<PAGE>   1
13.   Annual Report to Shareholders for the Fiscal Year Ended September 30, 1997

Consolidated Statement of Income
For the years ended September 30, 1997, 1996 and 1995 
(In Thousands of Dollars Except for Per-Share Data)

<TABLE>
<CAPTION>
                                                        1997            1996              1995
                                                     --------          -------          -------
<S>                                                 <C>              <C>               <C>      
Net sales                                           $ 123,295        $ 118,946         $ 109,574
                                                    ---------        ---------         ---------
Cost of goods sold                                     51,924           46,140            42,372
Selling, general and administrative expenses           50,789           47,695            43,945
Product development expenses                           17,233           18,337            15,385
Special charges                                           771           11,645              --
Amortization of intangible assets                         222              634               464
Net financing expenses                                  1,145              819               986
                                                    ---------        ---------         ---------
Income (loss) before income taxes                       1,211           (6,324)            6,422
Income taxes (benefit)                                    421             (884)            1,508
                                                    ---------        ---------         ---------
Net income (loss)                                   $     790        $  (5,440)        $   4,914
                                                    =========        =========         =========
Net income (loss) per share                         $     .10        $    (.70)        $     .66
                                                    =========        =========         =========
Fully diluted net income (loss) per share           $     .10        $    (.70)        $     .64
                                                    =========        =========         =========
</TABLE>

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






<PAGE>   2


Consolidated Balance Sheet
September 30, 1997 and 1996
(In Thousands of Dollars Except for Share Data)

<TABLE>
<CAPTION>

                                                                   1997             1996
                                                                 --------         --------
Assets
Current assets:
<S>                                                              <C>              <C>     
     Cash and cash equivalents                                   $  1,727         $  3,995
     Accounts receivable and other, net of allowances
           of $675 in 1997 and $630 in 1996                        25,113           18,538
     Inventories:
           Raw materials                                            7,787            8,255
           Work in process                                          5,671            4,880
           Finished products                                        3,121            4,291
                                                                 --------         --------
                 Total inventories                                 16,579           17,426
     Deferred income taxes                                          2,541            3,082
     Prepaid expenses                                                 566              699
                                                                 --------         --------
                 Total current assets                              46,526           43,740
                                                                 --------         --------
Property, plant and equipment, at cost:
     Land                                                           1,325            1,325
     Buildings and leasehold improvements                          15,917           13,310
     Manufacturing, laboratory and office equipment                24,285           23,238
                                                                 --------         --------
                                                                   41,527           37,873
        Less-Accumulated depreciation and amortization             24,272           22,531
                                                                 --------         --------
                 Total property, plant and equipment, net          17,255           15,342
                                                                 --------         --------
Intangible assets, net of accumulated amortization
   of $29,930 in 1997 and $29,708 in 1996                           1,825            2,064
Other assets                                                       13,507           12,688
                                                                 --------         --------
Total assets                                                     $ 79,113         $ 73,834
                                                                 ========         ========

Liabilities and Shareholders' Equity
Current liabilities:
     Current installments on long-term debt                      $     16         $     61
     Accounts payable                                              11,568            8,162
     Accrued payroll and related expenses                           4,698            4,525
     Other accrued expenses                                         6,951            9,358
     Income taxes payable                                           1,821            2,955
                                                                 --------         --------
                 Total current liabilities                         25,054           25,061
                                                                 --------         --------

Long-term debt                                                     17,442           13,308
Other long-term liabilities                                         3,899            3,655
Deferred income taxes                                                  35               54
Shareholders' equity:
     Common Shares, stated value $.025:
       Authorized - 30,000,000; issued and outstanding -
       4,877,975 in 1997 and 4,656,600 in 1996                        122              116
     Class B Common Shares, stated value $.025:
       Authorized - 9,000,000; issued and outstanding -
       2,786,278 in 1997 and 2,794,278 in 1996                         70               70
     Capital in excess of stated value                              7,297            5,293
     Earnings reinvested in the business                           25,773           25,865
     Cumulative translation adjustment                                250              562
     Unamortized portion of restricted stock plans                   (569)             (14)
     Common shares held in treasury, at cost                         (260)            (136)
                                                                 --------         --------
                 Total shareholders' equity                        32,683           31,756
                                                                 --------         --------
Total liabilities and shareholders' equity                       $ 79,113         $ 73,834
                                                                 ========         ========
</TABLE>

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


<PAGE>   3


Consolidated Statement of Shareholders' Equity 
For the years ended September 30, 1997, 1996 and 1995 
(In Thousands of Dollars Except for Share Data)

<TABLE>
<CAPTION>

                                               1997                       1996                         1995
                                               ----                       ----                         ----
                                              Shares        $            Shares        $              Shares        $
                                           ----------    ----------    ----------    ----------    ----------    ----------
<S>                                         <C>                 <C>     <C>                 <C>     <C>                 <C>
Common Shares:
Beginning balance                           4,656,600           116     4,308,976           108     4,156,836           104
Shares issued under stock plans               213,375             6       222,906             5       123,096             3
Conversion of Class B Common Shares             8,000          --         124,718             3        29,044             1
                                           ----------    ----------    ----------    ----------    ----------    ----------
Ending balance                              4,877,975           122     4,656,600           116     4,308,976           108
                                           ==========    ----------    ==========    ----------    ==========    ----------

Class B Common Shares:
Beginning balance                           2,794,278            70     2,918,996            73     2,948,040            74
Conversion to Common Shares                    (8,000)         --        (124,718)           (3)      (29,044)           (1)
                                           ----------    ----------    ----------    ----------    ----------    ----------
Ending balance                              2,786,278            70     2,794,278            70     2,918,996            73
                                           ==========    ----------    ==========    ----------    ==========    ----------

Common Shares held in treasury, at cost:
Beginning balance                             (10,155)         (136)         --            --            --            --
Shares repurchased                            (12,360)         (124)      (10,155)         (136)         --            --
                                           ----------    ----------    ----------    ----------    ----------    ----------
Ending balance                                (22,515)         (260)      (10,155)         (136)         --            --
                                           ==========    ----------    ==========    ----------    ==========    ----------

Capital in excess of stated value:
Beginning balance                                             5,293                       3,981                       3,469
Shares issued under stock plans                               1,742                       1,385                         512
Other                                                           262                         (73)                       --
                                                            -------                     -------                     -------
Ending balance                                                7,297                       5,293                       3,981
                                                            -------                     -------                     -------
                                                                                                                    
Cumulative translation adjustment:                                                                                  
Beginning balance                                               562                         589                         368
Translation adjustments                                        (550)                        (76)                        324
Gains (losses) from hedging net investments                                                                         
  in foreign subsidiaries                                       238                          49                        (103)
                                                            -------                     -------                     -------
Ending balance                                                  250                         562                         589
                                                            -------                     -------                     -------
                                                                                                                    
Unamortized portion of restricted stock plan:                                                                       
Beginning balance                                               (14)                         (6)                        (12)
Shares issued under stock plans                                (742)                        (14)                       --
Amortization                                                    187                           6                           6
                                                            -------                     -------                     -------
Ending balance                                                 (569)                        (14)                         (6)
                                                            -------                     -------                     -------
                                                                                                                    
Earnings reinvested in the business:                                                                                
Beginning balance                                            25,865                      32,157                      27,943
Net income (loss)                                               790                      (5,440)                      4,914
Cash dividends:                                                                                                     
  Common Shares ($.125 per share in 1997                                                                            
    and 1996 and $.106 per share in 1995)                      (603)                       (568)                       (450)
  Class B Common Shares ($.10 per share in                                                                          
    1997 and 1996 and $.085 per share in 1995)                 (279)                       (284)                       (250)
                                                            -------                     -------                     -------
Ending balance                                               25,773                      25,865                      32,157
                                                            -------                     -------                     -------
                                                                                                                    
Total shareholders' equity                                   32,683                      31,756                      36,902
                                                            =======                     =======                     =======
</TABLE>
                                                                              
On November 6, 1995, the company's Board of Directors approved a two-for-one  
split of the company's Common Shares and Class B Common Shares. The split was 
effected in the form of a stock dividend payable on December 11, 1995, to
shareholders of record on November 27, 1995. All amounts have been adjusted to
reflect the split.

