##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For fiscal year ended, SEPTEMBER 30, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from       to
 Commission File Number 1-9965
 
 KEITHLEY INSTRUMENTS, INC.
  Ohio
    
    34-0794417(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 28775 Aurora Road, Solon, Ohio, 44139  (440) 248-0400
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Shares, Without Par Value
    
    New York Stock Exchange
 None
 
 o þ
 o þ
 þ o
 þ
 þ o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



Keithley Instruments, Inc.
10-K Annual Report
 Table of Contents
 PAGEPART I:Item 1
    
    Business
    
    
    2Item 2
    
    Properties
    
    
    4Item 3
    
    Legal Proceedings
    
    
    4Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    4PART II:Item 5
    
    Market for the Registrants Common Equity and Related
Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    6Item 6
    
    Selected Financial Data
    
    
    7Item 7
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    8Item 7(a)
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 8
    
    Financial Statements and Supplementary Data
    
    
    14Item 9
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    33Item 9(a)
    
    Controls and Procedures
    
    
    33Item 9(b)
    
    Other Information
    
    
    33PART III:Item 10
    
    Directors and Executive Officers of the Registrant
    
    
    34Item 11
    
    Executive Compensation
    
    
    34Item 12
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    34Item 13
    
    Certain Relationships and Related Transactions
    
    
    34Item 14
    
    Principal Accountant Fees and Services
    
    
    34PART IV:Item 15
    
    Exhibits and Financial Statement Schedules
    
    
    34SIGNATURES
    
    
    
    
    
    36Exhibit 10(R) 2002 Stock Incentive PlanExhibit 14 Code of BusinessExhibit 21 Wholly Owned SubsidiariesExhibit 23 Consent-PWCExhibit 31A Certification 302-CEOExhibit 31B Certification 302-CFOExhibit 32A Certification 906-CEOExhibit 32B Certification 906-CFO
  -1-




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PART I.
 
 ITEM 1  BUSINESS.
 General
    Business Strategy
    Product Offerings
  New Products During Fiscal Year 2005
  -2-




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®
   Geographic Markets and Distribution
   Sources and Availability of Raw Materials
  Patents
  Seasonal Trends and Working Capital Requirements
  Customers
  -3-




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Backlog
  Competition
  Research and Development
  Government Regulations
  Employees
  Foreign Operations and Export Sales
   
 ITEM 2  PROPERTIES.
  
 ITEM 3  LEGAL PROCEEDINGS.
  
 ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  -4-




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EXECUTIVE OFFICERS OF THE REGISTRANT:
  Name
    
    Position
    
    AgeJoseph P. Keithley
    
    Chairman of the Board of Directors, President and Chief Executive Officer
    
    
    56Steven A. Chipchase
    
    Vice President Operations
    
    
    42Philip R. Etsler
    
    Vice President Human Resources
    
    
    55Alan S. Gaffney
    
    Vice President Commercial Marketing and Information Systems
    
    
    35Mark A. Hoersten
    
    Vice President Business Management
    
    
    47Larry L. Pendergrass
    
    Vice President New Product Development
    
    
    50John A. Pesec
    
    Vice President Worldwide Sales and Support
    
    
    45Mark J. Plush
    
    Vice President and Chief Financial Officer
    
    
    56Linda C. Rae
    
    Executive Vice President and Chief Operating Officer
    
    
    40
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PART II.
 
 ITEM 5  MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
  Cash DividendsCash Dividends
    
    Per Class BFiscal 2005
    
    High
    
    Low
    
    Per Common Share
    
    Common ShareFirst Quarter
    
    $
    19.99
    
    
    $
    15.96
    
    
    $
    .0375
    
    
    $
    .0300Second Quarter
    
    
    19.70
    
    
    
    15.58
    
    
    
    .0375
    
    
    
    .0300Third Quarter
    
    
    16.33
    
    
    
    12.90
    
    
    
    .0375
    
    
    
    .0300Fourth Quarter
    
    
    16.55
    
    
    
    13.05
    
    
    
    .0375
    
    
    
    .0300Fiscal 2004First Quarter
    
    $
    19.16
    
    
    $
    14.16
    
    
    $
    .0375
    
    
    $
    .0300Second Quarter
    
    
    25.73
    
    
    
    18.35
    
    
    
    .0375
    
    
    
    .0300Third Quarter
    
    
    22.90
    
    
    
    19.23
    
    
    
    .0375
    
    
    
    .0300Fourth Quarter
    
    
    22.07
    
    
    
    15.61
    
    
    
    .0375
    
    
    
    .0300
  Equity Compensation Plan Information as of September 30, 2005
 Number of securities remainingavailable for future issuanceNumber of securities to be
    
    Weighted-average
    
    under equity compensationissued upon exercise of
    
    exercise price of
    
    plans (excluding securitiesPlan category
    
    outstanding options
    
    outstanding options
    
    reflected in column (a)(a)
    
    (b)
    
    (c)Equity compensation plans
approved
by security holders
    
    
    3,327,346
    
    
    $
    20.04
    
    
    
    1,611,193
    (1)Equity compensation plans not
approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    3,327,346
    
    
    $
    20.04
    
    
    
    1,611,193
    (1)
 (1)
    
    Includes 81,119 shares available for issuance under the 1993 Employee Stock Purchase and
Dividend Reinvestment Plan.
 Purchases of Equity Securities
  -6-




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ITEM 6  SELECTED FINANCIAL DATA.
  For the years ended September 30,(In thousands of dollars except for per share data)
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001Operating Results:Net sales
    
    $
    141,552
    
    
    
    140,248
    
    
    
    106,718
    
    
    
    96,922
    
    
    
    149,692Gross margin percentage
    
    
    60.7
    %
    
    
    61.1
    %
    
    
    55.3
    %
    
    
    56.2
    %
    
    
    60.1
    %Income (loss) before income taxes
    
    $
    14,087
    
    
    
    15,541
    
    
    
    (4,361
    )
    
    
    (5,046
    )
    
    
    26,199Net income (loss)
    
    $
    10,128
    
    
    
    11,381
    
    
    
    (4,192
    )
    
    
    (3,080
    )
    
    
    17,392Basic earnings (loss) per share
    
    $
    0.62
    
    
    
    0.71
    
    
    
    (0.27
    )
    
    
    (0.20
    )
    
    
    1.11Diluted earnings (loss) per share
    
    $
    0.61
    
    
    
    0.69
    
    
    
    (0.27
    )
    
    
    (0.20
    )
    
    
    1.05Common Stock Information:Cash dividends per Common Share
    
    $
    0.150
    
    
    
    0.150
    
    
    
    0.150
    
    
    
    0.150
    
    
    
    0.140Cash dividends per Class B Common Share
    
    $
    0.120
    
    
    
    0.120
    
    
    
    0.120
    
    
    
    0.120
    
    
    
    0.112Weighted average number of shares
outstanding- diluted
    
    
    16,591
    
    
    
    16,544
    
    
    
    15,487
    
    
    
    15,687
    
    
    
