##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For fiscal year ended, SEPTEMBER 30, 2006
    
    Commission File Number 1-9965
 KEITHLEY INSTRUMENTS, INC.
  Ohio
(State or other jurisdiction of incorporation or organization)
    
    34-0794417
(I.R.S. Employer Identification No.)
 28775 Aurora Road, Solon, Ohio, 44139  (440) 248-0400
 Common Shares, Without Par Value
(Title of Each Class)
    
    New York Stock Exchange
(Name of Each Exchange on Which Registered)
 None
 o þ
 o þ
 þ o
 o
  o þ o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




---



##### 



Keithley Instruments, Inc.
10-K Annual Report
 Table of Contents
 PAGEPART I:Item 1
    
    Business
    
    
    2Item 1A
    
    Risk Factors
    
    
    5Item 1B
    
    Unresolved Staff Comments
    
    
    7Item 2
    
    Properties
    
    
    7Item 3
    
    Legal Proceedings
    
    
    7Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    8PART II:Item 5
    
    Market for the Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    9Item 6
    
    Selected Financial Data
    
    
    10Item 7
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 7A
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 8
    
    Financial Statements and Supplementary Data
    
    
    18Item 9
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    39Item 9A
    
    Controls and Procedures
    
    
    39Item 9B
    
    Other Information
    
    
    39PART III:Item 10
    
    Directors and Executive Officers of the Registrant
    
    
    40Item 11
    
    Executive Compensation
    
    
    40Item 12
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    40Item 13
    
    Certain Relationships and Related Transactions
    
    
    40Item 14
    
    Principal Accountant Fees and Services
    
    
    40PART IV:Item 15
    
    Exhibits and Financial Statement Schedules
    
    
    40SIGNATURES
    
    
    
    
    43
 ~ 1 ~




---



##### 



Forward-Looking Statements
     PART I
 ITEM 1  BUSINESS
 General
     Business Strategy
   ~ 2 ~




---



##### 



Product Offerings
  New Products During Fiscal Year 2006
     Geographic Markets and Distribution
   Sources and Availability of Raw Materials
  Patents
  Seasonal Trends and Working Capital Requirements
  ~ 3 ~




---



##### 



Customers
  Backlog
  Competition
  Research and Development
  Government Regulations
  Employees
  Foreign Operations and Export Sales
   Executive Officers Of The Registrant
  Name
    
    Position
    
    AgeJoseph P. Keithley
    
    Chairman of the Board of Directors, President and Chief Executive Officer
    
    
    58Steven A. Chipchase
    
    Vice President Operations
    
    
    43Philip R. Etsler
    
    Vice President Human Resources
    
    
    56Alan S. Gaffney
    
    Vice President Commercial Marketing and Information Systems
    
    
    36Mark A. Hoersten
    
    Vice President Business Management
    
    
    48Larry L. Pendergrass
    
    Vice President New Product Development
    
    
    51John A. Pesec
    
    Vice President Worldwide Sales and Support
    
    
    46Mark J. Plush
    
    Vice President and Chief Financial Officer
    
    
    57Linda C. Rae
    
    Executive Vice President and Chief Operating Officer
    
    
    41
 ~ 4 ~




---



##### 



ITEM 1A  RISK FACTORS
  Cyclicality of the electronics industry and timing of large orders
  Rapid technology changes
  Competitive factors
  ~ 5 ~




---



##### 



Dependence on key suppliers
  International operations, political and economic conditions
  Changes in manufacturing processes
  Tax planning strategies
  Information technology management systems
  Fixed cost of sales force
  Non-cash compensation expense
  Historical stock option grant practices
   ~ 6 ~




---



##### 



Other risk factors
  ITEM 1B  UNRESOLVED STAFF COMMENTS
  ITEM 2  PROPERTIES
  ITEM 3  LEGAL PROCEEDINGS
 Stock Option Investigations
    
    
    There was no evidence of backdating annual stock option grants prior to the date of
approval by the Board of Directors.
 
    
    There was a multi-day delay by management in setting the exercise price for annual stock
option grants in 2000, 2001 and 2002. The delay resulted in the options having a lower
exercise price than the price on the date of Board approval. In each of these three years, the
price selected by management was the lowest price for the Companys common shares for the
period between Board approval and the administrative recording of the grants.
 
    
    Although the Special Committee determined that the terms of the Companys stock incentive
plans required the options to be priced on the date the Board approved them, there was no
finding of intentional misconduct on the part of senior management or any other Keithley
officer, Director or employee responsible for the administration of the Companys stock option
grants. Notwithstanding the fact that management exceeded its authority under the Companys
plans, the Company will honor the options in accordance with the terms as they were set by
management.
 
    
    Based on evidence gathered and analyzed by the Independent Counsel, the Special Committee
found the dates selected by management for the annual grants in 2000-2002 are the appropriate
measurement dates for accounting purposes. Accordingly, it is unnecessary for the Company to
record any compensation expense with respect to the annual option grants in 2000-2002, and
therefore there is no need for the Company to restate its financial statements as a result of
these grants.
 ~ 7 ~




---



##### 




    
    The Special Committee concluded that there were no material misstatements in the Companys
public filings regarding the number of annual options granted during the years reviewed; there
is no evidence that the Company timed the grant date or pricing of annual stock option grants
to take advantage of material non-public information and there was no wrongdoing or lack of
oversight by the Companys independent directors or the Human Resources and Compensation
Committee of the Board of Directors (the Compensation Committee).
 
    
    The Special Committee also reviewed the Companys practices regarding stock option grants,
other than its annual grants, which are generally grants of smaller numbers of options to new
hires and to existing employees for promotions. The Special Committee concluded that
management exceeded certain aspects of the authority granted to management by the Companys
stock option plans and the Compensation Committee, but that these grants involved small
numbers of shares and were largely the result of ministerial errors by management.
    Derivative Litigation
    Other
  ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  ~ 8 ~




---



##### 



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 2006
    
    High
    
    Low
    
    Per Common Share
    
    Common ShareFirst Quarter
    
    $
    16.30
    
    
    $
    13.81
    
    
    $
    .0375
    
    
    $
    .0300Second Quarter
    
    
    15.95
    
    
    
    13.71
    
    
    
    .0375
    
    
    
    .0300Third Quarter
    
    
    16.10
    
    
    
    11.36
    
    
    
    .0375
    
    
    
    .0300Fourth Quarter
    
    
    13.43
    
    
    
    10.77
    
    
    
    .0375
    
    
    
    .0300Fiscal 2005First 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
    
    
    
    .0300
  Equity Compensation Plan Information as of September 30, 2006
 Number of securities remainingavailable for future issuanceNumber of securities to be
    
    Weighted-average
    
    under equity compensationissued upon exercise of
    
    exercise price of
    
    plans (excluding securitiesoutstanding options
    
    outstanding options
    
    reflected in column (a)Plan category
    
    (a)
    
    (b)
    
    (c)Equity compensation plans
approved
by security holders
    
    
    3,297,981
    
    
    $
    19.65
    
    
    
    1,528,389
    (1)Equity compensation plans not
approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    3,297,981
    
    
    $
    19.65
    
    
    
    1,528,389
    (1)
 (1)
    