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


<PAGE>   4


Consolidated Statement of Cash Flows 
For the years ended September 30, 1997, 1996 and 1995 
(In Thousands of Dollars)

<TABLE>
<CAPTION>

                                                                     1997             1996             1995
                                                                   --------         --------         --------
<S>                                                                <C>              <C>              <C>     
Cash flows from operating activities:
     Net income (loss)                                             $    790         $ (5,440)        $  4,914
     Adjustments to reconcile net income (loss) to
       net cash provided by (used in) operating activities:
           Depreciation                                               3,823            3,419            3,106
           Amortization of intangible assets                            222              634              464
           Deferred income taxes                                     (1,140)          (3,772)          (1,217)
           Deferred compensation                                        229              211              220
           Special charges                                             (771)          11,452             --
     Change in current assets and liabilities:
                 Accounts receivable and other                       (6,969)           2,317           (6,108)
                 Inventories                                            486           (5,275)          (2,864)
                 Prepaid expenses                                        29              (57)             289
                 Other current liabilities                            1,427             (143)           4,660
     Other operating activities                                         863             (746)          (1,007)
                                                                   --------         --------         --------
Net cash provided by (used in) operating activities                  (1,011)           2,600            2,457
                                                                   --------         --------         --------
Cash flows from investing activities:
     Payments for property, plant and equipment                      (5,849)          (8,539)          (2,695)
     Other investing activities                                         202               71               69
     Acquisitions of businesses                                        --             (1,408)            --
                                                                   --------         --------         --------
Net cash used in investing activities                                (5,647)          (9,876)          (2,626)
                                                                   --------         --------         --------
Cash flows from financing activities:
     Net decrease in short-term debt                                    (45)             (10)             (35)
     Borrowing of long-term debt                                      4,520            7,385            1,367
     Proceeds from sale of Common Shares                              1,144              974              520
     Cash dividends                                                    (882)            (852)            (700)
                                                                   --------         --------         --------
Net cash provided by financing activities                             4,737            7,497            1,152
                                                                   --------         --------         --------
Effect of changes in foreign currency exchange
   rates on cash and cash equivalents                                  (347)            (116)             195
                                                                   --------         --------         --------
Increase (decrease) in cash and cash equivalents                     (2,268)             105            1,178
Cash and cash equivalents at beginning of period                      3,995            3,890            2,712
                                                                   --------         --------         --------
Cash and cash equivalents at end of period                         $  1,727         $  3,995         $  3,890
                                                                   ========         ========         ========
Supplemental disclosures of cash flow information
     Cash paid during the year for:
           Income taxes                                            $  1,981         $  2,201         $  1,419
           Interest                                                   1,140              711              814

Supplemental schedule of noncash investing activities
     The company's acquisitions included the following
       noncash transactions:
           Fair value of assets acquired                       $       --           $  2,525     $       --
           Cash paid                                                   --             (1,408)            --
           Common Shares issued                                        --               (201)            --
                                                                   --------         --------         --------
                 Liabilities assumed                           $       --           $    916     $       --
                                                                   ========         ========         ========
</TABLE>

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

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


<PAGE>   5


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS

Percent of net sales for the years ended September 30, 1997, 1996 and 1995.

<TABLE>
<CAPTION>

                                                                1997         1996         1995
                                                                ----         ----         ----
<S>                                                            <C>           <C>          <C>  
Net sales                                                      100.0         100.0        100.0
Cost of goods sold                                              42.1          38.8         38.7
Selling, general and administrative expenses                    41.2          40.1         40.1
Product development expenses                                    14.0          15.4         14.0
Special charges                                                  0.6           9.8         --
Amortization of intangible assets                                0.2           0.5          0.4
Net financing expenses                                           0.9           0.7          0.9
                                                               -----         -----        -----
Income (loss) before income taxes                                1.0          (5.3)         5.9
Income taxes (benefit)                                           0.4          (0.7)         1.4
                                                               -----         -----        -----
Net income (loss)                                                0.6          (4.6)         4.5
                                                               =====         =====        =====
</TABLE>

RESULTS OF OPERATIONS (IN THOUSANDS OF DOLLARS EXCEPT FOR PER-SHARE DATA)
-------------------------------------------------------------------------

Net income was $790, or $.10 per share, in 1997 compared to a net loss of
$5,440, or $.70 per share, in 1996, and net income of $4,914, or $.64 per share,
in 1995. Excluding special charges totaling $771 pretax, or $.06 per share, in
1997, and $11,645 pretax, or $1.23 per share, in 1996, net income was $1,280, or
$.16 per share, in 1997, and $4,185, or $.53 per share, in 1996. The special
charges recorded in 1997 and 1996 related primarily to the relocation of the
Keithley MetraByte operation from Taunton, Massachusetts to Cleveland, Ohio.
1997's selling, general and administrative expenses also include approximately
$512 pretax for non-recurring officer retirement expenses. All three years
include expenses to develop the Quantox(R) system, the company's first product
based on the technology licensed from IBM in 1994, as well as to explore other
new business opportunities. These start-up losses totaled approximately $11,900,
$10,800 and $6,900 pretax in 1997, 1996 and 1995, respectively. Earnings before
taxes and special charges excluding losses from the company's new businesses
were approximately $13,900, $16,100 and $13,300 in 1997, 1996 and 1995,
respectively.

For the third consecutive year, the company reported record net sales. Net sales
were $123,295, $118,946 and $109,574 in 1997, 1996 and 1995, respectively. On a
year to year basis, net sales increased 4% and 9% in 1997 and 1996,
respectively. Four years ago, the company developed a strategy of targeting
selected growth industries (specifically in semiconductor, telecommunications
and electronic components) and has 

<PAGE>   6


been developing application-specific products for these industries. Strong
demand for these products, as well as a full year's shipments of Quantox in
1997, has more than offset decreased sales of the company's parametric test
equipment due to the weak semiconductor capital equipment industry during the
last quarter of fiscal 1996 and through the majority of fiscal 1997.
Geographically, domestic and export sales have increased for the last two years.
Net sales in Europe decreased from 1996 to 1997 and were flat from 1995 to 1996.

Cost of goods sold as a percentage of net sales was 42.1 in 1997, 38.8 percent
in 1996 and 38.7 percent in 1995. Foreign exchange hedging had a minimal effect
on cost of goods sold in 1997, 1996 and 1995. The increase in 1997 was due to
increased sales of Quantox which carries a lower gross margin, higher fixed
costs resulting from the expansion of manufacturing facilities and an 8 percent
strengthening of the U.S. dollar. The slight increase from 1995 to 1996 resulted
from increased sales of lower gross margin products offset by increased
manufacturing efficiencies due to higher sales volume. The U.S. dollar
strengthened less than 1 percent from 1995 to 1996 and had a minimal effect on
changes in costs.

Selling, general and administrative expenses have increased 6 percent from 1996
to 1997 and 9 percent from 1995 to 1996. As a percentage of net sales, they were
41.2 in 1997, and 40.1 in both 1996 and 1995. The increases in expenses were due
mostly to higher marketing costs associated with new business initiatives and
the introduction of new products from existing businesses, and higher
commissions due to increased sales. Additionally, 1997's expense includes
approximately $512 for non-recurring officer retirement expenses.

Product development expenses decreased $1,104, or 6 percent, to 14.0 percent of
net sales in 1997 from 15.4 percent in 1996, and increased $2,952, or 19
percent, from 14.0 percent in 1995. The decrease from 1996 to 1997 was due to
substantially lower costs for Keithley MetraByte products and the company's
Model S600 parametric test system which was substantially complete in 1997. The
decreased expenses in 1997 were offset somewhat by increased costs over the last
three years for development of new bench-top instrument products and exploration
of other new business opportunities.