    16,583At fiscal year-end:Dividend payout ratio
    
    
    24.6
    %
    
    
    21.7
    %
    
    
    n/m
    
    
    
    n/m
    
    
    
    13.3
    %Shareholders equity per share
    
    $
    6.81
    
    
    
    6.26
    
    
    
    5.33
    
    
    
    5.81
    
    
    
    5.90Closing market price
    
    $
    14.60
    
    
    
    17.45
    
    
    
    14.15
    
    
    
    12.15
    
    
    
    14.35Balance Sheet Data:Total assets
    
    $
    142,364
    
    
    
    136,666
    
    
    
    114,186
    
    
    
    120,371
    
    
    
    123,600Current ratio
    
    
    4.2
    
    
    
    3.3
    
    
    
    3.4
    
    
    
    3.9
    
    
    
    4.5Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000Total debt
    
    
    
    
    
    
    440
    
    
    
    409
    
    
    
    539
    
    
    
    3,000Total debt-to-capital
    
    
    
    
    
    
    0.4
    %
    
    
    0.5
    %
    
    
    0.6
    %
    
    
    3.1
    %Shareholders equity
    
    $
    111,976
    
    
    
    101,577
    
    
    
    84,763
    
    
    
    92,448
    
    
    
    93,946Other Data:Return on average shareholders equity
    
    
    9.5
    %
    
    
    12.2
    %
    
    
    -4.7
    %
    
    
    -3.3
    %
    
    
    20.5
    %Return on average total assets
    
    
    7.3
    %
    
    
    9.1
    %
    
    
    -3.6
    %
    
    
    -2.5
    %
    
    
    14.7
    %Return on net sales
    
    
    7.2
    %
    
    
    8.1
    %
    
    
    -3.9
    %
    
    
    -3.2
    %
    
    
    11.6
    %Number of employees
    
    
    651
    
    
    
    632
    
    
    
    608
    
    
    
    612
    
    
    
    640Sales per employee
    
    $
    220.7
    
    
    
    226.2
    
    
    
    174.9
    
    
    
    154.8
    
    
    
    236.5Cash flow:Net cash provided by (used in)
operating activities
    
    $
    10,543
    
    
    
    15,045
    
    
    
    (6,530
    )
    
    
    7,815
    
    
    
    38,273Ten-year compound annual growth rate:Net sales
    
    
    2.6
    %
    
    
    4.6
    %
    
    
    1.6
    %
    
    
    0.2
    %
    
    
    4.2
    %Net income
    
    
    7.5
    %
    
    
    28.8
    %
    
    
    n/m
    
    
    
    n/m
    
    
    
    15.2
    %
 n/m  These ratios are not meaningful due to the reported net losses in 2003 and 2002.
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ITEM 7
    
      MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
  Forward-Looking Statements
  Overview
      -8-




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Critical Accounting Policies and Estimates
  Use of estimates:
  Revenue recognition:
  Inventories:
  Income taxes:
  Pension plan:
   -9-




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Stock compensation plans:
  Results of Operations
   2005
    
    2004
    
    2003Net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of goods sold
    
    
    39.3
    
    
    
    38.9
    
    
    
    44.7Selling, general and administrative expenses
    
    
    39.7
    
    
    
    39.6
    
    
    
    46.6Product development expenses
    
    
    12.0
    
    
    
    10.7
    
    
    
    12.6Severance charges
    
    
    
    
    
    
    
    
    
    
    0.8Operating income (loss)
    
    
    9.0
    
    
    
    10.8
    
    
    
    (4.7
    )Investment income
    
    
    1.0
    
    
    
    0.4
    
    
    
    0.8Interest expense
    
    
    (0.0
    )
    
    
    (0.1
    )
    
    
    (0.2
    )Income (loss) before income taxes
    
    
    10.0
    
    
    
    11.1
    
    
    
    (4.1
    )Provision (benefit) for income taxes
    
    
    2.8
    
    
    
    3.0
    
    
    
    (0.2
    )Net income (loss)
    
    
    7.2
    
    
    
    8.1
    
    
    
    (3.9
    )
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Liquidity and Capital Resources
    -11-




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Contractual Obligations
    
    Payments Due by PeriodTotal
    
    Less than 1 year
    
    1-3 years
    
    3-5 years
    
    More than 5 yearsShort-Term Debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating Lease Obligations
    
    
    3,827
    
    
    
    1,584
    
    
    
    1,397
    
    
    
    570
    
    
    
    276Payments Under Deferred
Compensation Agreements (a)
    
    
    463
    
    
    
    98
    
    
    
    196
    
    
    
    169
    
    
    
    Pension Benefit (b)
    
    
    
    
    
    
    
    
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )Total Contractual Obligations
    
    $
    4,290
    
    
    $
    1,682
    
    
    $
    1,593
    
    
    $
    739
    
    
    $
    276
 
 (a)
    
    Includes amounts due under a deferred compensation agreement with a retired executive. Amounts
exclude additional interest that will be earned from September 30, 2005 through the time of
payment. Other executives and directors are included in this plan; however, as retirement dates are
uncertain, they are excluded from the above table.(b)
    
    The obligation related to pension benefits is actuarially determined and is reflective of
obligations as of September 30, 2005. The Company made its 2005 pension contribution of $2,500 in
fiscal 2005, and as such does not have a required contribution due in fiscal 2006. We are not able
to reasonably estimate our future required contributions beyond 2006 due to uncertainties regarding
significant assumptions involved in estimating future required contributions to our defined benefit
pension plans; including interest rate levels, the amount and timing of asset returns; what, if
any, changes may occur in legislation; and how contributions in excess of the minimum requirements
could impact the amounts and timing of future contributions. Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
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Factors That May Affect Future Results
        -13-




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ITEM 7A  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
     
 ITEM 8  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 Report of Independent Registered Public Accounting Firm
   Consolidated Financial Statements
  -14-




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Internal Control Over Financial Reporting
    
 Consolidated Statements of Operations
 2005
    
    2004
    
    2003Net sales
    
    $
    141,552
    
    
    $
    140,248
    
    
    $
    106,718Cost of goods sold
    
    
    55,567
    
    
    
    54,605
    
    
    
    47,646Selling, general and administrative
expenses
    
    
    56,177
    
    
    
    55,533
    
    
    
    49,786Product development expenses
    
    
    17,040
    
    
    
    15,017
    
    
    
    13,488Severance charges
    
    
    
    
    
    
    
    
    
    
    845Operating income (loss)
    
    
    12,768
    
    
    
    15,093
    
    
    
    (5,047
    )Investment income
    
    
    1,383
    
    
    
    540
    
    
    
    896Interest expense
    
    
    (64
    )
    
    
    (92
    )
    
    
    (210
    )Income (loss) before income taxes
    
    
    14,087
    
    
    
    15,541
    
    
    
    (4,361
    )Provision (benefit) for income taxes
    
    
    3,959
    
    
    
    4,160
    
    
    
    (169
    )Net income (loss)
    
