems or employ
computer technology for control, data storage, display or analysis purposes. The
Company's customers are engineers, technicians and scientists engaged in
manufacturing, product development and research functions within a range of
industries. Although the Company's products vary in capability, sophistication,
use, size and price, they generally test, measure, and analyze electrical and
physical properties. As such, the Company considers its business to be in a
single industry segment.

Strategy of Focus
- -----------------

Several years ago, the Company formulated a strategy to focus its
product and market development efforts toward growing markets including the
telecommunications, semiconductor, automotive and the electronic components
industries, and basic and applied research. In July of fiscal 1998 and November
of fiscal 1999, the Company sold two businesses which no longer fit this core
strategy. By pruning the organization of these non-strategic businesses, the
Company was better able to leverage resources and greatly improve the quality of
earnings.

The Company's strategy for sales growth consists of a few key points.
First, the Company has focused its efforts on identifying specific production
test applications within the targeted industries mentioned above. The Company
works closely with customers in these industries not only to determine what
their measurement needs are today, but also what their new emerging needs might
be. A thorough understanding of their applications coupled with the Company's
precision measurement technology enables us to add value to our customers'
processes; improving the quality, throughput and yield of their products.
Forming consultative relationships with customers where the Company can add
value is a key part of the strategy. Additionally, the Company recognizes the
importance of our traditional research customers. Whether they are doing basic
or applied research in a university or an industrial laboratory, these customers
give the Company a first-hand look at new industry trends and technologies, as
well as establish relationships that last a career.

Second, sales growth also requires a steady stream of innovative new
products. These products may be designed for very specific production test
applications driven by the target industry approach discussed above, or may be
used in applications that cross over a variety of industries. The Company refers
to its products as "computer-based solutions" because

1
4

regardless of the form factor, they are designed for usage with industry-leading
computer hardware and software. The Company utilizes open-architecture software
based-on Microsoft's(TM) Component Object Model technology, thus drastically
decreasing the start-up time for customers. By continuing to develop new
software and computer-based solutions, the Company believes it can capture a
greater share of purchases from the broader segments of the overall test and
measurement market.

Third, with the growth in popularity of the Internet and expanding role
of E-commerce, there is a greater opportunity to offer the Company's production
test applications knowledge to a wider range of its customers and prospects
worldwide. The Company's web site, www.keithley.com, is globally accessible 24
hours a day, and is an excellent, cost effective way to interact with current
and potential customers. Additionally, advances in database management allow the
Company to do a better job of reaching those people who are more likely to
benefit from its product offerings.

Product Offerings
- -----------------

The Company has more than 1,000 products that basically test, measure,
and analyze electrical and physical properties. The products come in three basic
form factors: benchtop instruments, PC plug in boards and integrated measurement
solution systems. Benchtop instruments generally range in price from $1,000 to
$10,000 and PC plug-in boards generally range in price from $100 to $4,000. The
price of the Company's integrated measurement solution systems is dependent upon
the type of system purchased and can range from $10,000 to $400,000.

The major specific product groups are described below:

DIGITAL MULTIMETERS. This product line includes a range of
instruments that are designed to cover measurements of voltage,
resistance, current and temperature for production test, design and
development, and research applications. Each digital multimeter has
a computer interface for integration into automated test and
measurement systems. Typical applications include testing
electrical components such as resistors and thermistors, and end
products which include cellular telephones, computer disk drives,
and pace makers. These products are marketed primarily through
direct marketing and personal selling.

SENSITIVE INSTRUMENTS. This product group includes electrometers,
picoammeters, sensitive digital voltmeters, micro-ohmmeters, and
certain other instruments which are distinguished by their extreme
sensitivity, resolution and accuracy as compared to the
capabilities of conventional meters. Sensitive instruments are used
by scientists, engineers, and researchers for the study of
materials, semiconductors, and superconductors. Typical customers
are industrial and government research laboratories, educational
institutions, and electronics manufacturers. These products are
marketed primarily through direct marketing and catalog mailings.

SWITCHES AND SOURCES. Switching instruments are used to route
electrical signals in test systems to measurement and source
instrumentation. This allows many devices or test points to be
measured with a minimum number of instruments. Switch

2
5

products together with Sensitive, Digital Multimeter, Source, I-V
and C-V instruments can be integrated into computer-based systems
to provide flexible, automated testing and measurement. The
switching product line allows Keithley to provide a complete
measurement solution to customers in production test,
semi-conductor characterization, and materials research
applications.

Sources generate the precise voltage and currents needed to test
electronic devices and investigate properties of materials. Source
products are sold to scientists and engineers in research,
semiconductor and electronic manufacturing markets, especially
where stable signals of low level current and voltage are needed.
These sources can be interfaced with computers as part of an
automated test system, or used manually on the laboratory bench.
Switches and Sources are marketed primarily through personal
selling.

PLUG-IN BOARDS. The qualities of these boards include data
acquisition capabilities in the form of a board that is installed
into a slot of the computer, boards that essentially contain an
instrument allowing benchtop engineering and automatic production
testing through an expansion slot of almost any personal computer,
and IEEE-488 bus interfaces and software for interfacing computers
with programmable measurement instrumentation. The boards are
marketed worldwide to researchers and scientists engaged in
laboratory automation and experimentation, engineers involved with
process control and data collection applications, and machine
builders and systems integrators involved in production test
applications. These products are marketed primarily through direct
marketing, catalog mailings, and personal selling.

APT PRODUCTS. The Company is one of the leading suppliers of
automated parametric test systems (APT) for semiconductor
production applications. In production, the systems allow
manufacturers to monitor quality control parameters during
fabrication of integrated circuits to improve manufacturing yields.
In research, the systems are used to analyze the characteristics of
semiconductor materials in the development of integrated circuit
devices. The systems can also be used to develop integrated circuit
manufacturing processes. A typical system incorporates Keithley
instrumentation and software, and computer hardware manufactured by
others. The system's major components are integrated, and in most
cases, customized to customer specification. The systems can also
incorporate wafer test structures used for determining the
reliability of semiconductor devices at various stages of
manufacturing. These test structures allow the Company's APT
systems to determine the quality of both the wafer and the
manufacturing process much earlier than with previous test methods.
Installation and servicing of the equipment and software, and
customer training are also provided. Selling prices for these
products generally range from $125,000 to $400,000.

C-V (CAPACITANCE VERSUS VOLTAGE). C-V systems include
high-frequency and quasistatic C-V meters, measurement and analysis
software, and computer-based test systems. C-V products are used by
scientists and engineers in semiconductor development and
manufacturing facilities, industrial and governmental research
laboratories, and educational institutions to research, develop,
and characterize semiconductor devices, materials and manufacturing
processes.

3
6

AGENCY PRODUCTS. The Company markets and distributes certain
hardware and software products manufactured by other test and
measurement companies. These agency products can be combined with
other Company products to meet a wide range of application needs.
The agency products are complementary to, but not competitive with,
products manufactured by the Company.

New Products During Fiscal Year 1999
- ------------------------------------

The Company has shifted its new product development process from a
product focus to a market focus. Several new products were introduced for
specific targeted markets during fiscal 1999 including the following:

The Model 6514 Electrometer was created through a long-standing
relationship with the Company's important research customers. This customer
group required an electrometer that offered a much more cost-effective means of
making fast, low-current measurements. The Model 2430 was developed for
production testing of active or passive components for targeted electronic
component customers. The area of telecommunications is one of the Company's
fastest growing markets and the Model 2306 Battery Simulator/Charger designed to
accurately simulate the performance of wireless devices under battery control
was introduced to serve those customers. The newest product addition for the
telecommunications area is System 41 Microwave Switching which allows RF
switching and signal routing over a higher bandwidth and provides more data
carrying capability. The Model 5201 Universal Serial Bus-Based Data Acquisition
System was designed for invehicle development test applications for the
automotive industry. New product offerings directed for the semiconductor
industry include the Model S630 APT System, the latest in the Company's award
winning S600 series. Additional introductions included the new Wafer Level
Reliability (WLR) Software Toolkit that provides semiconductor fabs with a solid
foundation for implementing a WLR monitoring program, and upgraded KTE
application software for the Company's APT systems that permits customers to
decrease their software development time. The Company also introduced new,
latest-technology versions of PCI plug-in data acquisition boards for those
customers with high performance requirements that demand this method of
measurement.

A key customer requirement for all the measurement alternatives that
the Company offers is ease of installation and usage, and that requires
cost-effective software. During the course of 1999, the Company introduced new
32-bit DriverLINX(R) software drivers. This software will gives customers a
hardware independent way to write their software and makes it easier for them to
migrate to the Company's future hardware. Customers also can take advantage of
standard Microsoft Windows 95/NT, visual basic and Active X Controls available
through Windows. The Company's data acquisition boards also include LabVIEW(TM)
VIs which allow usage with LabVIEW, a proprietary closed software environment
that is commonly used in the data acquisition industry.

4
7

Geographic Markets and Distribution
- -----------------------------------

During fiscal 1999, all of the Company's products were manufactured in
Ohio and were sold throughout the world in over 80 countries. The Company's
principal markets are the United States, Europe and the Pacific Basin.

In the United States, the Company's products are sold by the Company's
sales personnel, independent sales representatives and through direct marketing
and catalog mailings. United States sales offices are located in Solon, Ohio and
Santa Clara, California. The Company markets its products directly in countries
in which it has a sales office and through distributors in other countries.
European subsidiaries have sales and service offices located in or near London,
Munich, Paris, Amsterdam, Zurich and Milan. The Company also has sales offices
in Belgium, China, Taiwan and India. Sales in markets outside the above named
locations are made through independent sales representatives and distributors.

Sources and Availability of Raw Materials
- -----------------------------------------

The Company's products require a wide variety of electronic and
mechanical components, most of which are purchased. The Company has multiple
sources for the vast majority of the components and materials it uses; however,
there are some instances where the components are obtained from a sole-source
supplier. If a sole-source supplier ceased to deliver, the Company could
experience a temporary adverse impact on its operations; however, management
believes alternative sources could be developed quickly. Although shortages of
purchased materials and components have been experienced from time to time,
these items have generally been available to the Company as needed.

Patents
- -------

Electronic instruments of the nature the Company designs, develops and
manufactures cannot generally be patented in their entirety. Although the
Company holds patents with respect to certain of its products, it does not
believe that its business is dependent to any material extent upon any single
patent or group of patents, because of the rapid rate of technological change in
the industry.

Seasonal Trends and Working Capital Requirements
- ------------------------------------------------

Although the Company is not subject to significant seasonal trends, its
business is cyclical and is somewhat dependent upon the semiconductor industry
in particular. The Company does not have any unusual working capital
requirements.