    Includes 81,119 shares available for issuance under the 1993 Employee Stock Purchase and
Dividend Reinvestment Plan and 490,590 shares available for issuance under the 2005 Employee Stock
Purchase and Dividend Reinvestment Plan.
 Issuer Purchases of Equity Securities
  Total number of shares
    
    Maximum number ofpurchased as part of
    
    shares that may yetTotal number of
    
    Average price
    
    publicly announced
    
    be purchased undershares purchased
    
    paid per share
    
    plans or programs
    
    the plans or programsJuly 1  31, 2006
    
    
    150,000
    
    
    $
    12.40
    
    
    
    150,000
    
    
    
    1,635,000August 1  11, 2006
    
    
    40,500
    
    
    $
    11.27
    
    
    
    40,500
    
    
    
    1,594,500Total
    
    
    190,500
    
    
    $
    12.16
    
    
    
    190,500
    
    
    
    1,594,500
  ~ 9 ~




---



##### 



ITEM 6  SELECTED FINANCIAL DATA.
  For the years ended September 30,(In thousands of dollars except for per share data)
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Operating Results:Net sales
    
    $
    155,212
    
    
    
    141,552
    
    
    
    140,248
    
    
    
    106,718
    
    
    
    96,922Gross margin percentage
    
    
    61.3
    %
    
    
    60.7
    %
    
    
    61.1
    %
    
    
    55.3
    %
    
    
    56.2
    %Income (loss) before income taxes
    
    $
    9,913
    
    
    
    14,087
    
    
    
    15,541
    
    
    
    (4,361
    )
    
    
    (5,046
    )Net income (loss)
    
    $
    8,361
    
    
    
    10,128
    
    
    
    11,381
    
    
    
    (4,192
    )
    
    
    (3,080
    )Basic earnings (loss) per share
    
    $
    0.51
    
    
    
    0.62
    
    
    
    0.71
    
    
    
    (0.27
    )
    
    
    (0.20
    )Diluted earnings (loss) per share
    
    $
    0.50
    
    
    
    0.61
    
    
    
    0.69
    
    
    
    (0.27
    )
    
    
    (0.20
    )Common Stock Information:Cash dividends per Common Share
    
    $
    0.15
    
    
    
    0.15
    
    
    
    0.15
    
    
    
    0.15
    
    
    
    0.15Cash dividends per Class B Common Share
    
    $
    0.12
    
    
    
    0.12
    
    
    
    0.12
    
    
    
    0.12
    
    
    
    0.12Weighted average number of shares
outstanding- diluted
    
    
    16,567
    
    
    
    16,591
    
    
    
    16,544
    
    
    
    15,487
    
    
    
    15,687At fiscal year-end:Dividend payout ratio
    
    
    30.0
    %
    
    
    24.6
    %
    
    
    21.7
    %
    
    
    n/m
    
    
    
    n/mShareholders equity per share
    
    $
    7.03
    
    
    
    6.81
    
    
    
    6.26
    
    
    
    5.33
    
    
    
    5.81Closing market price
    
    $
    12.75
    
    
    
    14.60
    
    
    
    17.45
    
    
    
    14.15
    
    
    
    12.15Balance Sheet Data:Total assets
    
    $
    148,892
    
    
    
    142,364
    
    
    
    136,666
    
    
    
    114,186
    
    
    
    120,371Current ratio
    
    
    4.2
    
    
    
    4.2
    
    
    
    3.3
    
    
    
    3.4
    
    
    
    3.9Short-term debt
    
    $
    872
    
    
    
    
    
    
    
    440
    
    
    
    409
    
    
    
    539Long-term obligations
    
    $
    9,792
    
    
    
    8,240
    
    
    
    7,348
    
    
    
    9,631
    
    
    
    7,170Shareholders equity
    
    $
    116,503
    
    
    
    111,976
    
    
    
    101,577
    
    
    
    84,763
    
    
    
    92,448Total debt-to-capital
    
    
    0.7
    %
    
    
    
    
    
    
    0.4
    %
    
    
    0.5
    %
    
    
    0.6
    %Other Data:Return on average shareholders equity
    
    
    7.3
    %
    
    
    9.5
    %
    
    
    12.2
    %
    
    
    -4.7
    %
    
    
    -3.3
    %Return on average total assets
    
    
    5.7
    %
    
    
    7.3
    %
    
    
    9.1
    %
    
    
    -3.6
    %
    
    
    -2.5
    %Return on net sales
    
    
    5.4
    %
    
    
    7.2
    %
    
    
    8.1
    %
    
    
    -3.9
    %
    
    
    -3.2
    %Number of employees
    
    
    673
    
    
    
    651
    
    
    
    632
    
    
    
    608
    
    
    
    612Sales per employee
    
    $
    234.5
    
    
    
    220.7
    
    
    
    226.2
    
    
    
    174.9
    
    
    
    154.8Cash flow:Net cash provided by (used in) operating
activities
    
    $
    5,985
    
    
    
    10,543
    
    
    
    15,045
    
    
    
    (6,530
    )
    
    
    7,815Ten-year compound annual growth rate:Net sales
    
    
    2.7
    %
    
    
    2.6
    %
    
    
    4.6
    %
    
    
    1.6
    %
    
    
    0.2
    %Net income
    
    
    n/m
    
    
    
    7.5
    %
    
    
    28.8
    %
    
    
    n/m
    
    
    
    n/m
 n/m
    
    These ratios are not meaningful due to the reported net losses in 1996, 2002 and 2003.
 ~ 10 ~




---



##### 



ITEM 7  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Introduction and Overview
  Business Overview
      Critical Accounting Policies and Estimates
  Use of estimates:
  ~ 11 ~




---



##### 



Revenue recognition:
  Inventories:
  Income taxes:
   Pension plan:
     ~ 12 ~




---



##### 



Stock compensation plans:
  Results of Operations
   2006
    
    2005
    
    2004Net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of goods sold
    
    
    38.7
    
    
    
    39.3
    
    
    
    38.9Gross profit
    
    
    61.3
    
    
    
    60.7
    
    
    
    61.1Selling, general and administrative expenses
    
    
    40.9
    
    
    
    39.7
    
    
    
    39.6Product development expenses
    
    
    15.3
    
    
    
    12.0
    
    
    
    10.7Operating income
    
    
    5.1
    
    
    
    9.0
    
    
    
    10.8Investment income
    
    
    1.3
    
    
    
    1.0
    
    
    
    0.4Interest expense
    
    
    (0.0
    )
    
    
    (0.0
    )
    
    
    (0.1
    )Income before income taxes
    
    
    6.4
    
    
    
    10.0
    
    
    
    11.1Provision for income taxes
    
    
    1.0
    
    
    
    2.8
    
    
    
    3.0Net income
    
    
    5.4
    
    
    
    7.2
    
    
    
    8.1
    ~ 13 ~




---



##### 



Financial Condition, Liquidity and Capital Resources
 Working Capital
  2006
    
    
    2005Current assets:Cash and cash equivalents
    
    $
    10,501
    
    
    $
    14,397Short-term investments
    
    
    36,203
    
    
    
    40,869Refundable income taxes
    
    
    583
    
    
    
    387Accounts receivable and other, net
    
    
    26,836
    
    
    
    19,452Total inventories
    
    
    14,647
    
    
    