    $
    10,128
    
    
    $
    11,381
    
    
    $
    (4,192
    )Basic earnings (loss) per share
    
    $
    0.62
    
    
    $
    0.71
    
    
    $
    (0.27
    )Diluted earnings (loss)per share
    
    $
    0.61
    
    
    $
    0.69
    
    
    $
    (0.27
    )
  -15-




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Consolidated Balance Sheets
 2005
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    14,397
    
    
    $
    16,451Short-term investments
    
    
    40,869
    
    
    
    32,112Refundable income taxes
    
    
    387
    
    
    
    181Accounts receivable and other, net of allowance
for doubtful accounts of
$451 and $454 as of September 30,2005 and 2004,
respectively
    
    
    19,452
    
    
    
    21,435Inventories:Raw materials
    
    
    9,191
    
    
    
    9,720Work in process
    
    
    847
    
    
    
    840Finished products
    
    
    3,113
    
    
    
    2,055Total inventories
    
    
    13,151
    
    
    
    12,615Deferred income taxes
    
    
    4,444
    
    
    
    7,438Prepaid expenses
    
    
    1,385
    
    
    
    1,927Total current assets
    
    
    94,085
    
    
    
    92,159Property, plant and equipment, at cost:Land
    
    
    1,325
    
    
    
    1,325Buildings and leasehold improvements
    
    
    16,638
    
    
    
    16,315Manufacturing, laboratory and office equipment
    
    
    29,033
    
    
    
    29,63146,996
    
    
    
    47,271Less-Accumulated depreciation and amortization
    
    
    33,198
    
    
    
    32,968Total property, plant and equipment, net
    
    
    13,798
    
    
    
    14,303Deferred income taxes
    
    
    18,087
    
    
    
    16,456Other assets
    
    
    16,394
    
    
    
    13,748Total assets
    
    $
    142,364
    
    
    $
    136,666Liabilities and Shareholders EquityCurrent liabilities:Short-term debt
    
    $
    
    
    
    $
    440Accounts payable
    
    
    7,540
    
    
    
    7,422Accrued payroll and related expenses
    
    
    5,618
    
    
    
    9,897Other accrued expenses
    
    
    4,649
    
    
    
    5,047Income taxes payable
    
    
    4,341
    
    
    
    4,935Total current liabilities
    
    
    22,148
    
    
    
    27,741Long-term deferred compensation
    
    
    3,100
    
    
    
    2,605Other long-term liabilities
    
    
    5,140
    
    
    
    4,743Commitments and contingencies (See Note K)Shareholders equity:Common Shares, stated value $.0125:Authorized  80,000,000; issued and outstanding  14,300,676 and 14,067,107 in 2005 and 2004
    
    
    179
    
    
    
    176Class B Common Shares, stated value $.0125:Authorized - 9,000,000; issued and outstanding
 2,150,502 in 2005 and 2004
    
    
    27
    
    
    
    27Capital in excess of stated value
    
    
    30,180
    
    
    
    27,449Retained earnings
    
    
    82,425
    
    
    
    74,686Accumulated other comprehensive income
    
    
    397
    
    
    
    501Unamortized portion of restricted stock plan
    
    
    (25
    )
    
    
    (37
    )Common Shares held in treasury, at cost
    
    
    (1,207
    )
    
    
    (1,225
    )Total shareholders equity
    
    
    111,976
    
    
    
    101,577Total liabilities and shareholders equity
    
    $
    142,364
    
    
    $
    136,666
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Consolidated Statements of Shareholders Equity
  AccumulatedCapital
    
    
    
    
    
    other
    
    Unamortized
    
    CommonClass B
    
    in excess
    
    
    
    
    
    comprehen-
    
    portion of
    
    Shares
    
    TotalCommon
    
    Common
    
    of stated
    
    Retained
    
    sive income
    
    restricted
    
    held in
    
    shareholdersShares
    
    Shares
    
    value
    
    earnings
    
    (loss)
    
    stock plan
    
    treasury
    
    equityBalance September 30, 2002
    
    $
    172
    
    $
    27
    
    $
    26,567
    
    
    $
    72,087
    
    
    $
    (349
    )
    
    $
    (108
    )
    
    $
    (5,948
    )
    
    $
    92,448Comprehensive Loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,192
    )Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    777Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96Net unrealized loss on derivative
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (153
    )Net unrealized investment loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (273
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,745
    )Cash dividends:Common Shares ($.15 pershare)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,997
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,997
    )Class B Common Shares ($.12 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (258
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (258
    )Shares issued under stock plans, net of taxes
    
    
    
    
    
    
    
    
    
    
    (1,342
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,388
    
    
    
    1,046Repurchase of Common Shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,774
    )
    
    
    (2,774
    )Common Shares acquired for
settlement of deferred Directors fees
    
    
    
    
    
    
    
    
    
    
    176
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (176
    )
    
    
    Common Shares reissued in settlement
of Directors fees
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    43Balance September 30, 2003
    
    
    172
    
    
    
    27
    
    
    
    25,370
    
    
    
    65,640
    
    
    
    98
    
    
    
    (65
    )
    
    
    (6,479
    )
    
    
    84,763Comprehensive Income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,381Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Net unrealized gain on derivative securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70Net unrealized investment gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,784Cash dividends:Common Shares ($.15 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,077
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,077
    )Class B Common Shares ($.12 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (258
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (258
    )Shares issued under stockplans, net of taxes
    
    
    4
    
    
    
    
    
    
    
    1,929
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,404
    
    
    
    7,337Common Shares acquired for
settlement of deferred Directors fees
    
    
    
    
    
    
    
    
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (156
    )
    
    
    Common Shares reissued in settlement
of Directors fees
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    28Balance September 30, 2004
    
    
    176
    
    
    
    27
    
    
    
    27,449
    
    
    
    74,686
    
    
    
    501
    
    
    
    (37
    )
    
    
    (1,225
    )
    
    
    101,577Comprehensive Income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,128Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )Net unrealized gain on derivative securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75Net unrealized investment loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (163
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,024Cash dividends:Common Shares ($.15 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,131
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,131
    )Class B Common Shares ($.12 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (258
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (258
    )Shares issued under stock plans, net of taxes
    
    
    3
    
    
    
    
    
    
    
    2,749
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,752Common Shares acquired for
settlement of deferred Directors fees
    
    
    
    
    
    
    
    
    
    
    172
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (172
    )
    
    
    Common Shares reissued in settlement
of Directors fees
    
    
    
    
    
    
    
    
    
    
    (190
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190
    
    
    
    Amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    12Balance September 30, 2005
    
    $
    179
    
    
    $
    27
    
    
    $
    30,180
    
    
    $
    82,425
    
    
    $
    397
    
    
    $
    (25
    )
    
    $
    (1,207
    )
    
    $
    111,976
  -17-




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##### Table of Contents



Consolidated Statements of Cash Flows
 2005
    
    2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    10,128
    
    
    $
    11,381
    
    
    $
    (4,192
    )Adjustments to reconcile net income (loss) to
net cash provided by operating activities:Depreciation
    
    
    4,081
    
    
    