<PAGE>   7

An analysis of special charges recorded in the Consolidated Statement of Income
in 1997 and 1996, and the amount accrued in the Consolidated Balance Sheet is as
follows:

<TABLE>
<CAPTION>

                                                                                  Accrued at
                                                     Expense                     September 30,
Description:                                  1997            1996           1997           1996
------------                                  ----            ----           ----           ----

<S>                                         <C>             <C>            <C>            <C>    
Write off of Goodwill                       $  --           $ 5,737        $  --          $  --
Severance, outplacement and
  other personnel costs                        (291)          3,433            222          3,239
Lease and related costs                        (525)            998              3            998
Impaired inventory and equipment                 49             835           --             --
Relocation of facility and employees          1,073            --             --             --
Recruiting and consulting costs                 187            --             --             --
Manufacturing start-up costs                    282            --             --             --
European operating subleases                     (4)            642            574            642
                                            -------         -------        -------        -------
Totals                                      $   771         $11,645        $   799        $ 4,879
                                            =======         =======        =======        =======
</TABLE>

Since the acquisition of Keithley MetraByte in 1989, sales have declined for the
operation and earnings through 1996 had been poor. In September 1996, it became
apparent to management that due to the lack of growth, the business could not
support stand-alone operations. Therefore management made the decision to move
the Taunton, Massachusetts operation to Cleveland, Ohio. Also included in
special charges is an accrual for costs to be incurred over the next 3 to 11
years under two operating subleases at the company's European facilities.

Special charges of $771 pretax, or $.06 per share, recorded in 1997 include
gross costs of $1,902 primarily for the relocation of the Keithley MetraByte
operation from Taunton, Massachusetts to Cleveland, Ohio, net of a reversal of
$1,131 of expense (noncash) recorded during 1996 primarily for closing the
Taunton facility. The reversal of 1996 expense relates to changes in
circumstances which occurred during 1997. $256 of the gross expense represents a
noncash charge to reserve for additional impaired inventory. Special charges of
$11,645 pretax, or $1.23 per share, recorded in 1996 primarily represent the
expected costs of closing the Keithley MetraByte operation in Taunton. Of the
special charges, noncash charges in 1996 total $6,572. The relocation of the
Keithley MetraByte operation was complete in July 1997, and special charges for
the relocation going forward will not be material. At September 30, 1997 and
1996, $249 and $4,538, respectively was accrued in the Consolidated Balance

<PAGE>   8

Sheet under the category "Other accrued expenses" and $550 and $341,
respectively was accrued under the category "Other long-term liabilities."

Amortization expense of $222 in 1997 decreased from $634 in 1996. This is due to
the September 1996 write off of the remaining goodwill associated with Keithley
MetraByte. Amortization expense in 1996 increased from $464 in 1995 due to the
amortization of goodwill associated with the acquisitions of International
Sensor Technology in the first quarter of fiscal 1996 and Turner Engineering
Technology in the second quarter of fiscal 1996. Neither acquisition had a
material effect on net sales or earnings for fiscal 1997 or 1996.

Net financing expenses of $1,145 increased $326 from $819 in 1996 due to higher
average debt levels during the year. Net financing expenses decreased $167 in
1996 from $986 in 1995. Despite higher average debt levels in 1996, the decrease
from 1995 was due to lower interest rates on variable rate debt and absence of
certain fees related to the pay-off of a higher interest rate loan in the second
quarter of 1995.

The effective tax rate for 1997 was 34.7 percent. Foreign sales corporation
(FSC) benefits and benefits derived from the remittance of foreign dividends
were offset by a deferred tax charge resulting from the company's decision to
terminate corporate owned life insurance policies. The company recorded an
income tax benefit of $884 in 1996, which resulted from the company's pretax
loss. The 1996 effective rate (benefit) of (14.0) percent is less than the
statutory rate principally due to the non-deductibility of the Keithley
MetraByte goodwill written off, offset by the utilization of foreign tax credits
and FSC benefits. The effective income tax rate for 1995 of 23.5 percent is
lower than the statutory rate due primarily to utilization of foreign tax
credits and FSC benefits. At September 30, 1997, the company had capital loss
carryforwards of $123 and tax credit carryforwards of $2,334.

The company's financial results are affected by foreign exchange rate
fluctuations. Generally, a weakening U.S. dollar causes the price of the
company's product to be more attractive in foreign markets and favorably impacts
the company's sales and earnings. A strengthening U.S. dollar has an unfavorable
effect. This foreign exchange effect cannot be precisely isolated since many
other factors affect the company's foreign sales and earnings. These factors
include product offerings and 

<PAGE>   9

pricing policies of the company and its competition, whether competition is
foreign or U.S. based, changes in technology and local and worldwide economic
conditions.

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

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

In 1997, net cash used in operating activities was $1,011. Total debt of $17,458
at September 30, 1997, increased $4,089 from $13,369 at September 30, 1996 and
the debt-to-capital ratio at year-end was 34.8 percent versus 29.6 percent at
the end of fiscal 1996. The increase in debt and decrease in cash during the
year were used primarily to fund the expansion of the company's Semiconductor
and Radiation Measurements facilities. Additionally, accounts receivable levels
increased $6,575 primarily due to strong sales in September 1997.

On March 28, 1997, the company amended its credit agreement to extend its
expiration until March 28, 2002 and generally improve the terms under which the
company borrows. The agreement continued to be a $25,000 debt facility ($17,442
outstanding at September 30, 1997), which provides unsecured, multi-currency
revolving credit at various interest rates based on U.S. prime, LIBOR or FIBOR.
The company is required to pay a facility fee of between .125% to .20% on the
total amount of the commitment. Additionally, the company has a number of other
credit facilities in various currencies aggregating $5,460.

At September 30, 1997, the company had total unused lines of credit with
domestic and foreign banks aggregating $13,018, including short-term and
long-term lines of credit of $5,460 and $7,558, respectively. Under certain
long-term debt agreements, the company is required to comply with various
financial ratios and covenants. Principal payments on long-term debt are
scheduled as follows: 1998-$16, 2002-$17,442.

<PAGE>   10

During 1998, the company expects to finance capital spending and working capital
requirements with cash provided by operations. 1998 capital expenditures are
expected to approximate the 1997 level.

OUTLOOK
-------

The company has spent a substantial amount of its resources over the past three
years to develop new products and new businesses. Sales from these new business
initiatives are beginning to ramp-up, while expenses as a percentage of net
sales are declining. Management's goal is to have each of these new businesses
at break-even by the end of 1998, which will substantially improve earnings from
1997's levels. The company's Quantox product will be the most challenging to
achieving this goal.

Additionally, the company expects to decrease debt levels during 1998.

FACTORS THAT MAY AFFECT FUTURE RESULTS
--------------------------------------

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

Although the company operates in a single industry segment, certain of its
products and product lines including Quantox and the company's line of
parametric testers, are sold into the semiconductor capital equipment industry.
Growth in demand for semiconductors, new technology and pricing drive the demand
for new semiconductor capital equipment. Throughout much of the year, the order
growth of this industry had contracted which adversely affected revenues of the
company. Although order growth in this industry has recently increased, the
sustainability of this trend cannot be predicted.

The company's business relies on the development of new high technology products
and services to provide solutions to customer's complex measurement needs. This
requires anticipation of customers' changing needs and emerging technology
trends. The company must make long-term investments and commit significant
resources 

<PAGE>   11

before knowing whether its expectations will eventually result in products that
achieve market acceptance. The company incurs significant expenses developing
new business opportunities that may or may not result in significant sources of
revenue and earnings in the future.

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

The company currently has ten subsidiaries or sales offices located outside the
United States, and non-U.S. sales made up 45 percent of the company's revenue in
fiscal 1997. The company's future results could be adversely affected by several
factors, including changes in foreign currency exchange rates, changes in a
country's or region's political or economic conditions, trade protection
measures, import or export licensing requirements, unexpected changes in
regulatory requirements and natural disasters.


<PAGE>   12


NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

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

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
---------------------------

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

REVENUE RECOGNITION
-------------------

         Sales are recognized at time of shipment for all products.