Customers
- ---------

The Company's customers generally are involved in engineering research
and development, product testing, electronic service or repair, and educational
and governmental research. During the fiscal year ended September 30, 1999 no
one customer accounted for more than 10% of the Company's sales. Management
believes that the loss of any one of its customers would not materially affect
the sales or net income of the Company.

5
8
Backlog
- -------

The Company's backlog of unfilled orders amounted to approximately
$19,341,000 as of September 30, 1999 and approximately $9,049,000 as of
September 30, 1998. Included in the backlog at September 30, 1998 is $3,015,000
for products relating to the Quantox business which was sold in November 1998.
It is expected that the majority of the orders included in the 1999 backlog will
be delivered during fiscal 2000; however, the Company's past experience
indicates that a small portion of orders included in the backlog may be
canceled.

Competition
- -----------

The Company competes on the basis of quality, performance, service,
warranty and price, with quality and performance frequently being dominant.
There are many firms in the world engaged in the manufacture of electronic
measurement instruments, some of which are larger and have greater financial
resources than the Company. The Company's competitors vary between product lines
and certain manufacturers compete with the Company in multiple product lines.
The Company's principal competitors are Agilent Technologies, Inc. and National
Instruments, Inc.

Research and Development
- ------------------------

The Company's engineering development activities are directed toward
the development of new products that will complement, replace or add to the
products currently included in the Company's product line. The Company does not
perform basic research, but on an ongoing basis utilizes new component and
software technologies in the development of its products. The highly technical
nature of the Company's products and the rapid rate of technological change in
the industry require a large and continuing commitment to engineering
development efforts. Product development expenses were $10,745,000 in 1999,
$13,139,000 in 1998 and $17,233,000 in 1997, or approximately 11%, 11% and 14%
of net sales, respectively, for each of the last three fiscal years.

Government Regulations
- ----------------------

The Company believes that its current operations and its current uses
of property, plant and equipment conform in all material respects to applicable
laws and regulations. The Company has not experienced, nor does it anticipate,
any material claim or material capital expenditure in connection with
environmental laws and other regulations.

Employees
- ---------

As of September 30, 1999, the Company employed 526 persons, 109 of whom
were located outside the United States. None of the Company's employees are
covered under the terms of a collective bargaining agreement and the Company
believes that relations with its employees are good.

6
9

Foreign Operations and Export Sales
- -----------------------------------

Information related to foreign and domestic operations and export sales
is contained in Note K of the Notes to the Consolidated Financial Statements
included in a separate section at the end of this Form 10-K Annual Report.

The Company has significant revenues from outside the United States
which increase the complexity and risk to the Company. These risks include
increased exposure to the risk of foreign currency fluctuations and the
potential economic and political impacts from conducting business in foreign
countries. With the exception of changes in the value of foreign currencies,
which is not possible to predict, the Company believes that its foreign
subsidiaries and other larger international markets are in countries where the
economic and political climate is generally stable.

ITEM 2 - PROPERTIES.
----------

The Company's principal administrative, sales, marketing, manufacturing
and development activities are conducted at two Company-owned buildings in
Solon, Ohio. The two buildings total approximately 200,000 square feet and sit
on approximately 33 acres of land. The Company also owns another 50,000 square
foot building on 5.5 acres of land adjacent to its executive offices. This
facility is current being leased to others, but is available for expansion
should the Company require additional space. The Company also maintains a number
of sales and service offices in the United States and overseas. The Company
believes that the facilities it owns and leases by it are well maintained,
adequately insured and suitable for their present and intended uses.

ITEM 3 - LEGAL PROCEEDINGS.
-----------------

The Company is not a party to any material litigation.

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

Not applicable.

7
10

EXECUTIVE OFFICERS OF THE REGISTRANT:
- -------------------------------------

The description of executive officers is included pursuant to
Instruction 3 to Section (b) of Item 401 of Regulation S-K under the Securities
and Exchange Act of 1934.

The following table sets forth the names of all executive officers of
the Company and certain other information relating to their position held with
the Company and other business experience.

Executive Officer Age Recent Business Experience
- ----------------- --- --------------------------

Joseph P. Keithley 51 Chairman of the Board of Directors since 1991, Chief
Executive Officer since November 1993 and President
since May 1994.

Philip R. Etsler 49 Vice President Human Resources of the Company since
1990.

John M. Gherlein 44 Secretary of the Company since July 1999; partner in
the law firm of Baker & Hostetler LLP from 1990 to
present.

David H. Patricy 50 Vice President and General Manager of Test and
Measurement of the Company since 1997. Previously
General Manager of the Instrument Division from 1994
to 1997.

Mark J. Plush 50 Vice President and Chief Financial Officer of the
Company since October 1998. Previously, Controller
since 1982 and an Officer of the Company since 1989.

Gabriel A. Rosica 59 Senior Vice President and General Manager of
Semiconductor since February 1996. Previously Chief
Operating Officer of Bailey Controls Company from
August 1994 to January 1996.

D. Sherman Willows 63 Vice President Worldwide Sales since February 1999.
Previously General Manager of World Wide Sales from
1997 to 1999 and Eastern Regional Sales Manager from
1993 to 1997.

8
11

PART II.

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
------------------------------------------------------

STOCKHOLDER MATTERS.
--------------------

The Company's Common Shares trade on the New York Stock
Exchange under the symbol KEI. The high and low prices shown below are sales
prices of the Company's Common Shares as reported on the NYSE. There is no
established public trading market for the Company's Class B Common Shares;
however, they are readily convertible on a one-for-one basis into Common Shares.

Cash Dividends
Cash Dividends Per Class B
Fiscal 1999 High Low Per Common Share Common Share
- ----------- ---- --- ---------------- ------------

First Quarter $9 1/4 $3 3/4 $ .033 $ .0264
Second Quarter 9 11/16 6 1/2 .033 .0264
Third Quarter 9 6 9/16 .033 .0264
Fourth Quarter 14 15/16 8 3/16 .041 .0328

Fiscal 1998
- -----------

First Quarter $12 3/8 $8 1/8 $ .031 $ .025
Second Quarter 9 1/2 7 1/2 .031 .025
Third Quarter 8 9/16 7 5/16 .031 .025
Fourth Quarter 7 6/16 5 .031 .025

The approximate number of shareholders of record of Common Shares and
Class B Common Shares, including those shareholders participating in the
Dividend Reinvestment Plan, as of December 14, 1999 was 2,394 and 12,
respectively.

9
12

ITEM 6 - SELECTED FINANCIAL DATA.
------------------------

The following table sets forth consolidated selected financial data for
the Company. The financial data should be read in conjunction with the Financial
Statements and Notes thereto, included in a separate section at the end of this
Annual Report, and with Management's Discussion and Analysis of Financial
Condition and Results of Operations, included in Item 7 of this Annual Report.

For the years ended September 30,
(In thousands, except for per share data) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------

Operating Results
Net sales $100,938 $117,776 $123,295 $118,946 $109,574
Income (loss) before income taxes 16,717 8,189 1,211 (6,324) 6,422
Net income (loss) 13,708 5,004 790 (5,440) 4,914
Basic earnings (loss) per share 1.84 0.64 0.10 (0.74) 0.68
Diluted earnings (loss) per share 1.79 0.62 0.10 (0.74) 0.66

Common Stock Information
Cash dividends per Common Share 0.140 0.125 0.125 0.125 0.106
Cash dividends per Class B Common Share 0.112 0.100 0.100 0.100 0.085
Weighted average number of shares
outstanding- diluted 7,657 8,065 7,867 7,360 7,476
At fiscal year-end:
Dividend payout ratio (a) 7.6% 19.5% 125.0% -- 15.6%
Price/earnings ratio (a) 7.9 8.2 120.0 -- 23.3
Shareholders' equity per share 6.16 4.92 4.26 4.26 5.11
Closing market price 14.188 5.063 12.000 8.875 14.938

Balance Sheet Data
Total assets 74,751 71,017 79,113 73,834 66,109
Current ratio 2.0 1.9 1.9 1.7 2.0
Total debt 3,000 6,099 17,458 13,369 6,113
Total debt-to-capital 6.4% 13.6% 34.8% 29.6% 14.2%
Shareholders' equity 43,781 38,742 32,683 31,756 36,902

Other Data
Return on average shareholders' equity 33.2% 14.0% 2.5% -15.8% 14.3%
Return on average total assets 18.8% 6.7% 1.0% -7.8% 8.2%
Return on net sales 13.6% 4.2% 0.6% -4.6% 4.5%
Number of employees 526 564 693 716 659
Sales per employee 185.2 187.4 175.0 173.0 170.7
Cash flow
Noncash charges to income (b) 3,580 4,709 3,390 7,064 2,573
Net cash provided by (used in) operating activities 9,659 13,033 (1,011) 2,600 2,457
Ten-year compound annual growth rate
Net sales 1.3% 5.0% 7.9% 9.6% 8.8%
Net income (a) 12.7% -0.8% -13.3% -- 5.7%

(a) These ratios are not meaningful in 1996 due to reported net losses.

(b) Noncash charges to income include depreciation, amortization, deferred
compensation, deferred taxes and noncash special charges.

10
13

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

The following discussion should be read in conjunction with the
Financial Statements and related Notes included in a separate section at the end
of this Annual Report.

Overview
- --------

The Outlook section of Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Actual results could differ materially from those projected in the
forward-looking statements throughout this documents as a result of a number of
important factors. For a discussion of important factors that could affect the
Company's results, please refer to the risk factors set forth below in the
section entitled Factors That May Affect Future Results.

Results of Operations (In Thousands of Dollars Except for Per-Share Data)
- -------------------------------------------------------------------------

Percent of net sales for the years ended September 30, 1999, 1998 and 1997

1999 1998 1997
---- ---- ----

Net sales 100.0 100.0 100.0
Cost of goods sold 39.6 42.7 42.1
Selling, general and administrative expenses 38.5 39.7 41.4
Product development expenses 10.6 11.2 14.0
Gain on sale of business (5.1) (2.4) --
Special charges -- 1.0 0.6
Net financing (income) expenses (0.2) 0.9 0.9
----- ----- -----
Income before income taxes 16.6 6.9 1.0
Income taxes 3.0 2.7 0.4
----- ----- -----
Net income 13.6 4.2 0.6
===== ===== =====

Net income was $13,708, or $1.79 per share on a diluted basis, in 1999
compared to $5,004, or $.62 per share, in 1998, and $790, or $.10 per share, in
1997. Excluding gains on sales of businesses in 1999 and 1998, a favorable tax
adjustment in 1999, and special charges and other personnel cost reduction in
1998 and 1997, net income was $8,201, or $1.08 per share, in 1999, $4,679, or
$.58 per share, in 1998 and $1,614, or $.20 per share, in 1997. 1999's adjusted
net income of $8,201 is a new record high.