    4,010
    
    
    
    3,595Deferred income taxes
    
    
    (2,079
    )
    
    
    (187
    )
    
    
    (1,266
    )Deferred compensation
    
    
    (30
    )
    
    
    146
    
    
    
    150Change in current assets and liabilities:Refundable income taxes
    
    
    (203
    )
    
    
    361
    
    
    
    497Accounts receivable and other
    
    
    2,181
    
    
    
    (5,530
    )
    
    
    (792
    )Inventories
    
    
    (554
    )
    
    
    (1,358
    )
    
    
    (930
    )Prepaid expenses
    
    
    117
    
    
    
    (1,353
    )
    
    
    91Other current liabilities
    
    
    (5,128
    )
    
    
    7,925
    
    
    
    (4,039
    )Tax benefit of employee stock purchase and option
plans
    
    
    3,313
    
    
    
    798
    
    
    
    279Other operating activities
    
    
    (1,283
    )
    
    
    (1,148
    )
    
    
    77Net cash provided by (used in) operating activities
    
    
    10,543
    
    
    
    15,045
    
    
    
    (6,530
    )Cash flows from investing activities:Capital expenditures
    
    
    (3,768
    )
    
    
    (4,072
    )
    
    
    (4,039
    )Purchase of investments
    
    
    (38,194
    )
    
    
    (33,179
    )
    
    
    (6,248
    )Proceeds from maturities and sales of investments
    
    
    29,176
    
    
    
    21,037
    
    
    
    13,949Net cash (used in) provided by investing activities
    
    
    (12,786
    )
    
    
    (16,214
    )
    
    
    3,662Cash flows from financing activities:Net (repayment) borrowing of short-term debt
    
    
    (439
    )
    
    
    25
    
    
    
    (139
    )Proceeds from employee stock purchase and  option plans
    
    
    2,921
    
    
    
    3,898
    
    
    
    1,195Repurchase of Common Shares
    
    
    
    
    
    
    
    
    
    
    (2,774
    )Cash dividends
    
    
    (2,389
    )
    
    
    (2,335
    )
    
    
    (2,255
    )Net cash provided by (used in) financing activities
    
    
    93
    
    
    
    1,588
    
    
    
    (3,973
    )Effect of changes in foreign currency exchange
rates on cash and cash equivalents
    
    
    96
    
    
    
    293
    
    
    
    873(Decrease) increase in cash and cash equivalents
    
    
    (2,054
    )
    
    
    712
    
    
    
    (5,968
    )Cash and cash equivalents at beginning of period
    
    
    16,451
    
    
    
    15,739
    
    
    
    21,707Cash and cash equivalents at end of period
    
    $
    14,397
    
    
    $
    16,451
    
    
    $
    15,739Supplemental disclosures of cash flow  informationCash paid during the year for:Income taxes
    
    $
    3,774
    
    
    $
    486
    
    
    $
    1,991Interest
    
    
    182
    
    
    
    227
    
    
    
    193
  -18-




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Note A  Summary of Significant Accounting Policies
 Principles of consolidation
  Nature of operations
  Revenue recognition
  Foreign currency translation
  Advertising
  Product development expenses
  Cash and cash equivalents
  Accounts receivable and allowance for doubtful accounts
  2005
    
    2004
    
    2003Balance at beginning of year
    
    $
    454
    
    
    $
    458
    
    
    $
    412Additions
    
    
    4
    
    
    
    24
    
    
    
    73Write-offs, net of recoveries
    
    
    (3
    )
    
    
    (35
    )
    
    
    (42
    )Foreign exchange revaluation
    
    
    (4
    )
    
    
    7
    
    
    
    15Balance at end of year
    
    $
    451
    
    
    $
    454
    
    
    $
    458
 Inventories
  -19-




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##### Table of Contents



Property, plant and equipment
  Capitalized software
  Impairment of long-lived assets
  Capital stock
   Accumulated other comprehensive income
  2005
    
    
    2004Translation adjustment
    
    $
    521
    
    
    $
    519Minimum pension liability adjustment
    
    
    (36
    )
    
    
    (18
    )Net unrealized gain (loss) on derivative securities
    
    
    55
    
    
    
    (20
    )Net unrealized investment (loss) gain
    
    
    (143
    )
    
    
    20Accumulated other comprehensive income
    
    $
    397
    
    
    $
    501
 Income taxes
  Use of estimates
  -20-




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##### Table of Contents



Earnings per share, including pro forma effects of stock-based compensation
  2005
    
    
    2004
    
    
    2003Net income (loss) in thousands
    
    $
    10,128
    
    
    $
    11,381
    
    
    $
    (4,192
    )Weighted average shares outstanding
    
    
    16,337,903
    
    
    
    15,926,839
    
    
    
    15,487,435Assumed exercise of stock options,
weighted average of incremental
shares
    
    
    251,408
    
    
    
    583,989
    
    
    
    Assumed purchase of stock under
stock purchase plan, weighted
average
    
    
    1,983
    
    
    
    33,161
    
    
    
    Diluted
shares  adjusted weighted
average shares and assumed
conversions
    
    
    16,591,294
    
    
    
    16,543,989
    
    
    
    15,487,435Basic earnings (loss) per share
    
    $
    0.62
    
    
    $
    0.71
    
    
    $
    (0.27
    )Diluted earnings (loss) per share
    
    $
    0.61
    
    
    $
    0.69
    
    
    $
    (0.27
    )
        2005
    
    
    2004
    
    
    2003Net income (loss)
    
    $
    10,128
    
    
    $
    11,381
    
    
    $
    (4,192
    )Add: Stock-based employee compensation (income) expense
included in reported income/loss, net of related tax effects
    
    
    (5
    )
    
    
    45
    
    
    
    29Deduct: Stock-based employee compensation expense
determined under fair value based methods for all awards, net of related tax effects
    
    
    (6,168
    )
    
    
    (4,452
    )
    
    
    (4,029
    )Pro forma net income (loss)
    
    $
    3,955
    
    
    $
    6,974
    
    
    $
    (8,192
    )Pro forma earnings (loss) per share:Basic
    
    $
    0.24
    
    
    $
    0.44
    
    
    $
    (0.53
    )Diluted
    
    $
    0.24
    
    
    $
    0.42
    
    
    $
    (0.53
    )
 -21-




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##### Table of Contents



Derivatives and Hedging Activities
    Reclassifications
  Recent accounting pronouncements
     -22-




---



##### Table of Contents



Note B
 Guarantors Disclosure Requirements
 Guarantee of original lease:
  Product warranties:
   2005
    
    
    2004Beginning balance
    
    $
    1,459
    
    
    $
    1,498Accruals for warranties issued during the period
    
    
    1,823
    
    
    
    1,568Accruals related to pre-existing warranties
(including changes in estimates and expiring warranties)
    
    
    (425
    )
    
    
    (504
    )Settlements made (in cash or in kind) during the period
    
    
    (1,773
    )
    