NATURE OF OPERATIONS
--------------------

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

PRODUCT DEVELOPMENT EXPENSES
----------------------------

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

INVENTORIES
-----------

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

PROPERTY, PLANT AND EQUIPMENT
-----------------------------

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


<PAGE>   13


INTANGIBLE ASSETS
-----------------

      Intangible assets relate to business acquisitions and are amortized on a
straight-line basis over their estimated useful lives of 10 years. Management
reviews the carrying value of intangible assets using an estimated future cash
flow method (undiscounted and without interest charges) whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. At September 30, 1996, the company wrote off the remaining
goodwill associated with its 1989 acquisition of Keithley MetraByte. (See Note
B.) 

OTHER ASSETS
------------

      Included in the "Other assets" caption of the Consolidated Balance Sheet
at September 30, 1997 and 1996, were $8,814 and $7,152, respectively, in
deferred tax assets. Also included in "Other assets" were pension related
assets. (See note E.) 

OTHER ACCRUED EXPENSES
----------------------

      Included in the "Other accrued expenses" caption of the Consolidated
Balance Sheet at September 30, 1997 and 1996, were $2,496 and $1,476,
respectively, for commissions payable to outside sales representatives of the
company. 

CAPITAL STOCK
-------------

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

      Included in the "Common shares held in treasury, at cost" caption of the
Consolidated Balance Sheet at September 30, 1997 and 1996, were Common Shares
repurchased to settle non-employee Directors' fees deferred pursuant to the
Keithley Instruments, Inc. 1996 Outside Directors Deferred Stock Plan. 

INCOME TAXES
------------

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


<PAGE>   14


USE OF ESTIMATES
----------------

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the reported
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. NET

INCOME PER SHARE
----------------

      The weighted average number of shares outstanding used in determining net
income per share was 7,866,750 (7,994,881 on a fully diluted basis) in 1997,
7,822,346 in 1996 and 7,476,138 (7,719,776 on a fully diluted basis) in 1995.
Both Common Shares and Class B Common Shares are included in calculating the
weighted average number of shares outstanding. 

HEDGING AND RELATED FINANCIAL INSTRUMENTS
-----------------------------------------

      The company utilizes foreign currency borrowings and foreign exchange
forward contracts to hedge foreign exchange risks for sales denominated in
foreign currencies and net equity or unremitted foreign earnings.

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

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

      The company has entered into swap instruments to mitigate the risk of
interest rate changes. The amounts exchanged under the swap agreements are
included in the "Net financing expenses" caption of the Consolidated Statement
of Income. The estimated fair value of the swap instruments are determined
through quotes from the related financial institutions.

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


<PAGE>   15
OTHER ACCOUNTING PRONOUNCEMENTS
-------------------------------

      In February 1997, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share." The Statement
redefines earnings per share under generally accepted accounting principles, and
is effective for the company's quarter ending December 31, 1997. Early adoption
is not allowable. Under the new standard, primary earnings per share is replaced
by basic earnings per share and fully diluted earnings per share is replaced by
diluted earnings per share. The adoption of this standard is not expected to
have a significant impact on the company's previously reported earnings per
share amounts.

      In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). This Statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements displayed with the same prominence as other financial
statements. Comprehensive income includes such items as foreign currency
translation adjustments and unrealized gains and losses from investing and
hedging activities. SFAS 130 is required to be adopted in the company's fiscal
year ending September 30, 1999.

      Also in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131). This Statement requires
that public companies report financial and descriptive information about its
reportable operating segments. Generally, financial information is required to
be reported on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments. This Statement
requires that a public business enterprise report a measure of segment profit or
loss, certain specific revenue and expense items, and segment assets. It
requires that public companies report information about the revenues derived
from the company's products or services, geographic areas, and major customers.
SFAS 131 is required to be adopted in the company's fiscal year ending September
30, 1999.

      In September 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2).
This Statement provides guidance on when revenue should be recognized and in
what amounts for licensing, selling, leasing, and otherwise marketing computer
software. It applies to all companies that earn such revenue. It does not apply,
however, to revenue earned on products or services containing software that is
incidental to the products or services as a whole. SOP 97-2 is required to be
adopted in the company's fiscal year ending September 30, 1999. The company has
not yet determined the financial statement impact of this Statement.


<PAGE>   16


NOTE B - SPECIAL CHARGES
         An analysis of special charges recorded in the Consolidated Statement
of Income in 1997 and 1996, and the amount accrued in the Consolidated Balance
Sheet is as follows:


<TABLE>
<CAPTION>
                                                                            Accrued at
                                                  Expense                  September 30,
Description:                                1997            1996         1997          1996
------------                                ----            ----         ----          ----
<S>                                        <C>            <C>           <C>           <C>      
Write off of Goodwill                      $  --          $ 5,737       $  --         $  --
Severance, outplacement and
  other personnel costs                       (291)         3,433           222         3,239
Lease and related costs                       (525)           998             3           998
Impaired inventory and equipment                49            835          --            --
Relocation of facility and employees         1,073           --            --            --
Recruiting and consulting costs                187           --            --            --
Manufacturing start-up costs                   282           --            --            --
European operating subleases                    (4)           642           574           642
                                           -------        -------       -------       -------
Totals                                     $   771        $11,645       $   799       $ 4,879
                                           =======        =======       =======       =======
</TABLE>

         Since the acquisition of Keithley MetraByte in 1989, sales have
declined for the operation and earnings had been poor. In September 1996, it
became apparent to management that due to the lack of growth, the business could
not support stand-alone operations. Therefore management made the decision to
move the Taunton, Massachusetts operation to Cleveland, Ohio. Also included in
special charges is an accrual for costs to be incurred over the next 3 to 11
years under two operating subleases at the company's European facilities.

         Special charges of $771 pretax, or $.06 per share, recorded in 1997
include gross costs of $1,902 primarily for the relocation of the Keithley
MetraByte operation from Taunton, Massachusetts to Cleveland, Ohio, net of a
reversal of $1,131 of expense (noncash) recorded during 1996 primarily for
closing the Taunton facility. The reversal of 1996 expense relates to changes in
circumstances which occurred during 1997. $256 of the gross expense represents a
noncash charge to reserve for additional impaired inventory. Special charges of
$11,645 pretax, or $1.23 per share, recorded in 1996 primarily represented the
expected costs of closing the Keithley MetraByte operation in Taunton. Of the
special charges, noncash charges in 1996 total $6,572. The relocation of the
Keithley MetraByte operation was complete in July 1997, and special charges for
the relocation going forward will not be material. Approximately 130 employees
were terminated in total as a result of the relocation, 40 of which were
terminated by September 30, 1996. Total net employment for the Keithley
MetraByte operation has been reduced by approximately 70 people. At September
30, 1997 and 1996, $249 and $4,538, respectively was accrued in the Consolidated
Balance Sheet under the category "Other accrued expenses" and $550 and $341,
respectively, was accrued under the category "Other long-term liabilities."


<PAGE>   17


NOTE C - FINANCING ARRANGEMENTS
<TABLE>
<CAPTION>

                                                                                  September 30,
                                                                                  -------------
                                                                                  1997           1996
                                                                                  ----           ----
<S>                                                                             <C>             <C>     
Long-term debt:
Revolving loans with various banks with interest due monthly; principal due
March 28, 2002:
    U.S. dollar denominated loans with an interest
      rate of 6.0% based on LIBOR                                               $ 14,000        $ 10,000
    U.S. dollar denominated loans with an interest
      rate of 8.5% and 8.25% based on Prime at
      at September 30, 1997 and 1996, respectively                                   600           1,000
    Deutsche mark denominated loans with an interest
      rate of 3.75% based on FIBOR                                                 2,842           2,292
Obligations under capital leases                                                      16              77
                                                                                --------        --------
                                                                                  17,458          13,369
   Less-Current installments on long-term debt                                        16              61
                                                                                --------        --------
Total long-term debt                                                            $ 17,442        $ 13,308
                                                                                ========        ========
</TABLE>

      On March 28, 1997, the company amended its credit agreement to extend its
expiration until March 28, 2002 and generally improve the terms under which the
company borrows. The agreement continued to be a $25,000 debt facility ($17,442
outstanding at September 30, 1997), which provides unsecured, multi-currency
revolving credit at various interest rates based on Prime, LIBOR or FIBOR. The
company is required to pay a facility fee of between .125% to .20% on the total
amount of the commitment. Additionally, the company has a number of other credit
facilities in various currencies aggregating $5,460.