Net sales were $100,938 in 1999, $117,776 in 1998 and $123,295 in 1997.
Excluding sales from divested businesses in all periods, net sales were $100,321
in 1999, $96,840 in 1998 and $105,201 in 1997. (See Note B.) The increase in
sales from current businesses in 1999 over 1998 is due to recoveries in the
semiconductor industry and Asian markets, as well as continued good growth for
the Company's products serving the telecommunications industry. The Company
believes it has gained market share for its products serving both the
semiconductor industry and the telecommunications industry. The decrease in
sales from current businesses in 1998 over 1997 was primarily due to weakness in
the semiconductor

11
14

capital equipment industry and the Asian financial situation. Geographically,
domestic and export sales from current businesses increased somewhat in 1999
from 1998, but decreased in 1998 from 1997. Net sales from current businesses in
Europe were essentially flat in all three years.

Cost of goods sold as a percentage of net sales was 39.6 in 1999, 42.7
in 1998 and 42.1 in 1997. The decrease from 1998 to 1999 was due to the absence
during all or most of 1999 of the Quantox product line and the Radiation
Measurements Division (RMD), whose margins were lower. Further, margins in the
remaining businesses improved largely in connection with higher sales. The
increase in 1998 from 1997 was due to increased sales of Quantox and a
strengthening of the U.S. dollar by 5 percent in 1998. The U.S. dollar had no
impact in 1999. Foreign exchange hedging had a minimal effect on cost of goods
sold in 1999, 1998 and 1997.

Selling, general and administrative expenses decreased 17 percent in
1999 to 38.5 percent of net sales, and decreased 8 percent in 1998 to 39.7
percent of sales from 41.4 percent of sales in 1997. The majority of the
decrease in 1999 can be attributed to the absence of RMD and only one month's
cost for Quantox. Lower expenses resulting from the cost reduction actions taken
over the last two years contributed to the three-year decline. Additionally,
1998 and 1997 expenses include approximately $1,210 pretax, or $.09 per share,
and $512 pretax, or $.04 per share, respectively, for personnel cost reductions
and officer retirement expenses.

Product development expenses decreased $2,394, or 18 percent in 1999
from 1998 and $4,094, or 24 percent, in 1998 from 1997. As a percentage of
sales, they were 10.6, 11.2 and 14.0 in 1999, 1998 and 1997, respectively. The
decrease in 1999 from 1998 was due to the absence of RMD and only one month's
costs for Quantox in 1999. Excluding costs for these divested businesses,
product development costs were flat in 1999 compared to 1998 and down 15 percent
in 1998 from 1997. The decrease in 1998 from 1997 (excluding the divested
businesses) was due primarily to the completion of the Company's new business
development efforts for the SmartLink(TM) product line and Model S600 parametric
test system, which were notable expenses in 1997.

On August 10, 1998, the Company sold certain assets used in the
operation of its Radiation Measurements Division to Inovision Radiation
Measurements, L.L.C. The sale was effective July 31, 1998, and resulted in a
gain of $2,852 pretax, or $.22 per share, recorded in the fourth quarter of
fiscal 1998. On November 9, 1998, the Company sold certain assets used in the
operation of its Quantox product line to KLA-Tencor Corporation for $9,147 in
cash. The agreement was effective October 31, 1998, and resulted in a pretax
gain of $4,808, or $.39 per share, recorded in the first quarter of fiscal 1999.
During the fourth quarter of fiscal 1999, an additional pretax gain of $345, or
$.03 per share, was recorded for the above mentioned sales of businesses. At the
time of the sales of these businesses, the Company established liabilities for
certain items that were to be settled at future dates. The additional adjustment
recorded in the fourth quarter of fiscal 1999 represents the settlement of
certain of these issues. (See Note B.)

12
15

An analysis of special charges is as follows:

Accrued at
Expense September 30,
Description: 1998 1997 1999 1998

Write off of goodwill $ 519 $ -- $ -- $ --
Severance, outplacement and
other personnel costs 290 (291) 2 24
Lease and related costs 280 (525) 180 248
Impaired inventory and equipment 122 49 -- --
Relocation of facility and employees 25 1,073 -- --
Recruiting and consulting costs -- 187 -- --
Manufacturing start-up costs -- 282 -- --
European operating subleases (64) (4) 474 540
------- ------- ------- -------
Totals $ 1,172 $ 771 $ 656 $ 812
======= ======= ======= =======

The Company did not record any special charges during 1999. Due to
continued weakness in the semiconductor capital equipment industry throughout
1998, the Company incurred special charges in 1998 for cost reduction actions
taken in the second quarter relative to its semiconductor business. Also, the
Company decided to change the methodology of pursuing its WLR business, which
was part of the 1996 acquisition of Turner Engineering Technology. As a result
of this decision, the Company reviewed the carrying value of the goodwill using
the estimated future cash flow method and determined that the goodwill was
impaired. 1998 special charges include $519 for the write-off of the remaining
balance of the goodwill. Additionally, the Company decided to further
consolidate its manufacturing operations. As a result, special charges in 1998
include lease costs accrued on a leased facility the Company will no longer
occupy. The reversal of European operating subleases represents a change in
circumstances in 1998. The special charges recorded during 1998 of $1,172
pretax, or $.09 per share, include $551 in noncash charges. Special charges of
$771 pretax, or $.06 per share, recorded in 1997 include gross costs of $1,902
primarily for the relocation of the Keithley MetraByte operation from Taunton,
Massachusetts to Cleveland, Ohio, net of a reversal of $1,131 of expense
(noncash) recorded during 1996 primarily for closing the Taunton facility. The
reversal of this 1996 expense relates to changes in circumstances that occurred
during 1997. $256 of the gross expense represents a noncash charge to reserve
for additional impaired inventory. In September 1996, management made the
decision to relocate the Keithley MetraByte operation to its Cleveland, Ohio
facility due to a lack of growth in sales and poor earnings. The relocation was
completed in July 1997, and during 1998, the Keithley MetraByte operation was
combined with the Company's Instruments group to form the Test and Measurement
business unit. At September 30, 1999 and 1998, $257 and $272, respectively, were
accrued in the Consolidated Balance Sheets under the category "Other accrued
expenses" and $399 and $540, respectively, were accrued under the category
"Other long-term liabilities."

The Company generated net financing income of $179 in 1999 compared to
expenses of $1,040 and $1,145 in 1998 and 1997, respectively. The improvement
was the result of lower interest expense due to lower average debt levels,
combined with higher interest income earned on significantly higher cash and
cash equivalents during 1999.

13
16

The effective tax rate for 1999 was 18.0 percent and was the
combination of several factors: the gain on the sale of businesses recorded at
the statutory rate including state and local taxes, a tax benefit resulting from
the release of certain valuation reserves due to the settlement of prior years'
tax liabilities and improved profitability in the Company's U.S. operations,
which enabled the Company to utilize a number of tax credits. The effective tax
rate for 1998 was 38.9 percent and reflects an unfavorable adjustment for prior
years' taxes. The effective tax rate for 1997 was 34.7 percent. In 1997, foreign
sales corporation (FSC) benefits and benefits derived from the remittance of
foreign dividends were offset by a deferred tax charge resulting from the
Company's decision to terminate corporate owned life insurance policies. At
September 30, 1999, the Company had tax credit carryforwards of $1,216.

The Company's financial results are affected by foreign exchange rate
fluctuations. Generally, a weakening U.S. dollar causes the price of the
Company's product to be more attractive in foreign markets and favorably impacts
the Company's sales and earnings. A strengthening U.S. dollar has an unfavorable
effect. This foreign exchange effect cannot be precisely isolated since many
other factors affect the Company's foreign sales and earnings. These factors
include product offerings and pricing policies of the Company and its
competition, whether competition is foreign or U.S. based, changes in
technology and local and worldwide economic conditions.

The Company utilizes hedging techniques designed to mitigate the
short-term effect of exchange rate fluctuations on operations and balance sheet
positions by entering into forward and option currency contracts and by
borrowing in foreign currencies. The Company's foreign borrowings are used as a
hedge of its net investments and for specified transactions. The Company does
not speculate in foreign currencies or derivative financial instruments, and
hedging techniques do not increase the Company's exposure to foreign exchange
rate fluctuations.

Liquidity and Capital Resources
- -------------------------------

In 1999, net cash provided by operating activities was $9,659 and cash
received from the sale of a business was $9,147. Cash was used to buy back
$8,366, or 942,803 shares, of the Company's common stock through its stock
repurchase programs, pay down debt by $3,056, purchase $1,545 of property, plant
and equipment and pay $955 in dividends. Total cash of $13,426 at September 30,
1999, increased $4,105 from September 30, 1998. The Company plans to use the
cash to continue to fund its stock repurchase program. Total debt of $3,000 at
September 30, 1999 decreased from $6,099 at September 30, 1998, and the
debt-to-capital ratio at year-end was 6.4 percent versus 13.6 percent at the end
of fiscal 1998.

The Company's credit agreement, which expires March 28, 2002, is a
$25,000 debt facility ($3,000 outstanding at September 30, 1999) that provides
unsecured, multi-currency revolving credit at various interest rates based on
Prime, LIBOR or FIBOR. The Company is required to pay a facility fee of between
.175% and .25% on the total amount of the commitment. Additionally, the Company
has a number of other credit facilities in various currencies aggregating
$5,281.

At September 30, 1999, the Company had total unused lines of credit
with domestic and foreign banks aggregating $27,281, including short-term and
long-term lines of credit of $5,281

14
17

and $22,000, respectively. Under certain long-term debt agreements, the Company
is required to comply with various financial ratios and covenants. Principal
payments on long-term debt are due in 2002.

During 2000, the Company expects to finance capital spending, working
capital requirements and the stock repurchase program with cash on hand and cash
provided by operations. Capital expenditures in fiscal 2000 are expected to be
somewhat higher than they were in 1999.

Outlook
- -------

Throughout 1999, the Company recognized increasing sales, earnings
(before gains on sales and a favorable tax adjustment), orders and backlog.
Additionally, order levels and backlog for fiscal 1999's fourth quarter were at
record levels. Although there continues to be good activity, order levels for
the first quarter of fiscal 2000 will be dependent on continued investment from
the Company's customers in the semiconductor, telecommunications and other key
electronics industries. However, due to the record backlog level, management
does believe that sales and earnings before taxes for the first quarter of
fiscal 2000 will be similar to or slightly better than those of the fourth
quarter.

The effective tax rate for fiscal 1999 was 18.0 percent; however,
management expects the Company's effective tax rate will approximate the
statutory rate in fiscal 2000.

Factors That May Affect Future Results
- --------------------------------------

Information included in the Letter to Shareholders and in the Outlook
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations relating to expectations as to financial performance,
revenues, earnings, expenses, the tax rate, annual sales growth, pretax return
on sales and return on equity constitute "forward-looking" statements, as that
term is defined in the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Some of the factors
that may affect future results are discussed below.