    
    (1,103
    )Ending balance
    
    $
    1,084
    
    
    $
    1,459
 Note C
 Repurchase of Common Shares
    -23-




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##### Table of Contents



Note D
 Short-term Investments
   Adjusted cost
    
    
    Unrealized gains
    
    
    Unrealized losses
    
    
    Market valueMoney market funds
    
    $
    2,000
    
    
    $
    
    
    
    $
    
    
    
    $
    2,000U.S. government and
agency securities
    
    
    25,537
    
    
    
    3
    
    
    
    (221
    )
    
    
    25,319Corporate notes and
bonds
    
    
    13,550
    
    
    
    
    
    
    
    
    
    
    
    13,550Total short-term
investments
    
    $
    41,087
    
    
    $
    3
    
    
    $
    (221
    )
    
    $
    40,869
  Adjusted cost
    
    
    Unrealized gains
    
    
    Unrealized losses
    
    
    Market valueMoney market funds
    
    $
    2,500
    
    
    $
    
    
    
    $
    
    
    
    $
    2,500U.S. government and agency securities
    
    
    11,030
    
    
    
    4
    
    
    
    (8
    )
    
    
    11,026Corporate notes and bonds
    
    
    18,551
    
    
    
    35
    
    
    
    
    
    
    
    18,586Total short-term investments
    
    $
    32,081
    
    
    $
    39
    
    
    $
    (8
    )
    
    $
    32,112
  2005
    
    
    2004Less than 1 year
    
    $
    24,512
    
    
    $
    21,0861 to 5 years
    
    
    16,357
    
    
    
    11,026Total short-term investments
    
    $
    40,869
    
    
    $
    32,112
  Note E  Financing Arrangements
    Note F  Foreign Currency
   -24-




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##### Table of Contents



Note G  Employee Benefit Plans
  United States Plan
    
    
    Non-U.S. Plan2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost-benefits earned during the year
    
    $
    1,274
    
    
    $
    1,242
    
    
    $
    181
    
    
    $
    176Interest cost on projected benefit obligation
    
    
    1,859
    
    
    
    1,760
    
    
    
    281
    
    
    
    285Expected return on plan assets
    
    
    (2,685
    )
    
    
    (2,557
    )
    
    
    (77
    )
    
    
    (68
    )Amortization of transition asset
    
    
    (43
    )
    
    
    (43
    )
    
    
    22
    
    
    
    21Amortization of prior service cost
    
    
    178
    
    
    
    178
    
    
    
    5
    
    
    
    5Net periodic pension cost
    
    $
    583
    
    
    $
    580
    
    
    $
    412
    
    
    $
    419
  United States Plan
    
    
    Non-U.S. Plan*2005
    
    
    2004
    
    
    2005
    
    
    2004Change in projected benefit obligations:Benefit obligation at beginning of year
    
    $
    29,063
    
    
    $
    28,626
    
    
    $
    5,311
    
    
    $
    4,624Service cost
    
    
    1,274
    
    
    
    1,242
    
    
    
    181
    
    
    
    176Interest cost
    
    
    1,859
    
    
    
    1,760
    
    
    
    281
    
    
    
    285Actuarial (gain) loss
    
    
    5,859
    
    
    
    (1,504
    )
    
    
    999
    
    
    
    50Benefits paid
    
    
    (1,115
    )
    
    
    (1,061
    )
    
    
    (144
    )
    
    
    (138
    )Foreign currency exchange rate changes
    
    
    
    
    
    
    
    
    
    
    (249
    )
    
    
    314Benefit obligation at year end
    
    $
    36,940
    
    
    $
    29,063
    
    
    $
    6,379
    
    
    $
    5,311Change in plan assets:Fair value of plan assets at beginning of year
    
    $
    29,662
    
    
    $
    25,753
    
    
    $
    1,061
    
    
    $
    930Actual return on pension assets
    
    
    2,362
    
    
    
    3,970
    
    
    
    28
    
    
    
    38Employer contributions
    
    
    3,500
    
    
    
    1,000
    
    
    
    62
    
    
    
    51Benefits paid
    
    
    (1,115
    )
    
    
    (1,061
    )
    
    
    (21
    )
    
    
    (20
    )Foreign currency exchange rate changes
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    62Fair value of plan assets at end of year
    
    
    34,409
    
    
    
    29,662
    
    
    
    1,092
    
    
    
    1,061Funded
status  over (under) funded
    
    
    (2,531
    )
    
    
    599
    
    
    
    (5,287
    )
    
    
    (4,250
    )Unrecognized actuarial (gain) loss
    
    
    10,896
    
    
    
    4,715
    
    
    
    611
    
    
    
    (393
    )Contributions after measurement date
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    Unrecognized prior service cost
    
    
    870
    
    
    
    1,048
    
    
    
    32
    
    
    
    38Unrecognized initial net (asset) obligation
    
    
    (10
    )
    
    
    (54
    )
    
    
    60
    
    
    
    84Prepaid pension assets (pension liability) recognized
    
    $
    9,225
    
    
    $
    7,308
    
    
    $
    (4,584
    )
    
    $
    (4,521
    )
  United States Plan
    
    
    Non-U.S. Plan*2005
    
    
    2004
    
    
    2005
    
    
    2004Other assets (long-term)
    
    $
    9,225
    
    
    $
    7,308
    
    
    $
    
    
    
    $
    Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    (4,584
    )
    
    
    (4,521
    )Prepaid pension assets (pension liability) recognized
    
    $
    9,225
    
    
    $
    7,308
    
    
    $
    (4,584
    )
    
    $
    (4,521
    )
 
 *
    
    The Company has purchased indirect insurance of $4,425 which is expected to be available to the
Company as non-U.S. pension liabilities of $4,584 mature. The caption, Other assets, on the
Companys Consolidated Balance Sheets includes $4,425 and $4,279 at September 30, 2005 and 2004,
respectively, for this asset. In accordance with SFAS No. 87, Employers Accounting for Pensions,
this Company asset is not included in the non-U.S. plan assets. -25-




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##### Table of Contents



June 30,2005
    
    
    
    2004Equity securities
    
    
    61
    %
    
    
    64
    %Debt securities
    
    
    12
    
    
    
    15Market neutral hedge fund
    
    
    18
    
    
    
    15Cash equivalent (money market fund)
    
    
    7
    
    
    
    3Real estate
    
    
    2
    
    
    
    All other
    
    
    
    
    
    
    3100
    %
    
    
    100
    %
    2005
    
    
    
    2004United States Pension Plan:Discount rate
    
    
    5.5
    %
    
    
    6.5
    %Rate of increase in compensation levels
    
    
    3.5
    %
    
    
    3.5
    %Non-U.S. Pension Plan:Discount rate
    
    
    4.25
    %
    
    
    5.25
    %Rate of increase in compensation levels
    
    
    3.0
    %
    
    
    3.0
    %
  2005
    
    
    
    2004
    
    
    