    13,151Deferred income taxes
    
    
    4,206
    
    
    
    4,444Prepaid expenses
    
    
    1,664
    
    
    
    1,385Total current assets
    
    
    94,640
    
    
    
    94,085Current liabilities:Short-term debt
    
    
    872
    
    
    
    Accounts payable
    
    
    8,033
    
    
    
    7,540Accrued payroll and related expenses
    
    
    6,089
    
    
    
    5,618Other accrued expenses
    
    
    4,870
    
    
    
    4,649Income taxes payable
    
    
    2,733
    
    
    
    4,341Total current liabilities
    
    
    22,597
    
    
    
    22,148Working capital
    
    $
    72,043
    
    
    $
    71,937
 ~ 14 ~




---



##### 



Sources and Uses of Cash
  2006
    
    
    2005Cash provided by (used in):Operating activities
    
    $
    5,985
    
    
    $
    10,543Investing activities
    
    
    (4,182
    )
    
    
    (12,786
    )Financing activities
    
    
    (5,861
    )
    
    
    93
         ~ 15 ~




---



##### 



Contractual Obligations
    
    Payments Due by PeriodTotal
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    More than 5 yearsShort-Term Debt
    
    $
    872
    
    
    $
    872
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating Lease Obligations
    
    
    6,337
    
    
    
    2,716
    
    
    
    3,036
    
    
    
    580
    
    
    
    5Payments Under Deferred
Compensation Agreements (a)
    
    
    394
    
    
    
    106
    
    
    
    212
    
    
    
    76
    
    
    
    Pension Benefit (b)
    
    
    
    
    
    
    
    
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )Total Contractual Obligations
    
    $
    7,603
    
    
    $
    3,694
    
    
    $
    3,248
    
    
    $
    656
    
    
    $
    5
 
 (a)
    
    Includes amounts due under a deferred compensation agreement with a retired executive. Amounts
exclude additional interest that will be earned from September 30, 2007 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, 2006. The Company made a 2006 pension contribution of $2,500 in
fiscal 2006, and as such does not have a required contribution due in fiscal 2007. 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
      ~ 16 ~




---



##### 



ITEM 7A  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   ~ 17 ~




---



##### 



ITEM 8  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Report of Independent Registered Public Accounting Firm
   Consolidated Financial Statements
   Internal Control Over Financial Reporting
    
 ~ 18 ~




---



##### 



Consolidated Statements of Operations
  2006
    
    
    2005
    
    
    2004Net sales
    
    $
    155,212
    
    
    $
    141,552
    
    
    $
    140,248Cost of goods sold
    
    
    60,037
    
    
    
    55,567
    
    
    
    54,605Gross profit
    
    
    95,175
    
    
    
    85,985
    
    
    
    85,643Selling, general and administrative expenses
    
    
    63,554
    
    
    
    56,177
    
    
    
    55,533Product development expenses
    
    
    23,671
    
    
    
    17,040
    
    
    
    15,017Operating income
    
    
    7,950
    
    
    
    12,768
    
    
    
    15,093Investment income
    
    
    1,972
    
    
    
    1,383
    
    
    
    540Interest expense
    
    
    (9
    )
    
    
    (64
    )
    
    
    (92
    )Income before income taxes
    
    
    9,913
    
    
    
    14,087
    
    
    
    15,541Provision for income taxes
    
    
    1,552
    
    
    
    3,959
    
    
    
    4,160Net income
    
    $
    8,361
    
    
    $
    10,128
    
    
    $
    11,381Basic earnings per share
    
    $
    0.51
    
    
    $
    0.62
    
    
    $
    0.71Diluted earnings per share
    
    $
    0.50
    
    
    $
    0.61
    
    
    $
    0.69
  ~ 19 ~




---



##### 



Consolidated Balance Sheets
  2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    10,501
    
    
    $
    14,397Short-term investments
    
    
    36,203
    
    
    
    40,869Refundable income taxes
    
    
    583
    
    
    
    387Accounts receivable and other, net of allowance for
doubtful accounts of $448 and $451 as of
September 30, 2006 and 2005, respectively
    
    
    26,836
    
    
    
    19,452Inventories:Raw materials
    
    
    9,375
    
    
    
    9,191Work in process
    
    
    1,208
    
    
    
    847Finished products
    
    
    4,064
    
    
    
    3,113Total inventories
    
    
    14,647
    
    
    
    13,151Deferred income taxes
    
    
    4,206
    
    
    
    4,444Prepaid expenses
    
    
    1,664
    
    
    
    1,385Total current assets
    
    
    94,640
    
    
    
    94,085Property, plant and equipment, at cost:Land
    
    
    1,325
    
    
    
    1,325Buildings and leasehold improvements
    
    
    16,961
    
    
    
    16,638Manufacturing, laboratory and office equipment
    
    
    31,682
    
    
    
    29,03349,968
    
    
    
    46,996Less-Accumulated depreciation and amortization
    
    
    35,543
    
    
    
    33,198Total property, plant and equipment, net
    
    
    14,425
    
    
    
    13,798Deferred income taxes
    
    
    17,679
    
    
    
    18,087Other assets
    
    
    22,148
    
    
    
    16,394Total assets
    
    $
    148,892
    
    
    $
    142,364Liabilities and Shareholders EquityCurrent liabilities:Short-term debt
    
    $
    872
    
    
    $
    Accounts payable
    
    
    8,033
    
    
    
    7,540Accrued payroll and related expenses
    
    
    6,089
    
    
    
    5,618Other accrued expenses
    
    
    4,870
    
    
    
    4,649Income taxes payable
    
    
    2,733
    
    
    
    4,341Total current liabilities
    
    
    22,597
    
    
    
    22,148Long-term deferred compensation
    
    
    3,549
    
    
    
    3,100Other long-term liabilities
    
    
    6,243
    
    
    
    5,140Commitments and contingencies (See Note K)Shareholders equity:Common Shares, stated value $.0125:Authorized - 80,000,000; issued and outstanding -
14,410,245 and 14,300,676 in 2006 and 2005
    
    
    180
    
    
    
    179Class B Common Shares, stated value $.0125:Authorized - 9,000,000; issued and outstanding -
2,150,502 in 2006 and 2005
    
    
    27
    
    
    
    27Capital in excess of stated value
    
    
    33,703
    
    
    
    30,155Retained earnings
    
    
    88,393
    
    
    
    82,425Accumulated other comprehensive income
    
    
    615
    
    
    
    397Common Shares held in treasury, at cost
    
    
    (6,415
    )
    
    
    (1,207
    )Total shareholders equity
    
    
    116,503
    
    
    
    111,976Total liabilities and shareholders equity
    
    $
    148,892
    
    
    $
    142,364
  ~ 20 ~




---



##### 



Consolidated Statements of Shareholders Equity
  Capital
    
    
    
    
    
    
    Accumulated
    
    
    CommonClass B
    
    
    in excess
    
    
    
    
    
    
    other
    
    
    Shares
    
    
    TotalCommon
    
    
    Common
    
    
    of stated
    
    
    Retained
    
    
    comprehensive
    
    
    held in
    
    
    shareholdersShares
    
    
    Shares
    
    
    value
    
    
    earnings
    
    
    income
    
    
    treasury
    
    
    equityBalance September 30, 2003
    
    $
    172
    
    
    $
    27
    
    
    $
    25,305
    
    
    $
    65,640
    
    
    $
    98
    
    
    $
    (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 stock plans, 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 Directors fees
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    Amortization
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28Balance September 30, 2004
    