Although the Company operates in a single industry segment, certain of
its products and product lines are sold into the semiconductor industry. Growth
in demand for semiconductors, new technology and pricing drive the demand for
new semiconductor capital equipment. Historically, sales and order levels for
this business have been volatile which can affect revenue and earnings for the
Company.

The Company's business relies on the development of new high technology
products and services to provide solutions to customer's complex measurement
needs. This requires anticipation of customers' changing needs and emerging
technology trends. The Company must make long-term investments and commit
significant resources before knowing whether its expectations will eventually
result in products that achieve market acceptance. The Company incurs
significant expenses developing new products that may or may not result in
significant sources of revenue and earnings in the future.

15
18

In many cases the Company's products compete directly with those
offered by other manufacturers. If any of the Company's competitors were to
develop products or services that are more cost-effective or technically
superior, demand for the Company's product offerings could slow.

The Company's cost structure is comprised of costs that are directly
related to the level of sales, as well as costs that are fixed and do not
fluctuate based on quarterly sales levels. The Company's ability to maintain its
cost structure or to further improve its cost structure depends on its ability
to control those costs that are fixed or semi-variable.

The Company pays taxes in several jurisdictions throughout the world.
The Company utilizes available tax credits and other tax planning strategies in
an effort to minimize the Company's overall tax liability. The Company's actual
tax rate for fiscal 2000 could change from what is currently anticipated due to
changes in various country's tax laws or changes in the Company's overall tax
planning strategy.

The Company currently has ten subsidiaries or sales offices located
outside the United States, and non-U.S. sales made up half of the Company's
revenue in fiscal 1999. The Company's future results could be adversely affected
by several factors, including changes in foreign currency exchange rates,
changes in a country's or region's political or economic conditions, trade
protection measures, import or export licensing requirements, unexpected changes
in regulatory requirements and natural disasters.

The Company recognizes the need to ensure that Year 2000 hardware and
software issues will not adversely impact its operations. With regard to the
Company's own information systems, a substantial portion of Year 2000
information technology compliance has been achieved in connection with the
Company's ongoing program to upgrade its key information and operational
systems. The Company completed the replacement of one remaining key system that
was not Year 2000 compliant on October 1, 1999. These costs and any anticipated
related costs will not have a material impact on the results of operations,
financial condition or cash flows of future periods. With regard to the
Company's own products, all products currently being sold have been evaluated
for Year 2000 compliance. Most have been found to be ready for the Year 2000
change. Any exceptions have been identified and alternative solutions for
continuing use of these products have been noted. The cost of identifying and
modifying products for Year 2000 compliance did not have a material effect on
the results of operations, financial condition or cash flows of future periods
and any future costs are not expected to have a material impact. Lastly, the
Company has surveyed its base of key suppliers to determine if their systems
(insofar as they relate to the Company's business) comply with Year 2000
requirements. The Company is now monitoring their performance to process orders
and deliver products as the Year 2000 approaches. There can be no assurance that
the systems of other companies with which Keithley Instruments, Inc. does
business will be able to adequately address the Year 2000 issue. If it is
determined that any third party may not be ready, the Company will develop a
contingency plan. While management does not expect that the failure of any third
party to be fully compliant by January 1, 2000 would significantly affect
results of operations, financial condition or cash flows of future periods,
there can be no assurance that any such failure will not have an adverse effect
on the Company's operations.

16
19

The Company has modified its systems to accommodate the Euro. The cost
of these modifications was immaterial to the Company's results of operations.
Although difficult to predict, any competitive implications and any impact on
existing financial instruments are expected to be immaterial to the Company's
results of operations, financial condition or cash flows of future periods.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------

Response to this item is included in "Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations" above.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
--------------------------------------------

The response to this Item 8 is included in a separate section at the
end of this Annual Report.

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

None.

17
20

PART III.

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
---------------------------------------------------

See the table listing the nominees for directors under the caption
"Election of Directors" in the Company's Proxy Statement to be used in
conjunction with the February 12, 2000 Annual Meeting of Shareholders and filed
with the Securities and Exchange Commission pursuant to Section 14(a) of the
Securities Exchange Act of 1934, which table is incorporated herein by this
reference. The information required with respect to the executive officers of
the Company is included under the caption "Executive Officers of the Registrant"
of this Form 10-K Annual Report and incorporated herein by reference.

ITEM 11 - EXECUTIVE COMPENSATION.
-----------------------

See the caption "Executive Compensation and Benefits" in the Company's
Proxy Statement to be used in conjunction with the February 12, 2000 Annual
Meeting of Shareholders and filed with the Securities and Exchange Commission
pursuant to Section 14(a) of the Securities Exchange Act of 1934, which section
is incorporated herein by this reference.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------

See the caption "Principal Shareholders" in the Company's Proxy
Statement to be used in conjunction with the February 12, 2000 Annual Meeting of
Shareholders and filed with the Securities and Exchange Commission pursuant to
Section 14(a) of the Securities Exchange Act of 1934, which section is
incorporated herein by this reference.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------

James B. Griswold, a Director and nominee for Director, is a partner in
the law firm of Baker & Hostetler LLP. Baker & Hostetler LLP served as general
legal counsel to the Company during the fiscal year ended September 30, 1999,
and is expected to render services in such capacity to the Company in the
future.

18
21

PART IV.

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
----------------------------------------------------------------

(a)(1) FINANCIAL STATEMENTS OF THE COMPANY

See Index to Consolidated Financial Statements at page F-1 of this Form
10-K Annual Report and the Financial Statements and Notes thereto which are
included at Pages F-2 to F-27 of this Annual Report.

(a)(2) FINANCIAL STATEMENT SCHEDULES

The following additional information should be read in conjunction with the
Consolidated Financial Statements of the Company described in Item 14(a)(1):

Schedule II Valuation and Qualifying Accounts

Schedules other than those listed above are omitted because they are not
required or not applicable, or because the information is furnished elsewhere in
the consolidated financial statements or the notes thereto.

19
22

(a)(3) INDEX TO EXHIBITS

Exhibit
Number Description
------- -----------

3(a) Code of Regulations, as amended on February 11, 1985.
(Reference is made to Exhibit 3(b) of the Company's Form
10 Registration Statement (File No. 0-13648) as declared
effective on July 31, 1985, which Exhibit is
incorporated herein by reference.)

3(b) Amended Articles of Incorporation, as amended on
February 10, 1996. (Reference is made to Exhibit 3(c) of
the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1996 (File No. 1-9965),
which Exhibit is incorporated herein by reference.)

4(a) Specimen Share Certificate for the Common Shares,
without par value.

4(b) Specimen Share Certificate for the Class B Common
Shares, without par value. (Reference is made to Exhibit
4(b) of the Company's Form 10 Registration Statement
(File No. 0-13648) as declared effective on July 31,
1985, which Exhibit is incorporated herein by
reference.)

10(a) 1984 Stock Option Plan, adopted in February 1984.
(Reference is made to the appropriate Exhibits of the
Company's Form 10 Registration Statement (File No.
0-13648) as declared effected on July 31, 1985, which
Exhibits are incorporated herein by reference.)

10(b) Keithley Instruments, Inc. Supplemental Deferral Plan
as amended.

10(c) Employment Agreement with Mark J. Plush dated April 7,
1994. (Reference is made to Exhibit 10(k) of the
Company's Annual Report on Form 10-K for the year ended
September 30, 1998 (File No. 1-9965), which Exhibit is
incorporated herein by reference.)

10(d) Employment Agreement, as amended, with Joseph P.
Keithley.

20

23

Exhibit
Number Description
------ -----------
10(e) Supplemental Executive Retirement Plan.

10(f) 1992 Stock Incentive Plan, as amended.

10(g) 1992 Directors' Stock Option Plan.

10(h) Credit Agreement dated as of May 31, 1994 by and among
Keithley Instruments, Inc. and certain borrowing
subsidiaries and the Banks named herein, and NBD Bank,
N.A., as Agent. (Reference is made to Exhibit 10(u) of
the Company's Quarterly Report on form 10-Q for the
quarter ended June 30, 1994 (File No. 1-9965) which
Exhibit is incorporated herein by reference.)

10(i) 1996 Outside Directors Deferred Stock Plan.
(Reference is made to Exhibit 10(x) of the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1996 (File No. 1-9965), which Exhibit
is incorporated herein by reference.)

10(j) First Amendment dated March 28, 1997, to the Credit
Agreement dated May 31, 1994. (Reference is made to
Exhibit 10(y) of the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1997
(File No. 1-9965), which Exhibit is incorporated
herein by reference.)

10(k) 1997 Directors' Stock Option Plan, adopted in February
1997. (Reference is made to Exhibit 10(z) of the
Company's Annual Report on form 10-K for the fiscal year
ended September 30, 1997 (File No. 1-9965), which
Exhibit is incorporated herein by reference.)

11 Statement Re Computation of Per Share Earnings.

21 Subsidiaries of the Company.

23 Consent of Experts.

27 Financial Data Schedule (EDGAR version only).

ITEM 14(b) REPORTS ON FORM 8-K.

No reports on Form 8-K were filed during the quarterly period ended September
30, 1999.

ITEM 14(c) EXHIBITS: See "Index to Exhibits" at Item 14(a)(3) above.

ITEM 14(d) FINANCIAL STATEMENT SCHEDULES: Schedules required to be filed in
response to this portion of Item 14 are listed above in Item 14(a)(2).

21
24

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.

Keithley Instruments, Inc.
(Registrant)

By: /s/ Joseph P. Keithley
------------------------------
Joseph P. Keithley, (Chairman, President and Chief
Executive Officer)

Date: December 3, 1999
------------------------

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

Signature Title Date
- --------- ----- ----

/s/ Joseph P. Keithley Chairman of the Board of Directors, 12/3/99
- -------------------------------- President and Chief Executive Officer
Joseph P. Keithley (Principal Executive Officer)

/s/ Brian R. Bachman Director 12/3/99
- --------------------------------
Brian R. Bachman

/s/ James T. Bartlett Director 12/3/99
- --------------------------------
James T. Bartlett

/s/ Arden L. Bement, Jr. Director 12/3/99
- --------------------------------
Dr. Arden L. Bement, Jr.

/s/ James B. Griswold Director 12/3/99
- --------------------------------
James B. Griswold

/s/ Leon J. Hendrix, Jr. Director 12/3/99
- --------------------------------
Leon J. Hendrix, Jr.

/s/ William J. Hudson, Jr. Director 12/3/99
- --------------------------------
William J. Hudson, Jr.

/s/ R. Elton White Director 12/3/99
- --------------------------------
R. Elton White

22
25

KEITHLEY INSTRUMENTS, INC.
INDEX TO FINANCIAL STATEMENTS

Financial Statements: Page No.
- --------------------- --------

Report of Independent Accountants F-2
Consolidated Statements of Income F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7

Financial Statement Schedule:
For the Three Years Ended September 30, 1999
Schedule II - Valuation and Qualifying Accounts F-28

F-1
26

Report of Independent Accountants

To the Board of Directors and Shareholders
of Keithley Instruments, Inc.