    2003United States Pension Plan:Discount rate
    
    
    6.5
    %
    
    
    6.25
    %
    
    
    6.75
    %Expected long-term rate of return on plan assets
    
    
    8.25
    %
    
    
    8.25
    %
    
    
    8.25
    %Rate of increase in compensation levels
    
    
    3.5
    %
    
    
    3.5
    %
    
    
    4.5
    %Non-U.S. Pension Plan:Discount rate
    
    
    5.25
    %
    
    
    6.0
    %
    
    
    6.0
    %Expected long-term rate of return on plan assets
    
    
    7.0
    %
    
    
    7.0
    %
    
    
    7.0
    %Rate of increase in compensation levels
    
    
    3.0
    %
    
    
    3.0
    %
    
    
    3.0
    %
  -26-




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##### Table of Contents



United States Plan
    
    
    Non-U.S. Plan2006
    
    $
    1,077
    
    
    $
    1442007
    
    $
    1,127
    
    
    $
    1682008
    
    $
    1,184
    
    
    $
    1972009
    
    $
    1,241
    
    
    $
    2302010
    
    $
    1,293
    
    
    $
    2442011  2015
    
    $
    8,866
    
    
    $
    1,538
    Note H  Stock Plans
 Stock Option Plans
    -27-




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##### Table of Contents



Outstanding
    
    
    ExercisableWeighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Average
    
    
    Number
    
    
    Averageof Shares
    
    
    Exercise Price
    
    
    of Shares
    
    
    Exercise PriceSeptember 30, 2002
    
    
    2,936,189
    
    
    $
    17.70
    
    
    
    1,327,715
    
    
    $
    15.39Options
granted at fair market value
    
    
    694,550
    
    
    
    15.35Options exercised
    
    
    (99,400
    )
    
    
    3.74Options forfeited
    
    
    (131,000
    )
    
    
    22.74September 30, 2003
    
    
    3,400,339
    
    
    
    17.44
    
    
    
    1,831,702
    
    
    
    17.22Options
granted at fair market value
    
    
    661,600
    
    
    
    19.15Options exercised
    
    
    (569,969
    )
    
    
    4.32Options forfeited
    
    
    (87,124
    )
    
    
    20.97September 30, 2004
    
    
    3,404,846
    
    
    
    19.88
    
    
    
    1,830,472
    
    
    
    22.54Options
granted at fair market value
    
    
    94,250
    
    
    
    16.33Options exercised
    
    
    (67,050
    )
    
    
    7.24Options forfeited
    
    
    (104,700
    )
    
    
    19.80September 30, 2005
    
    
    3,327,346
    
    
    $
    20.03
    
    
    
    3,186,059
    
    
    $
    20.32
  Outstanding
    
    
    
    
    
    
    ExercisableWeightedAverageNumber
    
    
    Remaining
    
    Weighted
    
    
    
    Number
    
    
    WeightedRange of
    
    of Shares
    
    
    Contractual
    
    Average
    
    
    
    of Shares
    
    
    AverageExercise Prices
    
    Outstanding
    
    
    Life (years)
    
    Exercise Price
    
    
    
    Exercisable
    
    
    Exercise Price$2.53 - $5.72
    
    
    314,446
    
    
    2.94
    
    $
    4.23
    
    
    
    
    314,446
    
    
    $
    4.23$10.70 - $14.95
    
    
    606,350
    
    
    6.91
    
    $
    13.51
    
    
    
    
    465,063
    
    
    $
    13.47$15.38 - $17.00
    
    
    639,750
    
    
    8.00
    
    $
    16.19
    
    
    
    
    639,750
    
    
    $
    16.19$17.08 - $23.13
    
    
    1,234,050
    
    
    7.28
    
    $
    18.86
    
    
    
    
    1,234,050
    
    
    $
    18.86$32.28 - $36.85
    
    
    72,000
    
    
    5.36
    
    $
    36.72
    
    
    
    
    72,000
    
    
    $
    36.72$45.13
    
    
    456,000
    
    
    4.84
    
    $
    45.13
    
    
    
    
    456,000
    
    
    $
    45.13$48.44 -$66.75
    
    
    4,750
    
    
    4.99
    
    $
    61.95
    
    
    
    
    4,750
    
    
    $
    61.953,327,346
    
    
    6.56
    
    $
    20.03
    
    
    
    
    3,186,059
    
    
    $
    20.32
 -28-




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##### Table of Contents



1993 Employee Stock Purchase Plan
   Pro Forma Disclosure
   2005
    
    
    
    2004
    
    
    
    2003Expected life (years)
    
    
    2.5
    
    
    
    4.5
    
    
    
    4.2Risk-free interest rate
    
    
    3.4
    %
    
    
    3.5
    %
    
    
    2.5
    %Volatility
    
    
    44
    %
    
    
    51
    %
    
    
    54
    %Dividend yield
    
    
    1.0
    %
    
    
    1.0
    %
    
    
    1.0
    %
  2005
    
    
    
    2004
    
    
    
    2003Expected life (years)
    
    
    1.0
    
    
    
    1.0
    
    
    
    1.0Risk-free interest rate
    
    
    1.7
    %
    
    
    1.1
    %
    
    
    1.5
    %Volatility
    
    
    41
    %
    
    
    50
    %
    
    
    55
    %Dividend yield
    
    
    1.0
    %
    
    
    1.0
    %
    
    
    1.0
    %
 Subsequent Changes to Stock-based Compensation
   -29-




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##### Table of Contents



Note I  Income Taxes
  2005
    
    
    2004
    
    
    2003United States
    
    $
    12,269
    
    
    $
    8,974
    
    
    $
    (6,711
    )Non-U.S.
    
    
    1,818
    
    
    
    6,567
    
    
    
    2,350$
    14,087
    
    
    $
    15,541
    
    
    $
    (4,361
    )
  2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    4,032
    
    
    $
    1,620
    
    
    $
    255Non-U.S.
    
    
    1,705
    
    
    
    2,681
    
    
    
    922State and local
    
    
    301
    
    
    
    46
    
    
    
    (80
    )Total current
    
    
    6,038
    
    
    
    4,347
    
    
    
    1,097Deferred:Federal
    
    
    (1,530
    )
    
    
    (50
    )
    
    
    (873
    )Non-U.S.
    