    
    176
    
    
    
    27
    
    
    
    27,412
    
    
    
    74,686
    
    
    
    501
    
    
    
    (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 Directors fees
    
    
    
    
    
    
    
    
    
    
    (190
    )
    
    
    
    
    
    
    
    
    
    
    190
    
    
    
    Amortization
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Balance September 30, 2005
    
    
    179
    
    
    
    27
    
    
    
    30,155
    
    
    
    82,425
    
    
    
    397
    
    
    
    (1,207
    )
    
    
    111,976Comprehensive Income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,361Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9Net unrealized loss on derivative
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15
    )Net unrealized investment gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,579Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,240
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,240Cash dividends:Common Shares ($.15 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,135
    )
    
    
    
    
    
    
    
    
    
    
    (2,135
    )Class B Common Shares
($.12 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (258
    )
    
    
    
    
    
    
    
    
    
    
    (258
    )Shares issued under stock plans, net of taxes
    
    
    1
    
    
    
    
    
    
    
    1,127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,128Common Shares acquired for
settlement of deferred Directors fees
    
    
    
    
    
    
    
    
    
    
    222
    
    
    
    
    
    
    
    
    
    
    
    (222
    )
    
    
    Common Shares reissued in settlement
of Directors fees
    
    
    
    
    
    
    
    
    
    
    (41
    )
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    Repurchase of Common Shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,027
    )
    
    
    (5,027
    )Balance September 30, 2006
    
    $
    180
    
    
    $
    27
    
    
    $
    33,703
    
    
    $
    88,393
    
    
    $
    615
    
    
    $
    (6,415
    )
    
    $
    116,503
  ~ 21 ~




---



##### 



Consolidated Statements of Cash Flows
  2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    8,361
    
    
    $
    10,128
    
    
    $
    11,381Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation
    
    
    4,194
    
    
    
    4,081
    
    
    
    4,010Deferred income taxes
    
    
    1,041
    
    
    
    (2,079
    )
    
    
    (187
    )Deferred compensation
    
    
    208
    
    
    
    (30
    )
    
    
    146Stock-based compensation
    
    
    2,240
    
    
    
    
    
    
    
    Loss on the disposition/impairment of assets
    
    
    256
    
    
    
    126
    
    
    
    76Change in current assets and liabilities:Refundable income taxes
    
    
    (195
    )
    
    
    (203
    )
    
    
    361Accounts receivable and other
    
    
    (7,458
    )
    
    
    2,181
    
    
    
    (5,530
    )Inventories
    
    
    (1,459
    )
    
    
    (554
    )
    
    
    (1,358
    )Prepaid expenses
    
    
    31
    
    
    
    117
    
    
    
    (1,353
    )Other current liabilities
    
    
    (510
    )
    
    
    (5,128
    )
    
    
    7,925Tax benefit of stock purchase and stock-based
compensation arrangements
    
    
    
    
    
    
    3,313
    
    
    
    798Other operating activities
    
    
    (724
    )
    
    
    (1,409
    )
    
    
    (1,224
    )Net cash provided by operating activities
    
    
    5,985
    
    
    
    10,543
    
    
    
    15,045Cash flows from investing activities:Capital expenditures
    
    
    (4,910
    )
    
    
    (3,768
    )
    
    
    (4,072
    )Purchase of investments and other
    
    
    (35,665
    )
    
    
    (38,194
    )
    
    
    (33,179
    )Proceeds from maturities and sales of investments
    
    
    36,393
    
    
    
    29,176
    
    
    
    21,037Net cash used in investing activities
    
    
    (4,182
    )
    
    
    (12,786
    )
    
    
    (16,214
    )Cash flows from financing activities:Net borrowing (repayment) of short-term debt
    
    
    865
    
    
    
    (439
    )
    
    
    25Proceeds from employee stock purchase and option plans
    
    
    428
    
    
    
    2,921
    
    
    
    3,898Tax benefit of stock purchase and stock-based
compensation arrangements
    
    
    266
    
    
    
    
    
    
    
    Repurchase of Common Shares
    
    
    (5,027
    )
    
    
    
    
    
    
    Cash dividends
    
    
    (2,393
    )
    
    
    (2,389
    )
    
    
    (2,335
    )Net cash (used in) provided by financing activities
    
    
    (5,861
    )
    
    
    93
    
    
    
    1,588Effect of changes in foreign currency exchange
rates on cash and cash equivalents
    
    
    162
    
    
    
    96
    
    
    
    293(Decrease) increase in cash and cash equivalents
    
    
    (3,896
    )
    
    
    (2,054
    )
    
    
    712Cash and cash equivalents at beginning of period
    
    
    14,397
    
    
    
    16,451
    
    
    
    15,739Cash and cash equivalents at end of period
    
    $
    10,501
    
    
    $
    14,397
    
    
    $
    16,451Supplemental disclosures of cash flow information
Cash paid during the year for:Income taxes
    
    $
    2,003
    
    
    $
    3,774
    
    
    $
    486Interest
    
    
    51
    
    
    
    182
    
    
    
    227
  ~ 22 ~




---



##### 



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
  2006
    
    2005
    
    2004Balance at beginning of year
    
    $
    451
    
    
    $
    454
    
    
    $
    458Additions
    
    
    86
    
    
    
    4
    
    
    
    24Write-offs, net of recoveries
    
    
    (94
    )
    
    
    (3
    )
    
    
    (35
    )Foreign exchange revaluation
    
    
    5
    
    
    
    (4
    )
    
    
    7Balance at end of year
    
    $
    448
    
    
    $
    451
    
    
    $
    454
 ~ 23 ~




---



##### 



Inventories
  Property, plant and equipment
  Capitalized software
  Impairment of long-lived assets
  Capital stock
   Class B
    
    Common SharesCommon Shares
    
    Common Shares
    
    held in treasuryBalance September 30, 2003
    
    
    13,760,558
    
    
    
    2,150,502
    
    
    
    (535,888
    )Common Shares acquired for
settlement of
deferred Directors fees
    
    
    
    
    
    
    
    
    
    
    (9,423
    )Common Shares reissued in
settlement of directors fees
    
    
    
    
    
    
    
    
    
    
    2,483Shares issued under stock plans
    
    
    306,549
    
    
    
    
    
    
    
    398,837Balance September 30, 2004
    
    
    14,067,107
    
    
    
    2,150,502
    
    
    
    (143,991
    )Common Shares acquired for
settlement of
deferred Directors fees
    
    
    
    
    
    
    
    
    
    
    (11,222
    )Common Shares reissued in
settlement of directors fees
    
    
    
    
    
    
    
    
    
    
    17,795Shares issued under stock plans
    
    
    233,569
    
    
    
    
    
    
    
    Balance September 30, 2005
    
    
    14,300,676
    
    
    
    2,150,502
    
    
    
    (137,418
    )Common Shares acquired for
settlement of
deferred Directors fees
    
    
    
    
    
    
    
    
    