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Keithley Instruments, Inc. and its subsidiaries at September 30, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1999 in conformity with accounting
principles generally accepted in the United States. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio

November 5, 1999

F-2
27

Consolidated Statements of Income
For the years ended September 30, 1999, 1998 and 1997
(In Thousands of Dollars Except for Per-Share Data)

1999 1998 1997
--------- --------- ---------

Net sales $ 100,938 $ 117,776 $ 123,295
--------- --------- ---------
Cost of goods sold 39,923 50,332 51,924
Selling, general and administrative expenses 38,885 46,756 51,011
Product development expenses 10,745 13,139 17,233
Gain on sale of businesses (5,153) (2,852) --
Special charges -- 1,172 771
Net financing (income) expenses (179) 1,040 1,145
--------- --------- ---------
Income before income taxes 16,717 8,189 1,211
Income taxes 3,009 3,185 421
--------- --------- ---------
Net income $ 13,708 $ 5,004 $ 790
========= ========= =========
Basic earnings per share $ 1.84 $ .64 $ .10
========= ========= =========
Diluted earnings per share $ 1.79 $ .62 $ .10
========= ========= =========

The accompanying notes are an integral part of the financial statements.

F-3
28

Consolidated Balance Sheets
As of September 30, 1999 and 1998
(In Thousands of Dollars Except for Share Data)

1999 1998
-------- --------

Assets
Current assets:
Cash and cash equivalents $ 13,426 $ 9,321
Accounts receivable and other, net of allowances
of $679 and $704 as of September 30, 1999
and 1998, respectively 19,633 17,586
Inventories:
Raw materials 4,853 5,997
Work in process 4,009 3,163
Finished products 2,187 2,490
-------- --------
Total inventories 11,049 11,650
Deferred income taxes 3,074 3,267
Prepaid expenses 519 503
-------- --------
Total current assets 47,701 42,327
-------- --------
Property, plant and equipment, at cost:
Land 1,325 1,325
Buildings and leasehold improvements 15,090 14,984
Manufacturing, laboratory and office equipment 21,878 23,025
-------- --------
38,293 39,334
Less-Accumulated depreciation and amortization 25,617 24,723
-------- --------
Total property, plant and equipment, net 12,676 14,611
-------- --------

Deferred income taxes 7,801 8,087
Other assets 6,573 5,992
-------- --------
Total assets $ 74,751 $ 71,017
======== ========

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 8,119 $ 6,191
Accrued payroll and related expenses 5,872 4,203
Other accrued expenses 6,046 6,902
Income taxes payable 3,382 4,591
-------- --------
Total current liabilities 23,419 21,887
-------- --------
Long-term debt 3,000 6,099
Other long-term liabilities 4,543 4,277
Deferred income taxes 8 12
Shareholders' equity:
Common Shares, stated value $.025:
Authorized - 30,000,000; issued and outstanding -
4,415,349 in 1999 and 5,092,903 in 1998 132 127
Class B Common Shares, stated value $.025:
Authorized - 9,000,000; issued and outstanding -
2,692,528 in 1999 and 2,785,378 in 1998 67 70
Capital in excess of stated value 9,071 8,877
Earnings reinvested in the business 42,623 29,870
Accumulated other comprehensive income 112 429
Unamortized portion of restricted stock plan (239) (283)
Common Shares held in treasury, at cost (7,985) (348)
-------- --------
Total shareholders' equity 43,781 38,742
-------- --------
Total liabilities and shareholders' equity $ 74,751 $ 71,017
======== ========

The accompanying notes are an integral part of the financial statements.

F-4
29

Consolidated Statements of Shareholders' Equity
For the years ended September 30, 1999, 1998 and 1997
(In Thousands of Dollars)

Accumulated other
comprehensive income
---------------------

Capital Earnings Minimum Unamortized Common
Class B in excess reinvested pension Cumulative portion of Shares Total
Common Common of stated in the liability translation restricted held in shareholders
Shares Shares value business adjustment adjustment stock plan treasury equity
--------- ------- --------- ---------- ---------- ----------- ------------- ---------- ------------

BALANCE SEPTEMBER 30, 1996 116 70 5,293 25,865 -- 562 (14) (136) 31,756
Comprehensive Income:
Net Income 790
Translation adjustment (550)
Total comprehensive income 240
Cash dividends:
Common Shares ($.125 per
share) (603) (603)
Class B Common Shares
($.10 per share) (279) (279)
Shares issued under stock
plans 6 2,004 (742) 1,268
Repurchase of Common Shares (124) (124)
Gains from hedging net
investments in foreign
subsidiaries 238 238
Amortization 187 187
--------- ------- -------- ---------- ---------- ----------- --------- ---------- ----------
BALANCE SEPTEMBER 30, 1997 122 70 7,297 25,773 250 (569) (260) 32,683

Comprehensive Income:
Net Income 5,004
Translation adjustment 146
Total comprehensive income 5,150
Cash dividends:
Common Shares ($.125 per (629) (629)
share)
Class B Common Shares ($.10 (278) (278)
per share)
Shares issued under stock
plans 5 1,580 1,585
Repurchase of Common Shares (88) (88)
Gains from hedging net
investments in foreign
subsidiaries 33 33
Amortization 286 286
--------- ------- -------- ---------- ---------- ---------- ----------- ---------- ----------
BALANCE SEPTEMBER 30, 1998 127 70 8,877 29,870 -- 429 (283) (348) 38,742

Comprehensive Income:
Net Income 13,708
Translation adjustment (281)
Minimum pension
liability adj. (39)
Total comprehensive income 13,388
Cash dividends:
Common Shares ($.14 per
share) (653) (653)
Class B Common Shares
($.112 per share) (302) (302)
Shares issued under stock plans 2 194 1,077 1,273
Conversion to Common Shares 3 (3) --
Repurchase of Common Shares (8,714) (8,714)
Gains from hedging net
investments in foreign
subsidiaries 3 3
Amortization 44 44
========= ======= ======== ========== =========== =========== =========== ========== ==========
BALANCE SEPTEMBER 30, 1999 132 67 9,071 42,623 (39) 151 (239) (7,985) 43,781
========= ======= ======== ========== =========== =========== =========== ========== ==========

The accompanying notes are an integral part of the financial statements.

F-5
30

Consolidated Statements of Cash Flows
For the years ended September 30, 1999, 1998 and 1997
(In Thousands of Dollars)

1999 1998 1997
-------- -------- --------

Cash flows from operating activities:
Net income $ 13,708 $ 5,004 $ 790
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation 2,923 3,653 3,823
Amortization of intangible assets -- 196 222
Deferred income taxes 475 (22) (1,140)
Deferred compensation 183 331 229
Special charges -- 551 (771)
Gain on sale of businesses (5,153) (2,852) --
Change in current assets and liabilities:
Accounts receivable and other (2,488) 6,625 (6,969)
Inventories (1,581) 3,670 486
Prepaid expenses 156 (648) 29
Other current liabilities 2,205 (3,320) 1,427
Other operating activities (769) (155) 863
-------- -------- --------
Net cash provided by (used in) operating activities 9,659 13,033 (1,011)
-------- -------- --------

Cash flows from investing activities:
Capital expenditures (1,545) (2,753) (5,849)
Proceeds received from sale of assets 9,147 8,683 --
Cash expenditures for sale of assets (1,636) (759) --
Other investing activities 58 96 202
-------- -------- --------
Net cash provided by (used in) investing activities 6,024 5,267 (5,647)
-------- -------- --------

Cash flows from financing activities:
Net decrease in short-term debt -- (16) (45)
Borrowing (payment) of long-term debt (3,056) (11,314) 4,520
Proceeds from sale of Common Shares 925 1,458 1,144
Purchase of Treasury Shares (8,366) -- --
Cash dividends (955) (907) (882)
-------- -------- --------
Net cash provided by (used in) financing activities (11,452) (10,779) 4,737
-------- -------- --------

Effect of changes in foreign currency exchange
rates on cash and cash equivalents (126) 73 (347)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 4,105 7,594 (2,268)
Cash and cash equivalents at beginning of period 9,321 1,727 3,995
-------- -------- --------
Cash and cash equivalents at end of period $ 13,426 $ 9,321 $ 1,727
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Income taxes $ 3,641 $ 972 $ 1,981
Interest 179 891 1,140

Disclosure of accounting policy
For purposes of this statement, the Company considers all highly liquid
investments with maturities of three months or less when purchased to be
cash equivalents. Cash flows resulting from hedging transactions are
classified in the same category as the cash flows from the item being
hedged.

The accompanying notes are an integral part of the financial statements.

F-6
31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except for Per-Share Data)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of Keithley
Instruments, Inc. and its subsidiaries. Intercompany transactions have been
eliminated. Certain amounts in prior years have been reclassified to be
consistent with the current year's presentation.

REVENUE RECOGNITION
- -------------------
Sales are recognized at time of shipment for all products.

NATURE OF OPERATIONS
- --------------------
The Company operates in a single industry segment and is engaged in the
design, development, manufacture and marketing of complex electronic instruments
and systems. Its products provide electrical measurement-based solutions to the
telecommunications, semiconductor and electronic components industries.
Engineers and scientists around the world use the Company's advanced hardware
and software for process monitoring, production test and basic research.

PRODUCT DEVELOPMENT EXPENSES
- ----------------------------
Expenditures for product development are charged to expense as incurred.
These expenses include the cost of computer software, an integral part of
certain products. Costs defined by Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed," are immaterial to the financial statements and have been
expensed as incurred. The Company continually reviews the materiality and
financial statement classification of computer software expenditures.

INVENTORIES
- -----------
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market.

PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
Property, plant and equipment are stated at cost. Depreciation is provided
over periods approximating the estimated useful lives of the assets.
Substantially all manufacturing, laboratory and office equipment is depreciated
by the double declining balance method over periods of 3 to 10 years. Buildings
are depreciated by the straight-line method over periods of 23 to 45 years.
Leasehold improvements are amortized over the shorter of the asset lives or the
terms of the leases.

OTHER ACCRUED EXPENSES
- ----------------------
Included in the "Other accrued expenses" caption of the Consolidated
Balance Sheets at September 30, 1999 and 1998, were $1,476 and $1,599,
respectively, for commissions payable to outside sales representatives of the
Company.

F-7
32

CAPITAL STOCK
- -------------
The Company has two classes of stock. The Class B Common Shares have ten
times the voting power of the Common Shares but are entitled to cash dividends
of no more than 80% of the cash dividends on the Common Shares. Holders of
Common Shares, voting as a class, elect one-fourth of the Company's Board of
Directors and participate with holders of Class B Common Shares in electing the
balance of the Directors and in voting on all other corporate matters requiring
shareholder approval. Additional Class B Common Shares may be issued only to
holders of such shares for stock dividends or stock splits. These shares are
convertible at any time to Common Shares on a one-for-one basis.