    
    (549
    )
    
    
    (137
    )
    
    
    (393
    )Total deferred
    
    
    (2,079
    )
    
    
    (187
    )
    
    
    (1,266
    )Total provision (benefit)
    
    $
    3,959
    
    
    $
    4,160
    
    
    $
    (169
    )
  2005
    
    
    2004
    
    
    2003Federal income tax at statutory rate
    
    $
    4,790
    
    
    $
    5,284
    
    
    $
    (1,552
    )State and local income taxes
    
    
    (9
    )
    
    
    (103
    )
    
    
    292Tax on non-U.S. income
    
    
    (216
    )
    
    
    (284
    )
    
    
    215Foreign tax
credit carry forwards
    
    
    (323
    )
    
    
    (98
    )
    
    
    151Valuation allowance
    
    
    234
    
    
    
    105
    
    
    
    1,291Other tax
credit carry forwards
    
    
    (674
    )
    
    
    (281
    )
    
    
    (495
    )Adjustment for prior years taxes
    
    
    
    
    
    
    (552
    )
    
    
    Other
    
    
    157
    
    
    
    89
    
    
    
    (71
    )Effective
provision (benefit) for income taxes
    
    $
    3,959
    
    
    $
    4,160
    
    
    $
    (169
    )
 -30-




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##### Table of Contents



2005
    
    
    2004Deferred tax assets:Nonqualified stock options
    
    $
    222
    
    
    $
    3,183Capitalized research and development
    
    
    12,478
    
    
    
    9,347Inventory
    
    
    1,758
    
    
    
    1,837Deferred compensation
    
    
    1,394
    
    
    
    2,239Tax credit carryforward
    
    
    7,799
    
    
    
    8,071Depreciation
    
    
    1,025
    
    
    
    1,044Warranty
    
    
    339
    
    
    
    487Medical
    
    
    131
    
    
    
    157Intangibles
    
    
    88
    
    
    
    105State and local taxes
    
    
    1,104
    
    
    
    1,355Foreign net operating losses
    
    
    328
    
    
    
    417Other
    
    
    2,374
    
    
    
    1,301Total deferred tax assets
    
    
    29,040
    
    
    
    29,543Deferred tax liabilities:Pension contribution
    
    
    3,229
    
    
    
    2,558Other
    
    
    463
    
    
    
    464Total deferred tax liabilities
    
    
    3,692
    
    
    
    3,022Valuation allowance
    
    
    (2,817
    )
    
    
    (2,627
    )Net deferred tax assets
    
    $
    22,531
    
    
    $
    23,894
    2005
    
    
    2004
    
    
    2003Balance at beginning of year
    
    $
    2,627
    
    
    $
    2,332
    
    
    $
    532Charged to costs and expenses
    
    
    190
    
    
    
    105
    
    
    
    1,822Charged to other accounts
    
    
    
    
    
    
    190
    (a)
    
    
    510
    (b)Deductions
    
    
    
    
    
    
    
    
    
    
    (532
    )(c)Balance at end of year
    
    $
    2,817
    
    
    $
    2,627
    
    
    $
    2,332
 (a)
    
    The valuation allowance relates to provision for foreign tax credits and certain foreign
net operating losses, which may not be realized due to the uncertainty of future profitability
levels. Approximately $190 of the valuation allowance recorded in fiscal 2004 was recorded as a
reduction of shareholders equity as foreign tax credits generated in the current year could not be
utilized due to the benefit of nonqualified stock options.(b)
    
    The valuation allowance relates to provision for foreign tax credits, R&D credits, and certain
foreign net operating losses, which may not be realized due to the uncertainty of future
profitability levels. Approximately $510 of the valuation allowance recorded in fiscal 2003 was
recorded as a reduction of shareholders equity as foreign tax credits generated in that year could
not be utilized due to the benefit of nonqualified stock options.(c)
    
    The valuation allowance for Japanese taxes was no longer required as Japanese operations became
profitable and utilized net operating loss carryforwards.
  Year Expiration CommencesAlternative minimum tax credit
    
    $
    2,188
    
    
    indefiniteForeign tax credit
    
    
    2,405
    
    
    2012-2015R&D credit
    
    
    3,206
    
    
    2010-2020Foreign NOLs
    
    
    328
    
    
    indefinite$
    8,127
 -31-




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##### Table of Contents



Note J
 Severance Charges
    2005
    
    
    2004Beginning balance
    
    $
    107
    
    
    $
    503Expense recognized and adjustments
    
    
    (21
    )
    
    
    (21
    )Payments made
    
    
    (94
    )
    
    
    (406
    )Foreign exchange revaluation
    
    
    8
    
    
    
    31Ending balance
    
    $
    
    
    
    $
    107
 Note K
 Commitments and Contingencies
  2006
    
    $
    1,5842007
    
    
    8602008
    
    
    5372009
    
    
    3662010
    
    
    204After 2010
    
    
    276Total minimum operating lease payments
    
    $
    3,827
  Note L
 Segment and Geographic Information
  2005
    
    
    2004
    
    
    2003Net sales:Americas
    
    $
    43,237
    
    
    $
    46,998
    
    
    $
    35,605Europe
    
    
    43,544
    
    
    
    48,065
    
    
    
    38,594Asia
    
    
    54,771
    
    
    
    45,185
    
    
    
    32,519$
    141,552
    
    
    $
    140,248
    
    
    $
    106,718Long-lived assets:Americas
    
    $
    24,408
    
    
    $
    22,750
    
    
    $
    21,131Germany
    
    
    4,720
    
    
    
    4,545
    
    
    
    4,055Other
    
    
    1,064
    
    
    
    756
    
    
    
    738$
    30,192
    
    
    $
    28,051
    
    
    $
    25,924
 -32-




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##### Table of Contents



Unaudited Quarterly Results of Operations
  First
    
    
    Second
    
    
    Third
    
    
    FourthFiscal 2005Net sales
    
    $
    35,643
    
    
    $
    37,663
    
    
    $
    33,251
    
    
    $
    34,995Gross profit
    
    
    21,443
    
    
    
    23,082
    
    
    
    20,138
    
    
    
    21,322Income before income taxes
    
    
    4,045
    
    
    
    4,659
    
    
    
    2,732
    
    
    
    2,651Net income
    
    
    2,791
    
    
    
    3,215
    
    
    
    1,854
    
    
    
    2,268Diluted earnings per share
    
    
    .17
    
    
    
    .19
    
    
    
    .11
    
    
    
    .14Fiscal 2004Net sales
    
    $
    29,742
    
    
    $
    33,989
    
    
    $
    36,822
    
    
    $
    39,695Gross profit
    
    
    17,599
    
    
    
    21,332
    
    
    
    22,893
    
    
    
    23,819Income before income taxes
    
    
    1,578
    
    
    
    3,805
    
    
    
    4,788
    
    
    
    5,370Net income
    
    
    1,089
    
    
    
    2,625
    
    
    
    3,177
    
    
    
    4,490Diluted earnings per share
    
    
    .07
    
    
    
    .16
    
    
    
    .19
    
    
    
    .27
 
 ITEM 9  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 ITEM 9A  CONTROLS AND PROCEDURES.
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
    Changes in Internal Control Over Financial Reporting
  Chief Executive and Chief Financial Officer Certifications
  
 ITEM
9B  OTHER INFORMATION
  -33-




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##### Table of Contents



PART III.
 
 ITEM 10  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
   
 ITEM 11  EXECUTIVE COMPENSATION.
  
 ITEM 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
  
 ITEM 13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
  
 ITEM 14  PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  
 PART IV.
 