    
    (17,563
    )Common Shares reissued in
settlement of directors fees
    
    
    
    
    
    
    
    
    
    
    8,856Shares issued under stock plans
    
    
    109,569
    
    
    
    
    
    
    
    Repurchase of Common Shares
    
    
    
    
    
    
    
    
    
    
    (405,500
    )Balance at September 30, 2006
    
    
    14,410,245
    
    
    
    2,150,502
    
    
    
    (551,625
    )
 ~ 24 ~




---



##### 



Accumulated other comprehensive income
  2006
    
    
    2005Translation adjustment
    
    $
    703
    
    
    $
    521Minimum pension liability adjustment
    
    
    (27
    )
    
    
    (36
    )Net unrealized gain on derivative securities
    
    
    40
    
    
    
    55Net unrealized investment loss
    
    
    (101
    )
    
    
    (143
    )Accumulated other comprehensive income
    
    $
    615
    
    
    $
    397
 Income taxes
  Use of estimates
  Earnings per share, including pro forma effects of stock-based compensation
  2006
    
    2005
    
    2004Net income in thousands
    
    $
    8,361
    
    
    $
    10,128
    
    
    $
    11,381Weighted average shares outstanding
    
    
    16,395,407
    
    
    
    16,337,903
    
    
    
    15,926,839Assumed exercise of stock options,
weighted average of incremental
shares
    
    
    170,495
    
    
    
    251,408
    
    
    
    583,989Assumed purchase of stock under
stock purchase plan, weighted
average
    
    
    1,262
    
    
    
    1,983
    
    
    
    33,161Diluted shares  adjusted weighted
average shares and assumed
conversions
    
    
    16,567,164
    
    
    
    16,591,294
    
    
    
    16,543,989Basic earnings per share
    
    $
    0.51
    
    
    $
    0.62
    
    
    $
    0.71Diluted earnings per share
    
    $
    0.50
    
    
    $
    0.61
    
    
    $
    0.69
   2005
    
    2004Net income
    
    $
    10,128
    
    
    $
    11,381Add: Stock-based employee compensation (income) expense
included in reported
income, net of related tax effects
    
    
    (5
    )
    
    
    45Deduct: Stock-based employee compensation expense
determined under fair value
based methods for all awards, net of related tax effects
    
    
    (6,168
    )
    
    
    (4,452
    )Pro forma net income
    
    $
    3,955
    
    
    $
    6,974Pro forma earnings per share:Basic
    
    $
    0.24
    
    
    $
    0.44Diluted
    
    $
    0.24
    
    
    $
    0.42
 ~ 25 ~




---



##### 



Derivatives and Hedging Activities
    Reclassifications
  Recent accounting pronouncements
      ~ 26 ~




---



##### 



~ 27 ~




---



##### 



Note B  Guarantors Disclosure Requirements
 Guarantee of original lease:
  Product warranties:
   2006
    
    
    2005Beginning balance
    
    $
    1,084
    
    
    $
    1,459Accruals for warranties issued during the period
    
    
    1,442
    
    
    
    1,823Accruals related to pre-existing warranties
(including changes in estimates and
expiring warranties)
    
    
    (211
    )
    
    
    (425
    )Settlements made (in cash or in kind) during
the period
    
    
    (1,323
    )
    
    
    (1,773
    )Ending balance
    
    $
    992
    
    
    $
    1,084
 Note C  Repurchase of Common Shares
   2006Total number of shares purchased
    
    
    405,500Average price paid per share (including commissions)
    
    $
    12.40Identity of broker-dealer used to effect the purchases
    
    National Financial Securities LLCNumber of shares purchased as part of a publicly announced repurchase program
    
    
    405,500Maximum number of shares that remain to be purchased under the program
    
    
    1,594,500
   Note D  Short-term Investments
  ~ 28 ~




---



##### 



Adjusted cost
    
    
    Unrealized gains
    
    
    Unrealized losses
    
    
    Market valueU.S. government and
agency securities
    
    $
    16,558
    
    
    $
    
    
    
    $
    (154
    )
    
    $
    16,404Corporate notes and
bonds
    
    
    19,799
    
    
    
    
    
    
    
    
    
    
    
    19,799Total short-term
investments
    
    $
    36,357
    
    
    $
    
    
    
    $
    (154
    )
    
    $
    36,203
  Adjusted cost
    
    
    Unrealized gains
    
    
    Unrealized losses
    
    
    Market valueU.S. government and
agency securities
    
    $
    25,537
    
    
    $
    3
    
    
    $
    (221
    )
    
    $
    25,319Corporate notes and
bonds
    
    
    15,550
    
    
    
    
    
    
    
    
    
    
    
    15,550Total short-term
investments
    
    $
    41,087
    
    
    $
    3
    
    
    $
    (221
    )
    
    $
    40,869
  2006
    
    
    2005Less than 1 year
    
    $
    25,052
    
    
    $
    24,5121 year to 5 years
    
    
    11,151
    
    
    
    16,357Total short-term investments
    
    $
    36,203
    
    
    $
    40,869
   2006
    
    
    2005Non-marketable equity securities
    
    $
    1,250
    
    
    $
    Note receivable
    
    
    2,750
    
    
    
    Venture capital fund
    
    
    183
    
    
    
    493$
    4,183
    
    
    $
    493
   Note E  Financing Arrangements
    ~ 29 ~




---



##### 



Note F  Foreign Currency
    Note G  Employee Benefit Plans
  United States Plan
    
    Non-U.S. Plan2006
    
    2005
    
    2006
    
    2005Service cost-benefits
earned during the year
    
    $
    1,641
    
    
    $
    1,274
    
    
    $
    214
    
    
    $
    181Interest cost on
projected benefit
obligation
    
    
    2,000
    
    
    
    1,859
    
    
    
    275
    
    
    
    281Expected return on plan
assets
    
    
    (2,890
    )
    
    
    (2,685
    )
    
    
    (80
    )
    
    
    (77
    )Amortization of
transition asset
    
    
    (10
    )
    
    
    (43
    )
    
    
    21
    
    
    
    22Amortization of prior
service cost
    
    
    178
    
    
    
    178
    
    
    
    5
    
    
    
    5Amortization of net loss
    
    
    438
    
    
    
    
    
    
    
    
    
    
    
    Net periodic pension
cost
    
    $
    1,357
    
    
    $
    583
    
    
    $
    435
    
    
    $
    412
  United States Plan
    
    Non-U.S. Plan*2006
    
    2005
    
    2006
    
    2005Change in projected
benefit obligations:Benefit obligation at
beginning of year
    
    $
    36,940
    
    
    $
    29,063
    
    
    $
    6,379
    
    
    $
    5,311Service cost
    
    
    1,641
    
    
    
    1,274
    
    
    
    214
    
    
    
    181Interest cost
    
    
    2,000
    
    
    
    1,859
    
    
    
    275
    
    
    
    281Actuarial (gain) loss
    
    
    (5,668
    )
    
    
    5,859
    
    
    
    54
    
    
    
    999Benefits paid
    
    
    (1,113
    )
    
    
    (1,115
    )
    
    
    (149
    )
    
    
    (144
    )Foreign currency
exchange rate changes
    
    
    
    
    
    
    
    
    
    
    362
    
    
    