Included in the "Common shares held in treasury, at cost" caption of the
Consolidated Balance Sheets at September 30, 1999 and 1998, were Common Shares
repurchased to settle non-employee Directors' fees deferred pursuant to the
Keithley Instruments, Inc. 1996 Outside Directors Deferred Stock Plan. At
September 30, 1999, the caption also included shares repurchased through the
Company's share repurchase programs. (See Note D.)

INCOME TAXES
- ------------
Provision has been made for estimated United States and foreign
withholding taxes, less available tax credits, for the undistributed earnings of
the non-U.S. subsidiaries as of September 30, 1999, 1998 and 1997.

USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles 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 reported
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

EARNINGS PER SHARE
- ------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Acccounting Standards No. 128, "Earnings Per Share." The
Company adopted this standard in 1998. All per share amounts have been restated
in accordance with the new standard.

Both Common Shares and Class B Common Shares are included in calculating
earnings per share. The weighted average number of shares outstanding used in
the calculation is set forth below:

1999 1998 1997
--------- ----------- ---------

Basic 7,447,081 7,799,507 7,588,094
Diluted 7,657,425 8,065,289 7,866,750

HEDGING AND RELATED FINANCIAL INSTRUMENTS
- ------------------------------------------
The Company utilizes foreign currency borrowings and foreign exchange
forward contracts to hedge foreign exchange risks for sales denominated in
foreign currencies and net equity or unremitted foreign earnings.

F-8
33

To hedge sales, the Company purchases foreign exchange forward contracts
or option contracts to sell foreign currencies to fix the exchange rates related
to near-term sales and the Company's margins. Underlying hedged transactions are
recorded at hedged rates, therefore realized and unrealized gains and losses are
recorded when the operating revenues and expenses are recorded.

To hedge equity or unremitted earnings, the Company borrows foreign
currencies or purchases foreign exchange forward contracts. Realized and
unrealized after-tax gains or losses on the hedging instruments are reflected in
the cumulative translation adjustment component of shareholders' equity.

The Company has entered into a swap instrument to mitigate the risk of
interest rate changes. The amount exchanged under the swap agreement is included
in the "Net financing (income) expenses" caption of the Consolidated Statements
of Income. The estimated fair value of the swap instrument is determined through
quotes from the related financial institutions.

The Company is exposed to credit loss in the event of nonperformance by
the counterparties to these financial instruments. Because the counterparties
are major financial institutions, the Company does not expect such
nonperformance.

OTHER ACCOUNTING PRONOUNCEMENTS
- -------------------------------
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). This Statement requires
expenses incurred during the application development stage of a software
implementation project to be capitalized and amortized over the useful life of
the project. SOP 98-1 is required to be adopted in the Company's fiscal year
ending September 30, 2000. Application of this standard is not expected to have
a material impact on the consolidated results of financial position of the
Company.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). This Statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In June 1999,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - an
amendment of FASB Statement No. 133" (SFAS 137). SFAS 137 deferred the effective
date of SFAS 133 for one year, therefore, SFAS 133 will be required to be
adopted in the Company's first quarter of its fiscal year ending September 30,
2001. The Company has not yet determined the financial statement impact of this
Statement.

F-9
34

NOTE B - SALE OF ASSETS
On August 10, 1998, the Company sold certain assets used in the
operation of its Radiation Measurements Division (RMD) to Inovision Radiation
Measurements, L.L.C. for $8,215 in cash. Additionally, the Company received $468
for certain liabilities incurred in the operation of RMD that were not assumed
by the buyer. The agreement, which was effective July 31, 1998, included the
sale of RMD's inventory, accounts receivable, machinery, equipment and other
tangible personal property, and intangible assets including patents and
technology. The sale resulted in a pretax gain of $2,852, or $.22 per share,
recorded in the fourth quarter of fiscal 1998.

On November 9, 1998, the Company sold certain assets used in the
operation of its Quantox product line to KLA-Tencor Corporation for $9,147 in
cash. The agreement, which was effective October 31, 1998, included the sale of
the Quantox inventory, certain machinery, equipment and other tangible personal
property. The Company retained the accounts receivable. The sale resulted in a
pretax gain of $4,808, or $.39 per share, recorded in the first quarter of
fiscal 1999.

During the fourth quarter of fiscal 1999, an additional pretax gain of
$345, or $.03 per share, was recorded for the above mentioned sales of
businesses. At the time of the sales of these businesses, the Company
established liabilities for certain items that were to be settled at future
dates. The additional adjustment recorded in the fourth quarter of fiscal 1999
represents the settlement of certain of these issues.

F-10
35

NOTE C - SPECIAL CHARGES
An analysis of special charges recorded in the Consolidated Statements
of Income in 1998 and 1997, and the amount accrued in the Consolidated Balance
Sheets at September 30, 1999 and 1998 is as follows:

Accrued at
Expense September 30,
------- -------------
Description: 1998 1997 1999 1998
---- ---- ---- ----

Write off of goodwill $ 519 $ -- $ -- $ --
Severance, outplacement and
other personnel costs 290 (291) 2 24
Lease and related costs 280 (525) 180 248
Impaired inventory and equipment 122 49 -- --
Relocation of facility and employees 25 1,073 -- --
Recruiting and consulting costs -- 187 -- --
Manufacturing start-up costs -- 282 -- --
European operating subleases (64) (4) 474 540
------- ------- --- ---
Totals $1,172 $ 771 $656 $812
====== ====== ==== ====

The Company did not record any special charges during fiscal 1999. Due
to continued weakness in the semiconductor capital equipment industry throughout
1998, the Company incurred special charges in 1998 for cost reduction actions
taken in the second quarter relative to its semiconductor business. Also, the
Company decided to change the methodology of pursuing its WLR business, which
was part of the 1996 acquisition of Turner Engineering Technology. As a result
of this decision, the Company reviewed the carrying value of the goodwill using
the estimated future cash flow method and determined that the goodwill was
impaired. 1998 special charges include $519 for the write-off of the remaining
balance of the goodwill. Additionally, the Company decided to further
consolidate its manufacturing operations. As a result, special charges in 1998
include lease costs accrued on a leased facility the Company will no longer
occupy. The reversal of European operating subleases represents a change in
circumstances in 1998. The special charges recorded during 1998 of $1,172
pretax, or $.09 per share, include $551 in noncash charges.

Special charges of $771 pretax, or $.06 per share, recorded in 1997
include gross costs of $1,902 primarily for the relocation of the Keithley
MetraByte operation from Taunton, Massachusetts to Cleveland, Ohio, net of a
reversal of $1,131 of expense (noncash) recorded during 1996 primarily for
closing the Taunton facility. The reversal of 1996 expense relates to changes in
circumstances that occurred during 1997. $256 of the gross expense represents a
noncash charge to reserve for additional impaired inventory. In September 1996,
management made the decision to relocate the Keithley MetraByte operation to its
Cleveland, Ohio facility due to a lack of growth in sales and poor earnings. The
relocation was completed in July 1997, and during 1998, the Keithley MetraByte
operation was combined with the Company's Instruments group to form the Test and
Measurement business unit.

At September 30, 1999 and 1998, $257 and $272, respectively, were
accrued in the Consolidated Balance Sheets under the category "Other accrued
expenses" and $399 and $540, respectively, were accrued under the category
"Other long-term liabilities."

F-11
36

NOTE D - SHARE REPURCHASE PROGRAMS
On November 11, 1998, the Company commenced a tender offer to
repurchase up to 2,000,000 of its Common Shares, or approximately 25 percent of
the outstanding Common Shares and Class B Common Shares combined. The offer was
conducted through a procedure commonly known as a "Dutch Auction" in which
shareholders could tender their shares at prices not in excess of $7.00 nor less
than $5.75 per share. The offer expired on December 10, 1998, and resulted in
the purchase of 405,733 Common Shares at $7.00 per share plus expenses of
approximately $1.00 per share.

At the conclusion of the Dutch Auction, the Company's Board of
Directors approved a program to repurchase up to 1,000,000 Common Shares on the
open market over a two-year period. The shares repurchased under both the Dutch
Auction and the stock repurchase program are expected to be held as treasury
stock, and from time to time, may be reissued in settlement of stock options and
the Company's employee stock purchase plan. During fiscal 1999 the Company
purchased 537,070 Common Shares at an average price of $9.54 per share including
commissions. Since commencing the tender offer in November 1998, the Company has
purchased under both buy back plans a total of 942,803 Common Shares, which
constitutes 12 percent of the combined Common and Class B Common Shares at the
start of the buy back programs, at an average price of $8.87 per share including
commissions. During fiscal 1999, the Company reissued 100,427 treasury shares in
settlement of shares purchased through the Company's stock option plans and
employee stock purchase plan.

F-12
37

NOTE E - FINANCING ARRANGEMENTS

September 30,
-------------
1999 1998
---- ----

Long-term debt:
Revolving loans with various banks with interest
due monthly; principal due
March 28, 2002:
U.S. dollar denominated loans with an interest
rate of 6.3% and 6.4% based on LIBOR at $ 3,000 $ 5,500
September 30, 1999 and 1998, respectively
Deutsche mark denominated loans with an interest
rate of 3.8% based on FIBOR -- 599
------- -------
3,000 6,099
Less-current installments on long-term debt -- --
------- -------
Total long-term debt $ 3,000 $ 6,099
======= =======

The Company's credit agreement, which expires March 28, 2002, is a $25,000
debt facility ($3,000 outstanding at September 30, 1999) that provides
unsecured, multi-currency revolving credit at various interest rates based on
Prime, LIBOR or FIBOR. The Company is required to pay a facility fee of between
.175% and .25% on the total amount of the commitment. Additionally, the Company
has a number of other credit facilities in various currencies aggregating
$5,281.

At September 30, 1999, the Company had total unused lines of credit with
domestic and foreign banks aggregating $27,281, including short-term and
long-term lines of credit of $5,281 and $22,000, respectively. Under certain
long-term debt agreements, the Company is required to comply with various
financial ratios and covenants. Principal payments on long-term debt are due in
2002.

The three-month LIBOR interest rate was 6.1 and 5.3 percent at September
30, 1999 and 1998.

The Company has an interest rate swap agreement with a commercial bank to
effectively fix its interest rate on $3,000 of variable rate debt. The agreement
effectively fixes the interest rate on a notional $3,000 of variable LIBOR rate
debt at 6.8 percent, and expires September 19, 2005. The interest differential
to be paid or received on the notional amount of the swap is recognized over the
life of the agreement. At September 30, 1999 interest rate levels, the swap
requires the Company to make payments to the bank and would cost the Company
approximately $24 to terminate.