 ITEM 15  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 (a)(1) Financial Statements
  (a)(2) Financial Statement Schedules
  -34-




---



##### Table of Contents



(a)(3) Index to Exhibits
 ExhibitNumber
    
    Description3(a)
    
    Code of Regulations, as amended on February 9, 1985. (Reference is made to Exhibit 3(a) of the Companys
Annual Report on Form 10-K
for the year ended September 30, 2002 (File No. 1-9965), which Exhibit is incorporated herein by reference.)3(b)
    
    Amended Articles of Incorporation, as amended on February 17, 2001. (Reference is made to Exhibit 3(c) of the
Companys Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 2001 (File No. 1-9965), which Exhibit is
incorporated herein by reference.)4(a)
    
    Specimen Share Certificate for the Common Shares, without par value. (Reference is made to Exhibit 4(a) of
the Companys Annual
Report on Form 10-K for the year ended September 30, 1999 (File No. 1-9965), which Exhibit is incorporated
herein by reference.)10(a)*
    
    Keithley Instruments, Inc. Supplemental Deferral Plan as amended. (Reference is made to Exhibit 10(b) of the
Companys Annual Report
on Form 10-K for the year ended September 30, 1999 (File No. 1-9965), which Exhibit is incorporated herein by
reference.)10(b)*
    
    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)*
    
    Supplemental Executive Retirement Plan. (Reference is made to Exhibit 10(e) of the Companys Annual Report on
Form 10-K for the year
ended September 30, 1999 (File No. 1-9965), which Exhibit is incorporated herein by reference.)10(e)*
    
    1992 Stock Incentive Plan, as amended. (Reference is made to Exhibit 10(f) of the Companys Annual Report on
Form 10-K for the year
ended September 30, 1999 (File No. 1-9965), which Exhibit is incorporated herein by reference.)10(f)*
    
    1992 Directors Stock Option Plan. (Reference is made to Exhibit 10(g) of the Companys Annual Report on Form
10-K for the year ended
September 30, 1999 (File No. 1-9965), which Exhibit is incorporated herein by reference.)10(g)
    
    Credit Agreement dated as of March 30, 2001 by and among Keithley Instruments, Inc. and Subsidiary Borrowers
and the Lenders and
Bank One, NA, as agent. (Reference is made to Exhibit 10(l) of the Companys Quarterly Report on form 10-Q
for the quarter ended
March 31, 2001 (File No. 1-9965) which Exhibit is incorporated herein by reference.)10(h)*
    
    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(i)*
    
    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.)10(j)
    
    First Amendment to Credit Agreement, dated August 1, 2002. (Reference is made to Exhibit 10(j) of the
Companys Quarterly Report on
Form 10-Q for the quarter year ended June 30, 2002 (File No. 1-9965), which Exhibit is incorporated herein by
reference.)10(k)*
    
    Keithley Instruments, Inc. 2002 Stock Incentive Plan (Reference is made to Exhibit 4(b) of the Companys
Registration Statement under
The Securities Act of 1933 dated May 13, 2002 on Form S-8 (File No. 333-88088), which Exhibit is incorporated
herein by reference.)10(l)
    
    Second Amendment to Credit Agreement, dated March 28, 2003. (Reference is made to Exhibit 10(l) of the
Companys Quarterly Report
on Form 10-Q for the quarter ended March 31, 2003 (File No. 1-9965), which Exhibit is incorporated herein by
reference.)10(m)
    
    Third Amendment to Credit Agreement, dated March 30, 2004. (Reference is made to Exhibit 10(m) of the
Companys Quarterly Report
on Form 10-Q for the quarter ended March 31, 2004 (File No. 1-9965), which Exhibit is incorporated herein by
reference.)10(n)
    
    Fourth Amendment to Credit Agreement, dated March 30, 2005. (Reference is made to Exhibit 10(n) of the
Companys Current Report
on Form 8-K dated March 30, 2005 (File No. 1-9965), which Exhibit is incorporated herein by reference.)10(o)*
    
    Form of Indemnification Agreement entered into by the Company and each of Brian R. Bachman, James T.
Bartlett, James B. Griswold,
Leon J. Hendrix, Jr., William Hudson, Joseph P. Keithley, Dr. N. Mohan Reddy, Barbara Scherer and R. Elton
White, as members of the
Companys Board of Directors On December 2, 2004. (Reference is made to Exhibit 10.1 of the Companys Current
Report on Form 8-K
dated December 2, 2004 (File No. 1-9965), which Exhibit is incorporated herein by reference.)10(p)*
    
    Form of Indemnification Agreement entered into by the Company and each of Philip R. Etsler, Mark J. Plush and
Linda C. Rae, as executive
officers of the Company, on December 2, 2004. (Reference is made to Exhibit 10.2 of the Companys Current
Report on Form 8-K dated
December 2, 2004 (File No. 1-9965), which Exhibit is incorporated herein by reference.)10(q)*
    
    Form of Indemnification Agreement entered into by the Company and Brian J. Jackman, as a member of the
Companys Board of
Directors On May 5, 2005. (Reference is made to Exhibit 10.1 of the Companys Current Report on Form 8-K
dated December 2, 2004
(File No. 1-9965), which Exhibit is incorporated herein by reference.)10(r)*
    
    Keithley Instruments, Inc. 2002 Stock Incentive Plan (as amended September 8, 2005)14
    
    Code of Ethics.21
    
    Subsidiaries of the Company.23
    
    Consent of PricewaterhouseCoopers LLP.31(a)
    
    Certification of Joseph P. Keithley pursuant to Rule 13a-14(a)-15d-14(a).31(b)
    
    Certification of Mark J. Plush pursuant to Rule 13a-14(a)-15d-14(a).32(a)+
    
    Certification of Joseph P. Keithley pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.32(b)+
    
    Certification of Mark J. Plush pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.
 
 *
    
    Management contract or compensatory plan or arrangement.+
    
    The certifications furnished pursuant to this item will not be deemed filed for purposes of Section 18 of
the Exchange Act (15 U.S.C.
78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be
incorporated by reference into any
filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference. -35-




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##### Table of Contents



SIGNATURES
  
 By:
    
    /s/ Joseph P. KeithleyJoseph P. Keithley,(Chairman, President and Chief Executive Officer)Date:
    
    December 8, 2005
  Signature
    
    Title
    
    Date/s/Joseph P. Keithley
    
    Chairman of the Board of Directors, President and
    
    12/8/05Joseph P. Keithley
    
    Chief Executive Officer (Principal Executive Officer)/s/ Mark J. Plush
    
    Vice President and Chief Financial Officer
    
    12/8/05Mark J. Plush
    
    (Principal Financial and Accounting Officer)/s/ Brian R. Bachman
    
    Director
    
    12/8/05Brian R. Bachman/s/ James T. Bartlett
    
    Director
    
    12/8/05James T. Bartlett/s/ James B. Griswold
    
    Director
    
    12/8/05James B. Griswold/s/ Leon J. Hendrix, Jr.
    
    Director
    
    12/8/05Leon J. Hendrix, Jr./s/ Brian J. Jackman
    
    Director
    
    12/8/05Brian J. Jackman/s/ N. Mohan Reddy
    
    Director
    
    12/8/05N. Mohan Reddy/s/ Barbara V. Scherer
    
    Director
    
    12/8/05Barbara
V. Scherer/s/ R. Elton White
    
    Director
    
    12/8/05R. Elton White
 -36-