      At September 30, 1997, the company had total unused lines of credit with
domestic and foreign banks aggregating $13,018, including short-term and
long-term lines of credit of $5,460 and $7,558, respectively. Under certain
long-term debt agreements, the company is required to comply with various
financial ratios and covenants. Principal payments on long-term debt are
scheduled as follows: 1998-$16, 2002-$17,442.

      The LIBOR interest rate was 5.7 percent and 5.4 percent at September 30,
1997 and 1996, respectively. The FIBOR interest rate was 3.3 percent at
September 30, 1997 and 1996.

      The company has two interest rate swap agreements with commercial banks to
effectively fix its interest rates on $6,000 of variable rate debt. The first
agreement effectively fixes the interest rate on a notional $3,000 of variable
LIBOR rate debt at 6.7 percent, and expires June 17, 2002. The second agreement
effectively fixes the interest rate on another notional $3,000 

<PAGE>   18

of variable LIBOR rate debt at 6.8 percent, and expires September 18, 2005. The
interest differentials to be paid or received on the notional amounts of the
swaps are recognized over the lives of the agreements. At September 30, 1997
interest rate levels, the swaps require the company to make payments to the bank
and would cost the company approximately $30 to terminate.

      Following is an analysis of Net financing expenses:
<TABLE>
<CAPTION>
                                                                 1997              1996             1995
                                                                 ----              ----             ----
<S>                                                              <C>              <C>               <C>   
Interest expense                                                 $1,315           $  957            $1,092
Investment income                                                  (170)            (138)             (106)
                                                                 ------            -----            ------
                                                                 $1,145           $  819            $  986
                                                                  =====            =====             =====
</TABLE>



<PAGE>   19


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

      Certain transactions of the company and its foreign subsidiaries are
denominated in currencies other than the functional currency. The Consolidated
Statement of Income includes gains (losses) from such foreign exchange
transactions of $95, $91 and $(22) for 1997, 1996 and 1995, respectively.

      At September 30, 1997, the company had obligations under foreign exchange
forward contracts to sell 2,100,000 Deutsche marks, 140,000 British pounds,
2,200,000 French francs at various dates through December 1997. The total U.S.
dollar equivalent amount of these foreign exchange contracts of $1,744 includes
an unrecognized loss of $48 at September 30, 1997.

      The company has purchased and written currency option contracts that
effectively provide minimum and maximum exchange rates that the company would
receive for anticipated foreign currency denominated sales. Under the terms of
the options, the company has the right to deliver 3,000,000 Deutsche marks at
average rates of 1.91 per U.S. dollar and the obligation, if called, to deliver
4,500,000 Deutsche marks at average rates of 1.73 per U.S. dollar. The options
expire in October and December 1997 and January 1998. The options had no effect
on net income in fiscal 1997, and gains and losses on the options, if any, are
recorded as incurred.


<PAGE>   20


NOTE E - EMPLOYEE BENEFIT PLANS

      The company has non-contributory defined benefit pension plans covering
all of its eligible employees in the United States and certain non-U.S.
employees. Pension benefits are based upon the employee's length of service and
a percentage of compensation above certain base levels. Pension expense for
these plans is shown below:

<TABLE>
<CAPTION>
                                                                        1997            1996              1995
                                                                        ----            ----              ----
<S>                                                                   <C>               <C>            <C>    
      Service cost-benefits earned during the period                  $   733           $   652        $   605
      Interest cost on projected benefit obligation                     1,192             1,048            945
      Actual return on assets                                          (3,470)           (2,471)        (1,818)
      Net amortization and deferral                                     2,115             1,328            884
                                                                       ------            ------         ------
      Net periodic pension cost                                       $   570           $   557        $   616
                                                                       ======            ======         ======
</TABLE>

      The following table sets forth the funded status of the company's plans
and the related amounts recognized in the Consolidated Balance Sheet at
September 30, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                                        Non-U.S.
                                                     United States Plan                   Plan
                                                         Overfunded                    Underfunded*
                                                    ---------------------              ------------
                                                      1997          1996         1997           1996
                                                      ----          ----         ----           ----
Actuarial present value of benefit obligations:
<S>                                                 <C>           <C>           <C>           <C>     
Vested benefit obligation                           $ 11,459      $ 10,439      $  1,694      $  1,678
                                                    ========      ========      ========      ========
Accumulated benefit obligation                      $ 12,094      $ 10,890      $  1,917      $  1,899
                                                    ========      ========      ========      ========
Projected benefit obligation                        $ 14,763      $ 13,280      $  2,777      $  2,732
Plan assets at fair value                           $ 19,474      $ 16,385      $    498      $    498
                                                    --------      --------      --------      --------
Projected benefit obligation (in excess of)
   or less than plan assets                         $  4,711      $  3,105      $ (2,279)     $ (2,234)
Unrecognized net gain                                 (3,824)       (1,972)         (331)         (567)
Unrecognized prior service cost                        1,149         1,263            64            79
Unrecognized initial net (asset) obligation             (358)         (401)          211           265
                                                    --------      --------      --------      --------
Prepaid pension assets (pension liability)
   recognized in the Consolidated Balance
   Sheet                                            $  1,678      $  1,995      $ (2,335)     $ (2,457)
                                                    ========      ========      ========      ========

<FN>
*     The company has purchased indirect insurance of $2,409 which is expected to be available to the
      company as non-U.S. pension liabilities of $2,335 mature. The caption, "Other assets," on the
      company's Consolidated Balance Sheet includes $2,409 and $2,514 at September 30, 1997 and 1996,
      respectively, for this asset. In accordance with 
</TABLE>
<PAGE>   21
      Statement of Financial Accounting Standards No. 87, "Employers' Accounting
      for Pensions," this company asset is not included in the non-U.S. plan
      assets.

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

<TABLE>
<CAPTION>
                                                                          1997           1996         1995
                                                                          ----           ----         ----
<S>                                                                       <C>            <C>          <C> 
United States Pension Plan:
Discount rates                                                            7.5%           7.5%         7.5%
Expected long-term rate of return on plan assets                          8.5%           8.5%         8.5%
Rate of increase in compensation levels                                   5.5%           5.5%         5.5%

Non-U.S. Pension Plan:
Discount rates                                                           6.25%           6.5%         7.5%
Expected long-term rate of return on plan assets                          7.0%           7.0%         7.0%
Rate of increase in compensation levels                                   3.5%           3.5%         4.5%
</TABLE>

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

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

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

      In addition to the defined benefit pension plan, the company also
maintains a retirement plan for substantially all of its employees in the United
States under Section 401(k) of the Internal Revenue Code. The company makes
contributions to the 401(k) plan, and expense for this plan amounted to $403,
$388 and $539 in 1997, 1996 and 1995, respectively.

      The company also has an unfunded supplemental executive retirement plan
(SERP) for an officer and for former key employees which includes retirement,
death and disability benefits. The officer took early retirement causing a
reversal of previously accrued expense in 1997. Expense (income) recognized for
these benefits was $(3) for 1997, $102 for 1996 and $85 for 1995. Liabilities of
$489 and $497 were accrued in the "Other long-term liabilities" caption on the
company's Consolidated Balance Sheet to meet all SERP obligations at September
30, 1997 and 1996, respectively.