Following is an analysis of net financing (income) expenses:

1999 1998 1997
------- ------- -------

Interest expense $ 220 $ 1,137 $ 1,315
Investment income (399) (97) (170)
------- ------- -------
$ (179) $ 1,040 $ 1,145
======= ======= =======

F-13
38

NOTE F - FOREIGN CURRENCY
The functional currency for the Company's foreign subsidiaries is the
applicable local currency. Income and expenses are translated into U.S. dollars
at average exchange rates for the period. Assets and liabilities are translated
at the rates in effect at the end of the period. Translation gains and losses
are recognized in the cumulative translation component of shareholders' equity.

Certain transactions of the Company and its foreign subsidiaries are
denominated in currencies other than the functional currency. The Consolidated
Statement of Income includes gains (losses) from such foreign exchange
transactions of $40, $(138) and $95 for 1999, 1998 and 1997, respectively.

At September 30, 1999, the Company had obligations under foreign exchange
forward contracts to sell 1,800,000 Euros and 180,000 British pounds at various
dates through December 1999. The total U.S. dollar equivalent amount of these
foreign exchange contracts of $2,189 includes an unrecognized loss of $32 at
September 30, 1999.

F-14
39

NOTE G - EMPLOYEE BENEFIT PLANS
The Company has noncontributory defined benefit pension plans covering
all of its eligible employees in the United States and certain non-U.S.
employees. Pension benefits are based upon the employee's length of service and
a percentage of compensation above certain base levels. A summary of components
of net periodic pension cost is shown below:

1999 1998 1997
------- ------- -------

Service cost-benefits earned during the period $ 1,011 $ 945 $ 733
Interest cost on projected benefit obligation 1,443 1,356 1,192
Actual return on assets (2,141) (3,791) (3,470)
Net amortization and deferral 92 2,073 2,115
------- ------- -------
Net periodic pension cost $ 405 $ 583 $ 570
======= ======= =======

The following table sets forth the funded status of the Company's plans
and the related amounts recognized in the Consolidated Balance Sheet at
September 30, 1999 and 1998:

Non-U.S.
United States Plan Plan
Overfunded Underfunded*
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------

CHANGE IN PROJECTED BENEFIT OBLIGATIONS:
Benefit obligation at beginning of year $ 16,999 $ 15,219 $ 4,098 $ 2,777
Service cost 831 780 180 165
Interest cost 1,213 1,186 229 170
Actuarial (gain) loss (397) 188 (321) 805
Benefits paid (611) (421) (84) (41)
Plan amendment -- 457 -- --
Curtailment gain -- (410) -- --
Foreign currency exchange rate changes -- -- (358) 222
-------- -------- -------- --------
Benefit obligation at year end $ 18,035 $ 16,999 $ 3,744 $ 4,098
======== ======== ======== ========

F-15
40

Non-U.S.
United States Plan Plan
Overfunded Underfunded*
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------

CHANGE IN PLAN ASSETS:

Fair value of plan assets at beginning
of year $ 23,500 $ 19,474 $ 655 $ 498
Actual return on pension assets 2,130 3,718 10 72
Employer contributions 157 728 50 54
Benefits paid (611) (420) (11) (4)
Foreign currency exchange rate changes -- -- (59) 35
Fair value of plan assets at end of year 25,176 23,500 645 655
-------- -------- -------- --------
Funded status - over (under) funded 7,141 6,501 (3,099) (3,443)
Unrecognized actuarial gains (5,582) (5,146) 151 474
Unrecognized prior service cost 1,329 1,470 53 63
Unrecognized initial net (asset) obligation (270) (314) 165 201
-------- -------- -------- --------

Prepaid pension assets (pension liability)
recognized in the Consolidated Balance
Sheets $ 2,618 $ 2,511 $ (2,730) $ (2,705)
======== ======== ======== ========

*The Company has purchased indirect insurance of $2,634 which is expected to be
available to the Company as non-U.S. pension liabilities of $2,730 mature. The
caption, "Other assets," on the Company's Consolidated Balance Sheets includes
$2,634 and $2,776 at September 30, 1999 and 1998, respectively, for this asset.
In accordance with Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions," this Company asset is not included in the
non-U.S. plan assets.

The significant actuarial assumptions as of the year-end measurement
date were as follows:

1999 1998 1997
---- ---- ----

UNITED STATES PENSION PLAN:
Discount rate 7.25% 7.5% 7.5%
Expected long-term rate of return on plan assets 8.25% 8.25% 8.5%
Rate of increase in compensation levels 5.0% 5.0% 5.5%

NON-U.S. PENSION PLAN:
Discount rate 6.0% 6.0% 6.25%
Expected long-term rate of return on plan assets 7.0% 7.0% 7.0%
Rate of increase in compensation levels 4.0% 4.0% 3.5%

The "Projected Unit Credit" Actuarial Cost Method is used to determine the
Company's annual expense.

For the United States plan, the Company uses the "Entry Age Normal"
Actuarial Cost Method to determine its annual funding requirements. United
States plan assets are invested primarily in common stocks and fixed-income
securities.

Although there are no requirements for the Company to fund the non-U.S.
pension plan, the Company has made contributions in the past. Non-U.S. plan
assets represent employee and Company contributions and are invested in a direct
insurance contract payable to the individual participants.

F-16
41

The sale of the Radiation Measurements Division's assets resulted in the
termination of essentially all the Division's employees. As a result, the
Company recognized a gain for pension curtailment of $410 in 1998. The gain is
included in the "Gain on sale of businesses" caption on the Company's
Consolidated Statement of Income. (See Note B.)

In addition to the defined benefit pension plan, the Company also
maintains a retirement plan for all of its eligible employees in the United
States under Section 401(k) of the Internal Revenue Code. The Company makes
contributions to the 401(k) plan, and expense for this plan amounted to $932,
$443 and $403 in 1999, 1998 and 1997, respectively.

The Company also has an unfunded supplemental executive retirement plan
(SERP) for former key employees which includes retirement, death and disability
benefits. Expense (income) recognized for these benefits was $37, $12 and $(3),
for 1999, 1998 and 1997, respectively. The income recognized during 1997 was due
to an officer taking early retirement causing a reversal of previously accrued
expense. Liabilities of $190 and $170 were accrued in the "Other long-term
liabilities" caption on the Company's Consolidated Balance Sheets to meet all
SERP obligations at September 30, 1999 and 1998, respectively.

F-17
42

NOTE H - STOCK PLANS

Stock Option Plans
- ------------------
Under the 1984 Stock Option Plan and the 1992 Stock Incentive Plan,
675,000 and 1,900,000 of the Company's Common Shares, respectively, were
reserved for the granting of options to officers and other key employees. After
February 11, 1994, no new grants could be issued from the 1984 Stock Option
Plan. The Compensation and Human Resources Committee of the Board of Directors
administers the plans. Incentive stock options granted under the plans can not
be less than the fair market price at the date of the grant with an exercise
period not to exceed ten years. Such grants generally become exercisable over a
four year period. The option price under nonqualified stock options is
determined by the Committee on the date the option is granted. The 1992 Stock
Incentive Plan also provides for restricted stock awards and stock appreciation
rights. This plan will expire on February 8, 2002. All options outstanding at
the time of termination of either plan shall continue in full force and effect
in accordance with their terms.

The 1997 Directors' Stock Option Plan provides for the issuance of
200,000 of the Company's Common Shares to non-employee Directors. Under the
terms of the plan, each non-employee Director is automatically granted an option
to purchase 5,000 Common Shares at the close of each annual shareholders'
meeting. The plan will expire on February 15, 2007. On February 15, 1997, the
Company's Board of Directors terminated the 1992 Directors' Stock Option Plan.
Prior to its termination, this plan provided for the issuance of 60,000 of the
Company's Common Shares to non-employee Directors, with each non-employee
Director automatically granted an option to purchase 600 Common Shares at the
close of each annual shareholders' meeting. All options outstanding at the time
of termination of the plans shall continue in full force and effect in
accordance with their terms. The option price for grants under both plans is the
fair market value of a Common Share on the date of grant. The options under both
plans are exercisable six months and one day after the date of grant and will
expire after ten years.

F-18
43

The activity under all option plans was as follows:

Outstanding Exercisable
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- ----- --------- -----

September 30, 1996 1,171,989 $ 8.24 400,044 $ 5.45
Options granted at fair market value 310,000 11.18
Options granted above fair market value 1,100 11.54
Options granted below fair market value 82,528 -
Options exercised (124,873) 1.70
Options forfeited (37,212) 9.23
-------------------------------------------------------------

September 30, 1997 1,403,532 8.97 593,607 7.01
Options granted at fair market value 280,050 5.70
Options granted above fair market value 38,204 10.18
Options granted below fair market value 30,322 4.83
Options exercised (111,228) 5.37
Options forfeited (264,011) 9.47
-------------------------------------------------------------

September 30, 1998 1,376,869 8.44 707,844 7.93
Options granted at fair market value 313,200 8.20
Options granted above fair market value 45,658 5.65
Options granted below fair market value 33,184 7.23
Options exercised (157,919) 5.11
Options forfeited (97,677) 7.53
-------------------------------------------------------------

September 30, 1999 1,513,315 $8.69 785,169 $9.42
=============================================================

The options outstanding at September 30, 1999 have been segregated into
ranges for additional disclosure as follows:

- ----------------------------------------------------------------------------- ----------------------------------
Outstanding Exercisable
- ------------------------ ----------------- ---------------- ----------------- ----------------- ----------------
Weighted Average
Remaining Weighted Average Weighted Average
Range of Exercise Number of Shares Contractual Exercise Number of Shares Exercise
Prices Outstanding Life Price Exercisable Price
- ------------------------ ----------------- ---------------- ----------------- ----------------- ----------------

$4.13 - $5.06 405,583 6.76 years $ 4.96 179,433 $ 4.83
$5.19 - $8.81 408,032 9.17 years $ 8.09 85,832 $ 7.66
$9.06 - $10.00 290,300 5.96 years $ 9.27 227,100 $ 9.23
$11.44 - $15.69 409,400 6.46 years $12.56 292,804 $12.89
1,513,315 7.18 years $ 8.69 785,169 $ 9.42
- ------------------------ ----------------- ---------------- ----------------- ----------------- ----------------

1993 Employee Stock Purchase Plan
- ---------------------------------

On February 5, 1994, the Company's shareholders approved the 1993
Employee Stock Purchase and Dividend Reinvestment Plan. The plan offers eligible
employees the opportunity to acquire the Company's Common Shares at a discount
and without transaction costs. Eligible employees can only participate in the
plan on a year-to-year basis, must enroll prior to the commencement of each plan
year, and in the case with U.S. employees, must authorize monthly payroll

F-19
44

deductions. Non-U.S. employees submit their contribution at the end of the plan
year. The purchase price of the Common Shares is 85 percent of the lower market
price at the beginning or ending of the calendar plan year. A total of 750,000
Common Shares are available for purchase under the plan. Total shares may be
increased with shareholder approval or the plan may be terminated when the
shares are fully subscribed. No compensation expense is recorded in connection
with the plan. During 1999 and 1998, 58,393 and 108,602 shares, respectively,
were purchased by employees at a price of $7.38 per share.