    (249
    )Benefit obligation at
year end
    
    $
    33,800
    
    
    $
    36,940
    
    
    $
    7,135
    
    
    $
    6,379Change in plan assets:Fair value of plan
assets at beginning of
year
    
    $
    34,409
    
    
    $
    29,662
    
    
    $
    1,092
    
    
    $
    1,061Actual return on
pension assets
    
    
    3,087
    
    
    
    2,362
    
    
    
    26
    
    
    
    28Employer contributions
    
    
    1,500
    
    
    
    3,500
    
    
    
    61
    
    
    
    62Benefits paid
    
    
    (1,113
    )
    
    
    (1,115
    )
    
    
    (22
    )
    
    
    (21
    )Foreign currency
exchange rate changes
    
    
    
    
    
    
    
    
    
    
    62
    
    
    
    (38
    )Fair value of plan
assets at end of year
    
    
    37,883
    
    
    
    34,409
    
    
    
    1,219
    
    
    
    1,092Funded status  over
(under) funded
    
    
    4,083
    
    
    
    (2,531
    )
    
    
    (5,916
    )
    
    
    (5,287
    )Unrecognized actuarial
loss
    
    
    4,593
    
    
    
    10,896
    
    
    
    754
    
    
    
    611Contributions after
measurement date
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    Unrecognized prior
service cost
    
    
    692
    
    
    
    870
    
    
    
    29
    
    
    
    32Unrecognized initial
net (asset) obligation
    
    
    
    
    
    
    (10
    )
    
    
    41
    
    
    
    60Prepaid pension assets
(pension liability)
recognized
    
    $
    10,368
    
    
    $
    9,225
    
    
    $
    (5,092
    )
    
    $
    (4,584
    )
 ~ 30 ~




---



##### 



United States Plan
    
    Non-U.S. Plan*2006
    
    2005
    
    2006
    
    2005Other assets (long-term)
    
    $
    10,368
    
    
    $
    9,225
    
    
    $
    
    
    
    $
    Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    (5,092
    )
    
    
    (4,584
    )Prepaid pension assets
(pension liability)
recognized
    
    $
    10,368
    
    
    $
    9,225
    
    
    $
    (5,092
    )
    
    $
    (4,584
    )
     June 30,2006
    
    2005Equity securities
    
    
    63
    %
    
    
    61
    %Fixed income
    
    
    12
    
    
    
    12Market neutral hedge fund
    
    
    18
    
    
    
    18Cash equivalent (money market fund)
    
    
    4
    
    
    
    7Real estate
    
    
    3
    
    
    
    2100
    %
    
    
    100
    %
    2006
    
    2005United States Pension Plan:Discount rate
    
    
    6.625
    %
    
    
    5.5
    %Rate of increase in compensation levels
    
    
    4.0
    %
    
    
    3.5
    %Non-U.S. Pension Plan:Discount rate
    
    
    4.5
    %
    
    
    4.25
    %Rate of increase in compensation levels
    
    
    3.0
    %
    
    
    3.0
    %
  2006
    
    2005
    
    2004United States Pension Plan:Discount rate
    
    
    5.375
    %
    
    
    6.5
    %
    
    
    6.25
    %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
    %
    
    
    3.5
    %Non-U.S. Pension Plan:Discount rate
    
    
    4.25
    %
    
    
    5.25
    %
    
    
    6.0
    %Expected long-term rate of return on
plan assets
    
    
    5.0
    %
    
    
    7.0
    %
    
    
    7.0
    %Rate of increase in compensation levels
    
    
    3.0
    %
    
    
    3.0
    %
    
    
    3.0
    %
 ~ 31 ~




---



##### 



United States Plan
    
    Non-U.S. Plan2007
    
    $
    1,130
    
    
    $
    1732008
    
    $
    1,190
    
    
    $
    2102009
    
    $
    1,249
    
    
    $
    2472010
    
    $
    1,307
    
    
    $
    2632011
    
    $
    1,418
    
    
    $
    2862012  2016
    
    $
    9,689
    
    
    $
    1,816
    Note H  Stock Plans
 Stock Option Plans
      ~ 32 ~




---



##### 



Weighted
    
    Weighted AverageNumber
    
    Average
    
    Remaining
    
    Aggregateof Shares
    
    Exercise Price
    
    Contractual Life (Years)
    
    Intrinsic ValueOutstanding at
September 30, 2003
    
    
    3,400,339
    
    
    $
    17.44Options granted at
fair market value
    
    
    661,600
    
    
    
    19.15Options exercised
    
    
    (569,969
    )
    
    
    4.32
    
    
    
    
    
    
    $
    9,963Options forfeited
    
    
    (87,124
    )
    
    
    20.97Outstanding at
September 30, 2004
    
    
    3,404,846
    
    
    
    19.88Options granted at
fair market value
    
    
    94,250
    
    
    
    16.33Options exercised
    
    
    (67,050
    )
    
    
    7.24
    
    
    
    
    
    
    $
    624Options forfeited
    
    
    (104,700
    )
    
    
    19.80Outstanding at
September 30, 2005
    
    
    3,327,346
    
    
    
    20.03Options granted at
fair market value
    
    
    165,651
    
    
    
    15.05Options exercised
    
    
    (59,366
    )
    
    
    5.46
    
    
    
    
    
    
    $
    540Options forfeited
    
    
    (135,650
    )
    
    
    29.70Outstanding at
September 30, 2006
    
    
    3,297,981
    
    
    $
    19.65
    
    
    
    5.83
    
    
    $
    2,333Vested and expected
to vest
at September
30, 2006
    
    
    3,297,981
    
    
    $
    19.65
    
    
    
    5.83
    
    
    $
    2,333Exercisable at
September 30, 2006
    
    
    3,118,580
    
    
    $
    19.92
    
    
    
    5.66
    
    
    $
    2,330
  Outstanding
    
    
    
    
    
    ExercisableWeighted AverageNumber
    
    Remaining
    
    Weighted
    
    Number
    
    WeightedRange of
    
    of Shares
    
    Contractual
    
    Average
    
    of Shares
    
    AverageExercise Prices
    
    Outstanding
    
    Life (years)
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$  2.53 - $13.76
    
    
    847,430
    
    
    
    4.75
    
    
    $
    10.61
    
    
    
    835,680
    
    
    $
    10.58$14.79 - $16.12
    
    
    718,401
    
    
    
    7.28
    
    
    $
    15.85
    
    
    
    550,750
    
    
    $
    16.10$16.23 - $18.41
    
    
    587,600
    
    
    
    5.36
    
    
    $
    18.06
    
    
    
    587,600
    
    
    $
    18.06$18.72 - $19.23
    
    
    577,350
    
    
    
    7.47
    
    
    $
    18.81
    
    
    
    577,350
    
    
    $
    18.81$19.97 - $45.13
    
    
    563,200
    
    
    
    4.45
    
    
    $
    40.32
    
    
    
    563,200
    
    
    $
    40.32$48.44 - $66.75
    
    
    4,000
    
    
    
    4.00
    
    
    $
    61.05
    
    
    
    4,000
    
    
    $
    61.053,297,981
    
    
    
    5.83
    
    
    $
    19.65
    
    
    
    3,118,580
    
    
    $
    19.92
 ~ 33 ~




---



##### 



2006
    
    2005
    
    2004Expected life (years)
    