<PAGE>   22


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

       Subject to shareholder approval in February 1998, the Company's Board of
Directors adopted the 1997 Directors' Stock Option Plan. This Plan provides for
the issuance of 200,000 of the company's Common Shares to non-employee
Directors. Under the terms of the plan, each non-employee Director is
automatically granted an option to purchase 5,000 Common Shares at the close of
each annual shareholders' meeting. The plan will expire on February 15, 2007.
All options outstanding at the time of termination of the plan shall continue in
full force and effect in accordance with their terms. On February 15, 1997, the
company's Board of Directors terminated the 1992 Directors' Stock Option Plan.
Prior to its termination, this plan provided for the issuance of 60,000 of the
company's Common Shares to non-employee Directors, with each non-employee
Director automatically granted an option to purchase 600 Common Shares at the
close of each annual shareholders' meeting. The option price for grants under
both Plans is the fair market value of a Common Share on the date of grant. The
options under both plans are exercisable six months and one day after the date
of grant and will expire after ten years.


<PAGE>   23


   The activity under the option plans, combined, was as follows:

<TABLE>
<CAPTION>
                                                Outstanding                     Exercisable
                                                -----------                     -----------
                                                             Weighted                    Weighted
                                                             Average                      Average
                                                 Number      Exercise         Number      Exercise
                                               of Shares      Price         of Shares      Price
                                               ---------      -----         ---------      -----
<S>                                            <C>             <C>            <C>          <C>  
September 30, 1994                               848,888       $ 5.23         306,892      $5.73
 Options granted at fair market value            237,500        13.44
 Options granted below fair market value           1,800        13.52
 Options exercised                               (96,408)        5.09
 Options forfeited                                (5,792)        5.35
                                          -------------------------------------------------------

September 30, 1995                               985,988         7.23         303,030       5.74
 Options granted at fair market value            359,400         9.93
 Options granted below fair market value          14,560                                    --
 Options exercised                              (149,373)        4.90
 Options forfeited                               (38,586)        8.01
                                          -------------------------------------------------------

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

September 30, 1997                             1,403,532       $ 8.97         593,607      $7.01
                                          =======================================================
</TABLE>

      The options outstanding at September 30, 1997 have been segregated into
ranges for additional disclosure as follows:

<TABLE>
<CAPTION>
                                          Outstanding                                      Exercisable        
                                          Weighted 
                                          Average                Weighted                           Weighted  
                        Number of         Remaining              Average           Number of        Average   
Range of Exercise       Shares            Contractual            Exercise          Shares           Exercise  
Prices                  Outstanding       Life                   Price             Exercisable      Price     
------                  -----------       ----                   -----             -----------      -----     
<S>                      <C>              <C>                    <C>               <C>              <C>       
$4.00 - $4.88              297,707        6.30 years             $ 4.75            232,957          $ 4.73    
$5.00 - $9.06              269,025        4.03 years             $ 6.20            253,400          $ 6.26    
$9.25 - $9.25              310,500        8.94 years             $ 9.25                  0            --   
$10.00 - $13.52            284,400        9.94 years             $11.44                900          $13.52    
$13.69 - $15.69            241,900        8.00 years             $13.96            106,350          $13.72    
                        ----------        ----------             ------            -------          ------    
                         1,403,532        7.48 years             $ 8.97            593,607          $ 7.01    
                        ==========        ==========             ======            =======          ======    
                                                                 
</TABLE>

<PAGE>   24



1993 Employee Stock Purchase Plan
---------------------------------
On February 5, 1994, the company's shareholders approved the 1993 Employee Stock
Purchase and Dividend Reinvestment Plan. The plan offers eligible employees the
opportunity to acquire the company's Common Shares at a discount and without
transaction costs. Eligible employees can only participate in the plan on a
year-to-year basis, must enroll prior to the commencement of each plan year, and
in the case with U.S. employees, must authorize monthly payroll deductions.
Foreign employees submit their contribution at the end of the plan year. The
purchase price of the Common Shares is 85 percent of the lower market price at
the beginning or ending of the calendar plan year. A total of 750,000 Common
Shares are available for purchase under the plan. Total shares may be increased
with shareholder approval or the plan may be terminated when the shares are
fully subscribed. No compensation expense is recorded in connection with the
plan. During 1997 and 1996, 94,227 and 74,156 shares had been purchased by
employees at prices of $7.86 and $4.25 per share, respectively.

Pro Forma Disclosure
--------------------
       As of September 30, 1997, the company had various stock-based
compensation plans which are described above. The company has elected to
continue to account for stock issued to employees according to APB Opinion 25,
"Accounting for Stock Issued to Employees" and its related interpretations.
Under APB No. 25, no compensation expense is recognized in the company's
consolidated financial statements for employee stock options except in certain
cases when stock options are granted below the market price of the underlying
stock on the date of grant. During 1997, $187 was recognized in compensation
expense for such grants. Alternatively, under the fair value method of
accounting provided for under Statement of Financial Accounting Standards No
123, "Accounting for Stock-Based Compensation" (SFAS 123), the measurement of
compensation expense is based on the fair value of employee stock options or
purchase rights at the grant or right date and requires the use of option
pricing models to value the options.

      The weighted average fair value of options granted under stock options
plans in 1997 and 1996 was $4.97 and $4.34, respectively. The fair value of
options at date of grant was estimated using the Black-Scholes model with the
following weighted average assumptions:

<TABLE>
<CAPTION>
                                             1997               1996
                                             ----               ----
<S>                                         <C>                <C>  
Expected life (years)                       5.0                4.6
Risk-free interest rate                     6.0%               6.4%
Volatility                                 41.5%              41.5%
Dividend yield                              1.3%               1.3%
</TABLE>
     
<PAGE>   25
      The weighted average fair value of purchase rights granted under the 1993
Employee Stock Purchase Plan in 1997 and 1996 was $3.05 and $5.49, respectively.
The fair value of employees' purchase rights was estimated using the
Black-Scholes model with the following assumptions:

<TABLE>
<CAPTION>
                                             1997              1996
                                             ----              ----
<S>                                         <C>                <C>  
Expected life (years)                        1.0                1.0
Risk-free interest rate                      5.5%               4.9%
Volatility                                  41.5%              41.5%
Dividend yield                               1.3%               1.3%
</TABLE>

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

<TABLE>
<CAPTION>
                                          1997                1996
<S>                                       <C>              <C>     
Pro forma net income                      $214             $(5,704)
Pro forma net income per share            $.03             $  (.73)
</TABLE>

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


<PAGE>   26


NOTE G - INCOME TAXES
      For financial reporting purposes, income (loss) before income taxes
includes the following components:

<TABLE>
<CAPTION>
                                                          1997           1996         1995
                                                          ----           ----         ----
<S>                                                      <C>           <C>           <C>   
      United States                                      $  (892)      $(9,383)      $ 1,970
      Non-U.S                                              2,103         3,059         4,452
                                                         -------       -------       -------
                                                         $ 1,211       $(6,324)      $ 6,422
                                                         =======       =======       =======
      The provision for income taxes is as follows:
                                                            1997          1996          1995
                                                         -------       -------       -------
Current:
      Federal                                            $   275       $ 1,330       $   720
      Non-U.S                                              1,091         1,513         1,859
      State and local                                        195            45           146
                                                         -------       -------       -------
      Total current                                        1,561         2,888         2,725
                                                         -------       -------       -------
Deferred:
      Federal                                             (1,124)       (3,800)       (1,199)
      Non-U.S                                                (16)           28           (18)
                                                         -------       -------       -------
      Total deferred                                      (1,140)       (3,772)       (1,217)
                                                         -------       -------       -------
      Total provision (benefit)                          $   421       $  (884)      $ 1,508
                                                         =======       =======       =======
</TABLE>

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

<TABLE>
<CAPTION>
                                              1997          1996           1995
                                              ----          ----           ----
<S>                                         <C>           <C>           <C>    
Federal income tax at statutory rate        $   412       $(2,150)      $ 2,183
State and local income taxes                    129            30            96
Tax on non-U.S. income and tax credits         (945)         (884)         (881)
Non-deductible amortization                    --           2,123           158
Terminated life insurance contract              877          --            --
Other                                           (52)           (3)          (48)
                                            -------       -------       -------
Effective income tax (benefit)              $   421       $  (884)      $ 1,508
                                            =======       =======       =======
</TABLE>