Pro Forma Disclosure
- --------------------
As of September 30, 1999, the Company had various stock-based
compensation plans that are described above. The Company has elected to continue
to account for stock issued to employees according to APB Opinion 25,
"Accounting for Stock Issued to Employees" and its related interpretations.
Under APB No. 25, no compensation expense is recognized in the Company's
consolidated financial statements for employee stock options except in certain
cases when stock options are granted below the market price of the underlying
stock on the date of grant. During 1999 and 1998, $44 and $260, respectively,
was recognized in compensation expense for such grants. Alternatively, under the
fair value method of accounting provided for under Statement of Financial
Accounting Standards No 123, "Accounting for Stock-Based Compensation" (SFAS
123), the measurement of compensation expense is based on the fair value of
employee stock options or purchase rights at the grant or right date and
requires the use of option pricing models to value the options.

The weighted average fair value of options granted under stock options
plans in 1999, 1998 and 1997 was $3.52, $2.29 and $4.97, respectively. The fair
value of options at the date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:

1999 1998 1997
---- ---- ----

Expected life (years) 4.6 4.4 5.0
Risk-free interest rate 5.5% 4.8% 6.0%
Volatility 46.0% 41.5% 41.5%
Dividend yield 1.3% 1.3% 1.3%

The weighted average fair value of purchase rights granted under the 1993
Employee Stock Purchase Plan in 1999, 1998 and 1997 was $2.93, $3.05 and $5.49,
respectively. The fair value of employees' purchase rights was estimated using
the Black-Scholes model with the following assumptions:

1999 1998 1997
---- ---- ----

Expected life (years) 1.0 1.0 1.0
Risk-free interest rate 5.0% 5.1% 5.5%
Volatility 42.7% 41.5% 41.5%
Dividend yield 1.3% 1.3% 1.3%

F-20
45

The pro forma impact to both net income and earnings per share from
calculating stock-related compensation expense consistent with the fair value
alternative of SFAS 123 is indicated below:

1999 1998 1997
---- ---- ----

Pro forma net income $ 12,706 $ 4,226 $ 214
Pro forma earnings per share:
Basic $ 1.71 $ 0.54 $ 0.03
Diluted $ 1.66 $ 0.52 $ 0.03

For purposes of the pro forma disclosures, the estimated fair value of
the stock-based awards is amortized over the vesting period. The effects of
applying SFAS 123 in this pro forma disclosure are not indicative of future
amounts.
SFAS 123 is applicable only to awards made after fiscal 1995.

F-21
46

NOTE I - INCOME TAXES

For financial reporting purposes, income (loss) before income taxes
includes the following components:

1999 1998 1997
---- ---- ----

United States $ 14,130 $ 4,923 $ (892)
Non-U.S 2,587 3,266 2,103
-------- -------- --------
$ 16,717 $ 8,189 $ 1,211
======== ======== ========
The provision (benefit) for income
taxes is as follows:
1999 1998 1997
-------- -------- --------
Current:
Federal $ 1,143 $ 1,416 $ 275
Non-U.S 1,191 1,622 1,091
State and local 200 169 195
-------- -------- --------
Total current 2,534 3,207 1,561
-------- -------- --------
Deferred:
Federal 275 310 (1,124)
Non-U.S 200 (332) (16)
-------- -------- --------
Total deferred 475 (22) (1,140)
-------- -------- --------
Total provision $ 3,009 $ 3,185 $ 421
======== ======== ========

Differences between the statutory United States federal income tax and
the effective income tax rates are as follows:

1999 1998 1997
---- ---- ----

Federal income tax at statutory rate $ 5,684 $ 2,784 $ 412
State and local income taxes 133 111 129
Tax on non-U.S. income and tax credits (72) (333) (945)
Change in valuation allowance (1,928) -- --
Terminated life insurance contract -- -- 877
Adjustment for prior years' taxes (168) 480 --
Tax credits (685) -- --
Other 45 143 (52)
-------- -------- --------
Effective income tax $ 3,009 $ 3,185 $ 421
======== ======== ========

F-22

47

Significant components of the Company's deferred tax assets and
liabilities as of September 30, 1999 and 1998 are as follows:

Deferred tax assets: 1999 1998
- ------------------- ---- ----

Capitalized research and development $ 4,824 $ 5,707
Depreciation 980 949
Warranty 367 627
Intangibles 181 965
State and local taxes 1,196 1,685
Alternative minimum tax credit carryforwards 1,148 1,151
Deferred compensation 784 693
Inventory 1,402 1,673
General business credit carryforwards 68 1,013
Other 1,123 1,203
-------- --------
Total deferred tax assets 12,073 15,666
-------- --------
Valuation allowance for deferred tax assets -- (3,127)
-------- --------
12,073 12,539
-------- --------

Deferred tax liabilities:
- ------------------------
Pension contribution 890 768
Other 316 429
-------- --------
Total deferred tax liabilities 1,206 1,197
-------- --------
Net deferred tax assets $ 10,867 $ 11,342
======== ========

The valuation allowance at the end of 1998 related to tax credit
carryforwards and certain state tax benefits which in the opinion of management
would likely not be realized. The current year decrease relates primarily to the
utilization of tax credits and in managements' opinion, the remaining tax
credits will be utilized in the future based upon improved profitability in the
Company's U.S. operations during 1999.

At September 30, 1999, the Company had tax credit carryforwards as
follows:
Year Expiration
Commences
---------
General business credit $ 68 2012
Alternative minimum tax credit 1,148 Indefinite

F-23
48

NOTE J - LEASES
The Company leases certain equipment under capital leases. Manufacturing,
laboratory and office equipment includes $495 of leased equipment at September
30, 1999 and 1998, respectively. Accumulated depreciation includes $494 and $483
at September 30, 1999 and 1998, respectively, related to these leases. The
Company also leases certain office and manufacturing facilities and office
equipment under operating leases. Rent expense under operating leases (net of
sublease income of $211 in 1999, $95 in 1998 and $84 in 1997) for 1999, 1998 and
1997 was $1,657, $2,165 and $2,658, respectively. Future minimum lease payments
under operating leases are:

2000 $1,953
2001 1,444
2002 883
2003 599
2004 528
After 2004 1,542
------
Total minimum operating lease payments $6,949
======

F-24
49

NOTE K - SEGMENT AND GEOGRAPHIC INFORMATION

The Company adopted FASB Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
for the fiscal year ended September 30, 1999. This statement designated the
internal organization, that is used by management, for making operating
decisions and assessing performance as the source of the Company's reportable
segments. It also required disclosures about products and service, geographic
areas and major customers.

The Company's business is to develop measurement-based solutions to
verify customers' product performance. All the Company's products are computer
based (multi-point) systems operating under software control. The Company's
customers are engineers, technicians and scientists in manufacturing, product
development and research functions within a range of industries. Keithley's
advanced hardware and software is used for process monitoring, production test
and basic research. Although the Company's products vary in capability,
sophistication, use, size and price, they basically test, measure and analyze
electrical and physical properties. As such, the Company's management determined
the Company operates in a single industry segment. The operations by geographic
area are presented below. The basis for attributing revenues from external
customers to a geographic area is the location of the customer.

1999 1998 1997
---- ---- ----

NET SALES:
United States $ 50,672 $ 60,653 $ 67,503
Europe 31,986 33,694 31,606
Pacific Basin 12,513 17,253 18,291
Other 5,767 6,176 5,895
-------- -------- --------
$100,938 $117,776 $123,295
======== ======== ========
LONG-LIVED ASSETS:
United States $ 15,898 $ 17,075 $ 20,670
Germany 3,017 3,136 2,791
Other 334 392 312
-------- -------- --------
$ 19,249 $ 20,603 $ 23,773
======== ======== ========

F-25
50

NOTE L - CONTINGENCIES
The Company is engaged in various legal proceedings arising in the
ordinary course of business. The ultimate outcome of these proceedings is not
expected to have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.

F-26
51

Unaudited Quarterly Results of Operations
(In Thousands of Dollars Except for Per-Share Data)

First Second Third Fourth
----- ------ ----- ------
Fiscal 1999

Net sales $20,881 $24,387 $25,947 $29,723

Gross profit 12,075 14,635 15,985 18,320

Gain on sale of business 4,808 -- -- 345

Income before income taxes (1) 5,772 2,756 3,357 4,832

Net income (2) 3,783 1,984 4,612 3,329

Diluted earnings per share (1) (2) .48 .26 .61 .44

Fiscal 1998
Net sales $31,623 $29,696 $28,578 $27,879

Gross profit 18,584 16,688 16,443 15,729

Gain on sale of business -- -- -- 2,852

Income before income taxes (1) (3) 1,636 1,162 996 4,395

Net income (2) (3) 1,096 779 667 2,462

Diluted earnings per share (1) (2) (3) .14 .10 .08 .31

(1) The first and fourth quarter of fiscal 1999 include pretax income of
$4,808, or $.39 per share, and $345, or $.03 per share, for the gain on the
sales of businesses, respectively. The fourth quarter of fiscal 1998
includes pretax income of $2,852, or $.22 per share, for the gain on the
sale of a business.

(2) The third quarter of fiscal 1999 includes a favorable adjustment of $2,195,
or $.29 per share, from settlements of prior years' tax liabilities and the
release of certain valuation reserves due to improved profitability from U.
S. operations. The fourth quarter of fiscal 1998 includes a charge for
prior years' taxes of $480, or $.06 per share.

(3) The second and fourth quarters of fiscal 1998 include pretax charges of
$335, or $.03 per share, and $837, or $.06 per share, in special charges,
respectively. The third and fourth quarter of fiscal 1998 include pretax
charges of $663, or $.06 per share, and $547, or $.03 per share for
severance and other officer retirement expenses, respectively.

F-27
52

SCHEDULE II
KEITHLEY INSTRUMENTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands of Dollars)

Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Balance at Charged to
Beginning of Costs and Balance at End
Description Period Expenses Deductions (1) of Period
- ----------- ------------- ----------- -------------- --------------

For the Year Ended
September 30, 1999:

Valuation allowance for
deferred tax assets $3,127 $ -- $3,127 $ --

For the Year Ended
September 30, 1998:

Valuation allowance for
deferred tax assets $3,166 $ 54 $ 93 $3,127

For the Year Ended
September 30, 1997:

Valuation allowance for
deferred tax assets $2,994 $172 -- $3,166

(1) Represents utilization of tax credits, capital loss carryovers and
release of valuation reserve.

F-28