    
    4.5
    
    
    
    2.5
    
    
    
    4.5Risk-free interest rate
    
    
    4.3
    %
    
    
    3.4
    %
    
    
    3.5
    %Volatility
    
    
    45
    %
    
    
    44
    %
    
    
    51
    %Dividend yield
    
    
    1.0
    %
    
    
    1.0
    %
    
    
    1.0
    %
  Performance Award Units
   Weighted AverageGrant DateNumber of Shares
    
    Fair ValueOutstanding at September 30, 2005
    
    
    
    
    
    
    Awards granted
    
    
    164,025
    
    
    $
    15.05Awards issued
    
    
    
    
    
    
    Awards forfeited
    
    
    (2,400
    )
    
    
    15.05Outstanding at September 30, 2006
    
    
    161,625
    
    
    $
    15.05
 Restricted Award Units
   Weighted AverageGrant DateNumber of Shares
    
    Fair ValueOutstanding at
September 30, 2005
    
    
    
    
    
    
    Awards granted
    
    
    16,775
    
    
    $
    14.91Awards issued
    
    
    
    
    
    
    Awards forfeited
    
    
    (850
    )
    
    
    15.05Outstanding at
September 30, 2006
    
    
    15,925
    
    
    $
    14.90
 Directors Equity Plans
  ~ 34 ~




---



##### 



Employee Stock Purchase Plan
   Note I  Income Taxes
  2006
    
    
    2005
    
    
    2004United States
    
    $
    8,705
    
    
    $
    13,637
    
    
    $
    8,726Non-U.S.
    
    
    1,208
    
    
    
    450
    
    
    
    6,815$
    9,913
    
    
    $
    14,087
    
    
    $
    15,541
  2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    (109
    )
    
    $
    4,032
    
    
    $
    1,620Non-U.S.
    
    
    617
    
    
    
    1,705
    
    
    
    2,681State and local
    
    
    3
    
    
    
    301
    
    
    
    46Total current
    
    
    511
    
    
    
    6,038
    
    
    
    4,347Deferred:Federal, state and local
    
    
    962
    
    
    
    (1,530
    )
    
    
    (50
    )Non-U.S.
    
    
    79
    
    
    
    (549
    )
    
    
    (137
    )Total deferred
    
    
    1,041
    
    
    
    (2,079
    )
    
    
    (187
    )Total provision
    
    $
    1,552
    
    
    $
    3,959
    
    
    $
    4,160
  2006
    
    
    2005
    
    
    2004Federal income tax at
statutory rate
    
    $
    3,370
    
    
    $
    4,790
    
    
    $
    5,284State and local income taxes
    
    
    612
    
    
    
    (9
    )
    
    
    (103
    )Extraterritorial Income
Exclusion
    
    
    (547
    )
    
    
    (697
    )
    
    
    (539
    )Domestic Manufacturing
Deduction
    
    
    (24
    )
    
    
    
    
    
    
    Research Tax Credit
    
    
    (201
    )
    
    
    (674
    )
    
    
    (393
    )Tax on non-U.S. income
    
    
    265
    
    
    
    481
    
    
    
    255Foreign tax credit
carryforwards
    
    
    (400
    )
    
    
    (323
    )
    
    
    (98
    )Valuation allowance
    
    
    (1,281
    )
    
    
    234
    
    
    
    105Other tax credit carryforwards
    
    
    
    
    
    
    
    
    
    
    112Adjustment for prior years
taxes
    
    
    (315
    )
    
    
    
    
    
    
    (552
    )Other
    
    
    73
    
    
    
    157
    
    
    
    89Effective provision for
income taxes
    
    $
    1,552
    
    
    $
    3,959
    
    
    $
    4,160Effective income tax rate
    
    
    15.7
    %
    
    
    28.1
    %
    
    
    26.8
    %
 ~ 35 ~




---



##### 



Deferred tax assets:
    
    2006
    
    
    2005Stock options
    
    $
    940
    
    
    $
    222Capitalized
research and
development
    
    
    11,125
    
    
    
    12,478Inventory
    
    
    1,640
    
    
    
    1,758Deferred
compensation
    
    
    1,408
    
    
    
    1,394Tax credit
carryforward
    
    
    6,343
    
    
    
    7,799Depreciation
    
    
    1,274
    
    
    
    1,025Warranty
    
    
    318
    
    
    
    339Medical
    
    
    131
    
    
    
    131Intangibles
    
    
    72
    
    
    
    88State and local
taxes
    
    
    940
    
    
    
    1,104Net operating losses
    
    
    1,135
    
    
    
    511Other
    
    
    1,398
    
    
    
    2,374Total deferred tax
assets
    
    
    26,724
    
    
    
    29,223Deferred tax
liabilities:Pension contribution
    
    
    3,552
    
    
    
    3,229Other
    
    
    146
    
    
    
    463Total deferred tax
liabilities
    
    
    3,698
    
    
    
    3,692Valuation allowance
    
    
    (1,141
    )
    
    
    (3,000
    )Net deferred tax
assets
    
    $
    21,885
    
    
    $
    22,531
   2005
    
    
    2004
    
    
    2003Balance at
beginning of year
    
    $
    3,000
    
    
    $
    2,627
    
    
    $
    2,332Charged to costs
and expenses
    
    
    561
    
    
    
    373
    
    
    
    105Charged to other
accounts
    
    
    
    
    
    
    
    
    
    
    190
    (a)Deductions
    
    
    (2,420
    ) (b)
    
    
    
    
    
    
    Balance at end of
year
    
    $
    1,141
    
    
    $
    3,000
    
    
    $
    2,627
 (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 against the foreign tax credits was released due to the
current year utilization of credits and the Companys increased capacity to utilize
credits prior to the expiration period.
  Year Expiration CommencesAlternative minimum tax credit
    
    $
    2,212
    
    
    indefiniteForeign tax credit
    
    
    610
    
    
    
    2012-2013R&D credit
    
    
    3,521
    
    
    
    2009-2021Foreign NOLs
    
    
    1,135
    
    
    2010-indefinite
   ~ 36 ~




---



##### 



Note J  Severance Charges
   2005Beginning balance
    
    $
    107Expense recognized and adjustments
    
    
    (21
    )Payments made
    
    
    (94
    )Foreign exchange revaluation
    
    
    8Ending balance
    
    $
    
 Note K  Commitments and Contingencies
 Leases
  2007
    
    $
    2,7162008
    
    
    1,8042009
    
    
    1,2322010
    
    
    4202011
    
    
    160After 2011
    
    
    5Total minimum operating lease payments
    
    $
    6,337
 Stock
option matters
    
    
    There was no evidence of backdating annual stock option grants prior to the date of
approval by the Board of Directors.
    
    There was a multi-day delay by management in setting the exercise price for annual
stock option grants in 2000, 2001 and 2002. The delay resulted in the options having a
lower exercise price than the price on the date of Board approval. In each of these three
years, the price selected by management was the lowest price for the Companys common shares for the period between Board approval and the administrative recording of the
grants.
    