<PAGE>   27


      Significant components of the company's deferred tax assets and
liabilities as of September 30, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>

Deferred tax assets:                                 1997             1996
--------------------                                 ----             ----

<S>                                               <C>            <C>     
Capitalized research and development              $  6,589       $  5,221
Special charges                                        184          1,724
Intangibles                                            832          1,006
State and local taxes                                1,471          1,441
Alternative minimum tax credit carryforwards         1,276          1,174
Deferred compensation                                  558            615
Inventory                                            1,597          1,124
General business credit carryforwards                1,058            872
Other                                                1,909          1,252
                                                  --------       --------
Total deferred tax assets                           15,474         14,429
                                                  --------       --------
Valuation allowance for deferred tax assets         (3,166)        (2,994)
                                                  --------       --------
                                                    12,308         11,435
                                                  --------       --------

Deferred tax liabilities:
Pension contribution                                   818            904
Other                                                  170            351
                                                  --------       --------
Total deferred tax liabilities                         988          1,255
                                                  --------       --------
Net deferred tax assets                           $ 11,320       $ 10,180
                                                  ========       ========
</TABLE>

      The valuation allowance relates to tax credit carryforwards which will
likely not be realized. The current year increase relates primarily to an
increase in deferred state tax items.

      At September 30, 1997, the Company had capital loss and tax credit
carryforwards as follows:

<TABLE>
<CAPTION>

                                                                                 Year Expiration
                                                                                   Commences
                                                                                ---------------
<S>                                                         <C>                       <C> 
General business credit                                     $1,058                    2002
Capital loss                                                   123                    1998
Alternative minimum tax credit                               1,276                  Indefinite
</TABLE>



<PAGE>   28


NOTE H - LEASES
      The company leases certain equipment under capital leases. Manufacturing,
laboratory and office equipment includes $526 of leased equipment at September
30, 1997 and 1996. Accumulated depreciation includes $510 and $487 at September
30, 1997 and 1996, respectively, related to these leases. The company also
leases certain office and manufacturing facilities and office equipment under
operating leases. Rent expense under operating leases (net of sublease income of
$84 in 1997, $245 in 1996 and $282 in 1995) for 1997, 1996 and 1995 was $2,658,
$2,178 and $2,119, respectively. Future minimum lease payments under operating
leases are:
<TABLE>
<CAPTION>
<S>   <C>                                                        <C>   
      1998                                                       $2,063
      1999                                                        1,820
      2000                                                        1,656
      2001                                                        1,198
      2002                                                          701
      After 2002                                                  2,507
                                                                  -----
Total minimum operating lease payments                           $9,945
                                                                 ======
</TABLE>



<PAGE>   29


NOTE I - GEOGRAPHIC SEGMENTS
      The company operates in a single industry segment and is engaged in the
design, development, manufacture and marketing of complex electronic instruments
and systems. The operations by geographic area are presented below:

<TABLE>
<CAPTION>
                                                                1997            1996           1995
                                                                ----            ----           ----
NET SALES, INCLUDING INTERCOMPANY SALES:
----------------------------------------
<S>                                                         <C>             <C>             <C>      
United States (1)                                           $ 106,217       $  98,232       $  88,410
Europe                                                         31,606          37,799          37,659
Intercompany                                                  (14,528)        (17,085)        (16,495)
                                                            ---------       ---------       ---------
Net sales                                                   $ 123,295       $ 118,946       $ 109,574
                                                            =========       =========       =========
INCOME (LOSS) BEFORE INCOME TAXES (2):
United States                                               $   1,889       $  (7,372)      $   4,282
Europe                                                          2,236           3,180           4,158
Adjustments/eliminations                                         (219)            (34)             77
                                                            ---------       ---------       ---------
                                                                3,906          (4,226)          8,517
                                                            ---------       ---------       ---------
Corporate expenses                                             (1,550)         (1,279)         (1,109)
Net financing expenses                                         (1,145)           (819)           (986)
                                                            ---------       ---------       ---------
Income (loss) before income taxes                           $   1,211       $  (6,324)      $   6,422
                                                            =========       =========       =========
IDENTIFIABLE ASSETS:
United States                                               $  61,264       $  54,507       $  49,087
Europe                                                          9,120           9,720          11,164
Adjustments/eliminations                                       (4,979)         (5,651)         (5,429)
                                                            ---------       ---------       ---------
                                                               65,405          58,576          54,822
Corporate assets                                               13,708          15,258          11,287
                                                            ---------       ---------       ---------
Total assets                                                $  79,113       $  73,834       $  66,109
                                                            =========       =========       =========

<FN>
(1) U.S. sales include $24,186, $21,295 and $18,793 in export sales to markets other than Europe in
1997, 1996 and 1995, respectively.

(2) 1997 and 1996 income (loss) before income taxes includes special charges (benefit) of $775 and
$11,003 in the U.S., and $(4) and $642 in Europe, respectively. (See Note B.)
</TABLE>

        Intercompany sales were at cost plus a negotiated markup. Assets of
geographic areas are identified with the operations of each area. Corporate
assets consist of cash and cash equivalents, other receivables, prepaid expenses
and deferred income taxes.


<PAGE>   30


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



<PAGE>   31


                        Report of Independent Accountants
                        ---------------------------------


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


      In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Keithley Instruments, Inc. and its subsidiaries at September 30, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.


PRICE WATERHOUSE LLP



Cleveland, Ohio
November 17, 1997



<PAGE>   32


                     Statement of Management Responsibility
                     --------------------------------------


      The consolidated financial statements of Keithley Instruments, Inc. were
prepared by management and, accordingly, management is responsible for their
accuracy and objectivity. The company utilizes accounting policies which are, in
the judgment of management, the most appropriate for the company's
circumstances. Certain estimates and judgments are required in the preparation
of financial statements. The financial information included in this Annual
Report has been prepared using management's best estimates, which were based
upon appropriate research and investigation.

      The company maintains internal accounting control systems that are
designed to detect and correct material misstatements of financial information.
These systems are regularly modified in response to the company's changing
business conditions. Additionally, our independent accountants, Price Waterhouse
LLP, obtain a sufficient understanding of the internal control structure in
order to plan and complete the annual audit of the company's financial
statements.

      The Audit Committee of the Board of Directors, which consists of three
Directors otherwise independent of the company, serves an oversight role in
reviewing the internal control monitoring process. The Committee regularly meets
with and has direct access to Price Waterhouse LLP.

      Management acknowledges its responsibility to provide financial
information (both audited and unaudited) that is representative of the company's
operations and financial position, prepared on a consistent basis and relevant
for a meaningful appraisal of the company.



Joseph P. Keithley                               Ronald M. Rebner
Chairman, President                              Vice President and Chief
and Chief Executive Officer                      Financial Officer



<PAGE>   33


Stock Market Price and Cash Dividends


      Since November 28, 1995, the company's Common Shares have traded on the
New York Stock Exchange under the symbol KEI. Prior to November 28, 1995, the
company's Common Shares traded on the American Stock Exchange under the symbol
KEI. The high and low prices shown below are sales prices of the company's
Common Shares as reported on the NYSE or the AMEX. There is no established
public trading market for the company's Class B Common Shares; however, they are
readily convertible on a one-to-one basis for Common Shares.