    Although the Special Committee determined that the terms of the Companys stock
incentive plans required the options to be priced on the date the Board approved them,
there was no finding of intentional misconduct on the part of senior management or any
other Keithley officer, Director or employee responsible for the administration of the Companys stock option grants.
Notwithstanding the fact that management exceeded its authority under the Companys
plans, the Company will honor the options in accordance with the terms as they were set by
management.
    
    Based on evidence gathered and analyzed by the Independent Counsel, the Special
Committee found the dates selected by management for the annual grants in 2000-2002 are
the appropriate measurement dates for accounting purposes. Accordingly, it is unnecessary
for the Company to record any compensation expense with respect to the annual option
grants in 2000-2002, and therefore there is no need for the Company to restate its
financial statements as a result of these grants.
    
    The Special Committee concluded that there were no material misstatements in the
Companys public filings regarding the number of annual options granted during the years
reviewed; there is no evidence that the Company timed the grant date or pricing of annual
stock option grants to take advantage of material non-public information and there was no
wrongdoing or lack of oversight by the Companys independent directors or the Human
Resources and Compensation Committee of the Board of Directors (the Compensation
Committee).
    
    The Special Committee also reviewed the Companys practices regarding stock option
grants, other than its annual grants, which are generally grants of smaller numbers of
options to new hires and to existing employees for promotions. The Special Committee
concluded that management exceeded certain aspects of the authority granted to management
by the Companys stock option plans and the Compensation Committee, but that these grants
involved small numbers of shares and were largely the result of ministerial errors by
management.
 ~ 37 ~




---



##### 



Note L  Segment and Geographic Information
  2006
    
    
    2005
    
    
    2004Net sales:United States
    
    $
    46,489
    
    
    $
    39,819
    
    
    $
    44,588Other Americas
    
    
    4,982
    
    
    
    3,418
    
    
    
    2,410Germany
    
    
    19,791
    
    
    
    15,903
    
    
    
    16,865Other Europe
    
    
    30,387
    
    
    
    27,641
    
    
    
    31,200Japan
    
    
    16,691
    
    
    
    17,189
    
    
    
    17,566Other Asia
    
    
    36,872
    
    
    
    37,582
    
    
    
    27,619$
    155,212
    
    
    $
    141,552
    
    
    $
    140,248Long-lived assets:United States
    
    $
    30,246
    
    
    $
    24,408
    
    
    $
    22,750Germany
    
    
    5,406
    
    
    
    4,720
    
    
    
    4,545Other
    
    
    921
    
    
    
    1,064
    
    
    
    756$
    36,573
    
    
    $
    30,192
    
    
    $
    28,051
 ~ 38 ~




---



##### 



Note M  Subsequent Event
  Unaudited Quarterly Results of Operations
 Following are the Companys unaudited quarterly results of operations for fiscal 2006 and 2005.
 First
    
    
    Second
    
    
    Third
    
    
    FourthFiscal 2006Net sales
    
    $
    35,790
    
    
    $
    39,679
    
    
    $
    38,427
    
    
    $
    41,316Gross profit
    
    
    22,203
    
    
    
    24,215
    
    
    
    23,427
    
    
    
    25,330Income before income taxes
    
    
    2,621
    
    
    
    3,008
    
    
    
    1,730
    
    
    
    2,554Net income
    
    
    1,926
    
    
    
    2,098
    
    
    
    1,669
    
    
    
    2,668Diluted earnings per share
    
    
    .12
    
    
    
    .13
    
    
    
    .10
    
    
    
    .16Fiscal 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
    
    
    
    .14
 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
    ~ 39 ~




---



##### 



Changes in Internal Control Over Financial Reporting
  Chief Executive and Chief Financial Officer Certifications
  ITEM 9B  OTHER INFORMATION
  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
  ~ 40 ~




---



##### 



(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(c)*
    
    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 (d)*
    
    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 (e)*
    
    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 (f)
    
    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 (g)*
    
    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 (h)*
    
    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 (i)
    
    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 (j)*
    
    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 (k)
    
    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 (l)
    
    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 (m)
    
    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 (n)*
    
    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 (o)*
    
    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 (p)*
    
    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 (q)*
    
    Keithley Instruments, Inc. 2005 Employee Stock Purchase and
Dividend Reinvestment Plan. (Reference is made to Appendix B
of the Companys Definitive Proxy Statement dated December
29, 2005 (File No. 1-9965), which is incorporated herein by
reference.)10 (r)
    
    Fifth Amendment to Credit Agreement, dated September 27, 2006.10 (s)*
    
    Keithley Instruments, Inc. form of option agreement for the
use in connection with awards granted under the Keithley
Instruments, Inc. 2002 Stock Incentive Plan. (Reference is
made to Exhibit 10.1 of the Companys Current Report on Form
8-K dated October 3, 2005 (File No. 1-9965), which Exhibit is
incorporated herein by reference.)10 (t)*
    
    Keithley Instruments, Inc. form of performance award
agreement for use in connection with awards granted under the
Keithley Instruments, Inc. 2002 Stock Incentive Plan.
(Reference is made to Exhibit 10.2 of the Companys Current
Report on Form 8-K dated October 3, 2005 (File No. 1-9965),
which Exhibit is incorporated herein by reference.)
 ~ 41 ~




---



##### 



ExhibitNumber
    
    Description10 (u)*
    
    Keithley Instruments, Inc. form of restricted unit award agreement for use in connection
with awards granted under the Keithley Instruments, Inc. 2002 Stock Incentive Plan.
(Reference is made to Exhibit 10.3 of the Companys Current Report on Form 8-K dated
October 3, 2005 (File No. 1-9965), which Exhibit is incorporated herein by reference.)10 (v)*
    
    Keithley Instruments, Inc. 2002 Stock Incentive Plan (as amended December 28, 2006).14
    
    Code of Ethics. (Reference is made to Exhibit 14 of the Companys Annual Report on Form
10-K for the year ended September, 30, 2005 (File No. 1-9965), which Exhibit is
incorporated herein by reference.)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. (c) Exhibits
  (d) Financial Statement Schedules
  ~ 42 ~




---



##### 



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

Date: December 28, 2006
  Signature
    
    Title
    
    Date/s/ Joseph P. Keithley
    
    Chairman of the Board of Directors, President and

    12/28/06Joseph P. Keithley
    
    Chief Executive Officer (Principal Executive Officer)/s/ Mark J. Plush
    
    Vice President and Chief Financial Officer
    
    12/28/06Mark J. Plush
    
    (Principal Financial and Accounting Officer)/s/ Brian R. Bachman
    
    Director
    
    12/28/06Brian R. Bachman/s/ James T. Bartlett
    
    Director
    
    12/28/06James T. Bartlett/s/ James B. Griswold
    
    Director
    
    12/28/06James B. Griswold/s/ Leon J. Hendrix, Jr.
    
    Director
    
    12/28/06Leon J. Hendrix, Jr./s/ Brian J. Jackman
    
    Director
    
    12/28/06Brian J. Jackman/s/ N. Mohan Reddy
    
    Director
    
    12/28/06N. Mohan Reddy/s/ Thomas A. Saponas
    
    Director
    
    12/28/06Thomas A. Saponas/s/ Barbara V. Scherer
    
    Director
    
    12/28/06Barbara V. Scherer/s/ R. Elton White
    
    Director
    
    12/28/06R. Elton White
 ~ 43 ~