<TABLE>
<CAPTION>
                                                                                       Cash Dividends
                                                              Cash Dividends             Per Class B
Fiscal 1997                   High            Low            Per Common Share           Common Share
-----------                   ----            ---            ----------------           ------------

<S>                          <C>             <C>                <C>                       <C>    
First Quarter                $11 1/8         $7 3/8             $  .031                   $  .025
Second Quarter                 9 3/8          7 3/4                .031                      .025
Third Quarter                 12              7 5/8                .031                      .025
Fourth Quarter                12 3/8         10 1/8                .031                      .025

Fiscal 1996

First Quarter               $18             $14                 $  .031                   $  .025
Second Quarter               16 7/8          12 7/8                .031                      .025
Third Quarter                19 1/8          12 5/8                .031                      .025
Fourth Quarter               14 1/4           8 3/8                .031                      .025

</TABLE>


<PAGE>   34


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

<TABLE>
<CAPTION>

                                                                    First          Second         Third          Fourth
                                                                    -----          ------         -----          -------
Fiscal 1997
-----------

<S>                                                                <C>            <C>            <C>            <C>     
Net sales                                                          $ 27,886       $ 28,148       $ 32,410       $ 34,851

Gross profit                                                         16,132         16,402         18,514         20,323

Income (loss) before income taxes (1) (2)                            (1,171)          (464)         1,088          1,758

Net income (loss) (1) (2)                                              (838)          (338)           761          1,205

Net income (loss) per share (primary and fully diluted)(1)(2)
                                                                       (.11)          (.04)           .10            .15
Fiscal 1996

Net sales                                                          $ 29,823       $ 30,019       $ 29,403       $ 29,701

Gross profit                                                         17,988         19,052         18,027         17,739

Income (loss) before income taxes (1)                                 1,659          2,045          1,006        (11,034)

Net income (loss) (1)                                                 1,145          1,485            761         (8,831)

Net income (loss) per share (primary and fully diluted) (1)
                                                                        .15            .19            .10          (1.14)

<FN>
(1) Includes special charges as follows:

  1997 Special charges pretax                                      $     58       $    375       $    306       $     32      
  1997 Special charges per share                                       --             (.03)          (.02)          --        
  1996 Special charges pretax                                          --             --             --           11,645      
  1996 Special charges per share                                       --             --             --            (1.23)  
                                                                   

(2)The fourth quarter includes pretax charges of $512 for non-recurring
   officer retirement expenses.
</TABLE>

<PAGE>   35
<TABLE>
<CAPTION>

Eleven Year Summary
(In Thousands Of Dollars Except For Per-Share Data)

For the year ended September 30,                            1997             1996            1995           1994       1993(b)    
----------------------------------------------------------------------------------------------------------------------------------

<S>                                                     <C>                    <C>             <C>            <C>           <C>   
Operating Results
 Net sales                                              $123,295          118,946         109,574         89,248        91,146    
 Income (loss) before income taxes and
  cumulative effect of accounting change                   1,211           (6,324)          6,422            124         5,530    
 Net income (loss)                                           790           (5,440)          4,914            907         4,784    
 Net income (loss) per share (a)                            0.10            (0.70)           0.66           0.13          0.68    
 Fully diluted net income (loss) per share (a)              0.10            (0.70)           0.64           0.13          0.68    

Common Stock Information (a)
 Cash dividends per Common Share                        $  0.125            0.125           0.106          0.100         0.100    
 Cash dividends per Class B Common Share                $  0.100            0.100           0.085          0.080         0.080    
 Weighted average number of shares
  outstanding- fully diluted (in thousands)                7,995            7,822           7,720          7,088         7,061    
 At fiscal year-end:
  Dividend payout ratio (d)                                125.0%            --              16.1%          76.9%         14.7%   
  Price/earnings ratio (d)                                 120.0             --              23.3           40.4           7.4    
  Shareholders' equity per share                        $   4.26             4.26            5.11           4.50          4.45    
  Closing market price                                  $ 12.000            8.875          14.938          5.250         5.000    

Balance Sheet Data
 Total assets                                           $ 79,113           73,834          66,109         54,410        52,413    
 Current ratio                                               1.9              1.7             2.0            1.9           2.2    
 Total debt                                             $ 17,458           13,369           6,113          4,816         6,518    
 Total debt-to-capital                                      34.8%            29.6%           14.2%          13.1%         17.2%   
 Shareholders' equity                                   $ 32,683           31,756          36,902         31,946        31,415    

Other Data
 Return on average shareholders' equity                      2.5%           -15.8%           14.3%           2.9%         16.0%   
 Return on average total assets                              1.0%            -7.8%            8.2%           1.7%          9.1%   
 Return on net sales                                         0.6%            -4.6%            4.5%           1.0%          5.2%   
 Number of employees                                         693              716             659            625           625    
 Sales per employee                                     $  175.0            173.0           170.7          142.8         139.8    
 Cash flow
  Noncash charges to income (c)                         $  3,390            7,064           2,573          1,346         1,849    
  Net cash provided by (used in) operating activities   ($ 1,011)           2,600           2,457          6,641         6,289    
 Ten-year compound annual growth rate
  Net sales                                                  7.9%             9.6%            8.8%           7.0%         10.0%   
  Net income (d)                                           -13.3%            --               5.7%         -14.2%          9.1%   

Eleven Year Summary
(In Thousands Of Dollars Except For Per-Share Data)

For the year ended September 30,                         1992          1991         1990         1989         1988         1987
---------------------------------------------------------------------------------------------------------------------------------

Operating Results
 Net sales                                             94,666        99,497      100,593       88,728       72,282       57,652
 Income (loss) before income taxes and
  cumulative effect of accounting change              (10,420)        6,816        5,675        7,311        8,204        5,209
 Net income (loss)                                    (12,453)        4,233        3,378        4,131        5,414        3,280
 Net income (loss) per share (a)                        (1.77)         0.60         0.48         0.59         0.78         0.49
 Fully diluted net income (loss) per share (a)          (1.77)         0.60         0.48         0.59         0.78         0.49

Common Stock Information (a)
 Cash dividends per Common Share                        0.100         0.094        0.089        0.082        0.058        0.046
 Cash dividends per Class B Common Share                0.080         0.075        0.071        0.066        0.046        0.036
 Weighted average number of shares
  outstanding- fully diluted (in thousands)             7,046         7,026        7,014        6,994        6,974        6,790
 At fiscal year-end:
  Dividend payout ratio (d)                              --            15.7%        18.5%        13.9%         7.4%         9.4%
  Price/earnings ratio (d)                               --            10.1          8.5         11.0         11.5         17.5
  Shareholders' equity per share                         4.05          5.85         5.40         4.88         4.37         3.68
  Closing market price                                  4.563         6.063        4.063        6.500        8.938        8.500

Balance Sheet Data
 Total assets                                          53,160        66,637       69,205       69,917       46,602       44,268
 Current ratio                                            2.3           2.1          2.3          2.7          2.4          1.9
 Total debt                                             8,978        10,506       16,562       22,419        2,027        5,773
 Total debt-to-capital                                   23.9%         20.3%        30.4%        39.6%         6.2%        18.4%
 Shareholders' equity                                  28,530        41,129       37,870       34,216       30,518       25,577

Other Data
 Return on average shareholders' equity                -35.8%          10.7%         9.4%        12.7%        19.0%        14.5%
 Return on average total assets                        -20.8%           6.2%         4.9%         7.1%        11.9%         8.5%
 Return on net sales                                   -13.2%           4.3%         3.4%         4.7%         7.5%         5.7%
 Number of employees                                      679           716          750          742          579          523
 Sales per employee                                     135.7         135.7        134.8        134.3        131.2        115.1
 Cash flow
  Noncash charges to income (c)                        15,185         4,325        6,649        4,234        3,062        2,516
  Net cash provided by (used in) operating activities   4,475         9,399        9,111        4,592        6,812        5,741
 Ten-year compound annual growth rate
  Net sales                                              11.1%         12.8%        13.7%        16.4%        17.9%        19.2%
  Net income (d)                                         --            39.7%        10.4%        12.5%        21.2%        19.8%

<FN>
(a)  Share data adjusted for two-for-one stock split in November 1995, three-for-two stock split in 1987 and three-for-one stock
     split in 1985.
(b)  Includes a benefit for the cumulative effect of adopting FAS 109 of $1,447 or $.21 per share.
(c)  Noncash charges to income include depreciation, amortization, deferred compensation, deferred taxes, noncash special charges
     and the cumulative effect of adopting FAS 109.
(d)  These ratios are not meaningful in 1992 and 1996 due to reported net losses.

</TABLE>